Saturday, May 31, 2008

Getting Case-Shillered: Can you spell conflict of interest?

(Realtor Magazine) If the unemployment rate is historically low yet your customers are waiting for home prices to drop 30 percent before they buy, you’ve just been Case-Shillered. The S&P/Case-Shiller Home Price Index is the benchmark the financial press uses to tell us how terrible the housing market is. One must wonder why. The index’s findings are notoriously softer than the indexes used by the Office of the Federal Housing Enterprise Oversight, NAR, and even Realogy.

In 2007, home prices went down for the first time in decades, but by how much? OFHEO said by 0.3 percent, NAR 1.4 percent, and Realogy 1 percent. Case-Shiller? 8.9 percent. Yale economist Robert Shiller, cofounder of the index, is scaring home buyers with proclamations that home prices “will fall further than the 30 percent drop in the historic depression of the 1930s,” as he told the Associated Press in April. Prognostications like that are a problem because financial journalists such as Michael Grynbaum of The New York Times, Les Christie of CNN, and Rex Nutting of CBS MarketWatch, as well as securities investors and analysts, call his index “the best gauge” of real estate values.

Since when do reporters feel the need to fluff a source, and why are analysts so enthralled with the index? One reason might be its Wall Street seal of approval: It was launched to provide information for hedge funds. Created by Shiller and Karl Case, an economics professor at Wellesley, the index is licensed exclusively to Macromarkets LLC for “developing, structuring and trading financial instruments,” says the Macromarkets Web site. Among Macromarkets’ products is the Housing Futures and Options index, which forms the basis for “directly investing in and hedging U.S. housing” on the Chicago Mercantile Exchange, where futures and options on the index are traded. “Every time a CME hedge is made, revenue flows to Macromarkets,” says NAR’s chief economist, Lawrence Yun. “People would hedge only if they believe price movements will be volatile.” Shiller is a founder and chief economist of Macromarkets.

So, is the index biased to the negative? Its divergence from OFHEO’s findings is so wide that Andrew Leventis, the agency’s senior economist, has undertaken studies to find out why. A January 2008 study, “Real Estate Futures Prices as Predictors of Price Trends,” showed that while “implied price forecasts” were reasonably accurate for the most recent round of expiring futures contracts, the index’s contract prices have tended to significantly “overshoot” actual price declines. A February 2008 paper, “Comparison of House Price Measures,” found the index uses a very different mix of markets and weights than OFHEO. Among other things, it gives more weight to the Pacific Coast, where prices have been volatile.

A third paper, “Revisiting the Differences between the OFHEO and S&P/Case-Shiller House Price Indexes,” tried to overcome the differences in outcome by mimicking how Shiller weights its data. For example, it added data on nonconforming loans, which are dominated by subprime loans. Even after these changes, OFHEO’s test index only came within 4.7 percentage points of Case-Shiller’s 8.9 percent plunge. By making other adjustments such as adding weight to faster selling homes, OFHEO whittled the difference even further, but still came within only 1.6 percentage points of the index.

What this shows is that the “weights” are selective. In any case, OFHEO researchers admit that they don’t really know the source of divergence between their index and Case-Shiller’s; indeed, NAR’s Yun has said that the lack of transparency with the Shiller index has been a problem for economists.

Case-Shiller might be lauded by the financial press, while NAR is assumed to be promoting a positive spin, but let’s be clear: OFHEO and NAR don’t have relationships with hedge funds on the side.

Writer Blanche Evans is editor of Realty Times and publisher of Agent News. She is also the author of The Hottest E-Careers in Real Estate.

Another nefarious Countrywide plot

(Tanta @ Calculated Risk) From Housing Wire:
Last week’s Investor’s Business Daily painted a pretty rough picture of everyone’s favorite industry whipping post Countrywide Financial Corp., after getting wind of a servicing policy that requires some delinquent borrowers to pay 30 percent of arrearages before the lender will begin discussing loan modification options — fees that the reporter, Kathleen Doler, called “a steep entrance fee.” . . .

It’s not a blanket policy, as Doler notes, but some borrowers are seeing this policy while others are not. And, of course, Doler finds a few consumer advocates more than willing to demonize the policy, and Countrywide as well. Not hard to do these days.

For its part, Countrywide told IBD that the policy was intended to be a good-faith demonstration, and suggested that the 30 percent policy is only applicable to borrowers staring down a scheduled foreclosure auction. . . .

Allow us to paraphrase what we think the nicely-worded press statement really says: look, if we’ve tried and wasted our resources trying to contact a borrower anywhere from the past 8 to 12 months and they don’t bother to return any of our calls, read any of their mail, or answer the door when we send countless loss mit specialists out there in person, you’ll have to forgive us for calling bullshit when they decide to call asking for a loan mod the day before the foreclosure sale.
I'm pretty sure Angelo was in favor of using "bullshit" in the statement but his PR people told him he's already in enough trouble over "disgusting."

As far as the policy itself, of dealing with eleventh-hour workout requests from borrowers who have been blowing you off until the week before the trustee's sale? I have two words to respond to that: Laura Richardson. You will recall that the good Congresswoman let three homes go into the foreclosure process--and she has admitted that she made no attempts to work with the servicer until all three foreclosures were well advanced and the legal fees had started piling up--and then got all righteous with WaMu because her request for a modification the week before the scheduled sale didn't magically make everything go away. I am not suggesting that Richardson is a "typical American borrower," but she suggested that, so there. Would I make her put cash down on the table before bothering to start a last-minute workout with her? You bet your sweet eclair I would.

What really frustrates me about the criticisms of this specific policy is the complaint that it's "inconsistent": it is exactly a policy that is applied only in certain circumstances. On a case-by-case basis. When appropriate. (I am not affirming excessive faith in Countrywide's ability to determine what is and is not "appropriate" in all situations. But saying they need to do better at that is not to say the policy is wrong.) But as I have argued since the "Hope Now" thing first emerged last year, one-size-fits-all paint-by-numbers workout strategies are doomed to fail.

The fact of the matter is that not all borrowers are the same, and not all circumstances are the same. I am reminded of this article from the Washington Post we looked at several weeks ago, which contained some pretty level-headed advice from Diane Cipollone, of the Sustainable Homeownership Project:
Then, said Cipollone, contact a nonprofit housing counseling agency or an attorney. Avoid any unsolicited offers from people who say they can save your house. Do not avoid mail or phone calls from your lender. And if your lender stops accepting payments because it is moving toward foreclosure, save that money for a contribution toward the loan workout. "If you've missed eight mortgage payments and have spent all that money because the lender stopped accepting payments, that is not a good outcome [nor] a good way to start negotiations," said Cipollone.
The article then describes the successful modification workout that a couple named Ramsey received, after having made a $3000 "down payment" to the servicer.

The fact of the matter is that no one is going to modify your mortgage payments down to zero in any scenario. If you have made no payments for months on end, and have made no attempt to contact your servicer to request a repayment plan or anything else during those months, and at the last minute before foreclosure you do not have any money in savings--the equivalent of several months' worth of a reasonably modified payment--why should the lender bother with you? You can try telling the lender that for the last six months or more your other expenses were so high that you could not set aside even two or three hundred dollars a month that would otherwise have gone toward the mortgage payment, but in that case, how will you afford the modified payments? If you can document a "temporary" financial hardship, why haven't you contacted the servicer until now?

I am personally willing to bet that if Countrywide asked you for 30% of back payments, late fees, and legal charges, and you were only able to scrape up 20%, they'd probably play ball with you, assuming you have a good story about why there is reason to believe that you can and will make the modified payments. Workouts are a process of negotiation; that's the point. And I'll eat my blog if it turns out that Countrywide is the only servicer with a policy similar to this for late-stage modification requests. My sense is that the animus here is against Countrywide, not any coherent objection to a policy of asking borrowers to put down some "earnest money" before being given a deal that may be in everyone's financial best interest, but which is inevitably beset by moral hazard.

