Thursday, July 31, 2008

Freddie Mac Pushes Out Foreclosure Timelines

(Housing Wire) Pressure to raise servicer spreads may have just gotten a little more intense on Thursday, with Freddie Mac (FRE: 8.17 -6.41%) announcing a huge, mixed bag of changes to its servicing guidelines — including doubling the amount of money it pays for each workout alternative, and lengthening foreclosure timelines in key states. The GSE also said it would start reimbursing servicers for the cost of door-to-door outreach programs, and make administrative changes intended to streamline the workout process.

“We are taking these steps because we want to reinforce the tremendous importance of workouts and reward their use,” said Freddie Mac vice president of servicing and asset management Ingrid Beckles.

“Giving our servicers more time and greater compensation to help troubled borrowers is fundamental to preserving homeownership and maximizing our efforts to minimize foreclosures.”

Tweaking timelines
Foreclosure timelines have been the lifeblood of the servicing industry for decades; and, while many borrowers may have been unaware of it, servicers have long been compensated by the GSE for their annual performance relative to timelines.

But no more. Perhaps the boldest move by Freddie Mac on Thursday — and one that won’t get much press attention — was its decision to eliminate foreclosure timeline compensation altogether for servicers, effective immediately. In other words, servicers will no longer earn a bonus based on how quickly they can foreclose.

If that doesn’t scream “modify more loans,” then the GSE’s decision to double compensation for servicers in completing workouts certainly will. Freddie said it will now pay servicers $800 for a loan modification, $2,200 for a short payoff or make-whole preforeclosure sale, and $500 per repayment plan. Deeds-in-lieu of foreclosure didn’t get Freddie’s same endorsement, however, and will remain at the current incentive level of $250, the GSE said.

The decision to eliminate timeline compensation, however, was only part of a much broader program change rolled out by Freddie; the mortgage finance giant also said that it was increasing its allowable foreclosure timeline in 21 states to a whopping 300 days from last of date payment, and 150 days from initiation of foreclosure, effective on Friday.

Included in the list of 21? California, the epicenter of the nation’s foreclosure mess, of course.

For servicers, news of increased workout incentives came as welcome news; extension of foreclosure timelines, however, did not. The reason? Longer foreclosure timelines mean increased servicer advances, and given that most servicers are operating on 25 to 50 basis points in a servicing fee, pushing out reimbursement timelines means that servicers will feel the squeeze.

A review of the servicer bulletin by HW found that no mention of changes to servicer reimbursement policies accompanied the change in timelines.

The GSE also revised its loan modification guidelines, eliminating a prior requirement that a mortgage must not have been previously modified; the idea here is to allow servicers the ability to re-modify a previously modified loan, and signals capitulation on data showing that many previous loan modifications aren’t sticking.

Freddie Mac also said it will temporarily reimburse the cost of leaving a door hanger up to $15 per mortgage, and up to $50 per mortgage for a door knocking that results in the borrower contacting their servicer — certainly good news for companies like Titanium Solutions and the servicers that use firms like them. Freddie will also reimburse servicers up to $200 for additional fees paid to vendors for door knocking if the contact made leads to a workout, the GSE said.

Related links: full servicer bulletin

Wednesday, July 30, 2008

Housing Bill: Change to Home Sale Tax Exclusion Rule

(Calculated Risk) A little mentioned provision in the Housing and Economic Recovery Act of 2008 amends the Home Sale Exclusion Rules.

I've copied the main portion of the provision at the bottom.

This applies to homeowners that move into a nonqualifed residence (that they already own) like a vacation home or rental unit. Here was the old rule from the IRS:

To exclude gain, a taxpayer must both own and use the home as a principal residence for two of the five years before the sale. The ownership and use periods need not be concurrent.
Under the new rule, the owner only gets a percentage of the exclusion based on a ratio of how long the property is their primary residence divided by how long they owned the property. This prevents people from moving into vacation homes or rental units for two years and then obtaining the entire exclusion. Here is an excerpt (see the bill for the entire text):
(a) IN GENERAL.—Subsection (b) of section 121 of the Internal Revenue Code of 1986 (relating to limitations) is amended by adding at the end the following new paragraph:

(A) IN GENERAL.—Subsection (a) shall not apply to so much of the gain from the sale or exchange of property as is allocated to periods of nonqualified use.
(B) GAIN ALLOCATED TO PERIODS OF NONQUALIFIED USE.—For purposes of subparagraph (A), gain shall be allocated to periods of nonqualified use based on the ratio which—
(i) the aggregate periods of nonqualified use during the period such property was owned by the taxpayer, bears to
(ii) the period such property was owned by the taxpayer.
For purposes of this paragraph
(i) IN GENERAL.—The term ‘period of nonqualified use’ means any period (other than the portion of any period preceding January 1, 2009) during which the property is not used as the principal residence of the taxpayer or the taxpayer’s spouse or former spouse.
EFFECTIVE DATE.—The amendment made by this section shall apply to sales and exchanges after December 31, 2008.
Just another interesting provision.

S&P Revises Most U.S. RMBS Loss Assumptions, Again

(Housing Wire) Never has a “we told you so” felt less fulfilling. Starting in May, we began suggesting that Standard & Poor’s Ratings Services’ estimates of loss severity were looking too conservative relative to observed loss levels; it was a stance we reiterated in mid-June, as well.

On Wednesday, the rating agency capitulated, saying it had modified both its method for projecting lifetime losses and its loss severity assumptions for U.S. subprime, prime jumbo, and Alt-A RMBS transactions.

“Earlier this month, we affirmed our loss assumptions for the U.S. RMBS 2006 vintage, and we projected that house prices would decline an additional 10% by June 2009,” said Standard & Poor’s credit analyst Frank Parisi.

“Now, however, we believe that the influence of continued foreclosures, distressed sales, the increase in carrying costs for properties in inventory, the costs associated with foreclosures, and more declines in home sales will depress prices further and lead loss severities higher than we had previously assumed.”

S&P said it had increased expected loss projections for 2006 subprime RMBS to 23 percent from 19 percent; early 2007 subprime deals saw expected losses pushed out to 27 percent from previous assumptions of 23 percent.

On short-reset hybrid Alt-A loans, total losses are now expected to reach 12.2 percent — almost double S&P’s earlier estimate of 6.3 percent. Early 2007 originations saw loss projections jump to 15 percent from 7.5 percent, as well.

2007 vintage option ARMs are now expected to produce a loss cumulative loss rate of 14.8 percent, instead of the 8.8 percent that had previously been projected, S&P said.

Cue more write-downs, more losses
The change in loss assumptions invariably means more losses for investors as numerous deals now face the specter of further downgrades. On Tuesday, for example, S&P said it had placed 1,614 ratings on 187 U.S. RMBS transactions backed by U.S. first-lien Alt-A mortgage collateral issued during 2005, 2006, and 2007 on CreditWatch with negative implications. All told, the affected classes represented an original par amount of
approximately $56.82 billion.

As of the June 2008 distribution, S&P said that severely delinquent loans (90-plus days, foreclosures, and REOs) for the affected transactions made up an average 17.85 percent of the current pool balances. Over the past three months, severe delinquencies had increased by an astounding 28.70 percent, underscoring just how bad things are getting in Alt-A and just how fast it’s taking place.

Most importantly, S&P said it had raised loss severity assumptions for 2006 and 2007 Alt-A hybrid and negative-amortization transactions to 40 percent from 35 percent.

That assumption may yet prove to be too conservative relative to the loss numbers we’ve been seeing recently; but that’s an issue we’ll cover in a separate story with updated statistics.

S&P’s updated assumptions weren’t just limited to first lien pools — the rating agency also updated its loss assumptions for 2005-2007 vintage U.S. HELOC RMBS deals on Tuesday, and the picture wasn’t exactly pretty: for 2007 deals, the loss ranges span from 1.49 to 74.44 percent with an average estimate of 37.89 in cumulative losses. For 2006 deals, the cumulative loss expectation is slightly better, but still eye-opening: 22.62.

If you weren’t sour on second liens yet — most existing loans in this area haven’t yet begun to exhibit the default patterns close to such huge loss estimates — it may be time for you to get there. (Unless, of course, you’re content to accept a 10 percent hike in dividend payout as proof that seconds won’t be a problem.)

Bush Signs Bill for Homeowners, Fannie, Freddie

(Bloomberg) -- President George W. Bush signed into law legislation that helps 400,000 homeowners facing foreclosure and extends a lifeline to Fannie Mae and Freddie Mac.

