Sunday, November 30, 2008

Doris Dungey (a.k.a. "Tanta), Prescient Finance Blogger, Dies at 47

(NY Times) The blogger Tanta, an influential voice on the mortgage collapse, died Sunday morning in Columbus, Ohio.

Tanta, who wrote for Calculated Risk, a finance and economics blog, was a pseudonym for Doris Dungey, 47, who until recently had lived in Upper Marlboro, Md. The cause of death was ovarian cancer, her sister, Cathy Stickelmaier, said.

Thanks in large part to Tanta’s contributions, Calculated Risk became a crucial source of prescient analysis as the housing market at first faltered, then collapsed and finally spawned a full-blown credit crisis.

Tanta used her extensive knowledge of the loan industry to comment, castigate and above all instruct. Her fans ranged from the Nobel laureate Paul Krugman, an Op-Ed columnist for The New York Times who cited her in his blog, to analysts at the Federal Reserve, who cited her in a paper on “Understanding the Securitization of Subprime Mortgage Credit.”

She wrote under a pseudonym because she hoped some day to go back to work in the mortgage industry, and the increasing renown of Tanta in that world might have precluded that. Tanta was Ms. Dungey’s longtime family nickname, Ms. Stickelmaier said.

Calculated Risk, which gets about 75,000 visitors a day, was started in early 2005 by a retired technology executive named Bill McBride. The housing market was soaring, but Mr. McBride sensed that the industry was about to peak, and he posted articles and data that made his case.

The blog quickly drew a lively and informed group of commentators, few livelier and none more informed than someone who called herself Tanta. She began by correcting some of Mr. McBride’s posts. “She would tell me either I was wrong or the article I was quoting was wrong,” he said Sunday. “It was clear she really knew her stuff. And she was funny about it.”

Tanta soon graduated from merely commenting to being a full-scale partner. Her first post, in December 2006, took issue with an optimistic Citigroup report that maintained that the mortgage industry would “rationalize” in 2007, to the benefit of larger players like, well, Citigroup.

“Bear with me while I ask some stupid questions,” Tanta wrote, and proceeded to assert that the industry was less likely to “rationalize” than fall apart, which it did. Citigroup was bailed out by the government last month.

She loved the intricacies of mortgage financing and would joke about being not just a nerd on the subject but a nerd’s nerd. She eventually wrote, for the Calculated Risk site, “The Compleat √úberNerd,” 13 lengthy articles on mortgage origination channels, mortgage-backed securities and foreclosures that constituted a definitive word on the subject.

The rest of the time, Tanta liked to chew on the follies of regulators, the idiocies of lenders and — a particular favorite — clueless reporters, which according to her was just about all of them. She did not approve, she once wrote, of “parading one’s ignorance about mortgages in an article full of high-minded tut-tutting over ignorance about mortgages.”

In March 2006, Ms. Dungey was diagnosed with late-stage ovarian cancer.

Ms. Dungey was raised in Bloomington-Normal, Ill., had a graduate degree in English, and worked as a writer and trainer for a variety of lenders, including Champion Federal and AmerUs Mortgage.

One of Tanta’s last posts was written as the $700 billion bailout was first being debated in mid-September, and it seemed that the Treasury Department might buy bad assets directly from troubled banks.

Tanta argued that for every asset that banks unloaded on the government, the chief executives should be required to explain “why they acquired or originated this asset to begin with, what’s really wrong with it in detail, what they have learned from this experience, and what steps they are taking to make sure it never happens again.”

Friday, November 28, 2008

Mr Mortgage: In-Depth Look at Mortgage Rates…5.5% is Not a Reality for Most

(Mr. Mortgage) Rates are not as low as the Wall Street analysts would have you believe. They are taking about ‘base-rates’ for a perfect credit, vanilla borrower and assuming everyone gets that rate and is able to qualify. This may be how it was two years ago due to soaring house values and easy credit but that is far from reality today.

The rates at 5.5% you are hearing quoted since the Fed ‘announcement’ is very much like that car shown for $9,999 in the paper - there is only one available and by the time you get yours, it costs twice as much. The fact is that most do NOT get the best rates available, rather get a shockingly higher rate.