Friday, May 30, 2008

Countrywide wants up-front payments to discuss some loan mods? So what?

(Housing Wire) Last week’s Investor’s Business Daily painted a pretty rough picture of everyone’s favorite industry whipping post Countrywide Financial Corp., after getting wind of a servicing policy that requires some delinquent borrowers to pay 30 percent of arrearages before the lender will begin discussing loan modification options — fees that the reporter, Kathleen Doler, called “a steep entrance fee.”

From the story, an indictment:

They said Countrywide is requiring homeowners to pay 30% of the amount they are in arrears on payments, plus 30% of accrued late fees and 30% of attorney fees already incurred in the foreclosure process.

The payment doesn’t guarantee a loan modification, they said. It is only the price some consumers must pay to begin discussions with Countrywide, based in Calabasas, Calif.

The policy seems to go against Countrywide’s advertising and public statements about its efforts to help troubled borrowers stay in their homes. It comes amid a major drive by Congress and the Bush administration to steady the housing market and help homeowners avoid foreclosure.

It’s not a blanket policy, as Doler notes, but some borrowers are seeing this policy while others are not. And, of course, Doler finds a few consumer advocates more than willing to demonize the policy, and Countrywide as well. Not hard to do these days.

For its part, Countrywide told IBD that the policy was intended to be a good-faith demonstration, and suggested that the 30 percent policy is only applicable to borrowers staring down a scheduled foreclosure auction:

“It is Countrywide’s fiduciary duty to our investors to ensure that borrowers seeking workouts have the wherewithal to stay in their home,” the statement said. “For those who have not contacted the company and are seriously delinquent, the company views a 30% payment as good faith towards a modification and a demonstration of the borrower’s ability to resume and make payments in the future.”

Which is another way of saying that this policy likely doesn’t even enter into the equation with a one month delinquent borrower. Probably not even a 3 month delinquency. (It probably would behoove Countrywide’s press folks to learn the value of actually communicating with the press, but that’s a story for another day.)

Allow us to paraphrase what we think the nicely-worded press statement really says: look, if we’ve tried and wasted our resources trying to contact a borrower anywhere from the past 8 to 12 months and they don’t bother to return any of our calls, read any of their mail, or answer the door when we send a countless loss mit specialists out there, you’ll have to forgive us for calling bullshit when they decide to call asking for a loan mod the day before the foreclosure sale.

That’s what we’d suspect the policy really is, although we can’t be sure, since Countrywide has decided to play coy with the press on this.

I’m sure, given Countrywide’s recent track history in the servicing arena, that some borrowers have been assigned the 30 percent fee erroneously; I’m also pretty sure that many borrowers can’t negotiate Countrywide’s maze of a loss mitigation department fast enough to formally request a loan modification before their account gets flagged for the 30 percent requirement. And that’s a real problem — problem enough even to suggest that the up-front loan mod fee should be rescinded.

But that’s a very different argument than simply suggesting that the policy is inherently wrong to begin with, and that Countrywide’s policies “change with the wind” — an allegation made by one Glenn Neely of American Mortgage Resolution Advocates LLC in the story. (I tried to find the company on the Web, but apparently they have no Web site.)

Loan modifications are costly, and can be time consuming — if you’ve ever worked in servicing for a meaningful period of time, you learn pretty quickly that the borrowers who go AWOL until right before the foreclosure sale, or right before an eviction, aren’t usually the ones interested in keeping their home and negotiating in good faith. It may not be pretty to say, but it’s absolutely true, and it happens all the time.

Beyond that, by deciding to hide from the servicer for months on end, fees and arrearages have been piling up — totals that must be paid by the servicer and/or borrower regardless of whether the loan is restructured or not. Which means qualifying for a viable loan modification is that much harder to do, even if the borrower isn’t playing games; after all, isn’t the entire point here for servicers to invest their limited resources in preventing avoidable foreclosures?

If so, I’d argue that such a policy — unpopular as it may seem — could be helping Countrywide do just that; and borrowers making good-faith and early efforts to work with their servicer on a solution should be thanking their lucky stars that it exists.

April Workouts Move Higher; Evidence of Success?

(Housing Wire) HOPE NOW, the well-known alliance of mortgage servicers, counselors, and investors pulled together by Treasury officials last year, said Friday morning that mortgage servicers provided loan workouts to approximately 183,000 homeowners in April 2008, up 23,000 from the total recorded in March — the highest monthly amount since the program was begun in July 2007. Since July 2007, nearly 1.6 million troubled homeowners have been extended loan modifications and repayment plans, the group said in a press statement.

“These numbers clearly demonstrate that HOPE NOW is succeeding at helping homeowners avoid foreclosure and stay in their homes,” said HOPE NOW executive director Faith Schwartz.

Estimates from the group show that approximately 106,000 of the prime and subprime loan workouts conducted by mortgage servicers in April were repayment plans, while approximately 77,000 were loan modifications. The current pace set in April would translate into just over 548,000 loan workouts in the second quarter; that total would be well above the 502,520 recorded during Q1.

Like most housing news these days, however, the good news comes with requisite ominous; HOPE NOW also reported 80,926 foreclosures in April, a total that would translate into 242,778 if extrapolated through the second quarter. That total would be an 18 percent jump in foreclosures during the quarter — meaning that while more borrowers are getting help, more borrowers are troubled in total as well.

To normalize comparisons, it’s worthwhile to look at total workouts against foreclosure activity.

In 2007’s third quarter that ratio stood at 2.95, meaning that for every 3 borrowers helped, one lost their home. By Q4, that ratio had risen to 3.13 — good news. In the first quarter of this year, the workout:foreclosure ratio fell to 2.44 despite an increase in workouts, suggesting servicers were having trouble keeping up with an influx of troubled borrowers.

April’s ratio? 2.26 borrowers in workout per foreclosure, the worst reading yet.

(Tanta @ Calculated Risk) Meanwhile, the Hope Now folks released a pathetic set of data charts on mortgage loss mitigation through April 2008. For heaven's sake, we're the financial industry, people. We're supposed to be able to use Excel properly.

There are some really puzzling features of this data, like why the total loan counts have not changed since October (see the first page). Since those loan counts are used to calculate the 60+ day delinquency percentage, the failure to update the total count makes those numbers rather dubious. On page two, I found myself unable to make sense of the completed FC sales/FC starts calculation using any possible definition of "five months" I can think of. Perhaps I am misreading the footnote. In any event, I gave up on my ambition to put this data into a more sensible format for you, after I lost confidence in the data integrity.

So here's from the press release, instead:

The April report from HOPE NOW estimates that on an industry-wide basis:

* Mortgage servicers provided loan workouts for approximately 183,000 at-risk borrowers in April. This is an increase of 23,000 from the number of workouts in March 2008 and is the largest number of workouts completed in any month since HOPE NOW’s inception.

* The total number of loan workouts provided by mortgage servicers since July 2007 has risen to 1,558,854.

* Approximately 106,000 of the prime and subprime loan workouts conducted by mortgage servicers in April were repayment plans, while approximately 77,000 were loan modifications.

Maybe next month the report will be cleaned up a little and we can look in more detail at these numbers. If we can shame Hope Now into issuing something readable.

HUD: Brokered Loans More Expensive

(Housing Wire) Clearly seeking to buttress its proposal to reform the Real Estate Settlement and Procedures Act, the U.S. Department of Housing and Urban Development released a study late Thursday suggesting that brokered loans are, on average, more expensive for consumers than borrowing direct from a lender — and that brokers were pocketing nearly all of the benefits of so-called yield spread premiums for themselves, rather than passing any cost savings on to consumers.

According to the study, which was conducted by researchers at the Urban Institute and used data on originations from May and June of 2001, borrowers saw no reduction in out-of-pocket fees when they agreed to higher interest rates and a yield spread premium. In fact, many borrowers saw no reduction at all in fees and often paid more in total loan fees, compared to borrowers that did not agree to pay a higher interest rate.

