Monday, September 29, 2008

New Servicer Targets Needs of Distressed Mortgage Investors By: PAUL JACKSON September 29, 2008

(Housing Wire) Add another firm to a growing number of special servicers targeting the so-called “high-touch” segment created by distressed asset investors looking to aggressively modify acquired loans. Dallas-based Wingspan Portfolio Advisors, LLC, announced on Monday that it had opened its doors for business, and that it would announce its first major client relationship next month.

“High-touch” special servicing has become an in-demand item for investors looking to recoup their investment on sub- and non-performing loans, and a fair number of special servicing firms have publicly announced their intentions to pursue this market in recent months. One such firm, for example, is Dallas-based Aqcura Loan Services, which began targeting the specific needs of lenders, hedge funds and investors in distressed debt back in April. Even giant servicing operation Residental Capital LLC signaled in August its desire to build up a third-party special servicing business targeting distressed asset investors.

But for all of the interest investors now having in third-party servicing arrangements, the space remains relatively wide open, according to various fund managers that have spoken with HW.

Wingspan is led by Steven Horne, a lawyer and servicing industry veteran who perviously was a director of Servicing Risk Strategy with Fannie Mae (FNM: 1.56 -14.75%). He also spent nine years as a partner with Sherman Financial Group, as well as serving as a director of default servicing for Ocwen Financial Corp. (OCN: 7.91 -1.37%). Wingspan’s senior management team includes industry veterans with decades of proven default servicing success at many leading companies.

“There are very few specialists out there with the tools and skills needed to cure these nonperforming mortgages, and so many times these loans, and especially the ones with low equity or low balances, are given up on,” said Horne.

Horne suggested that traditional servicing methods rely on net present value (NPV) to arrive at decisions, and said that doing so creates an assumption that loans outside the loss mitigation model can never be saved.

“We don’t arrive at the decision that a loan is lost before we completely understand the situation,” he said. “That means using advanced analytics that consider each factor affecting the loan and exploring every servicing strategy open to us.”

Horne said that the company is structured to focus on loss mitigation: 50 percent or more of the income earned by loss mitigation specialists at the company is tied directly to bringing loans back from the brink of foreclosure to paying status.

“Once they’ve accomplished that, we switch the case over to other specialists whose jobs entail keeping the payments flowing until the loan is contractually current,” Horne notes.

“We even monitor call times to make certain a sufficient amount of time is spent with each borrower. That’s another departure from traditional servicing methods, but our borrowers need that extra attention if they are going to have a chance to succeed at bringing their mortgage current.”

For more information, visit

Friday, September 26, 2008

Schwarzenegger Terminates Mortgage Restrictions

(Housing Wire) California governor Arnold Schwarzenegger vetoed a bill Thursday that had proposed instituting stricter regulations on state-licensed mortgage brokers, in an attempt to protect borrowers from irresponsible lending. In the wake of sky-high residential foreclosures, the wide-reaching bill was one of more than a dozen mortgage-related bills introduced by California lawmakers in January.

Schwarzenegger signed 10 of those bills, which the governor’s office said “will aim to increase accountability in the real estate market, improve transparency standards in order to prevent abusive lending practices and help Californians maintain homeownership in the aftermath of the foreclosure crisis.” California has consistently been one of the hardest-hit states throughout the nation’s housing mess.

Despite the passage of the other measures, bill AB 1830, proposed by state Assembyman Ted Lieu (D-Torrance) was blocked, leaving consumer groups dissatisfied and angry. The bill was the centerpeice of an effort by consumer groups to rein in mortgage brokers that many say helped fuel the mortgage crisis.

The bill would have established a “fiduciary duty” for mortgage brokers to consumers, prohibited steering borrowers into higher-cost loans, banned option ARMs, and signficantly limited the use of yield spread premiums as a form of broker compensation.

“California is experiencing 1,300 foreclosures every single day,” as a result of loose lending practices, said Paul Leonard, director of the California office of the Center for Responsible Lending. ”We should not allow the narrow interests of the mortgage brokers who got us into this mess dictate how we get out … yet Schwarzenegger just did.”

The bill passed with a 6-4 vote in the Senate. But Schwarzenegger said that while the bill had laudable intentions, it “overreaches and may have unintended consequences,” according to the Sacramento Bee Thursday. Among them were putting California mortgage brokers at a competitive disadvantage.

The California Association of Realtors, however, praised Scwarzenegger’s decision for blocking a bill they said would have failed to apply to conventional lenders and created a new, unnecessary right of enforcement by private parties.

“AB 1830 is a feel-good measure that would have unequally burdened different sectors of the mortgage industry, but would not have addressed lender misconduct that inspired the legislation in the first place,” said CAR president William Brown, in a press statement.

”We don’t need more laws— we need more enforcement.”

Among the mortgage legislation signed by Schwarzenegger was: SB 1461, which requires real estate agents to disclose their license number on all first-point-of-contact marketing materials; SB 1737, which authorizes the state’s real estate licensing authority to suspend or bar a person who has committed a violation of real estate law; AB 69, which mandates that all mortgage loan servicers report detailed data to their licensing agency in regards to loan modifications; AB 180, which provides a registration and bonding process for foreclosure consultants; and SB 870, which allows the California Housing Finance Agency to more quickly establish a mortgage refinance program.

“I am pleased to sign legislation that protects consumers and creates a responsible and accountable lending environment that will encourage homeownership in out state,” Schwarzenegger said.

Wednesday, September 24, 2008

Mortgage Bankers Association's Cramdown Claim Debunked

(Adam Levitin @ Credit Slips) I have received several inquiries about the Mortgage Bankers Association's spurious claim that permitting modification of mortgages in bankruptcy will result in higher interest rates or less credit availability. I have drafted a very short explanation of why the MBA's claim is patently false and in fact disprovable. It is available here.

FHA Moves to Stop “Buy and Bail”

(Housing Wire) As the nation’s housing mess has rolled out, more than a few media reports have provided anecdotal evidence to support the idea that some borrowers are buying new homes for less money and then immediately defaulting on their current principal residence — called a “buy and bail,” most of the borrowers doing this are hopelessly underwater on their current mortgage.

And they’re having to lie about receiving rental income on their current home in order to do it, in many cases, too.

The Federal Housing Adminstration last week moved to stop the practice, saying that “FHA and others in the mortgage industry have observed an increasing number of homeowners who have chosen to vacate their existing principal residence and purchase a new residence.” (By “vacate,” FHA officials mean “default on.”)

Under guidance set forth in a Mortgagee Letter released on Friday, underwriters may no longer consider rental income from a property being vacated in most circumstances, and must ensure that the homebuyer can manage payments on of the full debt service of both mortgages — at least temporarily, while the FHA sizes up a more permanent set of measures to address the trend. The guidance applies even in situations where the FHA has not insured the mortgage to be “bailed” on, the letter said.

There are some exceptions to the FHA’s temporary rule here: formal relocations and situations where the homebuyer has sufficient equity in the vacated property (defined as LTV of 75 percent or less).

Read the full Mortgage Letter >>

Tuesday, September 23, 2008

Why Bulk Mortgage Modifications are a Bad Idea

(Felix Salmon) Matthew Yglesias:

There really is an urgent need to "do something" and also an urgent need to try to make sure we do the right thing. Middle class people are pretty desperately in need of some form of bulk modification of mortgages, a step the financial institutions and their hirelings in the GOP have been blocking for months. In theory, this question is separable from the bailout issue. In practice, the banks' desire for a bailout provides a key moment leverage and opportunity.

I'm not a fan of this idea. Yes, this is "a key moment leverage and opportunity". But that's no reason to do something which doesn't make fundamental sense. And a bulk mod makes very little sense for three main reasons.