The 5.5% rates are for the best AAA, high-FICO, low loan-to-value, owner-occupied purchase or rate & term refi. This loan scenario makes up the minority of all borrowers and arguably the ones that need no help. The rates for most of us, especially those that need to refi out of a toxic loan, are still well over 6%. The rates for Jumbos are much worse and did not respond anywhere close to conforming.

Please read my latest report entitled Mortgage Rates Tumble! It Does Not Mean What it Used to for additional information.

Now I am going to show you some of the best rates available in the nation available on 11/26. These are wholesale rates meaning they are only available to mortgage brokers. To get a retail (consumer) rates, just add one point roughly.

For example, if you see a 5.5% @ (1.000) this means that at a rate of 5.5%, the mortgage broker would receive in return 1% of the loan amount in a rebate that can be used as her commission, to pay borrowers fees etc. In a deal with this pricing and rebate depending on the loan amount it would likely be a ‘no point’ deal where the consumer had to pay all other closing costs such as appraisal, credit, escrow, title, lender processing, underwriting etc. Count on about $2500 for ‘other’.

Taking this into consideration you will see on the rate sheet that a 30-yr fixed $417k loan is about 5.5% at no points. A Jumbo $650k loan is approx 6.25% at no points.

BUT, NOW GET READY FOR THE TRUTH - In Recent Months Rate Adjusters Have Soared

A rate adjuster is a ‘hit’ to the interest rate if you do not fall inside the tight vanilla box. During the bubble years, the vanilla box was big. Over the past year, it has shrunk considerably to a point where to the majority do not fit inside of it. This is a perfect example of ‘credit tightening’.

All of those adjusters in the grid below the rates grid are what takes most borrowers interest rates well above 6% again. If you are not a perfect 720 score, <80%> if you are lucky enough to only be impacted by 1.000 of adjustments, your real interest rate is 5.875% at no points plus $2500 closing costs.

Actual Conforming Rates (11/26) Below - most borrowers will get rates at 6.25% to 6.75%

Conforming $417k Fannie Mae ‘base rates’ are shown below across the top row. Note the 30-yr fixed at 5.5% pays the loan officer 1.128% of the loan amount to be used as commission or towards closing costs. In most cases this would mean 5.5% is a NO POINT loan. To do a NO COST loan the rebate has to be around 3% which takes rates well above 6%.

Now, add up all of the adjusters for not being a perfect credit, low loan-to-value vanilla borrower. See below this grid.

ADJUSTMENTS GRID ABOVE - (Note: 1.000 adjustment = roughly .375 to rate)

The Conforming $417k base rate row above are not what most get. This is because all loans are unique. You have to build your loan using the adjusters - I highlighted the most popular in red boxes. Please see all that apply to you. Notice how that if you do not have a perfect 740 score, decent loan-to-value and no second mortgage, you are getting hit. 1.000 in hits = roughly .375% in rate.

Conforming Borrower & Current Rate Example

675 credit score, 80% cash-out refi used to pay off a second mortgage, fully documented. This used to be considered super prime with very few pricing adjustments. Now they get smoked. 1) LTV & FICO hit = 1.75% to fee 2) Cash-Out Hit = 1.00 to fee.

The cumulative adjustment for this loan scenario of 2.75% of the loan amount in fee or 75 to 87.5bps in rate pushing the 5.5% rates to a whopping 6.375% at no points.

If they had a second to 90% CLTV they wanted to keep open as many do, there would be another 1% hit making the rate as high as 6.75% or forcing the borrower to come in with 1% of the loan amount, as much as $4,170 PLUS all closing costs.

Actual Jumbo Rates (11/26) Below - most borrowers will get rates at 6.75% to 7.50%

Jumbo from $417,001 to $625k ’base rates’ are show below in upper left boxes. Serious adjusters apply here as well unless you are a 740 credit score borrower doing an 80% rate/term refi or purchase with no second mortgage on a primary residence.

Note that a 30-yr fixed at 6.25% pays the loan officer 0.818% of the loan amount to be used as commission or towards closing costs. In most cases this would mean 6.25%-6.5% is a NO POINT loan.

Now, add up all the hits for not being a perfect credit, low loan-to-value vanilla borrower below the rate boxes. I have highlighted some of the most common in red. These are cumulative adjustments. Be aware that 1.00 in fee adjustments equal roughly .375% to .500% in rate.