The study suggested that loans made by mortgage brokers were approximately $300 to $425 more expensive than those made by direct lenders, other loan characteristics being held equal. Depositories (banks, thrifts, and credit unions) were the lowest cost originator, followed by large mortgage banks. Smaller mortgage banks were found to have terms closer to those of mortgage brokers than to large mortgage banks and depositories, according to the study.

The Urban Institute’s study found significant disparities in closing costs even when it compared borrowers with identical credit scores, loan terms and mortgage amounts; in addition, variations appeared to be based on education level, geography, race and ethnicity as well. Even after accounting for these factors, there remain very substantial variations in what consumers pay at settlement.

“This report demonstrates once and for all that the process consumers endure when they buy their homes is entirely too confusing,” said HUD Deputy Secretary Roy A. Bernardi. “Clearly, we need to open the window and allow consumers to understand the fine print and shop more effectively for the largest purchase of their lives.”

Minorities still paying more?
The study found evidence — sure to fire up consumer advocates — that both Hispanic and African-American families paid more for their mortgages, on average, than did non-minorities. African-American families paid an average of $415 more in total loan origination fees than non-minorities, according to the study; Hispanic borrowers paid an average of $365 more.

A closer inspection of the study’s findings in this red-hot area, however, suggests that the conclusions are less than conclusive evidence of predatory lending practices than one might think. The study’s author cautions as much.

“The interpretation of the race differentials cannot be entirely clear from the data available in this
study,” the study’s author, Dr. Susan Woodward, writes. “The discussion in the later chapter on defaults will reveal that borrowers who live in neighborhoods with a high fraction of African Americans have higher default likelihoods than do other borrowers, other things equal, while Latino borrowers have lower default likelihoods than other borrowers.”

Woodward notes that “default patterns are in the same direction as some of, but not all, the differences in pricing by race.”

Brian Montgomery, HUD Assistant Secretary for Housing and Federal Housing Commissioner, said the study paints an overall picture suggesting that informed consumers pay less.

“The core problem is that too many Americans sign a mountain of documents they don’t understand and pay thousands of dollars for services that they’ve probably never heard of. This report proves that the more informed you are, the less you pay.”

HUD’s proposal to reform RESPA is part of the agency’s effort to reduce what it calls “junk fees” at origination.
In particular, HUD wants to change what information is provided in the so-called Good Faith Estimate that lenders provide to borrowers prior to mortgage closing; HUD wants a standard GFE for both brokers and lenders that discloses key elements of the loan and sources of compensation for third-party brokers.

The proposed GFE would consolidate closing costs into major categories, and display total estimated settlement charges prominently on the first page, a move HUD says will help a borrower more easily compare loan offers. In addition, HUD’s new proposed rules would specify the charges that can — and cannot — change at settlement; for those fees that can change, HUD also would limit the amount of allowable changes.

Bloomberg's weird foreclosure and delinquency numbers

(Tanta @ Calculated Risk) Forgive me for once again falling into despair over the media's inability to report sensibly and critically on foreclosure and delinquency numbers. I should be immune by now. If you are wiser than I, just skip to the next post. If you still cradle to your wounded heart the battered but indomitable belief that even media outlets like Bloomberg can learn to spot the flaws in a reported statistic, and that there is a point to doing this, click the link below.


The headline: "New Overdue Home Loans Swamp Effort to Fix Mortgages in Default." We will take this as a promise that the article is going to demonstrate something about the relationship between newly delinquent loans and workout efforts.

The lede:

    May 30 (Bloomberg) -- Newly delinquent mortgage borrowers outnumbered people who caught up on their overdue payments by two to one last month, a sign that nationwide efforts to help homeowners avoid default may be failing.

    In April, 73,880 homeowners with privately insured mortgages fell more than 60 days late on payments, compared with 39,584 who got back on track, a report today from the Washington-based Mortgage Insurance Companies of America said.

The last of eighteen paragraphs:

    Last month's 54 percent "cure ratio" among defaulted mortgages compares with 80 percent a year earlier and 87 percent in March. The comparison may not be valid because one lender changed the way it calculated defaults and cures reported to the insurers.

So we start with an eye-popping number, and then only at the very end do we note that this number may mean much less than meets the eye. This is, in fact, what MICA said in its data release:

    WASHINGTON, D.C. May 30, 2008 Mortgage Insurance Companies of America (MICA) today released its monthly statistical report for April which includes a one-time adjustment to the number of defaults and cures and also notes an 11.7% increase in new insurance written year-over-year.

    As a result of a major lender’s change to its methodology for recording delinquencies, and to how it reports them to MICA’s members, there was a sharp increase, to 73,880, in reported defaults in April. The increase includes both newly reported defaults for the month, as well as previously unreported defaults by this lender.

    MICA’s members reported 39,584 cures in April. This statistic also reflects the above noted change in reporting defaults.

I assumed when I read this that somebody--a large somebody, since it significantly impacts the data--switched over from the OTS method to the MBA method of delinquency reporting. I do not know if this is the case or not. Before I published this article, however, I might have called MICA for a comment. In any case I might have been more cautious with headlining a number that is described as a "one-time adjustment" to the data collection. Burying that in the last paragraph is . . . disingenuous.

I'm also a touch troubled by the statement that "Last month's 54 percent 'cure ratio' among defaulted mortgages compares with 80 percent a year earlier and 87 percent in March." That is literally true. However, the
cure rate in December of 2007 was 54.1% and in January of 2008 was 51.4%. Could there be some seasonality in these numbers? Another confounding factor besides new delinquencies?

So what about the second half of the claim?

    "Modifications are not occurring nearly at the numbers necessary to stem the foreclosure crisis," Allen Fishbein, housing director for the Consumer Federation of America in Washington, said in a May 19 interview. "People are still going into foreclosure when, with a writedown on existing principal, they could still stay in their homes."

    In the first two months of 2008, lenders modified loans for 114,000 borrowers while starting 346,000 foreclosures, according to a study by the Durham, North Carolina-based Center for Responsible Lending. In April, 22 percent of the homes in the foreclosure process had been taken over by lending banks; a year earlier, that figure was 15 percent, according to Irvine, California-based data provider RealtyTrac.

Did you assume, when you read that second paragraph, that the 114,000 modifications were exclusive of (not the same loans as) the 346,000 foreclosure starts? It seems you were supposed to assume that. But is is true? "Foreclosure start" simply means that a legally-required preliminary filing (a Notice of Default, Notice of Intent, or Lis Pendens, depending on the state and the type (judicial or non-judicial) of foreclosure) has been made. That is a "start" because in most jurisdictions it will be another 90 to 180 days, or even more in some states, until the auction can be scheduled, the home sold, and the foreclosure "completed." My own view is that the "best practice" is to work hard to negotiate a modification, if possible, in the early days of delinquency before starting the foreclosure process. However, that is not always possible, and it is also "best practice" to continue to attempt reasonable workouts during the foreclosure process all the way up the day before sale, if necessary. There are certainly cases in which a borrower simply cannot be brought to talk to the servicer until the initial FC filing galvanizes him into it. All of this means that it is impossible to look simply at modifications completed in a period compared to foreclosures started in a period and conclude that the starts will never get a mod or that the mods were not effected after the FC start.

Besides that, where is the data to back up the idea that a 30% ratio of modifications to foreclosure starts is poor performance? I am personally not sure that much more than 30% of recent vintage loans can be saved. Back out fraud, flippers and speculators, and borrowers whose loan balances would have to be reduced by half in order to get a workable payment--which would most likely exceed the cost to the investor of a foreclosure--and 30% doesn't sound so shabby.