  1. We're in the midst of a major banking crisis, and there's a reason why a bulk mod has been opposed by the financial institutions: it would cost them a lot of money that they don't have. Right now, there are too few loan modifications. But a blunderbuss approach where the main qualification for getting a mod is having a mortgage? Would mean far too many. Even a relatively modest bulk mod, in a world where there are $13 trillion of mortgages outstanding, could cause the loss of hundreds of billions of dollars in present value and bank capital.
  2. So you restrict the bulk mod -- to people with adjustable-rate mortgages, say, who bought their houses between this date and that date. But you still can't underwrite these things: it's a bulk mod. So a bunch of people who can afford the reset payments will end up getting free money off their mortgage payments, and a bunch of people who can't even afford the lower, initial payments will unhelpfully stave off the inevitable. Both of these groups of people will cause bank losses which we really don't need right now.
    And of course even an all-mortgages-eligible bulk mod is essentially a transfer from renters to owners, and from people who've paid off their mortgage to those who haven't. The more you narrow it down, the less fair it becomes: billions of dollars will essentially end up being spent on Californians who bought houses they couldn't afford, rather than the more sensible people across the country who didn't. This is not good politics, or good policy.
  3. Drafting a bulk mod is really, really hard, given the way in which servicers' hands are tied. You're basically violating a whole raft of securitization contracts, and the unintended consequences are bound to be legion. Remember it's not just banks who own these mortgages: they pop up in MBSs and CDOs held by investors all over the world. It would be much easier to just write checks to homeowners, to help defray their mortgage costs: at least that would be legal. But the politics of that would be even more lethal than the politics of a bulk mod.

There is lots of legislation which would be a really good idea right now. But I'm not a particular fan of even the good-idea legislation (like chapter 13 bankruptcy for homeowners in foreclosure) being stapled on to this bailout bill. Stapling on a rushed and necessarily complex loan-modification bill would be almost certain to end in tears.

What Does It Take to Modify a MBS Servicing Agreement?

(Credit Slips) This evening I did a little sample of MBS indentures and pooling and servicing agreements (PSAs) to see what it takes to modify them. This is an important issue because it will determine the amount of MBS that the government would have to buy in a bailout to be able to get to the underlying loans in order to modify them and help financially distressed homeowners. I looked at 24 MBS deals (I used Alan White's deal sample, but couldn't find docs for two deals). By my read of the documents, doing any serious loan modification would require the government to hold a lot of MBS. Of the 24 deals, 21 or 87.5% required a 2/3 majority to modify the servicing agreement, while only 3 or 12.5% required a simple majority.

Many PSAs, however, further provide that any amendment that would "reduce in any manner the amount of, or delay the timing of, payment received on Mortgage Loans which are required to be distributed on any certificate.." may not be done without the consent of the certificate holder. Widescale modifications and loan restructurings would inevitably reduce the amount of payment to be distributed or delay the timing of the payments. If the pool is overcollateralized or there is a first loss position willing to absorb these losses, then 100% shouldn't be necessary, but if widescale modifications are necessary, 100% agreement of MBS holders will be necessary.

This means it will be difficult, if not impossible, for the government to gather up enough MBS to get to the underlying mortgages. Not everyone holding MBS will sell to the government or even be eligible to participate in the bailout. And there are second mortgages that are in separate pools. It will also take time to process and to sort, time during which the foreclosure machine will keep rolling along. This is Humpty-Dumpty, and all of Paulson's horses and all of Bernanke's men will have a lot of trouble putting these pools back together again.

What this means is that it will be entirely arbitrary which homeowners the government will be able to assist in the end. It will have nothing to do with the merits of a homeowner's case or the homeowner's willingness to incur a cost. It will be entirely a function of which financial institutions work with the government and who happens to hold what MBS paper. This is another why bankruptcy modification is necessary--it is the only fair solution that is available to all homeowners, not a lucky, random few.

Monday, September 22, 2008

The Credit Crunch of 2007: What went wrong? Why? What lessons can be learned?

By John C. Hull of the University of Toronto

Abstract: This paper explains the products that were used to securitize mortgages during the period leading up to the credit crunch of 2007 and explains why many of these products have performed so badly. It also examines some of the lessons that can be learned from the crisis.

Download paper (390K PDF) 15 pages

Friday, September 19, 2008

The Pain of Selling a Home for Less Than the Loan

(NYT) Many Americans are discovering an unfortunate twist to the housing crisis: even after selling a home and moving away, they might have to keep paying on it for years, even decades.

With home prices tumbling, millions of people owe more on their mortgages than the houses are worth. If a new job or other life change compels them to sell, their choices include bringing a pile of cash to the closing to make the bank whole, going into foreclosure or cutting a deal with the lender to pay off the balance of the loan over time.

How sellers will react when confronted with these unappealing options is one of the biggest questions hanging over Wall Street as it tries to move beyond the carnage overwhelming such venerable firms as Lehman Brothers, American International Group and Merrill Lynch.

A sale for less than the value of the mortgage on a property is known as a “short sale,” because the transaction leaves a homeowner short of the funds needed to settle the debt. Agents and lenders say the number of short sales is rising markedly.

Reluctantly, banks are agreeing to let some short sales go through. But instead of writing off the unpaid portion of the debt, they want homeowners to sign a note promising to pay some or all of the balance due.

This was the situation confronting Mike and Linda Kelly, who needed to sell their house in the foreclosure-plagued Central Valley of California when Mr. Kelly got a new job 75 miles away.

The Kellys owe $300,000 on their house, which has a pool in the back, crepe myrtle bushes in front and, because Mr. Kelly is a ham radio buff, a 40-foot antenna above it. But the best offer they could get gave the bank $220,000.

CitiMortgage said it would approve a sale at that price, but at the last minute told the Kellys they needed to pay $166 a month for the next 20 years, a total of $40,000.

“When you are ready to participate in the loss, feel free to call me,” a Citi loss mitigation specialist, April Easter, wrote to them in an e-mail message.

Moody’s estimates that about 10 million homeowners have negative equity, a condition known colloquially as being upside down or underwater. By next June, the forecasting company expects the total to rise to 12.7 million — a quarter of all homeowners who have mortgages.

Owners in this predicament who must sell, like the Kellys, have few alternatives if they are not flush.

“The first wave of foreclosures involved a lot of investors who just disappeared,” said Lance Churchill of Frontline Seminars, which teaches real estate agents how to negotiate with lenders on short sales. “Now, homeowners with jobs and assets are underwater and want to sell. The banks want as much as they can get, today or in the future, and the owners want to get away clean.”

This clash is a central aspect of the financial crisis engulfing Wall Street. During the boom, millions of mortgages were bundled into bonds that were sold to investors and banking houses. But with real estate prices falling and mortgage defaults rising, it has become nearly impossible to calculate the worth of those bonds, and investors are fleeing them.

Lenders like Citi — which has already lost more than $50 billion in ill-advised real estate-related ventures — are walking a tightrope.

If they do short sales without trying to extract anything from the sellers, everyone in the country who is upside down could try to wriggle out. The banks and bondholders will take a fresh wave of hits; some might not survive. But if a lender drives too hard a bargain, the owner can default, leaving the bank worse off than if it had taken the short sale.

“It’s a game of chicken, with huge consequences for the banks, the borrowers and the economy,” Mr. Churchill said.

Lenders’ demands take many forms. Mary Gonzalez, an agent in San Jose, had to stave off a request from a mortgage company that her client take cash advances on her credit cards to settle a mortgage debt. That lender eventually agreed to settle for a few thousand dollars.

At the other extreme, JPMorgan Chase says it wants short sellers to sign a note for the full balance due, with interest, over 30 years if necessary.

While there are no authoritative national numbers on short sales, a related statistic — the number of people selling their homes for less than they paid — is rising rapidly, at least in California.

In August, 54.2 percent of Californians who sold their homes suffered a loss, a sharp rise from 16.8 percent in August 2007. Today’s number exceeds the peak of 53.2 percent reached at the end of the last downturn in January 1996, according to the research firm DataQuick. (In some of those cases, the sellers may have lost their down payment without necessarily incurring a cash shortfall at closing.)