Bush signed the measure at the White House shortly after 7 a.m. Treasury Secretary Paulson, Housing and Urban Development Secretary Steve Preston and Federal Housing Administration Director Brian Montgomery were present for the Oval Office signing, among others.

``We look forward to putting in place new authorities to improve confidence and stability in markets, and to provide better oversight for Fannie Mae and Freddie Mac,'' Fratto said.

The law is aimed at stemming foreclosures and halting a free-fall in housing prices by providing federal insurance for refinanced 30-year mortgages for homeowners struggling to make their monthly payments.

The measure also is designed to restore confidence in Fannie Mae and Freddie Mac by tightening regulations and authorizing the Treasury secretary to inject capital into the two biggest U.S. providers of mortgage money.

The measure passed the Senate July 26 and the House three days earlier.

The recession in the housing market, the worst since the Depression, along with higher fuel prices and a shrinking job market, is weighing on consumers and the economy.

The White House Office of Management and Budget this week cut its February forecast for economic growth this year to 1.6 percent from 2.7 percent. The OMB said it expected the economy to expand 2.2 percent next year, compared with its earlier forecast of 3 percent growth.

Lead Lobbyist

The foreclosure-prevention measure, unveiled in March, was bolstered after Treasury Secretary Henry Paulson sought and received temporary authority, through Dec. 31, 2009, to lend money or to buy the stock of Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac. The goal is to avert a collapse of the companies that buy or finance almost half of the $12 trillion of U.S. mortgages.

The treasury chief, who was the lead lobbyist for the White House, persuaded Bush to back off a threatened veto over a section of the legislation that provides $3.9 billion in grants to states to buy and repair foreclosed properties. Bush said he regarded it as a bailout of lenders. Democrats said it would stabilize neighborhoods.

New Regulator

The law creates a new, independent regulator called the Federal Housing Finance Agency. It would ensure that Fannie Mae and Freddie Mac adhere to minimum capital requirements, limit the size of portfolios and oversee executive pay for the two government-sponsored enterprises.

Under the law, the Federal Housing Administration can now insure higher loan limits, up to $625,500 from $417,000 in high- cost areas. The law also raises the nation's debt limit to $10.6 trillion from $9.816 trillion to accommodate the Paulson plan.

A new FHA program, a unit of the U.S. Department of Housing and Urban Development, would insure up to $300 billion in refinanced 30-year fixed loans for about 400,000 borrowers struggling with their monthly payments after loan holders agree to cut their mortgage balance.

The measure would offer $15 billion in tax breaks, including provisions offering the equivalent of interest-free loans worth up to $7,500 for first-time homebuyers. States would be able to offer an additional $11 billion in mortgage revenue bonds to refinance subprime loans.

The Homeownership Obsession

(Robert J. Samuelson in the Washington Post) The real lessons of the housing crisis have gotten lost. It's routinely portrayed as the financial system run amok; the housing market became a casino. The remedy, we're told, is to enact rules that prevent a repetition. All this is partly true. But it ignores a larger truth: Our infatuation with homeownership, embedded in dozens of government policies, has turned housing -- once a justifiable symbol of the American dream -- into something of a national nightmare.

As a society, we're overinvesting in real estate. We build too many McMansions. They use too much energy, and their carrying costs, including mortgage payments, absorb too much of Americans' incomes. We think everyone should become a homeowner, when many families can't or shouldn't. The result is to encourage lending to weak borrowers who are likely to default. The avid pursuit of a few more percentage points on the homeownership rate (it rose from 64 percent of households in 1994 to 69 percent in 2005) has condoned enormously damaging policies.

Does every house need a "home entertainment center"? Well, no. But when you subsidize something, you get more of it than you otherwise would. That's our housing policy. Let's count the conspicuous subsidies.

The biggest favor the upper middle class. Homeowners can deduct interest on mortgages of up to $1 million on their taxes; they can deduct local property taxes; profits (capital gains) from home sales are mostly shielded from taxes. In 2008, these tax breaks are worth about $145 billion. Next, government funnels cheap credit into housing through congressionally chartered Fannie Mae and Freddie Mac. Long perceived as being backed by the U.S. Treasury, Fannie and Freddie could borrow at preferential rates; they now hold or guarantee $5.2 trillion worth of mortgages, two-fifths of the national total. Finally, the Federal Housing Administration insures mortgages for low- and moderate-income families that require only a 3 percent down payment.

Congress's response to the present crisis is, not surprisingly, more of the same. The legislation enacted last week adds new subsidies to the old. It creates more tax breaks; most first-time home buyers could receive a $7,500 tax credit. It expands the lending authority of Fannie Mae and Freddie Mac. Previously, the permanent ceiling on their mortgages was $417,000; now it would be as much as $625,500. And the FHA would be authorized to support, at much lower monthly payments, the refinancing of mortgages of an estimated 400,000 homeowners who are in danger of default.

More subsidies may -- or may not -- stabilize the housing market in the short run. But there are long-term hazards. Make no mistake: I'm not anti-housing. I believe that homeownership strengthens neighborhoods and encourages people to maintain their property. It's also true, as economist Mark Zandi shows in his book "Financial Shock," that today's housing collapse had multiple causes: overconfidence about rising home prices, cheap credit, lax lending practices, inept government regulation, speculative fever, sheer fraud.

Still, the government's pro-housing policies contributed in two crucial ways.

First, they raised demand for now suspect "subprime" mortgages. The Department of Housing and Urban Development sets "affordable" housing goals for Fannie Mae and Freddie Mac to dedicate a given amount of credit to poorer homeowners. One way Fannie and Freddie fulfilled these goals was to buy subprime mortgage securities -- many of which have now gone bad. Second, government's housing bias created a permissive climate for lax lending. Both the Clinton and present Bush administrations bragged about boosting homeownership. Regulators who resisted the agenda risked being "roundly criticized," notes Zandi.

Good intentions led to bad outcomes: an old story. Fannie's and Freddie's losses impelled the Treasury Department to propose a rescue; given the companies' size and the government's implicit backing of their debt, doing otherwise would have risked a financial panic. Personal savings have been skewed toward housing. Many Americans approaching retirement "have accumulated little wealth outside their homes," concludes a study by economists Annamaria Lusardi of Dartmouth College and Olivia S. Mitchell of the University of Pennsylvania. Even some past gains from the pro-housing policies are eroding; the homeownership rate has now dropped to 68 percent.

We might curtail housing subsidies without exposing the economy to the disruption of outright elimination. The mortgage interest deduction could be converted to a less generous credit; Fannie and Freddie's expanded powers could be made temporary; the FHA's minimum down payment could be set at a more sensible 5 percent. But even these modest steps would require recognizing that the homeownership obsession has gone too far. It would require a willingness to confront the huge constituency of homeowners, builders, real estate agents and mortgage bankers. There is no sign of either. When tomorrow's housing crisis occurs, we will probably find its seeds in the "solution" to today's.

Tuesday, July 29, 2008

U.S. Banks announce covered bond issuance plans

(WSJ) Four of the nation's largest banks will begin issuing a type of debt the Bush administration has been pushing as a way to help reinvigorate the housing market.

On Monday, Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co. and Wells Fargo & Co., said they would begin issuing so-called covered bonds, a popular method of financing in Europe that could make more mortgage financing available in the U.S.

The move came as federal regulators announced a set of voluntary industry guidelines intended to provide clarity to issuers and investors about the types of assets banks must hold if they issue such bonds and how investors would fare in the event of a bank failure.

"As we are all aware, the availability of affordable mortgage financing is essential to turning the corner on the current housing correction...covered bonds have the potential to increase mortgage financing," Treasury Secretary Henry Paulson said at an event to announce the agreement.

The move is the latest step by the Bush administration to aid the beleaguered housing market. Two weeks ago, the Treasury unveiled a plan to shore up mortgage titans Fannie Mae and Freddie Mac by creating an unlimited line of credit for the firms and getting authority to invest in the companies. The two firms are critical to the housing market because together they own or guarantee about $5.2 trillion of U.S. home mortgages -- nearly half of all those outstanding. The firms have seen their shares pummeled by investors concerned about their capital levels.

Washington's interest in pushing covered bonds stems from the success of Europe's $2.75 trillion covered-bond market. Such bonds are the primary source of mortgage-loan funding for European banks. Some analysts have predicted that a covered-bond market in the U.S. could grow to $1 trillion over the next few years. There are currently $11 trillion in home mortgages outstanding in the U.S.