As far as the second claim--the increase from 15% to 22% of homes in foreclosure "taken over by lending banks," I'm prepared to read that literally. There is no jurisdiction in which a foreclosed home must be purchased by the lender at the foreclosure sale; all jurisdictions require public auctions in which third parties can bid. An increase in REO (lenders "winning" the auction) does not necessarily mean an increase in completed foreclosures; it can mean that fewer third parties care to bid on foreclosed homes. All the data I have seen recently suggests that this is the case: buyers are still wary of further price declines, and lenders are still bidding higher than potential RE investors. One therefore expects the FC-to-REO numbers to increase. But they can do that even in the absence of an increase in total foreclosures. In order for this statistic to mean much, we have to know how much of the increase is due to more foreclosures, and how much due to fewer third-party bidders.

So put these dubious statistics together--the rest of the Bloomberg article is basically filler--and you get anomalous data on new delinquencies, ambiguous data on modification-to-foreclosure-starts, and a claim about REO rates substituting for a claim about foreclosure completion rates. How about taking back that headline, Bloomberg?

You know, last year I might have had some more sympathy for these reporters. We were just newly into the whole problem and a lot of concepts--delinquency reporting methodology, foreclosure processes, various ways of reporting "cures" and "starts"--were all new to everybody except industry insiders and a handful of totally Nerdly blog readers. But surely by now we can have moved the ball forward a couple of yards? I am here to affirm that if you have been reporting on "the foreclosure crisis" for a year or more and you still can't ask basic questions about the press releases you read, you aren't doing your job.

Wednesday, May 28, 2008

Alt-A Problems Grow, While Subprime Takes Turn for the Worse

(Housing Wire) Despite an absolute dearth of ARM resets, the number of severely delinquent Alt-A borrower continues to grow, according to a report released late last week by Clayton Holdings, Inc. (CLAY: 5.89, 0.00%). The number of troubled Alt-A borrowers in the 2007 vintage rose an eye-popping 26.5 percent from March to April alone, nearly reaching 17 percent of loan volume.

The 2007 vintage isn’t the only Alt-A vintage facing problems, of course: 19.3 percent of borrowers with loans originated in 2006 were more than 60 days delinquent at the end of April, a jump of nearly 10 percent from March. Cumulative losses percentages for 2006 vintage Alt-A first liens continued what Clayton analysts called a “concerning upward trend,” with losses for 2006 issues running at more than three times the pace set by the 2004 and 2005 issues.

The troubles in Alt-A are appearing despite the fact that very few borrowers in any vintage are yet to face a strong wave of rate-reset activity. The graph to the right shows that, if anything, lenders and policymakers should be concerned about a wave of pending Alt-A resets that are looming in the back half of 2009.

a smoking gun?
click for larger view (source: Clayton)

That wave looming wave of resets may be particularly troubling, given the current U.S. interest rate and LIBOR outlook held by most economists and bank officials; most see interest rates flat to increasing over that time frame, both within the U.S. and abroad, a pattern that could bode poorly for borrowers facing rate adjustments.

The good news is that one-month roll rates — which measure the transition of loans from one stage to the next (i.e., performing to delinquent, delinquent to severely delinquent, etc.) — for nearly every Alt-A vintage decreased for the month, with only the 2003 vintage showing an increase. That sort of respite may end up being short lived, however, given the sharp increase in deliqnuencies and continued downward trending of cure rates for troubled borrowers.

Subprime woes, renewed?
Subprime mortgages aren’t sexy to most financial media any more, and numerous reports lately have suggested that the problem in subprime mortgages has largely been mitigated by lower interest rates that have limited payment shock for the most vulnerable borrowers.

a smoking gun?
click for larger view (source: Clayton)

All of which is true; but that shouldn’t hide the fact that 60 day delinquencies in the 2006 subprime vintage rose 5.4 percent in April and now stand at 34.6 percent of remaining collateral; in the 2007 vintage, 23.1 percent of collateral is more than 60 days in arrears, as well.

While resets are an immediate problem, there are yet a good number of resets that need to work their way out of the financial system (see graph to the right).

Perhaps more telling, toll rates increased in April on both subprime first and second liens after sharp declines in recent months, marking perhaps a renewed cycle for troubled subprime borrowers. Many media pundits have pointed to declining roll rates as evidence that the worst of the subprime crisis is behind us; the jump in rolls might suggest otherwise.

Appraisal tightening: back to 1975?

(Calculated Risk - Tanta) As a general rule I do not recommend reading "Realty Times" at 6:00 a.m., but I'm blaming twist.

It's not that people don't want homes, it's that they can't buy them under the stricter lending standards. . . .

Lenders are turning the clock back to 1975, requiring larger downpayments and higher credit scores to qualify for low interest rates. That's only prudent, but what they're also doing is tightening appraisals on properties that are being sold or refinanced.
In 1975, it was not unknown--it was in fact only made illegal that year by the Equal Credit Opportunity Act--to inquire about a married woman's future childbearing plans, her use of contraception, and her religion before deciding whether to "count" any income she might produce for purposes of qualifying for a loan. (If she said "Catholic," forget it.) If you think we are experiencing 1975 mortgage loan underwriting, you were born yesterday.

So why is it "prudent" to require larger downpayments and higher credit scores, but another thing entirely to tighten up on appraisals? And how is this nefarious appraisal tightening preventing people from buying homes?


There must be an anecdote, and we actually get a twofer:
Dallas Realtor Mary O'Keefe was hit with the new lending realities in a double whammy just this week.

"I had a closing that was delayed because the lender wanted a second appraisal," says Mary O'Keefe, a Dallas broker. "I told my clients absolutely no way would they pay for a second appraisal."

That deal finally closed, but O'Keefe lost another. A client wanted to take out some equity on her townhome, buy another property to live in, and save the townhome for mailbox money. The client had an 800-plus credit score, was approved by a lender, but went to her personal banker for the HELOC. She had an appraisal from the year before for $467,000 giving her about $155,000 in equity.

Because banks want to use appraisals no less than six months old, the personal banker called for a drive-by appraisal, which came in at $400,000, more than $20,000 below the lowest priced home in the community, and $75,000 below a home that sold a year ago three doors down.
So the purchase transaction actually did close, although it was--gasp!--"delayed," but this poor lady who wanted to cash out the "equity" in a townhome she was not going to occupy was stymied by some evil bank who--get this--wouldn't use a year-old appraisal. Turn on the disco ball and haul out your lava lamps! It's the seventies!

I confess to being somewhat alarmed, by the way, about a Realtor who tells a buyer that "no way" are they going to pay for a second appraisal. You would not, in the current environment, even consider paying another $350-$400 to assure yourself that you are not overpaying for your property by thousands of dollars?

The real problem here is that Realty Times wants to continue to perpetrate the view that establishing reliable appraised values is not in a homebuyer's best interest as well as a lender's. For some reason this reminded me of a story we posted just a year ago, in which the Wall Street Journal waxed outraged about some poor rich doctor who was having trouble getting his loan approved to buy a property for $1.05 million when the lender had gotten a broker price opinion stating that it was only worth $750,000. I did a bit of looking in the county real estate records, and it appears that our man did indeed buy the home on April 17, 2007 for $1.05 million. On April 27, 2007, the county assessed the property for tax purposes at $793,400. Per the WSJ he borrowed $885,000. I wonder if he still feels ripped off by the lender who told him he was overpaying for that home.

David Leonhardt Buys a House

(Felix Salmon) Many congratulations to David Leonhardt, who has just bought a house in Washington. Leonhardt is the person behind the NYT's truly wonderful rent vs buy calculator, which should be the first stop of call on the internet for anybody thinking of buying a house.

The reasons Leonhardt always rented, when he was in New York, were very good ones - and the reasons why he's buying, now, are good as well. Even though he believes the value of his house is going to fall, it can still make sense to buy, since a house is not an investment, or not wholly, and moving house if and when you think prices have bottomed is not easy or fun, and in any case only fools ever try to time the market. Plus, of course, in an inflationary environment, a fixed-rate mortgage is a much better bet than rents which are liable to rise at least in line with inflation and quite possibly even more.