The foreclosure option is, in theory, bad for everyone. Short sales offer all parties the ability to cut their losses earlier. But they also bring homeowner and lender into direct conflict on the contentious issue of who was responsible for those losses in the first place.

Many borrowers went wild during the boom, buying multiple properties at high prices, signing outlandish loans, taking out large sums to live in high style. But none of that would have been possible, of course, if banks chasing quick profits had not abandoned their lending standards.

The Kellys, both 64, did not join the free-for-all. He works in financial services; she is a doting grandmother and a volunteer at the local blood bank. “We’re not loaded,” Mrs. Kelly said.

They bought their home in December 2001 for $225,000. They refinanced once, four years later, taking out $75,000 to do improvements. At the time, the house was appraised at $450,000, seeming to offer a sufficient cushion.

But then the market tanked. Last winter, when the Kellys first began looking into selling, they knew any offer would be far below what they owed, and they could not afford to make up the deficit. So they began talking to Citi about their options. They did not want to surrender the house to foreclosure, ruining their credit, hurting their neighbors and betraying their image of themselves.

“We’ve never defaulted on any obligation through our whole lives,” said Mr. Kelly, a former marine who had served in Vietnam.

Citi sent the Kellys a letter saying, “We look at mortgages as partnerships.” The lender said it would be willing to let the home be sold for its fair market value, “even if the proceeds are less than the total amount owed.” Additional payments over the decades were not mentioned.

The Kellys had to jump through many hoops, surrendering their financial documents and explaining why they merited approval for a short sale. Only when a buyer was in hand and a price had been negotiated did Citi demand the $40,000 promissory note from the Kellys.

A spokesman for Citi, while declining to comment specifically on the Kelly case, said the amount each seller is asked to provide is determined by “affordability criteria,” and the sum is negotiable. But the e-mail exchanged between the Kellys and their Citi case worker do not show much evidence of negotiation.

“Lenders always say, ‘Don’t stick your head in the sand, come work with us,’ ” Mr. Kelly said. “I have found the truth to be absolutely the opposite. They have fought us every step of the way.”

Mr. Kelly did not want to pay the $40,000, but Mrs. Kelly had qualms about the couple’s thumbing their noses at the bank. “I wonder about suddenly someone knocking at the door with some awful bill to be paid,” she said.

Foreclosure laws vary among states but in some circumstances, a bank can go after borrowers for the balance due on a mortgage even after it has taken possession of the house. That has not begun to happen in large numbers, but many people believe it will.

“If you have substantial losses from borrowers with a substantial ability to pay, it makes sense to take them to court,” said William Markham, a foreclosure expert at the law firm Maldonado & Markham in San Diego. He thinks the threshold for suits is a six-figure loss on the house and a borrower with a six-figure income.

People in the industry say banks sometimes tell borrowers that their credit will take less of a hit if they agree to sign a promissory note than if they default. It is not true. In both cases, credit agencies consider the homeowner to have failed to live up to a solemn obligation.

“Your credit report is going to be equally bad with a short sale as a foreclosure,” said Maxine Sweet, a vice president of the credit bureau Experian.

It is true, however, that people who sign a promissory note may have an easier time buying a new house than people who have gone into foreclosure; guidelines imposed by Fannie Mae, the mortgage giant, treat foreclosure as a particular black mark in getting a fresh mortgage.

As the summer began, Mr. Kelly was getting tired of commuting for several hours every day to his new job. He asked Citi if it would accept half of what it was demanding, or $20,000. Before the lender could answer, their buyer backed out.

Feeling trapped, the Kellys are increasingly angry at Citi and other financial firms. “They damaged our economy and don’t take any of the responsibility, not really,” Mrs. Kelly said. Nevertheless, on Aug. 26, she mailed in the September mortgage payment.

A few days later, Mr. Kelly was abruptly laid off, along with 20 of his colleagues. He landed a new job on Monday but the offer was withdrawn on Wednesday. Too much economic turmoil for us to be adding staff, the company said.

Only one thing gives Mrs. Kelly any satisfaction. “Citi should have taken care of this when they could have,” she said. “Now there’s going to be nothing for them to get.”

Wednesday, September 17, 2008

Questions Surround FHA’s Push into Troubled Mortgages

(Housing Wire) Key executives from some of the nation’s largest mortgage servicing shops gathered on Capitol Hill Wednesday, testifying before the House Financial Services Committee over the recently-passed and soon-to-be-implemented Hope for Homeowners program that will see the Federal Housing Administration’s authority to underwrite refinanced mortgages for troubled borrowers expanded by a whopping $300 billion. The new program is expected to become effective on Oct. 1.

The emerging consensus among those in the servicing trenches that spoke with HW, however, has been that the program will have less impact than legislators might hope. And that was clearly the undercurrent in committee testimony Wednesday from servicing executives, evident as much in what was said as it was in what wasn’t.

Steven Hemperly, senior vice president of real estate default servicing at CitiMortgage, Inc., went so far as to only mention the Hope for Homeowners program in his closing remarks to committee chairman Barney Frank (D-MA) and other House members. His only mention of the program: “We look forward to the initiation of the Hope for Homeowners program and view it as a useful lending and servicing tool for struggling borrowers.”

While affirming Wells Fargo’s commitment to loss mitigation, execitive vice president Mary Coffin estimated that 30,000 to 40,000 borrowers might qualify for the Hope for Homeowners program. “We will use this program where it is needed,” she told House members.

Other servicers provided similar estimates, but said the total number of loans pushed to the program would likely end up being lower. “We do believe, based on our experience of the last year and a half, that the numbers of borrowers who ultimately take advantage of the program could be lower than the number that preliminarily qualify, as there may be several crucial barriers to the program’s widespread use,” said Molly Sheehan, a senior vice president at Chase Home Lending.

Bank of America loss mitigation head Michael Gross was the only servicer that noted that the company — which now owns mammoth Countrywide Financial’s mortgage servicing portfolio, and is the largest servicer in the nation — had actively engaged in forbearances thus far for borrowers the company believes will qualify under the program.

“We are proactively contacting these customers to confirm their eligibility for, and interest in, participating in the program,” Gross said. “Subject to investor consent and state procedural considerations, we will avoid completing foreclosure sales for the customers identified while the implementing regulations are being drafted.”

Part of servicers’ hesitance to provide details may be due to a lack of details surrounding the program specifics; it’s tough to say who will qualify when you don’t know what the standards will be. HUD commissioner Brian Montgomery, however, assured Congress that everything would be in place in time.

“First and foremost, we want to assure you that we are firmly committed to having the program up and running by October 1, 2008, and believe this goal is achievable,” Montgomery said to open his testimony on Wednesday.

Second liens, higher rates problematic
Beyond the program’s potentially limited reach, other more technical issues would seem to plague the program’s implementation, as well.

HUD’s Montgomery also alluded to perhaps the program’s largest sticking point: second liens. “One of the greatest challenges to successful loan modifications is obtaining the consent of all existing lien holders, including the holders of junior mortgages,” he said. He suggested HUD was close to proposing rules under the HFH program that would have second lien holders share in the government’s interest in the property.

That is clearly something that doesn’t sit well with first lien holders, particularly on portfolioed loans. Chase’s Sheehan said that “it seems counter intuitive that the second lien holder moves into a favored position in sharing future appreciation.”

“We believe it would enhance the success of the program were a similar incentive provided to the first lien holders,” she suggested. First lien holders must write-off significant principal on a troubled loan — down to 90 percent of current LTV — and must contribute the borrower’s initial 3 percent FHA mortgage insurance premium.

Montgomery also warned that loans under FHA’s Hope for Homeowners program would have a higher interest rate than other comparable loan programs — which would certainly seem to undermine the program’s intent to make mortgages more affordable for troubled borrowers.