Covered bonds are backed by mortgages but they are considered safer investments than the products that fueled the housing boom and landed many Wall Street banks in trouble. That's because the bonds stay on a bank's balance sheet and are backed by a "cover pool" of high-quality mortgages that must meet certain criteria, such as being up to date in their payments. Investors are also protected because if the mortgages go bad, the bank must step in to ensure that bond holders get their interest.

U.S. banks can issue covered bonds but only two have done so: Bank of America and Washington Mutual Inc. The market in the U.S. has been hampered in part because of regulatory uncertainty surrounding the products. Investors have worried about where they stand in the event of a bank's demise and issuers have wanted clarity about the types of assets they must hold, among other things.

The voluntary guidelines announced by the Treasury and supported by the Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and the Office of Thrift Supervision outline the types of collateral issuing banks must hold and the types of disclosure banks must make to investors. Among other things, the guidelines require that mortgages backing the debt be underwritten with fully documented income, current when added to the pool, replaced if they become more than 60 days delinquent and held on an issuer's balance sheet.

The guidelines are intended to reassure investors who have kept money on the sidelines after suffering heavy losses on bonds backed by subprime mortgages over the past year. At the same time, most banks and financial institutions, which have also incurred losses and write-downs on similar assets, have been unwilling to create or underwrite new mortgage securities.

Providing an alternative method of financing could help the housing market since investors would provide money to banks to make home loans. How much it could help remains to be seen and federal officials said they don't expect covered bonds to solve the housing problem.

"There are no magic bullets to solve the housing crisis," said FDIC Chairman Sheila Bair.

Monday, July 28, 2008

Paulson guidance on covered bonds

(FT Alphaville) The push to increase US banks’ options for funding mortgage lending received a boost on Monday when Hank Paulson, US Treasury secretary, issued guidelines on the development of a covered bond market.

The Treasury guidance on such bonds – widely used by mortgage banks in Europe but rare in the US – is a significant move towards stimulating US issuance following this month’s crucial policy statement from the Federal Deposit Insurance Corporation.

Covered bonds are a form of secured bank debt that gives investors recourse to an issuing bank’s balance sheet as well as to a pool of collateral – usually high-quality mortgages or public-sector loans – if the bank is unable to repay its debt.

Mr Paulson hopes the bonds will provide a new source of funding to the US’s mortgage lenders when the private, off-balance-sheet mortgage-backed bond markets remain in effect shut and the government sponsored agencies Fannie Mae and Freddie Mac face constraints.

Bankers involved in the field reckon that a US covered bond market could ultimately outstrip the roughly €2,000bn European market. However, it faces limitations in the near term because of restrictions placed on the bonds’ treatment by the FDIC, which importantly has oversight of banks if they become insolvent.

For example, the FDIC said banks should be restricted from using covered bonds for more than 4 per cent of their funding in order to avoid depleting the assets available to repay ordinary depositors and other unsecured creditors if a bank failed.

In the US, the cost of issuing covered bonds and the FDIC restrictions mean they could lie low in the pecking order of banks’ funding preferences, at least initially, according to analysts at Citigroup. Funding through Fannie and Freddie or through the Federal Home Loan Banks both appear more attractive for now, the analysts said.

Washington Mutual and Bank of America are the only US banks to have issued covered bonds so far, although HBOS of the UK has sold a deal in US dollars.

Covered bonds in Europe have not been immune to the turmoil in credit markets, either, in spite of being seen as much safer than other mortgage-backed bonds, in which investors do not have recourse to the issuers’ balance sheet. European issuance is down 35 per cent this year.

The Rise of Covered Bonds?

(Paul, Hastings, Janofsky & Walker LLP) In July 15, 2008, in the wake of the failure of Indymac Bank – one of the largest bank failures in history – and a mounting cloud of uncertainty enveloping the banking industry, the Federal Deposit Insurance Corporation (“FDIC”) issued its Final Covered Bond Policy Statement (“Final Policy Statement”). In a move many view as an effort by the FDIC to bolster the mortgage market and provide banks with a new liquidity tool (and funding alternative to the struggling securitization market), the Final Policy Statement may open the way to a U.S. market in covered bonds. Though covered bonds have existed and flourished in European markets, a U.S. market for these bonds has faced regulatory uncertainty making depository institutions hesitant to participate. The Final Policy Statement alleviates some of these concerns in an attempt to invite more players to the market. See PDF for more.

Servicers to ask for access to the discount window?

(Naked Capitalism) We've been told by mortgage counsellors involved in the Hope Now Alliance that servicers are hemmorhhaging cash, prime worse than subprime. Why? In default, servicers are required to advance the first 90 days of interest payments to the trust. Some agreements also require them to pay principal during that period. Even after the 90 days, the servicer has to continue to pay real estate taxes and insurance. The servicer can use any late payment or other penalties from the borrower to offset these costs.

The assumption was that if you were efficient at servicing, the overcollateralization would give servicers enough of a buffer to handle a reasonable level of defaults, But we are running vastly in excess of heretofore "reasonable" assumptions.

Here is the additional wrinkle from HousingWire:
The [housing] bill will not go into effect until October 1, and on Friday House Financial Services Committee chairman Barney Frank (D-MA) warned servicers that they needed to halt foreclosure activity on qualifying loans until the new laws became effective...

But... new housing bill wouldn’t like be effective until the middle of next year. A HUD spokesperson told American Banker that it was “absolutely totally unlikely” that the new program would be ready by October 1, noting the process HUD must go through to implement new programs — including determining underwriting standards for the new loan program the housing bill would create.

Without those standards, which could take through the end of this year to finalize, servicers will have nothing to go on in terms of refinancing troubled borrowers under the new program.

Which means two things: servicers choosing to hold off on even some foreclosures now in the hopes that they’ll be able to write-down, write-off and refinance certain troubled loans face the uncertainty of not knowing which loans will actually qualify, as well as the unsavory likelihood that they’ll be self-imposing a moratorium that could last much longer than 60+ days.

HW’s key sources have suggested that servicer advances are likely the most critical piece of the puzzle going forward, and that the housing bill — if anything — further puts pressure in this area.

“Servicers are being asked to put a voluntary moratorium on some unknown number of foreclosures, but nobody has addressed the servicer advances that must continue to be paid during this period,” said one industry consultant who asked not to be named. “And worse yet, nobody knows just how long servicers would need to keep advancing their money to a trust, since apparently there is a good chance the program wouldn’t be in place by October.”

A few servicing managers HW has spoken with have suggested that the only way many servicers can survive the current environment is by having access to the discount window or FHLB advances, to help keep servicing operations afloat — meaning that the servicing shop has to be within a bank, generally speaking.

And that’s exactly the sort of capital strain, BTW, that many of the nation’s already-limping banks can ill afford to take on right about now.
Let's face it. Barney Frank is one Congressman. He can bluster all he wants to about servicers needing to hold off on foreclosures, but his words have no legal standing (admittedly, if a lot of other Congressmen pick up on his theme, that's a different matter). And the vast majority of commentators see the bill as having perilous little impact.

However, Frank's push to hold off on foreclosures might give the servicers air cover to seek relief. Lord help us. Who isn't in line to get a bailout?

Sunday, July 27, 2008

Stop Paying Your 2nd Now I

(Exurban Nation) I'm serious. The time has come to take the plantation back from the masters. Just because I find the moral hazards the current lending crisis has introduced to be excrementitious doesn't mean I don't see it as a great opportunity. If you have a recent 1st & second and the value of your home is near or less than the value of your 1st mortgage lien then stop paying your 2nd now.

Why? Simple. You will make gobs of money with no consequences. Really, what are they gonna do? foreclose? Not hardly. they'd have to spend thousands and thousands only to end up OWING the 1st trust deed MORE than the house is worth. Isn't this great? Then, debt discharged, expenses lower take the paperwork to the county assessors office and have your tax bill likewise reduced by the same of even larger amount. Win-win as our dear departed scamboi used to proclaim.

Remember the rulez. Don't sign anything, they'll try to do to you what Countrywide did to Casey and convert a worthless 2nd to a personal debt that survives bankruptcy. Gosh, I wonder if they'd be interested in selling that $50k note to me for $500? I'd put a garnish on his wages for a bit of sweet passive income.

Second, stretch things out as far as possible. Lead them on. Part of the plan is to turn this into a movement and hopefully you'll just get lost in the flood. The longer things go unaddressed the less likely it is in their interest in going after any phantom equity.

Now here's phase 2. For a few people following my plan the 2nd lien holder may start actually pursuing foreclosure. By this time you've got a tax bill and you've crushed the neighborhood comps and hopefully your neighbors have joined the plan. If the lender is dead set on forcing themselves to take a huge financial hit then it is time to negotiate. You've saved 6-8 months of "their" payments and you've gotten a break on your taxes; a gift that keeps on giving.