Of course, just because Leonhardt is renting doesn't make this a good time to buy, necessarily. Like most sensible buyers, Leonhardt is buying now because he's moving, and not the other way around. And he also says that while he did decide to buy in Washington, he still thinks that renting is almost certainly still the better option in New York.

What he doesn't mention is that he a very, very rare bird these days: a long-time renter, who has been saving up his down-payment for years, who is now buying his first home. Nationally, the opposite is much more common: people who bought homes they couldn't afford, who are losing those homes, and who are finding themselves back in the rental market.

Most potential house buyers, then, aren't just buying a house; they're selling one, too. In this market, with sales plunging, that can be very difficult indeed. Leonhardt doesn't have to worry about liquidating his old house in order to be able to make the downpayment on the new one; most Americans don't have that luxury.

And of course Leonhardt has that downpayment, which, these days, is very likely to be at least 20%. Again, this is very rare: Americans got used to the idea of buying houses with no money down, or at least very little. They're quite shocked when they discover, today, that even though they could affford a mortgage, no mortgage company is willing to lend to them unless they come up with a large downpayment - one which, most of the time, they don't have.

The history of the housing boom is one in which potential buyers were perfectly happy to pay as much as the bank was willing to lend them. That's still the case. Demand has fallen, but not enormously. The thing which has really dropped precipitously is the supply of home credit. Which is another reason why people like Leonhardt aren't going to help turn the housing market around. In order for house prices to rise, we don't need more would-be buyers, we need looser lenders. That isn't going to happen any time soon - and nor should it.

Tuesday, May 27, 2008

HELOCs and auto sales

From Eric Dash at the NY Times: As Credit Tightens, the Auto Industry Feels the Pain

Home equity loans, which had been used in at least one of every nine deals, when lenders were more generous, are no longer a source of easy money for many prospective buyers.
As home values have declined, millions of consumers have maxed out on home equity debt. In hot markets like California, nearly 30 percent of all consumers tapped into the value of their homes to help finance their new cars, according to CNW Marketing Research. In Florida, about 20 percent used home equity loans. New car sales in both states are down about 7 percent.
According to the NY Times graphic "Mortgaging the House to Buy a Car" (see article), about 1.9 million new cars were purchased using HELOCs in 2007, or 11.8% of the 16.2 million total new cars sold in 2007.

Although HELOCs were used for a variety of household expenditures, probably the two most common uses were for new cars and home improvements. It's not surprising that these two areas are being severely impacted as lenders sharply restrict HELOC borrowing.

Saturday, May 24, 2008

A [State] Congressional Speculator?

(Calculated Risk - Tanta) This is an update to post below on Rep. Linda Richardson's foreclosure woes.

Gene Maddaus of the Daily Breeze kindly forwarded today's additions to the saga. There are not two, but three homes owned by Richardson in foreclosure. And yes, she appears to have cashed out her primary residence back in 2006 to fund her campaign for State Assembly. So it looks like a pattern.

* * * * * *

I have been watching the story of Representative Linda Richardson and her foreclosure woes for a while now, while heretofore hesitating to post on it. For one thing, the original story--a member of Congress losing her expensive second home to foreclosure--had that kind of celebrity car-crash quality to it that I'm not especially interested in for the purposes of this blog. For another thing, posting about anything even tangentially related to politics invites the kind of comments that personally bore me to tears.

All that is still true, but the story has taken such an unfortunate turn that I feel obligated to weigh in on it. Specifically, Rep. Richardson is threatening us:

Rather than shy away from voting on mortgage-related bills, Richardson said her experiences could help her craft legislation to make sure others don't experience what she did. For example, she sees a need to add steps to inform property owners before their property can be sold.

"We have to ensure that lenders and lendees have the tools with proper timing to resolve this," she said.
If Rep. Richardson is going to base legislative proposals on her own experience, then it matters to the rest of us what that experience was. So click the link below if you can stand to hear about it.

* * * * * * * * * *

The story was originally reported in the Sacramento Capitol Weekly, and picked up by the Wall Street Journal, and thence covered by a number of blogs, with the storyline being that Rep. Richardson "walked away" from her home, a second home she purchased in Sacramento after being elected to the State Assembly. The "walk away" part came from a remark made by the real estate investor who purchased the home at the foreclosure auction, not Rep. Richardson or anyone who could be expected to understand her financial situation, but that didn't stop the phrase "walk away" from headlining blog posts.

Rep. Richardson has variously claimed at different times that the house was not in foreclosure, that she had worked out a modification with the lender, and that the lender improperly foreclosed after having agreed to accept her payments. Frankly, unless and until Rep. Richardson gives her lender, Washington Mutual, permission to tell its side of the story--I'm not holding my breath on that--we're unlikely to be able to sort out this mess of claims to my satisfaction, at least. It's possible that WaMu screwed this up--that it accepted payments on a workout plan with the understanding that foreclosure was "on hold" and then sold the property at auction the next week anyway. It's possible that Richardson's version of what went on is muddled, too. Without some more hard information I'm not inclined to assume the servicer did most of the screwing up, if for no other reason that we didn't find out until late yesterday, courtesy of the L.A. Land and Foreclosure Truth blogs, that Richardson's other home--her primary residence--was also in foreclosure proceedings as recently as March of this year, a detail that as far as I can tell Richardson never disclosed in all the previous discussion of the facts surrounding the foreclosure of her second home.

What part of this I am most interested in, right now, is the question of what in the hell exactly Richardson was thinking when she bought the Sacramento home in the first place. Since the story is quite complex, let's get straight on a few details. Richardson was a Long Beach City Council member who was elected to the state legislature in November of 2006. In January of 2007 she purchased a second home in Sacramento, presumably to live in during the Assembly session. In April 2007, the U.S. Congressional Representative from Richardson's district died, and Richardson entered an expensive race for that seat, winning in a special election in August of 2007. By December 2007 the Sacramento home was in default, and it was foreclosed in early May of 2008. The consensus in the published reports seems to be that Richardson spent what money she had on her campaign, not her bills. According to the AP:
Richardson, 46, makes nearly $170,000 as a member of Congress and was paid $113,000 during the eight months she served in the state Assembly in 2007 before her election to Congress. She also received a per diem total of $20,000 from California, according to a financial disclosure form she filed with the House of Representatives clerk.
It seems to me that all this focus on what happened after she bought the Sacramento home--running for the suddenly-available Congressional seat, changing jobs, etc.--is obscuring the issue of the original transaction.

In November of 2006, Richardson already owned a home in Long Beach. As a newly-elected state representative, she would have been required to maintain her principal residence in her district, but she would also have had to make some arrangements for staying in Sacramento during Assembly sessions, given the length of the commute from L.A. County to the state capitol. She seems to have told the AP reporter that "Lawmakers are required to maintain two residences while other people don't have to," which is not exactly the way I'd have put it. Lawmakers are required to maintain one primary residence (which need not be owned) in their district. They are not required to buy a home at the capitol (of California or the U.S.); many legislators do rent. Richardson is a single woman with no children, yet she felt "required" to purchase a 3-bedroom, 1 1/2 bathroom home in what sounds like one of Sacramento's pricier neighborhoods for $535,500, with no downpayment and with $15,000 in closing cost contributions from the property seller. (The NAR median price in Sacramento in the first quarter of 2007 was $365,300.)

I have no idea what loan terms Richardson got for a 100% LTV second home purchase in January 2007, but I'm going to guess that if she got something like a 7.00% interest only loan (without additional mortgage insurance), she got a pretty darn good deal. If she got that good a deal, her monthly interest payment would have been $3123.75. Assuming taxes and insurance of 1.50% of the property value, her total payment would have been $3793.13.