ADJUSTMENTS GRID ABOVE - (Note: 1.000 adjustment = roughly .375 to .500 to rate)

The Jumbo ‘base-rates’ quoted above are not what most get. This is because all loans are unique and you have to build your loan using the adjusters above - I highlighted the most common in red boxes. Please see all that apply to you.

Notice that if you are not a perfect borrower doing a vanilla loan with no second mortgage you can’t get these rates. As a matter of fact, a 680 score borrower can’t even do a loan over 75%. A 680 score 75.01% LTV borrower used to be AAA Prime and are still rated that way on the balance sheet of banks such as Wells Fargo, Citi and Chase. Note that 1.000 in hits = roughly .375% in rate to .500 in rate.

Jumbo Borrower & Current Rate Example

700 credit score, 80% no cash-out refi, fully documented. This used to be considered super prime with very few pricing adjustments. Now they get smoked. 1) LTV & FICO hit = 0.75% to fee 2) ‘Other’ hit >75% LTV or CLTV = 0.500 to fee. 3) If the borrower had a second mortgage above 80% which is common add another 1.00 to fee.

The cumulative adjustment of 1) and 2) it is a total of 1.25 to fee or roughly .625% to rate. This bring the base rate of 6.25% at no points to a whopping 6.875% at no points to the consumer.

If they had a second to 90% CLTV, which is common, there would be another 1% hit making the rate as high as 7.500% or forcing the borrower to come in with 1% of the loan amount, as much as $6,250 PLUS all closing costs.

————————————————————————————

In closing DON’T BELIEVE THE HYPE folks. That being said there is nothing wrong about calling your mortgage broker or the bank and seeing what you can hammer out. Perhaps, there are things that can be done. At least now you have some ammunition. -Best, Mr Mortgage

A Win-Win Bankruptcy Reform

(Rich Leonard in the Washington Post) I watched a middle-aged widow lose her home recently.

Her story was familiar. She owned her simple brick residence outright until four years ago, when a mortgage broker stopped by and offered her a loan too good to be true. In exchange for taking on a modest monthly payment, she could make some needed repairs and consolidate other debts.

More sophisticated than many borrowers, she realized she was getting an adjustable-rate mortgage. What she didn't realize was that, in the biggest "bait-and-switch" ever pulled by an entire industry, her ARM was not tied to the prime rate or any other index, as adjustable-rate mortgages have traditionally been. Her rate simply adjusted periodically, ever upward. When it hit 14 percent, her social worker's salary could no longer cover the payments.

I watched this story unfold in court, from my seat in a bankruptcy judge's chair. While a Chapter 13 filing temporarily stopped the foreclosure on this woman's home, it did little more than buy a few months' time.

Under existing law, bankruptcy courts cannot modify the terms of home mortgages. To keep her home, this debtor needed to demonstrate sufficient income not only to make her ongoing payments at 14 percent but also to cover, during her five-year repayment plan, the payments she had defaulted on. Her proposed plan was clearly not feasible based on her salary, so I had no choice but to lift the stay and allow the foreclosure to continue.

Homeowners are the only ones who cannot modify the terms of their secured debts in bankruptcy. Corporate America flocks to bankruptcy courts to do precisely this -- to restructure and reamortize loans whose conditions they find onerous or can no longer meet. Airlines are still flying and auto parts makers still operating because they have used this powerful tool of the bankruptcy process. Lehman Brothers will surely invoke it. But when the bankruptcy code was adopted in 1979, the mortgage industry persuaded Congress that its market was so tightly regulated and conservatively run that it should be exempted from the general bankruptcy rules permitting modification.

How far we have come.

For more than a year, a number of legislators, academics and judges have advocated removing this ban on home mortgage modification to help stem the increasing number of foreclosures. I have twice participated in briefing sessions organized by the House Judiciary Committee, where I was lectured by lobbyists for the mortgage industry about the sanctity of contracts. I have listened to their high-priced lawyers make fallacious constitutional arguments based on discredited cases from the 1930s. (This is, incidentally, an industry that is not particularly concerned about its own contractual obligations as it tries, through various Treasury-aided programs, to stay afloat.)