“Given the distressed nature of the borrowers likely to participate in the program, as well as the 1.5 percent annual mortgage insurance premium mandated for HOPE for Homeowner loans, early indications are that HOPE for Homeowner loans likely will have a higher interest rate than other FHA-insured products, including FHASecure, because they will cost more than standard FHA loans,” he said.

Subprime crisis: A timeline

( -- The subprime mortgage meltdown and resulting rippling repercussions have a brief, but dramatic, history.

Feb. 7, 2007 - HSBC announces it will see larger than anticipated losses from rising defaults of subprime mortgages in the United States, the first major bank to make an announcement about rising losses in the sector. While the announcement gets little attention at the time, subprime mortgages soon become a watch word along Wall Street and in financial news.

April 2, 2007 - New Century Financial, one of the nation's largest subprime mortgage lenders files for bankruptcy court protections, cutting 3,200 jobs, or 54% of its remaining work force that had already been scaled back in previous weeks as it stopped accepting new loans.

June 2007 - Two hedge funds run by Bear Stearns that had large holdings of subprime mortgages run into large losses and are forced to dump assets, with the trouble spreading with major Wall Street firms such as Merrill Lynch (MER, Fortune 500), JPMorgan Chase (JPM, Fortune 500), Citigroup (C, Fortune 500) and Goldman Sachs (GS, Fortune 500) which had loaned the firm money.

Sept. 18, 2007 - The Federal Reserve starts cutting interest rates, citing the credit crunch on Wall Street and in the broad economy. The nation's central bank will make cuts at seven straight meetings, including one emergency meeting, before it pauses. It also agrees to start loaning money directly to Wall Street firms, rather than only to commercial banks, and to accept troubled mortgage-backed securities as collateral.

July 11, 2008 - The FDIC takes over IndyMac, a California bank that had been one of the leading lenders who made home loans to people who did not provide proof of their income. The failure may turn out to be the most expensive in U.S. history, but FDIC warns that more bank failures lay ahead.

March 16, 2008 - JPMorgan Chase & Co. acquires troubled Wall Street firm Bear Stearns, in a deal engineered by the Federal Reserve, which agrees to provide up to $29 billion in financing to cover potential Bear Stearns losses that JPMorgan agrees to assume.

Sept. 6, 2008 - Treasury Secretary Henry Paulson announces a takeover of Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), putting the government in charge of the twin mortgage giants that own or back more than $5 trillion in mortgages. The Treasury Department agrees to provide up to $200 billion in loans to the cash-starved firms that are crucial sources of mortgage funding for banks and other home lenders.

Sept. 15, 2008 - Bank of America (BAC, Fortune 500) agrees to acquire Merrill Lynch, in a deal joining one of the nation's largest banks with one of the its largest brokerage firms, for up to $50 billion. Deal comes after talks to have Bank of America buy Lehman Brothers, another money-losing Wall Street firm, fall through. Unable to find a buyer, Lehman Brothers files for bankruptcy court protection.

Saturday, September 13, 2008

New Way to Tap Home Equity (Parts 1 and 2)

(Kenneth Harney @ WP) Improbable as it sounds at a time when U.S. homeowners have lost billions of dollars in equity, an industry is taking shape to help them tap portions of their equity wealth without incurring traditional mortgage debt or making interest payments.

Three companies with sophisticated capital market backers -- REX, EquityKey and Grander Financial -- are offering cash to owners who agree to cut them into some of the future appreciation of their properties.

The cash typically represents a fraction of the current market value of the home and rises with the percentage of future appreciation the owner is willing to share.

For example, REX offers $70,000 cash to the owner of a $900,000 house who is willing to share 30 percent of future appreciation. That rises to $117,000 in exchange for a 50 percent share. Existing equity in the home -- and future value growth attributable to capital improvements -- are not affected. There are no interest rates or monthly payments, and the timing of the end of the agreement usually is up to the property owner, although it's generally tied to a sale.

Unlike a reverse mortgage, where interest charges accrue and are added to the debt that must eventually be repaid, all of REX's receivables are tied to the future growth -- or decline -- in the value of the real estate.

REX makes its profit or takes its loss when the house is sold or the agreement otherwise ends. At that point, the owner repays the cash he was advanced. If values remain flat, the homeowner repays that amount, without interest, out of the sales proceeds. If values go down, REX takes a loss equal to the percentage of the value change it shared in the agreement, thus reducing but not eliminating the homeowner's loss.

If values grow steadily or even boom, REX's returns have the potential to soar. The company, which says it is now writing agreements in 13 states, is backed by American International Group (AIG), the world's largest insurance company, and the Royal Bank of Scotland's Connecticut-based Greenwich Capital Markets subsidiary.

Tjarko Leifer, managing director of San Francisco-based REX, said "we see ourselves at the beginning of a much larger industry" that is focused on providing products to efficiently tap the $9 trillion of equity held by homeowners. Unlike reverse mortgages, which usually are restricted to homeowners 62 or older and often entail significant fees, REX has no minimum age and relatively modest transaction fees. Participants must have a minimum 25 percent equity stake, however -- their total mortgage debt cannot exceed 75 percent of the home's market value.

The company's typical clients, Leifer said, are "56-year-old baby boomers" with a 50 percent equity stake in their homes. They've built up equity over the years, even in the face of the housing market downturn, and "want to protect what they've already got." But they also "want to take some chips off the table" for investments, personal expenditures or additional property.

Competitor EquityKey offers similar cash payouts in exchange for shares of future appreciation, but it has an age minimum of 65. Based in San Diego, EquityKey is a subsidiary of KBC Bank, a Belgian financial institution with $450 billion in assets.

The third player in the market, Grander Financial, is headed by mortgage industry entrepreneur Anthony Hsieh, who founded and sold two major home-loan companies:, which became E-Trade Mortgage, and Home Loan Center, which merged into LendingTree. His goal with Grander, he said, is "to create a geographically diverse" portfolio of investments tied to equity movements on homes across the country that will deliver at least moderate average growth rates over the coming years, even if some regional markets go soft.

Under Grander's "My Equity Freedom" program, the owner of a $500,000 house can receive an immediate $71,429 lump-sum payment in exchange for agreeing to share 50 percent of future appreciation. The owners of a $1 million house could get $142,857 in cash for sharing half of their future appreciation.

What's in the fine print of these cash-for-appreciation deals, and why are they not for everybody? No. 1: All the programs to date are highly targeted toward specific property types. For example, REX does not allow condos, duplexes, townhouses, rental real estate, tenant-in-common dwellings, or houses that are not single-family, detached dwellings that are "typical" for their area.

No. 2: Although sponsors bend over backward to emphasize that these transactions are not "mortgage debt," the fact is that they are real estate financings that give sponsors the legal right to a portion of an owner's future market value. At the extreme, owners who take the money but do not abide by the contract agreements can face legal remedies ranging all the way to foreclosure.

When an investor offers you $50,000 or $100,000 in exchange for 30 percent to 50 percent of your home's future appreciation, is it a good deal?

That's what some investment firms are promoting as an alternative to traditional home equity loans, lines of credit and reverse mortgages. The companies argue that sharing future increases in value is a superior way to convert current equity into spendable money now because there are no monthly payments or interest charges, fees are comparatively low, and investors agree to participate in losses in a home's value as well as in gains.

Two of the investment companies -- REX and Grander Financial -- are specifically targeting homeowners in their 50s and younger, who are ineligible for reverse mortgage programs, which are restricted to individuals 62 and older.

But are there drawbacks in the details that homeowners need to consider? Absolutely. Start with the core concept of "no interest" being charged on the lump-sum amounts of money homeowners receive. Is $50,000 today in exchange for half of all future appreciation on a hypothetical $500,000 house worth it?

Maybe -- especially if values are likely to remain flat, decline or increase minimally. But consider this scenario over an extended period, say eight to 10 years. Assume your house increases in value by $250,000 -- 50 percent -- and is worth $750,000 when you want to terminate the agreement and sell. You've had full use of the $50,000 during the years without paying a dollar of interest. Now you must pay back the $50,000 plus 50 percent of the appreciation -- $125,000 -- to the investor from the proceeds.