The AP reports that Richardson's salary as a state representative was $113,000 in 2007, and she received $20,000 in per diem payments (which are, of course, intended to offset the additional expense of traveling to and staying in the Capitol during sessions). I assume the per diem is non-taxable, so I'll gross it up to $25,000. That gives me an annual income of $138,000 or a gross monthly income of $11,500.

The total payment on the second home, then, with my sunny assumptions about loan terms, comes to 33% of Richardson's gross income. I have no idea what the payment is for her principal residence in Long Beach. I have no idea what other debt she might have. I am ignoring her congressional race and job changes and all that because at the point she took out this mortgage, that was all in the future and Richardson didn't know that the incumbent would die suddenly and all that. I'm just trying to figure out what went through this woman's mind when she decided it was a wise financial move to spend one-third of her pre-tax income on a second home. (There's no point trying to figure out what went through the lender's mind at the time. There just isn't.)

Now, Richardson has this to say about herself:
"I'm Laura Richardson. I'm an American, I'm a single woman who had four employment changes in less than four months," Richardson told the AP. "I had to figure out just like every other American how I could restructure the obligations that I had with the income I had."
Yeah, well, I'm Tanta, I'm an American, I'm a single woman, and I say you're full of it. You need to show us what your plan for affording this home was before the job changes, girlfriend. You might also tell me why you felt you needed such an expensive second home when you had no money to put down on it or even to pay your own closing costs. As it happens, the Mercury News/AP reported that by June of 2007--five months after purchase--you had a lien filed for unpaid utility bills. You didn't budget for the lights?

But what are we going to get? We're going to get Richardson all fired up in Congress about tinkering with foreclosure notice timing, which is last I knew a question of state, not federal, law, and which has as far as I can see squat to do with why this loan failed.

Quite honestly, if WaMu did give Richardson some loan modification deal, I'd really like to know what went through the Loss Mit Department's collective and individual minds when they signed off on that. Sure, Richardson's salary went up to $170,000 when she became a member of the U.S. Congress, but what does she need a home in Sacramento for after that? Where's she going to live in Washington, DC? And, well, her principal residence was also in the process of foreclosure at the same time. I suppose I might have offered a short sale or deed-in-lieu here, but a modification? Why would anybody do that? Because she's a Congresswoman?

I'm quite sure Richardson wants to be treated like just a plain old American and not get special treatment. Well, I was kind of hard on a plain old American the other day who wrote a "hardship letter" that didn't pass muster with me. I feel obligated to tell Richardson that she sounds like a real estate speculator who bought a home she obviously couldn't afford, defaulted on it, and now wants WaMu to basically subsidize her Congressional campaign by lowering her mortgage payment or forgiving debt. And that's . . . disgusting. At the risk of sounding like Angelo.

I know some of you are thinking that maybe poor Ms. Richardson got taken advantage of by some fast-talking REALTOR who encouraged her to buy more house than she could afford. According to Pete Viles at L.A. Land,
She likes the Realtors, and they like her. She filed financial disclosure forms with the House Ethics Committee reporting the National Assn. of Realtors flew her to Las Vegas in November to help swear in the new president of the association, Realtor Dick Gaylord of Long Beach.

In suggested remarks* at the NAR gathering, also filed with the House, Richardson's script read: "I might be one of the newest members of Congress but I am not a new member of the REALTOR Party. When I needed help to win a tough primary, REALTORS stood up and backed me even though I was the underdog."

--Real estate industry professionals have given her $39,500 in campaign contributions in the current election cycle, according to Open Secrets.
No wonder she's blaming the lender.

Friday, May 23, 2008

Ranieri Pursuing $1 Billion Distressed Mortgage Fund

(Housing Wire) Lewis Ranieri, the mortgage-backed bond market pioneer that made headlines earlier this week for his involvement in troubled Franklin Bank Corp., is the latest to jump into the distressed mortgage space with news Friday that a fund he manages has been seeking to raise $1 billion in fresh capital.

Selene Residential Mortgage Opportunity Fund LP, which counts Ranieri among its managing partners, has raised just $151 million so from investors in New York, Ohio and Pennsylvania as of April 15, according to a report published by Bloomberg News.

Further research by Housing Wire shows that the $28 billion South Carolina Retirement System, a pension fund, also invested $200 million with Selene earlier this month. The fund is one of the few U.S. pensions with permission to invest in alternative funds.

From Bloomberg:

“Our plan is to raise $1 billion and buy delinquent mortgages that we will recast and refinance and try to keep the borrower in the house without a foreclosure,” said David Creamer, a Selene managing partner and former GMAC executive, in an interview.

Interestingly, Ranieri seems, if anything, to be late to the distressed mortgage asset party. Other large players have been aggressively attempting to stake out positions in distressed mortgages since earlier in the first quarter of this year.

BlackRock Inc. (BLK: 207.35, +1.96%), the biggest publicly traded U.S. asset manager, said in March it was backing a new company called Private National Mortgage Acceptance Co. LLC, also known as PennyMac, that will buy mortgages at a discount and look to make money in the so-called scratch-and-dent business. PennyMac has a $2 billion war chest to step in and start buying, and will bankroll its own in-house servicing platform; BlackRock also recently negotiated a deal to snap up $15 billion in mortgages from Swiss bank UBS AG (UBS: 29.13, -2.61%).

Beyond BlackRock’s move, Marathon Asset Management, LLC, a global investment manager with $10.6 billion under management and over $20 billion in assets, is also buying up distressed mortgages and is also pumping the mortgages it buys to its own captive servicing operation, Phoenix-based Marix Servicing, LLC. The company has said in recent weeks that it has been buying well over a billion dollars in bad mortgages for the platform to service.

Selene snapped up the mortgage servicing platform of bankrupt Aegis Mortgage Co., a former Cerberus Capital Management LLC venture that went belly-up in August last year.

Related stories:

MarketWatch's Lew Sichelman on distrssed mortgage options

Q: I am a concerned homeowner who is currently locked into an adjustable first mortgage and a second mortgage with our credit union. I have done all of the things you suggested in your articles -- to no avail.

The rate on the ARM is locked in for the first three years. We did not want to buy out early because of the penalties, so we stuck it out until the three years was almost up. The market has since taken a serious nosedive. We were all approved and ready to close when we were given the bad news that our house is now worth $70,000 less than it was the year before and $20,000 less than what we originally paid.

Our mortgage did adjust in December and is due to adjust again in November. I spoke to our lender who said the rate would be going up 1.5 percent. That's at least $200 more per month, making our payment a total of $350 more per month since December. I spoke to three different departments -- refinance, retention and modification -- but, of course, none could help us out.
We were also told that we were not candidates for a rate freeze. I guess it's easier for them to foreclose on the homeowner. Any suggestions?

A: No, it's not easier for lenders to foreclose. It's an expensive, time-consuming process, from which arise no winners -- only losers, you and your lender. You are out on your fanny, and while your lender will eventually find someone else to buy your house, the company will be out thousands by then. So, no, foreclosure is a tale of woe for all parties -- except perhaps for the middlemen who are paid to fix up the house, keep it in good working order while it is sitting empty and sell it.

But that doesn't answer your question. As far as suggestions go, I am running out of ideas. You didn't say you couldn't afford to make the higher payments, so if you can continue to pay your mortgage, than do so. If you get behind, your lender will eventually come calling but by then your credit record will be laced with late payments and perhaps even a foreclosure.

Lenders are so overwhelmed right now with problem loans that they aren't even returning calls unless the borrower is at least 60 days past due. I have been telling people for years that if they can't make their payments, call their lenders right away. Now people are doing just that and their lenders aren't returning their calls. They just don't enough trained people to handle the deluge.

Besides, if you can afford to make the higher payments, your lender won't be very cooperative. You are going to have to prove you are now in over your head, perhaps way over your head. If you are in trouble, then be persistent. Call your lender every day if you have to. Don't take no for an answer, and don't take no answer for an answer, either. Keep trying until you find a sympathetic ear.