Offer them the deal to resume payments at a discount. Have them rescind penalties and accruals and you agree to resume paying on a balance half the previous outstanding.

Saturday, July 26, 2008

Summary and Text: Foreclosure Prevention Act of 2008

(Calculated Risk) This appears to be an up-to-date version of the bill.

As Housing Act Passes Congress, Questions Emerge

(Housing Wire) The Senate on Saturday morning passed The Housing and Economic Recovery Act of 2008, a sweeping aid package designed to help a growing number of troubled homeowners, in the hopes that the legislation might help calm financial markets that have been increasingly on edge throughout July.

Senate members from both major parties overwhelmingly approved the bill 72-13 in a weekend session, after the House’s own approval earlier in the week. It now head to President Bush, who is expected to sign the bill with little fanfare; the White House has said it expects no formal signing ceremony for a piece of legislation that has been termed “the most important housing bill in a generation” by Mortgage Bankers Association chairman Kieran Quinn.

Among the bill’s key centerpieces are provisions which would authorize the Federal Housing Administration to endorse up to $300 billion in new 30-year fixed rate mortgages for troubled subprime borrowers; lenders and investors must, however, first write-down principal loan balances to 90 percent of current appraisal value.

The bill will also provide vast new authority for the U.S. Treasury to backstop the continuing operations of both housing GSEs Fannie Mae (FNM: 11.55 -3.91%) and Freddie Mac (FRE: 8.27 -6.13%).

Ready by October?
The bill will not go into effect until October 1, and on Friday House Financial Services Committee chairman Barney Frank (D-MA) warned servicers that they needed to halt foreclosure activity on qualifying loans until the new laws became effective.

“I would hope that no one would be foreclosed upon between now and October 1st who would have qualified for this program had the effective date been immediate,” Frank said in remarks during a committee hearing.

“I think it would be a shame, an embarrassment to all of us if people were to lose their homes and the neighborhood deterioration were to be advanced and the economy would suffer because to satisfy CBO and other rules, we delayed this a couple of months.”

housing bill summary
Click for a complete summary of HR3221.

But the delay could be much more than just a few months, according to a report Friday evening in American Banker, which cited HUD officials as saying that the provisions of the new housing bill wouldn’t like be effective until the middle of next year.

A HUD spokesperson told American Banker that it was “absolutely totally unlikely” that the new program would be ready by October 1, noting the process HUD must go through to implement new programs — including determining underwriting standards for the new loan program the housing bill would create.

Without those standards, which could take through the end of this year to finalize, servicers will have nothing to go on in terms of refinancing troubled borrowers under the new program.

Which means two things: servicers choosing to hold off on even some foreclosures now in the hopes that they’ll be able to write-down, write-off and refinance certain troubled loans face the uncertainty of not knowing which loans will actually qualify, as well as the unsavory likelihood that they’ll be self-imposing a moratorium that could last much longer than 60+ days.

It also means that Barney Frank is one ticked-off Congressman.

“The notion that this takes a normal bureaucratic response when you have this social and economic crisis is unacceptable. … that would be incompetence bordering on malfeasance,” he said in an interview with American Banker on Friday. “I cannot believe that this would wait.”

HW’s key sources have suggested that servicer advances are likely the most critical piece of the puzzle going forward, and that the housing bill — if anything — further puts pressure in this area.

“Servicers are being asked to put a voluntary moratorium on some unknown number of foreclosures, but nobody has addressed the servicer advances that must continue to be paid during this period,” said one industry consultant who asked not to be named. “And worse yet, nobody knows just how long servicers would need to keep advancing their money to a trust, since apparently there is a good chance the program wouldn’t be in place by October.”

A few servicing managers HW has spoken with have suggested that the only way many servicers can survive the current environment is by having access to the discount window or FHLB advances, to help keep servicing operations afloat — meaning that the servicing shop has to be within a bank, generally speaking.

And that’s exactly the sort of capital strain, BTW, that many of the nation’s already-limping banks can ill afford to take on right about now.

Friday, July 25, 2008

Bank of America, Wells Fargo Say Loan Changes Rising

(Bloomberg) -- Bank of America Corp. and Wells Fargo & Co., the top mortgage lenders, told Congress they have accelerated the pace of loan modifications to avoid foreclosures amid criticism they are slow to help keep people in their homes.

Both banks added staff and contacted more homeowners to reduce loan rates or to arrange repayment plans to cut monthly payments, executives said today at a House Financial Services Committee hearing in Washington. Bank of America doubled its modifications in the first half of this year from the second half of 2007, and Wells Fargo increased staffing fivefold.

``Bank of America remains committed to helping our customers avoid foreclosure whenever they have a desire to remain in the property and a reasonable source of income,'' said Michael Gross, the Charlotte, North Carolina-based lender's managing director for loss mitigation, mortgage, home-equity and insurance services.

U.S. bank regulators, including Federal Reserve Chairman Ben S. Bernanke, and lawmakers are prodding mortgage servicers to help more borrowers who are falling behind on their payments. Foreclosure filings rose 121 percent in the second quarter from a year earlier, RealtyTrac Inc. of Irvine, California, reported.

Wells Fargo, which services one in eight U.S. mortgages, expanded its staff to more than 1,000, from 200 in 2005, to help borrowers, said Mary Coffin, executive vice president of Wells Fargo Home Mortgage. The San Francisco-based company contacted 94 percent of customers who are delinquent and helped 60 percent who agreed to work with the bank to avoid foreclosure, she said.

`Last Resort'
``Foreclosures are a measure of absolute last resort,'' Coffin said.
Bank of America helped more than 117,000 homeowners avoid foreclosure from January through June, almost double the pace in the second half of 2007, Gross said. The bank will modify at least $40 billion in troubled mortgages by the end of 2009 to help more than 250,000 borrowers keep their homes, Gross said.

Voluntary efforts so far``have not ramped up'' fast enough to curb foreclosures, said Julia Gordon, policy counsel at the Center for Responsible Lending, a Durham, North Carolina-based consumer group.

``We have heard wildly different things about how much modification is going on,'' said Representative Brad Miller, a North Carolina Democrat. ``We have heard from industry that they are modifying like crazy. And we've heard from consumer advocates that they are hardly modifying at all.''

`Sounds Better'
The assessment ``sounds better than it is,'' said Representative Barney Frank, the committee's chairman and a Massachusetts Democrat, who plans another hearing in September.

``There needs to be a sense of urgency,'' he said. ``Yes, I'm glad you're doing what you're doing, but please don't take any comfort from it because we've got problems.''

Bank of America and Wells Fargo are among mortgage lenders, servicers and counselors called the Hope Now Alliance, launched last year at the request of Treasury Secretary Henry Paulson to reach more borrowers at risk of default and change loan terms.

Almost 1.7 million homeowners averted foreclosure through loan modifications from July 2007 to May 2008, Faith Schwartz, executive director of the Hope Now Alliance, said at the hearing.

Frank said he expected lenders to help more borrowers or he would consider changing the relationship between servicers and investors to remove contractual barriers to modifying loans. Servicers have said they are sometimes constrained from changing loans because by contract they must represent investors who own the mortgage.

`Respond Appropriately'
``If it is the case that the servicers cannot respond appropriately, then that institution of a servicer acting on behalf of ultimate investors'' can't continue, Frank said during the hearing.

The bank executives told Frank their obligations to investors have led them to reduce loan interest rates before they cut mortgage balances.

``Reducing the interest rate will generally result in a lower loss to the investor than reducing the general balance,'' Gross said. ``It is the preferred option. That is the option that we are contractually bound to offer.''

The House this week passed legislation written by Frank to create a government program to insure mortgages for struggling borrowers after servicers voluntarily agree to reduce the loan balance.

If servicers don't participate, ``then next year we'll have to change the law to reduce the role of servicers,'' Frank told reporters after the hearing.

IMF Paper: US Housing Overvalued by 14%

(Naked Capitalism) Research by an IMF economist concludes that US residential real estate was overvalued by 14% as of the first quarter of 2008. The paper seeks to define an equilibrium price and also anticipates that the housing market will fall markedly below that level.

From Reuters (hat tip Michael Panzner):
The downward spiral of U.S. housing prices still has a way to go and homes were overvalued by between 8 percent to 20 percent in the first quarter of this year, according to research by an International Monetary Fund economist published on Friday.

In his report "What goes up must come down? House price dynamics in the United States," IMF economist Vladimir Klyuev used several economic techniques to determine by how much U.S. home prices are overvalued.