That may suit you just fine. Ignoring selling expenses and any existing mortgage debt, you net $575,000 because you owe $175,000 to the investor ($50,000 plus $125,000). For a $50,000 cash advance, you've given up $125,000. Your house increased in value by 50 percent, but look at the investor's return: The $50,000 advance has leveraged $125,000 -- well over double.

This may not be "interest" in the terminology preferred by the investors, but it's definitely a "yield" on their capital -- and a good one at that. The investors' return on a relatively small advance of money is magnified over extended periods because it's tied to the value changes of a far larger asset -- the entire house.

In fairness, there's risk to the investor as well. If your home value drops during that extended period, the investors suffer a loss proportional to their stake in the home's change in value.

There are some other considerations. Poke around the offering documents of these programs and you find restrictions that shouldn't be ignored, including the equivalent of a prepayment penalty for sales of properties within the first five years. In the REX and Grander Financial contracts, the penalty is 25 percent of the amount of the original advance in year one, 20 percent in year two, 15 percent during year three, 10 percent in year four and 5 percent in year five.

After that, there's no penalty for selling the house or terminating the agreement. On a $100,000 advance when the house is sold in year one, the homeowners would owe $125,000 plus any appreciation gain.

There's a potentially troublesome "deferred maintenance adjustment" clause in the agreements. The investors have the legal right, based on an "independent, third-party" appraisal or inspection, to claim additional payments at sale "to reflect any maintenance that should have been performed when the agreement was in effect." The words "should have" are subjective enough to cause some serious disagreements between owners and investors.

Take note, too, that the agreements give the investors the right to limit the "maximum authorized debt" on your home once you've pocketed an advance. That includes credit lines, second loans and first mortgages secured by the property.

Whatever the sponsors choose to call their products -- they are adamant that these are not "loans" -- they provide investors with a security instrument that constitutes a publicly recorded lien against the property similar to a deed of trust or mortgage.

Finally, in evaluating these products, bear this in mind: Because equity investment agreements without age restrictions are new, they receive little or no regulatory scrutiny at the federal or state levels. REX's managing director, Tjarko Leifer, said his firm would welcome regulation and uniform standards as the industry expands.

But it's not there now. Consumers need to thoroughly understand what they're getting into.

Loan Modifications: Anecdotes and Data

(Tanta @ Calculated Risk) From an email I got yesterday from a mortgage broker (with 28 years in the business), on the subject of loan modifications:

It really seems out of control with no one even able to get a straight answer. All the reports I see say that borrowers in trouble but who are willing to try to make a go of it are not getting help. Many are told, "Unless you are 90 days in arrears we can't help you, and BTW, we won't commit now to what we might or might not do if you do decide to miss a few payments."
I certainly see a lot of "reports" of this as well, which is why I think it's worthwhile to tackle the assumptions here (again).

First, what are "borrowers in trouble"? If they are current and have never been late on a payment, what kind of "trouble" are they in? Servicers do "loss mitigation" modifications when default on the loan is imminent or reasonably foreseeable. That is because there must be the probability of "loss" before anyone tries to "mitigate" it. How is default imminent or reasonably foreseeable if the borrower is paying as agreed?

Possibly we mean that the borrower is only one or two payments behind. The problem here is that most servicers do not consider default imminent after one missed payment. 30-day delinquencies are very likely to cure themselves: the borrower makes up the missed payment in the following month quite frequently, pays the late charge, and goes on. Obviously some do "roll" to 60 days down or worse; you can't have a 60-day delinquent loan that wasn't 30 days delinquent in the prior month. But even 60-day delinquencies have a fairly high "cure" rate.

It is very difficult to make the call at 60 days. As a matter of "traditional" loss mit practices (which may of course be undergoing some changes very recently), what the servicer does depends on what the borrower has told the collections department about the reason for delinquency. (Everyone has already had several collections calls by the 60th day of delinquency. If you refused to take those calls or refused to give a reason for your delinquency, you should not be surprised to find your "willingness to make a go of it" under some question.) If it appears to be a temporary matter (business was slow last month because of the hurricane, there were non-recurring unanticipated expenses to deal with), the servicer is likely to offer a forbearance or repayment plan rather than a modification. If it appears to be a longer-term problem (ARM reset, job loss, divorce), a servicer might consider a modification at this point. The two choices are not exactly mutually exclusive; a time-tested servicing strategy is to put the borrower on a repayment plan to verify his or her willingness to continue to make payments at the reduced level before going ahead with a permanent modification.

Those of you who are still convinced that it is somehow "unfair" that a loan really has to hit the 90-day down category before the servicer concludes that default is imminent should remind yourselves that it is extremely rare for a servicer to begin foreclosure proceedings until a loan is 90 days or more delinquent. Why is that? Because most loans with a 30- or 60-day delinquency cure themselves. If you want servicers to conclude that default is imminent the moment a borrower becomes one payment behind, you are really expecting servicers to start foreclosure proceedings that early in the game as a matter of course.

I don't happen to believe that borrowers are being told across the board that "unless you are 90 days in arrears we can't help you." I do believe that borrowers are regularly being told that unless they're 90 days in arrears they are not going to be considered for a permanent modification. The problem here is that we don't know what these borrowers asked for when they got that answer, what reason they gave for their "trouble," or what other options the servicer might have offered that they turned down. I have my suspicions about that, given that my broker correspondent indicates that the servicers are also saying "we won't commit now to what we might or might not do if you do decide to miss a few payments."

No sane negotiator would ever commit to modifying a loan as long as it was 90 days delinquent. Severe delinquency is a necessary, but not a sufficient condition. For one thing, if you are "deciding" to miss a few payments, there's some question about whether you are suffering a bona-fide hardship or not. It honestly really shocks me that people would expect a servicer to commit to giving you a deal prior to delinquency: that is simply inviting people to withhold payments in order to get their interest rates reduced. Why would anyone expect a servicer to do that?

Perhaps we all have widely-varying points of view about the wisdom of negotiating with hostage-takers, but I suspect that most of us believe that the police would be in error by declaring in advance that anyone who takes a hostage will have his demands met. It might, you know, encourage hostage-taking. What I suspect we're hearing from here are those unhappy campers who are basically telling their servicers they want a rate- or principal-reduction modification or else they'll "walk." The servicer tells them that nothing is on the table unless they're 90 days down, because that, at minimum, tests the seriousness of this threat to walk away. They come back with "So if I miss three payments, you'll modify my loan?" and the servicer says "Maybe. Maybe not." Of course that's what the servicers say. The rules of the game of chicken require this.

I think it is disingenuous to characterize this as borrowers "not getting any help." I think it is disingenuous to characterize this as not getting a "straight answer." It is a perfectly straight answer; it's probably too straight, if anything. While servicers who tell borrowers that modifications aren't on the table until the 90th day of delinquency are at least being honest, it appears that you can't really be that honest with a certain class of borrowers. That's because they interpret this as meaning that they "qualify" for a mod once they're 90 days down, as if that were the only issue.

The OCC's second Mortgage Metrics Report came out yesterday, and it shows that not only are repayment plans and especially modifications increasing, they are increasing at a faster rate than new foreclosure starts. I think one of the most useful metrics in the report is the number of new loss mitigation actions as a percentage of all seriously delinquent loans:

This is not a "cumulative" metric in any sense: it measures new actions taken in the month, not a cumulative total of actions taken, and the denominator is not all loans that have ever been seriously delinquent, but only those loans that are seriously delinquent in the report month. But given that most loans have to be seriously delinquent before loss mitigation is an option, this gives you a sense of how many eligible loans are given repayment plans or modifications (those are the only loss mit activities measured by this report).