Once you get behind on your payments, you will have a better chance of being heard. If not by your current lender, then hopefully by an investor who is purchasing troubled loans from lenders for 60 to 70 cents on the dollar. These kinds of investors have what's called "patient money," which means they can work with borrowers until the market returns to "normal," whatever that is.

Because they are buying mortgages at deep discount, they can afford to rework the loans so borrowers like you can remain in their homes or sell them for what they're currently worth without incurring any sort of penalties. I've spoken to a number of this kind of investment bankers over the last few weeks, and they all say they have the dough to wait out the down market and the leeway to work with borrowers no matter what they want to do, sell or stay.

Another possibility is the Federal Housing Administration, Uncle Sam's mortgage insurer. The agency, which protects lenders in case of borrower defaults, has a program under which people like yourself can refinance their homes. There are some limitations to the FHASecure program -- it can back loans only up to $729,750, for example -- but so far, the FHA says it has helped some 200,000 owners who were either current on their loans or overdue avoid foreclosure.

There's one more point I'd like to make. As I mentioned earlier, foreclosure is a long, drawn-out "process." You aren't going to get a notice until you are at least 90 days past due, and then it could take months longer for the case to go to court, depending on the state in which you reside.

On top of that, if you don't move out, the lender will have to evict you, which could take several more months. In other words, foreclosure is a process, not a sudden event. So you will have plenty of time to get your affairs in order and take the steps that are necessary to move on.

Renters are bad people?

(Naked Capitalism) Ken Funnell at Bank Laywer's Blog fulminates about an idea to deal with the burgeoning homeowner debt crisis, namely a proposal by House Representative Raúl M. Grijalva based on (but different in some key respects) from a Dean Baker proposal called "own to rent".

While there are problems with the idea, there is more than a germ of something useful here, but Funnell resorts to harrumphing and class snobbery rather than deal with the plan substantively.

The House bill is worse than Baker's suggestion. Baker wanted homeowners facing foreclosure to be offered the option of continuing as tenants as long as they want at a "fair market rate" as determined by appraisal. The shortfall of Baker's proposal is that the tenant has an openended right to remain, and the rent adjustment is not to a "fair market" rate but based on local market inflation. Thus the proposal looks a great deal like rent stabilization in New York City. (We'll return to why even that may not be as bad as that appears in due course).

The problem is that the bank-as-landlord now has no security. True, someone who bought a home and presumably fixed it up a bit (at a minimum curtains) won't be as casual as a typical renter would be. I might tweak the proposal to give the tenant a somewhat better deal if they put up a one-month deposit over time, and had the lease renewals go to a true market rate rent, not inflation indexed from the base rent.

But as ideas go, this isn't a bad one (and it turns out some conservative economists support it). The bank was going to wind up owning the property anyhow. This move saves them the considerable expense of foreclosure (reported to commonly be $50,000) and gets them cash flow right away. It saves them the hassle of disposal in a down market and the burden of certain aspects of property maintenance (the tenant will mow the lawn). It also prevents the specter, which is apparently happening in some neighborhoods, of empty properties creating an image of desperation (highly damaging to the sales process) and in some cases, squatters moving in.

It is also simpler than a mod (you offer the tenant the rental deal and it's go or no go rather than having to see what you can do given the homeowner's financial state). In areas with strong renter protection (like the communist city of New York) you might get them to agree in the rent agreement to accelerated eviction in the case they miss more than two or three rent payments (note in some places they can't be waived but a lot of tenants won't know that and will comply with an eviction notice).

Now how does the House bill screw this up? Ironically, the critics get bent out of shape with the rent control aspects, when the real fly in the ointment with the House version (as reported in Housing Wire) is that the homeowner has to have had his mortgage foreclosed. He can then petition the judge to stay.

Lovely. This is a lose-lose. The bank will have incurred all those foreclosure expenses, the now-former owner has to incur costs of his own to file to get the rental offer, and has had his already-bad credit record completely trashed by the foreclosure. And the indignities of the foreclosure process guarantees he will not have a good relationship with his new landlord. The original Baker process might leave the former owner feeling good that he was able to stay in his home and neighborhood; good will is likely to produce good behavior. Having the homeowner have to endure the foreclosure process to win the right to rent will assure acrimony and increase the odds of the property being trashed upon vacancy.

But what is Funnell's main objection? Renters are bad for neighborhoods:
it's not been my personal experience that "home renters" save a single family neighborhood; it's "home owners" who do that. The value of emotional pride of "ownership" should not be underestimated, nor should the fact that ensuring that upkeep, maintenance and repairs are performed promptly as needed protects the owner's monetary investment in the home. The worst neighbors I've had have been renters of single family homes situated in neighborhoods consisting primarily of owner-occupied houses.

Let's look at the logic here, It's "Ownership Society" plain and simple. Those who own homes are responsible and take good care of it; mere tenants are low-lifes and bad for property values.

And what's the basis for his assertion? Funnell's experience with some (perhaps as few as one) bad neighbors.

Gee, when I was growing up, we moved a lot. Once we had to rent because no suitable homes were available for purchase. And the home we rented was not only in a neighborhood of primarily owner-occupied homes, it was the best neighborhood in that town. And we didn't undergo a behavior change and trash the house because we were tenants. In fact, my mother re-did the downstairs half bath and papered the walls in one of the bedrooms without a concession from the landlord (she did get approval).

I've been a tenant and homeowner myself, and have also been a landlord. I happen to live in New York where a lot of people rent. I have friends in other cities who are landlords of residential property as well as some who are tenants in precisely the same sort of neighborhood that Funnell claims are damaged by renters.

My observations (and yes, this is anecdotal):
1. I've never heard anyone complain about "they trashed the property" tenant problems or that they neglected routine care you'd expect of a tenant. Deposits are good insurance against that. (The big issue is that tenants are sometime late in payments, but from what I have heard, small commercial tenants are worse in that regard than residential).

2. I've rented my apartment furnished (my own stuff, which is very nice, while I was overseas). An now-ex friend did more damage staying there for two weeks than two tenants did in a two-year period.

3. People are house-proud whether they own or rent. Yes, a renter will focus his expenditures on things he will take with him, but people who are slovenly will live in a slovenly fashion whether they own or rent.

My other observation is that rent stabilization is not the disaster to property owners that opponents like to say it is. Yes, landlords don't get the upside they would with market rents. so they do face an opportunity loss. But guess what? Give people property rights, and they act like they have property rights.

For instance, I know of two buildings in the area (Upper East Side on or near Park). One has quite a few rent stabilized apartments; the other has some rent controlled units (for rent control, the increases are more restricted than in rent stabilization). As long as the tenant i current on the rent in either setting, he is guaranteed a lease renewal (indeed, the tenancy rights can be passed to immediate family members).

Consider these examples: one tenant painted the entire apartment, re-did the floors, and put a new (fancy) refrigerator in the kitchen. One put in marble floors and new carpeting; another redid the wood floors, re-did the bath (including marble floors and tile), put in marble in the entryway and kitchen, put in new light fixtures, and re-did all the walls (paper or wall treatments). One re-did an entire three-bedroom apartment, which included entirely new kitchen with steel counters, new library (with built in wooden bookcases), new wooden herringbone flooring, new pocket doors with frosted glass (she reports the cost at over $1 million). Yes, these were all in rentals. I know other tenants in both buildings have made considerable improvements; I just don't have the details.

True to what you'd expect with rent control or rent stabilization, the public spaces in these two buildings are pretty dreary. And in at least one of these buildings, I am told that the landlord makes no effort to decontrol the rent controlled apartments (once the rent exceeds $2,000 a month, the landlord can attempt to destablize the apartment). In other words, the owner likes having established tenants who pay reliably even if he might in theory be able to extract more (and yes, this is an old New York landlord who owns a massive office building on Park midtown, plus other rental buildings, not a bleeding heart who inherited a building).