Klyuev drew from a government study of single-family home prices to conclude that values were "around 14 percent above equilibrium in the first quarter of 2008, with a plausible range of 8 to 20 percent."

His research showed that home prices became considerably overvalued from 2001 and while the housing market has started to correct itself, there is still a long way to go.....

The report also said that it is likely home prices will swing well below their equilibrium level before they start to recover.

Klyuev's research included data gathered by the U.S. Office of Federal Housing Enterprise Oversight which regulates mortgage-finance companies Fannie Mae and Freddie Mac and collects purchase price data.

Klyuev analyzed the dynamics of home prices and found the inventory-to-sales ratio the most important driver of changes in property values in the short run.

"Starts in foreclosures, which obviously add to inventory, seem to also exert additional downward pressure on prices," he added.

According to the research the bloated inventory-to-sales ratio, high foreclosure rates, and inertia in housing markets imply that recent price declines are likely to continue.

The research also considered whether the current fall in U.S. housing prices represented a nationwide bust.

"While the national price level is falling on every measure, there is an opinion that this decline might reflect oversized drops in a few isolated markets rather than a countrywide phenomenon," it said.

Doing the Banks One Better

(Steven Pearlstein @ Washington Post) Here's a bit of irony: At a time when the financial system is drowning in a sea of mortgage foreclosures, the organization that has developed the most effective system for getting bankers to restructure troubled loans is a self-described "bank terrorist" who routinely refers to bankers as financial predators and loan sharks.

So why do these bankers continue to deal with Bruce Marks and his Neighborhood Assistance Corporation of America?

Perhaps because they're afraid that Marks might do to them what he did to the old Fleet Bank, or Bank of America, or Countrywide, sending out his shock troops to disrupt their annual meetings, demonstrate outside the homes of their directors or set up picket lines at their children's schools.

Or maybe it's because this same in-your face activist with an MBA is as good or better than they are at system development and customer service, and way better at underwriting loans to people living on the edge.

This impressive machine was on display here in Washington this past week when as many as 20,000 people descended on the Capitol Hilton looking for help in restructuring mortgage loans that they no longer could afford. They came by plane and train, car and subway, starting before dawn and continuing late into the night, all of them clutching tattered folders and envelopes stuffed with the documentary evidence of their financial hardship and miscalculation. Many had received one of the 1.2 million postcards mailed the week before, but even more seemed to have heard of the event from a friend, neighbor or relative who'd already been.

It was striking how well-organized and executed it all was. Outside, there were plenty of volunteers and staff -- 350 were flown in from around the country -- doling out information, advise and sympathy to those waiting in line. Inside, groups of 100 were given a quick orientation in English and Spanish before having their key documents scanned into NACA's computers and proceeding to one-on-one sessions with a NACA financial counselor in the giant hotel ballroom.

In the space of 30 to 60 minutes, the well-trained, upbeat counselors managed to win the trust of their new clients, wring promises of a more frugal lifestyle and enter into their computers the relevant financial details. At a push of a button, NACA's underwriting system declared how much the client could afford in monthly mortgage payments, and automatically requested the mortgage servicing company to modify the loan accordingly. Depending on the service and the loan, the answer might be available in a matter of days or even hours. In about half the cases, the result is likely to be a below-market, fixed-rate loan with hundreds of dollars cut from their monthly payments.

A lot depends on which bank is servicing the loan. Bank of America and Citigroup, early targets of Marks' outrageous guerrilla tactics, had provided billions of dollars in mortgages through NACA to first-time homebuyers. The arrangements were meant to quiet a pesky critic and help the banks satisfy federal community reinvestment requirements. In time, however, the banks discovered that their NACA loans performed as well, or better, than the loans they had written themselves in those communities. So when Marks last year proposed to use the same process and underwriting software to negotiate loan modifications, Citigroup and Bank of America agreed to participate. Countrywide followed suit after swarms of NACA protesters closed down several of its offices.

Mark's next target: Wells Fargo.

This week's Washington event was so successful that Marks plans to take it on the road in eight other cities this fall. NACA got $15 million from the pot of federal money appropriated last year for financial counseling, along with $3.5 million from Fannie Mae and Freddie Mac. It also receives $150 for every loan that is successfully modified -- surely less than it would have cost the banks to deal directly with the borrowers.

Not that the banks aren't doing plenty of loan modifications on their own. By their count, the major banks and servicers in the Hope Now coalition have modified 530,000 loans in the past year, along with an additional 1.2 million "repayment plans" that delay payments but don't reduce them. Large numbers of at-risk borrowers have still not responded to lenders' outreach efforts.

What's remarkable about NACA's format is how efficient it is, and how enthusiastically people respond to it. Hope Now recently touted that it had sponsored 14 regional workshops at which homeowners facing foreclosures could consult with counselors and talk directly to representatives of all the major lenders. But those 14 events in 14 cities attracted a grand total of 6,000 homeowners. That's not much more than NACA was able to attract in single city in a single day.

It's not hard to figure out why. Homeowners facing foreclosure are probably going to be more responsive to an organization that treats them as victims, rather than deadbeats, and promises to be their advocate in wringing concessions from lenders. And by combining the function of trusted financial counselor and advocate with a credible loan underwriter, NACA seems to have created a model that is faster, cheaper and generates better results for both borrowers and lenders.

The big lesson here is that the foreclosure crisis is not unsolvable and that the solution need not involve large sums of taxpayer money. With home prices still falling and the economy headed into recession, mortgage lenders and investors have begun to realize that they will likely end up with less money with foreclosure than loan modification. And servicing companies are realizing that they need to rely on technology to quickly approve large number of modifications rather than holding out for the last dollar and requiring that any deal be reviewed by multiple supervisors.

Thursday, July 24, 2008

Agency MBS: You will be tempted by the yieldy side of the Force

(Accrued Interest) Although agency mortgage-backed securities (MBS) have been beaten up the last couple days, avoid the temptation to jump in. Agency MBS spreads are not as attractive as they seem, and the technicals for MBS are horrible.

This has nothing to do with the financial condition of Fannie Mae or Freddie Mac. We'll have to see how the government bailout progresses. Perhaps just the act of allowing the GSEs access to the discount window will be enough to ensure liquidity. But by all indications, protecting the mortgage securitization market (i.e., keeping mortgage borrowing rates low) is a primary goal of any government action. It isn't credit quality which is behind this underweight call. Rather its plain old fashioned market conditions.

MBS analysis is more complex than for other investment-grade bonds, in that the yield on the security is highly depended on the pace of principal repayments. These payments primarily come from two sources: refinancings and housing turnover. Historically, refinancings were the primary driver of changes in mortgage payment speeds. Anytime interest rates would fall, borrowers would rush to refinance and thus pay off their old mortgage. Housing turnover was more consistent, as people tended to move from house to house based on life circumstances as opposed to macroeconomic events.

But times are anything but typical. Various conditions are coming together which will keep homeowners in their current residence far longer than historic norms. There is a large number of homeowners currently underwater on their mortgage, and an even larger number with less than 20% equity. Given that getting a mortgage with less than 20% down payment is difficult and very expensive right now, homeowners who currently have less than 20% equity would have to come up with a lot of cash in order to move to another home.

So the housing turnover element of mortgage principal payments is set to plummet. In addition, the same factors will prevent many refinancings. A borrower underwater on his current mortgage will not be able to refinance his loan just because rates fall 50bps.

This means that the average life of a mortgage is longer than is currently being assumed.

For example, a Fannie Mae 30-year 6% mortgage security currently has a nominal yield of 6.19% and an average life of 5 years. The average life is the median of a Bloomberg survey on prepayment estimates. That calculates to a nominal yield spread of 271bps.

Note that a 6% mortgage security is typically made up of borrowers with a 6.5% mortgage. Currently mortgage borrowing rates are 6.26%, according to Freddie Mac. Under normal conditions, one would assume that a 6.5% borrower is relatively close to a refinancing opportunity. Hence Wall Street prepayment models are assuming that this mortgage will pay principal slightly faster than this time last year.

More likely is that mortgages will prepay at historically slow rates. Cutting Wall Street's estimated prepayments in half, the mortgage's average life goes from 5 years to 9 years. Because the yield curve is so steep, that results in the yield spread falling to 219bps. If you cut Wall Street's estimate by a third, the spread falls to 202bps.

As investors come to terms with the extending average lives, prices are likely to fall rather than yield spreads contract. Holding the 271bps yield spread constant but extending the average life to 9 years causes the price to drop by over 3%.