Allowing modifications is a solid solution, as evidenced by my example. This homeowner could have restructured her loan to terms resembling those of a conventional mortgage. If the court found that the market value of her home had fallen below what she owed, the secured portion that must be repaid in full would be reduced to the house's actual value; otherwise, the amount to be repaid would stay the same. The interest rate would be adjusted to reflect the prevailing market. However, because this homeowner is a riskier borrower than most, I would have raised her rate to account for that increased risk, as Supreme Court precedent requires. Instead of 14 percent, the rate would probably have been in the high single digits. This homeowner -- with her steady income -- could have made the reduced payments.

Such a solution would have been better for everyone. Obviously, it would have been good for the homeowner and the community in which she lives. Instead of another abandoned house tied up in foreclosure, her residence would be owned by a taxpaying citizen. More important, it would have been good for the lender. Whatever unknown mortgage syndicates hold pieces of this loan, they are never going to get their 14 percent return. Instead, the total recovery will be limited to the proceeds from a foreclosure sale in a depressed market. Any deficiency owed by the homeowner will be discharged as part of her bankruptcy. No one has been able to explain to me why it is not better for mortgage holders to get a fair return of principal back, albeit at a lower interest rate, than to take a lump sum through foreclosure that is probably much less than the value of the note.

There is a simple answer to the frequent, hyperbolic assertion that such a process would be abused: Chapter 13 is no walk in the park. It requires public disclosure of every aspect of your life, examinations under oath by a trustee and creditors, allowing creditors to haul you into court on any objection, and relinquishment of control of your financial life for up to five years. If you falter, your case will be dismissed and you will lose the entire benefit of the bankruptcy law, including having your original contract terms reinstated. That is precisely why allowing mortgage modifications is such a good approach. It would elegantly separate those homeowners who desperately need to stay in their homes and have sufficient incomes to make reasonable payments from those investors who bet on lax regulation, easy credit and an appreciating market in buying residential properties. Those in the latter category will have no use for this process, but for the first category, it could be a powerful step back to financial stability.

The writer is a judge with the U.S. Bankruptcy Court in the Eastern District of North Carolina.

Wednesday, November 26, 2008

Non-Profits Urge Reinstatement of DAPs After Home Sales Decline

(Housing Wire) The National Association of Realtors reported Monday that existing home sales fell 3.1 percent to 4.98 million in October, which happened to be the same month seller-funded down payment assistance programs became defunct. A provision within the Housing and Economic Recovery Act of 2008 — signed into law in July — effectively banned seller-funded down payment assistance programs beginning Oct. 1. Since then, these non-profits and their supporters have urged Congress to reconsider the programs that helped put people with no funds for closing costs and down payments into homes by giving monetary “gifts” to prospective buyers in just the right amount needed to obtain an FHA loan. The non-profits would then accept donations from the home seller in — surprise! — the same amount given to the buyer, plus a service fee. The non-profit paid its staff, the seller got rid of the house and the buyer became a homeowner with no up-front expenses.

Everyone was happy, right? That depends on whom you speak with. The non-profits got one thing right, however: The program didn’t cost a taxpayer dime. And it put people into homes who otherwise couldn’t have afforded them. It follows that these programs would try any way possible to reinstate seller-funded down payment assistance. One of the largest such non-profits, Nehemiah Corp. of America on Monday released a statement urging the reinstatement of the programs.

“As we anticipated, the spike in September home sales was short-lived, driven by hardworking Americans racing to take advantage of seller-funded down payment assistance (DPA) before it was eliminated on Oct. 1,” Nehemiah president Scott Syphax said. “October housing sales tanked, clearly illustrating the reality we now face in a post-DPA market…. We call on Congress to revisit the important role that DPA has played in providing access to homeownership, and urge them to remove the ban.”

A supporter of DPA, the National Association of Black Mortgage Brokers on Tuesday released its own statement asking Congress to reconsider the programs. “The grim 3.1 percent drop in existing-home sales in October released by the National Association of Realtors may be just the tip of the iceberg,” president Joy Jamison said. “There are an abundance of homes sitting on the market waiting to be purchased and there are hundreds of thousands of hardworking Americans, particularly minorities, who want nothing more than to be homeowners.” This problem could be resolved, according to Jamison, by lifting the ban and giving “innumerable minorities” access to these programs and the ability to achieve the dream of homeownership.