That suggests in other settings where tenants have strong protection of their property rights and know they have a deal, they too might (contrary to popular image) act in an owner-like fashion. They may not have the disposable income that Manhattanites do to throw money at the problem, but they might do more than one would anticipate via Home Depot and elbow grease (note that I am NOT advocating the rent control aspects of the Baker proposal, but am merely pointing out that some elements of the critique are overdone).

That is a very long winded way of saying aspersions of renters and renting should be made with great caution.

Thursday, May 22, 2008

OCC's Dugan on "unprecedented" HEL losses

Comptroller Dugan Tells Lenders that Unprecedented Home Equity Loan Losses Show Need for Higher Reserves and Return to Stronger Underwriting Practices

WASHINGTON — Comptroller of the Currency John C. Dugan said today that accelerating losses in the home equity business show the need to build reserves and to return to the stronger underwriting standards of past years.

Home equity loans and lines of credit grew dramatically in recent years, more than doubling, to $1.1 trillion, since 2002. In part, that’s because of the rapid appreciation in house prices, the tax deductibility feature of home equity loans, and low interest rates.

“But another contributing factor was perhaps not so obvious: liberalized underwriting standards,” Mr. Dugan said, in a speech to the Financial Services Roundtable’s Housing Policy Council. “These relaxed standards helped more people to qualify for loans, and more people to qualify for significantly larger loans.”

These relaxed standards included limited verification of a borrower’s assets, employment, or income; higher debt to equity ratios; and the use of home equity loans as “piggyback” loans that helped borrowers qualify for first mortgages with low down payments and without mortgage insurance, resulting in ever-higher cumulative loan-to-value ratios.

Consequently, once house prices began to decline in 2007, home equity lenders began to experience unprecedented losses. While losses have traditionally run at about 20 basis points, or two tenths of a percent of loans, they shot up to nearly 1 percent in the fourth quarter of 2007 and to 1.73 percent in the first three months of 2008.

Looked at in dollar terms, losses on all home equity loans, including HELOCs and junior home equity liens, rose from $273 million in the first quarter of 2007 to almost $2.4 billion in the first three months of 2008 – a nine-fold increase. And the largest home equity lenders are now saying that they expect losses to continue to escalate in 2008 and beyond, Mr. Dugan said.

The Comptroller said these loss numbers need to be viewed in perspective. Though accelerating quickly, they are still much lower than the loss rates for other types of retail credit, such as credit card loans.

“It’s true that home equity credit was priced with lower margins than these other types of credit, and it’s true that the product has become a significant on-balance sheet asset for a number of our largest banks,” he said. “Nevertheless, the higher level of losses and projected losses – even under stress scenarios – are what we at the OCC would describe generally as an earnings issue, not a capital issue. That is, while these elevated losses, depending on their magnitude, could have a significant effect on earnings over time, with few exceptions they are not in and of themselves likely to be large enough to impair capital.”

For the near term, Mr. Dugan said, the OCC expects national banks to continue to build reserves.

“I can’t stress enough how crucial reserves will be in helping the industry manage its way through this situation,” he said. “At some banks, the portion of reserves attributable to home equity loans just barely covers 2007 chargeoffs. With losses accelerating, those reserves are simply not going to be adequate, and that’s why our examiners are encouraging more robust portfolio analysis and loss reserve levels.”

In assessing loan loss reserves for home equity loans, he said, banks need to recognize that they are in uncharted territory. “New product structures, relaxed underwriting, declining home prices, potential changes in consumer behavior – all of these factors make it difficult to predict future performance of home equity loans,” he said.

Circumstances have changed fundamentally, and historical trends have little relevance in estimating credit losses. As a result, qualitative factors such as environmental analysis and changing consumer behavior clearly should be factored into the reserve calculation. Likewise, lenders should take into account the very real possibilities that unemployment or interest rates will increase from their quite low current levels.

Mr. Dugan said that while lenders have begun to take steps to improve underwriting on new home equity loans, more needs to be done.

“Even as banks begin to work their way through the current problems, we need to ask some hard questions about home equity product structure and underwriting criteria,” he said. “In particular, we need to revisit the problems that landed lenders where we are today – particularly some of the “shortcuts” established in reaction to aggressive competition.”

Among the practices that warrant close scrutiny are:

  • The use of home equity lines to finance down payments.
  • The appropriate use of collateral valuation tools, such as asset valuation models, which the Comptroller said must be closely managed, periodically validated, and supported with sound business rules.
  • Income documentation. Although the overt use of stated income has been largely abandoned, some lenders now ask for income information and authorization to verify it, but do not follow through. “This practice is only marginally better than expressly relying on stated income, since it is questionable whether the borrower’s belief that income will actually be verified will really induce a higher level of honesty in providing information,” Mr. Dugan said. “We need to think carefully about whether anything short of actual verification of income is acceptable from a safety and soundness perspective for most borrowers.”
  • The extended interest-only structure that home equity credit lines have in the early years of the loan term. Payment patterns can only be a proxy for a borrower’s capacity to handle a given debt level if he or she is asked to make payments that are meaningful. “Interest-only payments reflect a borrower’s capacity to pay interest on a debt, but not the debt itself,” Mr. Dugan said. “Further, this lack of structured payment discipline encourages borrowers to assume greater levels of debt, often to the limit of their ability to make minimum monthly payments. In contrast, higher payments that reduce principal address both these concerns.”

Mad Money: Everyone Benefits From Housing Bill

(NBC Mad Cap Recap) When it comes to the U.S. mortgage mess, was it the lenders or the borrowers that caused the problem?

Ask Sen. Chris Dodd, D-Conn., and he’ll tell you that at this point it doesn’t matter all that much.

There are between 9 million and 12 million homes where the debt exceeds the equity, Dodd told Cramer during an interview Wednesday, and “those numbers are growing.”

A “contagion effect” has taken hold, Dodd said, and now the weakness in residential mortgages is bleeding into other areas of the economy such as commercial mortgages, municipal finance and student loans.

But “the heart of the problem is housing,” Dodd said. And “the heart of the housing problem is the foreclosure issue. Until you address that, all of this is going to continue and get worse.”

The homeowner-rescue bill Dodd helped to push through the Senate banking committee, among other things, will provide cheaper, government-backed loans to Americans in danger of foreclosure. The full Senate still has to pass the bill and then President Bush, who's not necessarily a proponent, has to sign off on it.

Dodd admitted that the White House does at times seem insensitive to the troubles of homeowners.

“There’s this notion somehow of these people got into the mess themselves,” he said, as if “it’s their fault. There is something called ‘mortgage malpractice’ here,” meaning predatory lenders.

Many Americans seem to share the same attitude. Right or wrong, though, Dodd points out, the housing problem needs to be solved. Those who complain about their neighbors being “rescued” should consider this, he said: Foreclosures don’t just hurt the owner – they hurt the whole neighborhood.

There were 8,100 foreclosure filings a day in April, Dodd said. That means over 16,000 next-door neighbors watched their home values decline as a result. In fact, home values drop at least 1% a day as long as that foreclosure sign next door stays up.

“So everybody benefits when we get something like this [bill] moving,” Dodd said.

As for a veto, “I’m more optimistic now than I was a few weeks ago” about the bill being passed, Dodd said. Both Republicans and Democrats have come together on the measure, which includes the foreclosure fix, an affordable housing trust fund, and a new regulatory body to oversee Fannie Mae

Federal National Mortgage Association (Fannie Mae)

27.9 0.49 +1.79%

[FNM 27.9 0.49 (+1.79%) ] and Freddie Mac [FRE 26.29 0.13 (+0.5%) ], and a veto would erase all that work.

“I can’t believe they’re going to do that,” Dodd said.

What’s Cramer’s take on Dodd’s legislation?

“This is the beginning of the end of the decline in your house’s value,” he said.