Technicals for MBS remain ugly as well. Regional banks and credit unions were classically large buyers of agency MBS. But given the capital situation at banks, we are far more likely to see banks as net sellers of MBS over the next year. In addition, Fannie Mae and Freddie Mac will continue to dominate overall mortgage issuance, and both will be under political pressure to expand their guarantee business. This means more supply of agency MBS.

The best plays in MBS are securities where extension risk is limited. That's 15-year mortgages and hybrid-ARM securities. Both have a natural limit to how much interest rate risk can increase, given the shorter maturity/reset.

Wednesday, July 23, 2008

Housing Bill Adds Second Lien Amendment; DAPs to Be Eliminated

(Housing Wire) A sweeping housing aid package set to pass the House of Representatives added an important wrinkle Wednesday ahead of a key vote, while a long-controversial program for zero or little-money-down home purchases appears set to be relegated to the history books. According to a published report, the nearly 700-page long Housing and Economic Recovery Act of 2008, HR 3221, saw a vital new amendment added in final negotiations that would ostensibly give second lien holders some incentive to agree to having their positions wiped out as part of a program that would look to refinance troubled mortgages into loans endorsed by the Federal Housing Administration.

The Act would authorize the FHA to endorse up to $300 billion in new 30-year fixed rate mortgages for troubled subprime borrowers; the lender must, however, first write-down principal loan balances to 90 percent of current appraisal value.

It’s a proposition that in many cases would mean wiping out second lien holders, leading more than a few market participants to suggest recently that lenders would be unlikely to participate voluntarily — or, at the very least, that first lien holders would be held hostage by second lien holders.

An amendment added to the bill in compromise negotiations between House and Senate leaders would apparently look to solve this problem by allowing second lien holders to share in future price appreciation, even as their existing lien is extinguished via the refinancing transaction.

National Mortgage News first reported on the new amendment Wednesday afternoon in a blurb on the trade publication’s Web site; a copy of the amendment was not immediately available for media review at the time this story was published, leaving some question exactly as to how second lien holders would be impacted and what their position would be.

Kiss down-payment assistance programs goodbye?
The House bill also adopts language from the Senate version of the package that would ban so-called seller-funded down-payment assistance programs; this was a hotly-contested area of difference when the Senate volleyed its version of the bill back to the House.

“We’re going to yield to the Senate on that,” House Financial Services Committee Chairman Barney Frank (D-MA) is quoted as saying in the Washington Post. “There are a lot of trade-offs in the bill.”

Seller-funded downpayment assistance allows property sellers, including largely home builders, to donate funds to a non-profit agency, which then “gifts” the funds to a borrower as a down payment on a new home. The non-profits make a tidy processing fee, while critics — and even government agencies such as the IRS — have for years blasted the practice as a legalized scam.

“These schemes also have the effect of artificially inflating nominal house prices, since the sale price is not the same as the amount netted, at the end of the day, by the seller,” noted Felix Salmon in his highly-read economics blog at “I’m sure that a lot of politicians and realtors reckon that house prices need all the artificial inflation they can get at the moment, but my feeling is that over the medium to long term, no good can come of [DAP programs].”

The DAP provisions have been among the most hotly-contested in the housing bill that has been generally a source of disagreement itself.

“Losing one third of the FHA’s business that uses downpayment assistance will deny annually over one hundred thousand qualified moderate income, minorities, first-time homebuyers and women-headed households from becoming homeowners,” said Ann Ashburn, president of AmeriDream, Inc., a large down-payment assistance provider.

The House was still debating the complete housing package at the time this story was published. A vote was expected before the end of the day.

Bloomberg Discovers the REO Industry

(Housing Wire) A piece today at Bloomberg co-authored by Bob Ivry marks the financial news outlet’s “come to Jesus” moment with the REO industry, and reading it is certainly amusing for anyone that’s actually spent time working in the space. (BTW, Bob, if you’re ever doing another story on this, we’re here for you on background.)

The crux of the article, however, lies here:

Together, Fannie Mae and Freddie Mac, the two biggest U.S. mortgage finance companies, owned a record $6.9 billion of foreclosed homes on March 31, compared with $8.56 billion held by all 8,500 U.S. commercial banks and savings and loans.

Those outside the industry — and perhaps a good percentage of those inside the industry as well — might miss the real significance here. We know that Fannie and Freddie’s defaults are below those in the private party market, so you should be surprised to see such a large REO inventory on the books. At least until you realize just how large Fannie and Freddie really are relative to the rest of the market.

But the difference underscores one other aspect to the REO management ops at both GSEs, something the Bloomberg story scratches on:

Fannie Mae’s goal in selling its properties is to get the highest possible price, even if it means hanging on to them longer, said Gabrielle Harrison, the company’s vice president for REO sales. REO stands for “eal estate-owned,” a designation for properties that have been repossessed by creditors. Getting the highest price helps preserve neighborhood property values, she said.

Besides the humor for me in seeing REO merit a formal definition, what Harrison is alluding to is both GSEs’ focus on neighborhood stability; both have long been famously adamant in their selling prices and hesitant to sell to investors in service of this goal, preferring owner-occupants buy the properties instead. (You see, when you’re Fannie or Freddie, timelines apply less so than in the time-is-money world of private-party investment interests).

Had Ivry and his intrepid co-author Sharon Lynch explored the topic further, they’d have found out that while both GSEs have an interest in maintaining stability in their neighborhoods, right now this policy will translate into loss severity that goes well beyond the standard 20 percent once these properties are finally sold. Dean Williams, the inimitable CEO of Willliams and Williams, gives us part of the answer why:

It costs creditors such as Fannie Mae 2 percent of the value of the property every month in taxes, insurance, utilities, lost revenue, maintenance, management and cleanup after vandalism, Williams estimates.

Williams is referring to what’s known in the trade as cost of carry, and I’ve seen estimates ranging from 2 to 2.5 percent of unpaid principal balance — not “the value of the property,” as Bloomberg suggests, which would suggest declining carry costs right now in many markets when the exact opposite is taking place. I’ve also started to see cost of carry estimates reach up to 3 percent in certain cases lately, depending on where a portfolio of loans is concentrated and the investor behind a deal. In Fannie and Freddie’s case, the cost of carry is probably on the higher end of the spectrum, since the GSE’s disposition operations like to actively repair and maintain properties (part of selling to owner/occupants, as opposed to investors).

But cost of carry isn’t the only reason that loss severity is likely increasing for the GSEs — home price declines are eating away at any recovery value tied to the property itself, as well, and it’s doubtful that either GSE will hold onto properties long enough to see property values recover.

While the GSEs don’t disclose loss severity — and that’s one change I’d love to see made, given that these are government-regulated entities, after all — the above should illustrate why loss severities have been rising in the private-party market. I’d doubt that Fannie and Freddie are immune from a similar jump.

Nor are they immune, apparently, from an influx of inexperienced agents that are easily able to get REO listings assigned simply because of the sheer volume or work to be had:

Part of the difficulty for all owners of foreclosed property, and not just Fannie Mae, is a shortage of qualified agents in the field who can sell the homes efficiently, said Jesse Ramirez, a broker associate at Re/Max Partners Real Estate in Corona, California.

“They are all recent college grads without experience,” Ramirez said. “They have 300 files each and they’re overwhelmed. They don’t understand how the typical transaction goes. These people didn’t have jobs two years ago, not doing this.”

You’ll have to excuse me for a minute. I have an REO brokerage to go form….

Debtors Win Victories Against Mortgage Servicers

(Katie Porter @ Credit Slips) In the last few weeks, several courts have issued opinions ruling that mortgage servicers' actions have harmed consumers. Some of you follow this issue closely, but if you need an introduction, I've previously posted a bit on the basics of mortgage servicing and why it's an important component of the foreclosure problem. After the jump, I summarize three recent and newsworthy decisions. Debtors won big in these cases, variously recovering sizeable damages, having the foreclosure action against their home dismissed, or getting a preliminary injunction issued against a servicer's misconduct. Taken collectively, they all signal an increased willingness by courts at all levels (state, federal, bankruptcy) to take challenges to mortgage servicers' actions seriously. While I'm convinced that legislation, regulatory enforcement, and different market incentives are necessary to stop the misbehavior of mortgage servicers, this trio of decisions shows how litigation can help real families and point the way for further policymaking.