What it shows is that "prime" serious delinquencies are consistently the least likely to receive a repayment plan or modification. (It doesn't matter that prime loans are least likely to be seriously delinquent; we are only counting serious delinquencies here.) There are a number of possible reasons for this:

1. Prime borrowers may be less likely to experience serious delinquency for "temporary" or curable reasons. That is, prime borrowers may have more stable employment, more savings, and better financial management habits, such that they are less likely to become seriously delinquent because of work slow-downs or unanticipated expenses, which are the sorts of temporary hardships most likely to be cured with a repayment plan or modification that capitalizes arrearages. That would imply that when prime borrowers do become seriously delinquent, the underlying problem is more severe--less "curable"--that with other loans. Another possibility is that prime loans are more likely to become seriously delinquent for reasons such as need to relocate; in those cases, a short sale or deed-in-lieu may be a better option for both borrower and servicer than a repayment plan or modification.

2. Most of the prime loans in the OCC/OTS database (serviced by large depositories) are conforming loans in GSE securities. That suggests that they are less likely to be concentrated in the former "bubble markets" than the Alt-A and subprime loans. Insofar as a substantial fraction of these loans have much lower loss severities in foreclosure than the Alt-A and subprime loans, they are less likely to pass the "least loss to the investor" test.

3. Prime borrowers are possibly trying to play chicken with their servicers and are not winning. I have no idea whether such a thing is true or not, but these anecdotes we keep hearing like the one above have to be accounted for, if true. If anyone is "deciding" (rather than being forced by simple inability to pay) to become delinquent, you'd think it would most likely be the prime borrowers.

The question remains whether an overall monthly new loss mit rate of 8.83% of all seriously delinquent loans is much too low or much too high or about right. We really aren't given enough data in this report to judge that. (Just for one thing, we don't know how many of the seriously delinquent loans are speculative purchases or abandoned properties; those would be highly unlikely candidates for a repayment plan or modification.) Measuring new loss mit actions against all seriously delinquent loans, rather than against newly seriously delinquent loans, also leads to a question about the denominator. Since this category will include loans in the foreclosure process that have been and will be there for many months, and that may well be past the point where a workout is even appropriate, the metric will be skewed because of the sheer number of months loans in foreclosure spend in the process. But even if we conclude that this number is "too low," it certainly isn't zero.

Evetually, the OCC is really going to have to refine these metrics if we are going to have reliable data with which to answer the question of how much is enough, loss mit-wise. Certainly, proponents of this silly 90-day foreclosure moratorium for the GSEs need to explain why, exactly, they think that the number of successful workouts per delinquent loans will increase simply by eliminating foreclosure starts or delaying foreclosure completions. My fear is that we're basing public policy recommendations here on the kind of anecdote I started with, not on good data; if Congress and the regulators have better data than what's in this report, I don't know why they aren't sharing it with us. And this report still doesn't tell us how many seriously delinquent loans can practically or effectively be worked out short of foreclosure.

Friday, September 12, 2008

Beyond Leveraged Losses: The Balance Sheet Effects of the Home Price Downturn

(Jan Hatzius @ Goldman Sachs) This paper aims to quantify the impact of the decline in US home prices, the increase in mortgage credit losses, and the associated reduction in credit supply on real GDP growth. Using a state-level panel analysis, we first estimate the link between home prices and foreclosures. We estimate that an additional 10% home price decline from mid-2008 levels would be consistent with total residential mortgage credit losses over the years 2007-2012 of $636 billion, although the uncertainty is high. We then try to gauge the impact of the credit losses on the supply of credit from banks, assetbacked security markets, and the government-sponsored enterprises (GSEs), and the knock-on effect on real GDP growth. In our central scenario, we estimate that the crisis could lower real GDP growth in 2008 and 2009 by an average of 1.8 percentage points per year. This assumes that the GSEs continue to expand their mortgage book of business aggressively, an outcome that has become more likely following the measures announced by the U.S. Treasury on September 7, 2008. If instead the GSEs stopped expanding, the estimated GDP hit would rise to 3.2 points per year.

Thursday, September 11, 2008

Lose Your Home, Lose Your Vote

(Elizabeth Warren @ Credit Slips) With both political parties are focused on Michigan this fall, high foreclosure rates and the neighborhood fallout from those foreclosures are likely to become a political issue. The GOP has announced a new way to deal with the problem: challenge the voting eligibility of people whose homes have been posted for foreclosure. Evidently the GOP thinks those people are more likely to vote Democratic, so it can neutralize the impact of a sour housing market by barring votes from those who are losing their homes.

It isn't clear from the report whether the challenge is based on posted foreclosures or homes that have already been transferred from the homeowner. Presumably the challenge is based on no longer living in the area. Depending on how the list is constructed, this means challenging some larger or smaller number of people who are in financial trouble, but who are in their homes and are certainly eligible to vote in their local precincts.

Even if people are eventually allowed to vote, officials are already expressing concern about the long lines that such challenges would create. Of course, if those long lines are concentrated in the precincts with the highest proportions of foreclosures, perhaps that is all that is needed. Long lines may discourage votes in troubled neighborhoods where people are trying to cope with the fallout from foreclosures, but it will be easy in-and-out voting for those in more prosperous areas.

The leading foreclosure firm in the state seems to be a major supporter of the GOP's election efforts. That's a connection worth exploring--a law firm to file the foreclosures and a political party to challenge voters based on those same foreclosure filings.

The impact of the mortgage crisis just keeps widening. People who were cheated by subprime lenders have lost everything they put into their homes, have seen their credit destroyed and now may be unable to prove their eligibility to vote. Costs are also mounting for people who live in neighborhoods that were the targets of subprime campaigns--abandoned properties, crime, plummeting housing values. Those neighbors are paying those costs even when they had nothing to do with subprime debt.

As the foreclosure crisis gets deeper, it also gets wider.

New way to buy a piece of property

(The Australian) Buying into Australia's $3.2 trillion housing market -- without owning a single property -- will soon be a mouse click away.

An agreement between the Australian Securities Exchange and property research groups PR Data and Rismark has paved the way for the introduction next year of residential property derivatives, which will be traded on the ASX like shares.

Modelled on a successful US scheme that had $US2 billion worth of trades in its first year, Australian investors will be able to both buy and sell derivative or futures contracts in our major housing markets without owning property.

"It's a synthetic way of gaining exposure to Australian housing markets," said Paul Williams, the head of property derivatives for GFI Australia.

"This is exciting for our developing property derivatives market."

The scheme is mostly pitched at investors seeking exposure to property without the hassles of owning real estate and the typical $20,000-$50,000 transaction costs involved in buying and selling residential property. It could also be a godsend for renters priced out of the market by escalating prices.

Rismark International executive director Ben Skilbeck said first-time buyers required to save a $100,000 deposit for a $500,0000 home were commonly locked out because by the time they had saved their deposit, the cost of the house had risen another $200,000.

Mr Skilbeck said owing derivatives meant savings would effectively increase in line with house prices, providing a hedge against a future housing boom.

While the ASX declined to reveal details of the scheme -- including the cost to investors -- market players will be able to punt on falling house prices.

"If prices are going down in Perth, I will be able to sell my derivatives contract at a profit," said one analyst.

The scheme, which involves the purchase of derivative contracts from the ASX, is likely to be popular with apartment builders and developers looking to set benchmarks for both pricing and returns.

Rismark says the planned scheme also has potential to allow institutions cost-effective access to the housing sector.

Until now, institutions have steered well clear of residential property because of high transaction costs, mostly stamp duty.

Their property investments have been restricted to a combination of listed and unlisted property trusts, but with the big institutions owning more than 70 per cent of all commercial buildings in the nation's CBDs, there's little appropriate investment-grade stock left.

That has forced many to seek out foreign markets, even though their preference is to buy Australian property.

The scheme will use the long-established RP Data-Rismark indices, regarded as the market leader, to measure house prices.

RP Data, which is Australia and new Zealand's largest property data business, holds more than 113 million property data records covering 98 per cent of all homes.