The Jones v. Wells Fargo decision from the bankruptcy court in the Eastern District of Louisiana was a landmark opinion in describing the problems with Wells Fargo's servicing of bankruptcy debtors' mortgages. On July 1, 2008, the district court ruled on Wells Fargo's voluminous appeal. The court affirmed the bankruptcy court's factual findings and legal conclusions that actions like misapplying plan payments violates the Bankruptcy Code. The district court remanded to the bankruptcy court on the remedy, ruling that while the bankruptcy court had injunctive powers to order new accounting standards, the court should first make a finding that there was "no adequate legal remedy as an alternative to monetary punitive damages." If I were Wells Fargo (and I'm grateful that I'm not), I'd be worried that the remand is an invitation to a large sanction. Wells' decision to appeal the new accounting standards is itself noteworthy. Why not embrace correct accounting? Do servicers prefer to pay monetary damages on those rare (albeit increasingly frequent) occassions when they get caught and continue to overcharge debtors in all other instances? It appears the answer may be "yes." I'll post an update when the bankruptcy court rules on the remanded issue.

The bankruptcy court in the Eastern District of Arkansas granted a preliminary injunction against a mortgage servicer, ASC, to halt its "continuing its efforts to collect payments from [the debtors] that they did not owe." While the matter will proceed to trial for final disposition, the opinion in support of the injunction finds that ASC misapplied 14 payments, sent the debtors "inaccurante, incomprehensive mortgage statements," and refused to stop collecting. The court concluded that an injunction was required, in part, because the servicer had admitted that it "could not guarantee that it would not violate" an agreement to stop collecting, even though it had put a "stop call" on the account. This latter bit caused the judge to note that "[i]n other words, ASC's counsel explained that ASC could not be responsible for its own actions." The injunctive relief here is an important remedy for

On June 5, 2008, a New York state court dismissed with prejudice a foreclosure proceeding because Wells Fargo, and its servicing agent, Litton, could not prove that Wells Fargo owned the mortgage. The note had purportedly been assigned from Argent to Ameriquest to Wells Fargo but the court found the assignments defective. It also ruled that the servicing agreement between Wells Fargo and Litton was insufficient to give Litton authority to make the required "affidavit of facts" to support the foreclosure petition. While the original mortgage between the debtor and Argent seems to remain valid, the court ordered the other mortgages removed from the real property records. This "lack of standing" decision is very similar to the relief that two federal courts in Ohio granted to plaintiffs earlier this fall. While my research study found that 40% of bankruptcy claims were not accompanied by a note, these cases reveal the existence of an even bigger problem--the companies who are foreclosing may not have any legal right to do so. That is, it's not just that some servicers are sloppy and don't bother with the note, it's that some do not have the authority to foreclose at all!

Monday, July 21, 2008

Freddie Mac May Slow Purchases of Mortgages, Bonds

(Bloomberg) -- Freddie Mac, the second-largest U.S. mortgage-finance company, may cut purchases of home loans from banks and bonds backed by housing debt to shore up its capital amid record delinquencies.

The government-sponsored company is also considering selling securities and reducing its dividend while it prepares to issue $5.5 billion of stock, McLean, Virginia-based Freddie Mac said in a July 18 filing with the U.S. Securities and Exchange Commission. JPMorgan Chase & Co. analyst Matthew Jozoff said in a report last week that growth in mortgage holdings of Freddie Mac and the larger Fannie Mae will be ``weak.''

``This just means much less credit availability for mortgage borrowers,'' said Paul Colonna, who manages more than $100 billion as chief investment officer for fixed income at GE Asset Management in Stamford, Connecticut. ``They were teed up to be saviors of the mortgage crisis, but now they've got their own capital issues.''

The Bush administration and Congress are depending on the companies to help pull the U.S. out of the housing slump because they buy mortgages from banks, providing money to make new loans. Instead, Treasury Secretary Henry Paulson was forced to seek Congressional approval last week to extend more credit to the companies and buy their shares after Freddie Mac and Fannie Mae tumbled this year in New York Stock Exchange composite trading.

European Trading

Freddie Mac today rose 59 cents, or 6.4 percent, to $9.77 at 12:20 p.m. in Frankfurt, with 20,123 shares traded. Washington- based Fannie Mae increased 72 cents, or 5.4 percent, to $14.12, with 24,628 shares traded.

Freddie Mac lost 73 percent in New York trading this year and Fannie Mae declined 66 percent.

Combined losses at the companies will probably total $48 billion through 2009, New York-based Jozoff said in the JPMorgan report dated July 18. ``Mortgage losses are significant, and will probably foster capital conservation from the agencies rather than portfolio growth,'' he wrote.

Fannie Mae, created in Franklin Delano Roosevelt's New Deal plan, and Freddie Mac, started in 1970, are getting battered as foreclosures rise to the highest rate in at least three decades, the Mortgage Bankers Association said in a June report. One in every 501 households was in a stage of foreclosure in June, and bank seizures rose 171 percent since January, 2005, according to RealtyTrac Inc., an Irvine, California-based company that sells data on defaults.


Fannie Mae and Freddie Mac, which have the implicit backing of the U.S. government and get access to funds at lower rates than banks, became more indispensable this year after private providers of mortgages collapsed or were acquired. New Century Financial Corp. of Irvine, California, failed. Calabasas, California-based Countrywide Financial Corp. was bought by Bank of America Corp. IndyMac Bancorp, in Pasadena, California, was seized by bank regulators.

Freddie Mac and Fannie Mae, which own or insure almost half of the $12 trillion in U.S. home loans, accounted for more than 80 percent of mortgage securities created in the first quarter, double the level of a year earlier, according to data compiled by Bloomberg.

At the end of March Freddie Mac had $6 billion more than the minimum capital required by its regulator, the Office of Federal Housing Enterprise Oversight, and Fannie Mae had surplus capital of $5.1 billion. The companies already raised $20 billion in the past year to cover losses and meet Ofheo rules.

Preserving Capital

Freddie Mac will probably report a surplus exceeding the minimum 20 percent required for the second quarter, according to the SEC filing. The SEC registration and equity raising will allow the company to reduce its capital surplus level to 10 percent.

While that should allow Freddie Mac to buy more mortgages, the company suggested it still needs to preserve capital.

To stay above the 20 percent requirement ``we are considering measures such as reducing or rebalancing risk, limiting growth or reducing the size of our retained portfolio, slowing purchases into our credit guarantee portfolio, issuing additional preferred or convertible preferred stock, issuing common stock, and reducing the dividend on our common stock,'' Freddie Mac said.

Fannie Mae and Freddie Mac need less capital for their business of applying guarantees to mortgage securities. The companies must hold 2.5 percent of capital against their $1.5 trillion of investments and 0.45 percent against their guarantees of $3.6 trillion of securities.

Fannie Mae paid $1.55 billion in common and preferred dividends in 2007 and Fannie Mae's payouts totaled $2.48 billion, according to the company's annual reports.


The $5.5 billion share sale planned by Freddie Mac may not be enough, according to Friedman Billings Ramsey & Co. analyst Paul Miller. He estimates the companies will each need to raise $15 billion to replenish capital.

Freddie Mac probably would split fund-raising between common and preferred shares, UBS AG analysts said in a July 10 report. With Freddie Mac's market capitalization now at $5.9 billion, shareholders may suffer a 50 percent dilution of their stakes.

Freddie Mac rose 18 percent last week to $9.18 and Fannie Mae jumped 31 percent, to $13.40 after Paulson put the weight of the Treasury behind the companies, making the implicit government backing more explicit. A year ago, shares of both companies were more than $60.

Fixed-rate mortgage securities guaranteed by Fannie Mae, Freddie Mac or U.S. agency Ginnie Mae yielded 157 basis points, or 1.57 percentage points, more than Treasuries, according to Lehman Brothers Holdings Inc. index data. The spread compares with 69 basis points a year earlier.

``There's certainly fear among some investors that they might engage in large-scale selling,'' said Arthur Frank, head of mortgage-backed securities research at Deutsche Bank Securities in New York.

Tuesday, July 15, 2008

FDIC to Attempt Mods in IndyMac's Servicing Portfolio

(Naked Capitalism) The FDIC announced earlier that it will halt foreclosures in IndyMac's $15 billion loan portfolio. But I found this bit of the Wall Street Journal's article "IndyMac Reopens, Halts Foreclosures on Its Loans":
In its effort to halt foreclosures, the FDIC has much more flexibility to intervene with the roughly $15 billion of loans that were owned by IndyMac. But IndyMac also was handling another roughly $185 billion in mortgages in its servicing business. Ms. Bair said that FDIC officials also were looking at the troubled loans in the broader portfolio to see if there was a way to help borrowers avoid losing their homes.....

IndyMac is the nation's eighth-largest mortgage servicer, with $199 billion of assets, according to Inside Mortgage Finance, an industry newsletter. Some 8.26% of loans the company services were at least 30 days past due at the end of the first quarter, excluding loans in foreclosure, up from 5.41% for the same period a year earlier.

While the exact size of the servicing portfolio appears to be at issue, by any standards, it's pretty big. And we see a couple of interesting issues at work in Bair's desire to modify loans in the servicing portfolio.

On the one hand, we've long believed that more mods should be done than are actually taking place (and by that we mean principal writedowns). With housing prices down as far as they are already, and market clearing prices in many areas are almost certainly even lower (foreclosures in some locales are considerably delayed, due either to backlogged courts or banks who'd rather keep a resident in place, even a non-paying one, rather than have a vacant house that will deteriorate quickly). So if you have areas where the loss on sale + foreclosure costs puts the mortgage at a 40% or 50% loss, there ought to be a lot of room to do principal reduction and still have the investor come out ahead.

Even though mods to date have reportedly not been very successful, borrower counselors tell us that servicers are seldom writing down principal, mainly offering catch-up plans or offering near-term rate relief (at best with modest principal reduction).

The FDIC could in theory get some valuable insight into why modifications aren't being made. Theories abound, ranging from real (some bar mods) or perceived restrictions in the servicing agreements to disincentives (a successful mod reduces servicer cashflow) to servicer business models (servicer are not set up to do anything on a case-by-case basis and the cost of establishing this capability is beyond their means).

It would be very valuable to learn whether the failure to see many loan modifications is indeed due to the fact that most borrowers are too far over their heads to be saved, even with a substantial modification, or whether rigidities in the servicing role are preventing realistic changes to be made.

But there is a second complication: the FDIC is supposed to maximize recoveries on banks it seizes. Loan modifications in the servicing portfolio will reduce its income and thus its value to potential buyers. It appears that the FDIC would prefer to trade off any reduction in sales price against the gains to investors and homeowner, but it is a tradeoff that servicers heretofore have seemed reluctant to make.

I'm no fan of Bair's, but this is one case where her willingness to break china may be a plus. I stress "may" because I have serious doubts about her competence. But having announced her interest in trying to modify loans in the servicing portfolio, hopefully alert members of the press will follow up with her on her progress and more important, what she has learned about the impediments.

Monday, July 14, 2008

Moody's on Modification Re-Defaults

(Tanta at Calculated Risk) Sez Bloomberg (thank you, Brian!):

July 14 (Bloomberg) -- More than two of every five subprime borrowers whose mortgages were reworked in the first half of 2007 are defaulting anyway, Moody's Investors Service said.

Among subprime adjustable-rate mortgages modified in the first half of last year, 42 percent were at least 90 days late on March 31, the ratings firm said in a report today.

Modifying loans granted to consumers with poor credit records has gained favor as record numbers fail to keep up with payments and home prices tumble. Loans reworked more recently may perform better than ones modified in early 2007 because lenders are increasingly lowering interest rates and offering changes to consumers with fewer missed payments, Moody's said. That's different from 2007, when lenders focused on enforcing repayment plans.
I have not yet gotten my hands on the detailed Moody's report on this subject. However, I did look at Moody's press release, and it doesn't exactly attribute the issue for the early 2007 modifications to repayment plans. Per the press release (no free link), the majority of modifications done in the first half of 2007 involved simple deferral of principal/capitalization of past-due interest (that is, the borrower got "brought current" by having past-due interest added to the loan balance) without other changes in the loan terms. Modifications like that result in the same or even a slightly higher monthly payment than under the original loan terms.

If modifications processed in the second half of 2007 and later mostly involve 1) significantly lowered payments and 2) significantly less delinquent loans, then certainly theory predicts they will have a better re-default rate. On the other hand, it's early to be confident that the 40% redefault rate on the earlier mods will hold; generally speaking you need at least two years of "seasoning" on a group of modifications before you get useful numbers on re-default. That said, Moody's servicer survey from last year predicted a redefault rate of around 35% based on past experience of the servicers. It will be curious to see how high that redefault rate can go before the "least loss" models tip back toward foreclosure. So far Moody's is simply saying that the impact on cumulative losses of the early modifications has been "modest." That suggests to me that it may not take a much higher redefault rate for this "modest" lowering of cumulative losses to disappear.

I know that I for one am looking forward to Hope Now and the OCC to start reporting on re-defaults in their metrics (although I'm not going to hold my breath). Moody's is reporting strictly on subprime ARMs; while these have been the focus of modification efforts, we still need to know what's happening in the prime and Alt-A segments.

Otherwise, Moody's reports that as of March 2008, nearly ten percent of subprime ARMs with a reset date in the preceding 15 months had been modified.

Lawmakers to Add Treasury’s GSE Rescue Proposal to Housing Package Share

(Housing Wire) So much for any fight over whether the Treasury should be allowed to purchase shares in troubled housing finance giants Fannie Mae (FNM: 9.73, -5.07%) and Freddie Mac (FRE: 7.11, -8.26%).

Key Congressional Democrats gave their thumbs up late Monday to a Bush administration proposal that would grant the Treasury broad access to support both GSEs, and said they’d include it in an ever-expanding housing aid package now making its way through Congress.

“The bill will include the proposals announced yesterday by Secretary Paulson to ensure that Fannie and Freddie have the resources they need to continue to play their vital role in America’s housing finance system,” House Financial Services Committee chairman Barney Frank (D-MA) said in a statement.

Sources had suggested earlier that some Democrats might object to a Treasury proposal seeking to grant it temporary authority to purchase an equity interest in one or both GSEs, if needed; the administration’s proposal in this area effectively killed any stock rally Monday surrounding Fannie and Freddie over fears of potential serial dilution, as investors weighed the probability of any Treasury step-in.

Whether any such investment by the Treasury will actually be needed is the question du jour among analysts and investors alike. We’re sure you can find your fair share of analysts suggesting that the need for capital is so great at both GSEs that the Treasury will undoubtedly step right in; but not all analysts are making that kind of call.

A team of analysts led by Jim Vogel at FTN Financial suggested Monday that Freddie Mac could go at least four more quarters without needing outside capital, even with mounting losses, and dismissed recent comments by former St. Louis Fed president William Poole — who suggested last week that the GSE was insolvent — as “patently stupid analysis.”

(Not that it stopped famed investor Jim Rogers, who holds an active short position in Freddie, from reiterating the same argument to Bloomberg on Monday morning.)

Whispers of press leaks
Treasury secretary Henry Paulson has been adamant thus far in suggesting that any aid to the GSEs not benefit shareholders, a stance he also struck in the bailout of troubled Wall Street outfit Bear Stearns & Co. in March. But some of HW’s sources suggested over the weekend that Congressional Democrats had resisted the idea, at least initially, on the grounds that shareholders had invested out the belief that both had the government’s support.

Friday’s near-collapse of both the equity and debt markets for both GSEs, however, likely served to quickly removed any lingering policy differences — real or imagined — between Paulson and Congress, sources suggested.

It’s been whispered as of late by more than one analyst that Paulson may have leaked the onerous suggestion that the government was considering conservatorship for Fannie and Freddie, as reported last week by the New York Times, in an effort to strong-arm Democrats into agreeing to the administration’s proposal.

Technically speaking, conservatorship would be an issue only if the GSEs fell below well-defined critical capital levels, and neither is close to such a danger zone: taken together, Fannie and Freddie’s current capitalization is $50 billion above such a level. Freddie is also planning to raise an additional $5.5 billion in fresh capital later this year.

“Many sources are wondering if the administration or Congressional Republicans didn’t deliberately bobble the public relations efforts to reassure the markets in the wake of concerns that new accounting rules would increase regulatory capital needs,” said one source, an ABS analyst that asked not to be named in this story, in reference to a Monday report from Lehman Brothers Holdings Inc. (LEH: 12.40, -14.07%) that served to spark the spiral in share prices last week.

“Notably, debt markets did not falter appreciably until news of Treasury contingency plans escalated fears from serial dilution of existing shareholder interests to fear of imminent collapse.”

Intentional or not, the conservatorship report sent the GSEs and larger financial markets into a tailspin Friday, and have since put the Fed and the Treasury in the position of having to prove the thinking that says some institutions really are too big to fail — as if the bailout of Bear Stearns didn’t already prove such a mantra’s existence.

In the case of the GSEs, however, the very act of stepping in creates a special kind of conundrum: in times of crisis, just what does it mean to have an implicit government guarantee?

We’re about to find out.