Wednesday, September 10, 2008

Congress weighs reprieve for seller-funded gifts

(Inman News) A last-ditch effort to head off an Oct. 1 ban on the use of seller-funded down-payment assistance with FHA-backed loans is picking up steam as a compromise bill that would mend rather than end the practice gains momentum.

HR 6694, which would allow home builders to continue funneling down-payment assistance through nonprofit groups to home buyers using FHA loans, is certain to pass the House of Representatives and has the blessing of the Department of Housing and Urban Development, Rep. Barney Frank, D-Mass., said at a hearing on foreclosures this weekend.

The influential chairman of the House Financial Services Committee urged those attending a committee field hearing in Stockton Saturday to lobby the Senate -- which shoehorned language banning seller-funded gifts into HR 3221, the sweeping housing bill signed into law July 30 -- in support of the bill.

HR 6694 would automatically allow qualified borrowers with credit scores of 680 or above to use seller-funded down-payment assistance on FHA-backed loans, Frank said. Borrowers with scores between 620-680 who relied on seller-funded gifts might be subject to higher insurance premium fees.

Borrowers with scores below 620 would be excluded from using down-payment assistance until mid-2009, when HUD would be permitted to expand the program to include them if the Secretary of Housing determined it could be done without putting a dent in FHA's insurance requiring taxpayer subsidies.

HUD has sought to end the use of seller-funded down-payment assistance with FHA loans outright, claiming the practice artificially inflates home prices and that borrowers who relied on the gifts are more likely to default.

Although FHA loan guarantee programs have always been self-sustaining -- they are funded by premiums paid by borrowers, and not taxpayers -- HUD said the enormous growth in the use of seller-funded gifts and the poor performance of the loans threatens to put the insurance fund in the red.

Nonprofits that funnel payments from home builders to lenders to help borrowers meet minimum down-payment requirements on FHA loans dispute HUD's claims and have filed lawsuits that delayed HUD's implementation of a rule change banning the practice (see story). But the passage of HR 3221 made those court challenges moot.

Home builders -- many of whom relied on seller-funded gifts to close 20 percent to 30 percent of their sales in the second quarter -- have been bracing for the end of the program, and some lenders have already stopped processing such loans.

Frank said the bill that would give seller-funded gifts a reprieve, HR 6694, has the support of HUD Secretary Steve Preston because it also addresses an issue near and dear to the department's heart -- risk-based pricing.

In an effort to make FHA's loan guarantee programs operate more like private mortgage insurance, HUD on July 14 began giving borrowers with good credit a break on their upfront insurance premiums, while charging those with spotty credit more (see story).

Opponents of risk-based pricing maintain it places an unfair burden on low-income borrowers who rely on FHA loan guarantee programs. The Senate inserted a one-year moratorium on the use of risk-based pricing into HR 3221, which begins Oct. 1 and ends Sept. 30, 2009.

Under risk-based pricing, the upfront premium for FHA mortgage insurance ranges from 1.25 percent to 2.25 percent, depending on credit score. When the moratorium on risk-based pricing takes effect Oct. 1, FHA will begin charging all borrowers an upfront premium of 1.75 percent. Before the introduction of risk-based pricing in July, FHA had charged all borrowers a flat 1.5 percent upfront premium. In returning to a one-size fits all pricing structure, HUD said it was forced to raise premiums for all borrowers by 25 basis points to keep the program self-sustaining.

HR 6694 would allow HUD to continue risk-based pricing for borrowers with lower credit or FICO scores, but mandate refunds of some or all of the additional premiums paid if borrowers make timely payments.

HR 3221 had no provisions banning seller-funded gifts or risk-based pricing until it got to the Senate, Frank said, recounting the intense debate that took place around the massive housing bill. The bill's most hotly debated provision was a $300 billion expansion of FHA loan guarantee programs to help troubled borrowers refinance into more affordable loans (see story).

"The FHA loved the ban on down-payment assistance (but) hated the ban on risk-based pricing," Frank said at Saturday's hearing. "That seemed to me to offer an opportunity. So (HR 6694) will replace both bans with middle ground -- and it will pass the House, I can guarantee you. What you want to do now obviously is talk to your senators. We think it will go through there -- it has the approval now of the Secretary of HUD."

A HUD spokesman said he could not confirm that Preston supports HR 6694, and that HUD is still reviewing the bill.

"We understand that Congress is working on legislation related to seller-funded down-payment assistance, but our primary focus is on implementing the recently passed housing bill," the spokesman, Lemar Wooley, said in an e-mail. "Throughout this process, our number one priority is to ensure FHA's insurance fund remains sound and does not require taxpayer dollars."

At Saturday's hearing, Merced Mayor Ellie Wooten said the down-payment assistance program offered by Nehemiah Corp. of America was "heavily used" in Merced County.

"We are an agricultural community, and (farmworkers) are solid people, but many people don't have bank accounts with the 20 percent down payment," Wooten said. The minimum down payment for FHA guaranteed loans is now 3 percent, and is being raised to 3.5 percent on Oct. 1.

Wooten, a Realtor, said the Nehemiah program helped many borrowers get into homes, and "they made their payments and there was no monkey business. When the Nehemiah program was (banned), it knocked out quite a few very good qualified buyers. It has hurt us."

Democrat U.S. Rep. Dennis Cardoza, a former Realtor who represents Merced, Modesto and Stockton, also said down-payment assistance programs are "critical" in the region. "We have low-income folks who still have the ability to pay but don't have the ability to bring large down payments. When I was a Realtor, I had hundreds of folks tell me that's how they got into their house."

If Congress does take action to preserve FHA's ability to accept seller-funded down-payment assistance, it would have to move quickly. Although the ban mandated by HR 3221 doesn't take effect until Oct. 1, builders like Lennar Corp. have set a Sept. 23 deadline for loan applications involving seller-funded gifts.

Nehemiah President and CEO Scott Syphax, who also attended the hearing, said he believes HR 6694 -- currently awaiting a hearing in Frank's Financial Services Committee -- can emerge from the House and Senate in time to beat the deadline.

In a telephone interview before the hearing, Syphax said there's been a grassroots effort to preserve down-payment assistance programs.

"What's happened with this is the people have taken this over from us," Syphax said. "We are not in control at this point. Across the country, folks are forming groups on their own, making their own fliers. These are everybody from homeowners who have received a benefit, to people working in the real estate space. They are the ones turning this around -- it's not us."

Nehemiah and other supporters of down-payment assistance programs, including the National Association of Mortgage Brokers, the National Association of Black Mortgage Brokers and the National Urban League are planning a rally in Washington, D.C., on Wednesday.

Tuesday, September 9, 2008

Borrowers Increasingly Unsatisfied with Mortgage Servicers

As the nation’s housing mess has worn on, a growing number of borrowers are finding themselves dissatisfied with their mortgage servicer, according to data released Tuesday by market research firm J.D. Power and Associates. For a second consecutive year, customer satisfaction with the servicing of mortgages declined, the research company said.

Part of the problem likely stems not only from a growing number of troubled borrowers unhappy with what they perceive as a lack of responsiveness to their needs, but also from performing borrowers who are finding it increasingly difficult to get a quick answer to easy questions, as servicing employees are being stretched thin by a surge in borrower defaults.

“For most customers, their mortgage servicer is akin to a utility company - they just want things to work, and they expect a friction-free experience,” said Rocky Clancy, executive director of financial services at J.D. Power and Associates.

“Any bumps in the road that cause customers to have to spend time asking questions or solving problems negatively impact satisfaction, particularly if they have to call more than once or talk to more than one person to get their issues resolved.”

The study found that, in addition to reducing the number of problems and improving the resolution experience, a key to customer satisfaction is increasing customer adoption of electronic billing and payments. Fifty-six percent of customers report making payments through an automatic deduction or a Web site, compared with 36 percent of customers making payments by mail. In 2006, 49 percent of customers made payments electronically, while 42 percent paid via mail.

“Satisfaction with payment processing is 50 points higher for people making payments electronically instead of through ’snail’ mail,” said Clancy. “Automatic deductions, in particular, are associated with fewer problems because once things are on auto-pilot, the chances of something going wrong are slim.”

BB&T takes the cake, again
Branch Banking and Trust — that’s BB&T to the rest of us — ranked highest among primary mortgage servicers for a second consecutive year, J.D. Powers said. SunTrust Mortgage and Wells Fargo & Co. (WFC: 31.17 -7.12%) followed BB&T in the rankings.

The nation’s worst servicers, according to the study? The bottom five included Ocwen Financial Corp. (OCN: 7.00 -3.45%) — rated the worst servicer among those in the study — as well as Greentree Mortgage,Homecomings FinancialBeneficial Mortgage, and HSBC Mortgage Services. Also scoring below the industry average were CitiFinancialCountrywide Home Loans, and IndyMac Bank.

Customers with high levels of commitment to their primary mortgage servicer are more than three times more likely to say they “definitely will” continue to do business with their current lender than those customers with moderate levels of commitment, according to study results.

“Primary mortgages tend to be a highly commoditized product, so lenders can benefit considerably by increasing loyalty among their current customers,” said Clancy. “Highly committed customers tend to make more recommendations, intend to use the mortgage servicer again in the future, are less likely to switch and are more likely to use multiple products with the same firm - all of which help to benefit a lender’s bottom line.”

Friday, September 5, 2008

How are Covered Bond Ratings Determined?

(Felix Salmon) Remember covered bonds? They're ever so safe, because not only are they overcollateralized, they're also guaranteed by the issuing bank. As a result, Hank Paulson has been dropping hints that he'd like to see the mortgage industry move in the covered bond direction in future.

But "safe" doesn't mean "immune to downgrades", of course -- and Fitch has already started downgrading covered bonds issued by Washington Mutual. One problem is that it's very hard for a ratings agency to assign a rating to a both-and probability, which is what a covered bond is.

Let's say you need a 0.5% probability of default to be triple-A, and a 5% probability of default to be single-A. And, for the sake of argument, let's say that we're dealing with a bank which is only dabbling in mortgages, and has no chance of being brought down by its mortgage operations: it might fail, but if it fails it will be for reasons unrelated to mortgages.

So the bank structures a conventional mortgage-backed security with a whole bunch of tranches running from triple-A down to single-A and equity. Finding that it can't easily sell the single-A tranche in the open market, it covers (guarantees) the bond itself. And let's say that the bank itself has a single-A credit rating. What rating should the covered bond have?

It's tough. Mathematically speaking, if the chances of the collateralization failing are genuinely independent of the chances of the bank failing, then the chances of them both failing (which is what you need for a covered bond to default) are just 5% of 5%, which is 0.25%: easily low enough to be triple-A. But there's something intuitively a little dubious about two single-As making a triple-A quite so easily.

So one thing I'd like to see, if and when covered bonds become more popular, is the ratings agencies showing their work, as it were. We know what the rating of the bank is, and we know what the rating of the covered bond is, too. But in the interests of transparency, also tell us what the rating of the covered bond would be, if it didn't have the bank's guarantee. That would definitely help investors get an idea of what the chances are of one leg or other being kicked out from under the bond.

US Covered Bonds? Frederick II Would Be Turning in His Grave

(FT Alphaville) Is mortgage securitisation dead? What with Fannie and Freddie unfit for purpose, foreign capital draining from the market, and ratings regarded as more or less worthless, there are plenty of indicators that would have you believe the MBS has left the building

Linda Lowell at Housing Wire assesses the situation in some detail.

One possible panacea that has had a particularly warm reception from US Treasury officials is the covered bond, something we’ve covered in a little depth before.

Covered bonds though, aren’t enjoying quite the takeup Hank Paulson might have hoped for. Felix Salmon over at Market Movers notes the recent downgrading of covered bonds issued by Washington Mutual. Says Salmon:

Remember covered bonds? They’re ever so safe, because not only are they overcollateralized, they’re also guaranteed by the issuing bank. As a result, Hank Paulson has been dropping hints that he’d like to see the mortgage industry move in the covered bond direction in future

But “safe” doesn’t mean “immune to downgrades”, of course — and Fitch has already started downgrading covered bonds issued by Washington Mutual. One problem is that it’s very hard for a ratings agency to assign a rating to a both-and probability, which is what a covered bond is.

Salmon suggests that a key way to move forward might be a little more clarity on how CB’s get their triple-A ratings from the agencies: an idea of how the two main props to a CB rating, institutional risk and collateral risk, are modelled and apportioned.

So one thing I’d like to see, if and when covered bonds become more popular, is the ratings agencies showing their work, as it were. We know what the rating of the bank is, and we know what the rating of the covered bond is, too. But in the interests of transparency, also tell us what the rating of the covered bond would be, if it didn’t have the bank’s guarantee. That would definitely help investors get an idea of what the chances are of one leg or other being kicked out from under the bond.

It’s a great idea. There is a problem though - which Salmon seems to allude to (emphasis ours):

It’s tough. Mathematically speaking, if the chances of the collateralization failing are genuinely independent of the chances of the bank failing, then the chances of them both failing (which is what you need for a covered bond to default) are just 5% of 5%, which is 0.25%: easily low enough to be triple-A. But there’s something intuitively a little dubious about two single-As making a triple-A quite so easily.

If indeed. The problem is that in many cases, the two measures - institution risk and collateral risk - aren’t genuinely independent at all, but in fact, correlated. In some cases highly so. Consider: banks currently are in trouble because of the crash in price of mortgage-backed bonds.

Rating agencies do model this correlation. And the failure to capture it accuracy is exactly the reason why triple-A ratings have fallen so spectacularly from grace. Too often, different rating metrics were treated as independent, when in fact, they were correlated. Most ABS ratings suffered this problem.

We could talk a bit about gaussian copulas vs exponential vasiceks here, but this post is about covered bonds. So back to them.

Irregardless of the rating assumptions behind them, not everybody can be happy with the use of covered bonds as a market pick-me-up. Certainly not the Europeans anyway. Covered bonds are something of a sacred cow in most of Europe. Nowhere more so than in Germany, where most Landesbanken like to recount the 18th century Prussian provenance of the pfandbrief.

The covered bond market over here is very conservative. It’s strictly regulated by law. That is really what makes covered bonds so special. And there’s a very high emphasis on the exclusivity of the CB brand.

For example: Until earlier this year, the UK didn’t have its own covered bond law. Instead, it relied on a blend of contract laws to simulate the security of a covered bond through legally seperate shell companies. The nascent US model is the same. There was though, outcry when the the UK introduced its first “structured” CB. French banks in particular complained it was sullying the sanctity of the covered bond brand. In the end, the UK government, by coincidence or design, took their complaints seriously. It now has its own covered bond legislation, under which banks have to register with the FSA to issue covered bonds.

Even with that though, the UK is cautious with CBs. So much so, that even with a covered bond law, the government has still put an effective hold on UK covered bond issuance in the current market. The FSA has held off on inking the issuer registration forms that would allow the UK’s mortgage banks to issue.

Basically, the FSA did not want to do what they see as irreperable damage to the deep, liquid CB markets by lowering the bar - or even being seen to.

The US, of course, isn’t proceeding with quite the same caution. It seems that there covered bonds are being envisaged as safe products - but not necessarily the safest.

This is where the US might be shooting itself in the foot. At a time when foreign capital is flooding out of the mortgage market what they really want to do is attract some back. If they made covered bonds as strong as their European forebears, they might be able to tap the very deep and liquid European market.

It is, of course, a big might.

One thing is for sure though, under the current design, European CB buyers would be fools to touch the US stuff. They’re probably pretty narked that the things are being called Covered Bonds at all. What really makes a covered bond isn’t the issuers cover, but what the issuers cover gives: a very, very stable triple A rating.