Neither press release addressed what NAR economists have said really lies at the heart of the home sales decline: consumer hesitation. “Many potential home buyers appear to have withdrawn from the market due to the stock market collapse and deteriorating economic conditions,” NAR economist Lawrence Yun said in a press statement Monday. Consumer spending in October also saw its largest decline since September 2001 — 1 percent — according to a report Wednesday by the Commerce Department, suggesting much larger concerns than the scarcity of seller-funded down payment assistance have been driving the budgets of Americans in the past months.

Non-profits like Nehemiah and AmeriDream Inc. frequently reiterate the statistic that more than 1 million borrowers have used seller-funded down payment assistance programs to achieve homeownership. The statistic these programs don’t like to repeat is the one that led to their demise: Federal Housing Administration commissioner Brian Montgomery in June said the one-third portion of the FHA’s portfolio that consisted of loans made to borrowers that used these non-profits might soon cripple the “FHA’s ability to serve American citizens who need access to prime-rate home loans.”

“Data clearly demonstrates that FHA loans made to borrowers relying on seller-funded downpayment assistance go to foreclosure at three times the rate of loans made to borrowers who make their own down payments,” he said at the time.

MOODY'S WILL ASSIGN BACKED-Aaa RATINGS TO DEBT SECURITIES COVERED BY THE FDIC'S GUARANTEE

New York, November 24, 2008 -- Moody's announced that it will assign backed-Aaa and backed Prime-1 ratings to eligible debt securities covered by the Federal Deposit Insurance Corporation's (FDIC) guarantee under the Debt Guarantee Program component of the Temporary Liquidity Guarantee Program established in the United States. To be eligible for the guarantee, debt must be senior, unsecured and issued between October 14, 2008 and June 30, 2009 and, if issued after December 5, 2008, must have a stated maturity of at least 31 days.

The backed-Aaa rating reflects that the FDIC guarantee is unconditional and irrevocable and backed by the full faith and credit of the Aaa-rated United States government. The outlook for the backed-Aaa ratings is stable, in line with that of the US government.

Moody's will assign backed -Aaa and backed Prime-1 ratings with a stable outlook only to those issuers that are currently not rated at that level and participate in the program. Backed-Aaa ratings will only be assigned to those obligations maturing prior to the expiration of the FDIC guarantee on June 30, 2012. To reflect the stand-alone credit profile of the issuers and the exposure of creditors once the guarantee is withdrawn, Moody's will also maintain the stand-alone short-term ratings of the issuers. The backed Prime-1 rating will be withdrawn upon maturity of short term debt guaranteed under the program.

The FDIC's obligation under this program will be triggered by an uncured payment default on the guaranteed obligations, and the FDIC will satisfy the guarantee obligation by making scheduled interest and principal payments under the terms of the guaranteed debt instrument. Moody's believes this feature of the guarantee program ensures timely payment.

Moody's views this guarantee positively for Bank Financial Strength Ratings as well as for banks' non-guaranteed debt issues, as it should restore market confidence -- at least during the guarantee period -- in the institutions' liquidity. However, as such support had been already factored into the current ratings and given the temporary nature of the guarantee (until June 30, 2012) this will not impact the long-term bank deposit ratings or debt maturing after the end of the guarantee period.

In addition, the implementation of the guarantee program scheme does not threaten the Aaa rating of the United States government. The likelihood that a situation could unfold where a large-scale activation of the guarantee would materially impair the United States government's balance sheet is sufficiently remote as not to weigh on its Aaa rating.

Key terms of the guarantee:

Under the program the FDIC will guarantee all senior unsecured debt which satisfies certain eligibility requirements (including, in the case of debt issued after December 5 2008, a minimum stated maturity of at least 31 days) issued by insured depository institutions and certain affiliates and holding companies between October 14, 2008 and June 30, 2009. The guarantee expires on June 30, 2012 and participating entities have until December 5, 2008 to opt out of the guarantee program.

There are various limitations on the scope of the guarantee, including (among others):

The maximum amount of debt that is guaranteed under the program for each participating entity is subject to a cap that is generally equal to 125% of the participating entity's senior unsecured debt outstanding at September 30, 2008 and maturing between this date and June 30, 2009 (including debt with a stated maturity of 30 days or less).

The holding company's capacity under this cap may be applied to a subsidiary insured depository (leaving the holding company with no capacity under the program). This does not apply in reverse, a holding company cannot utilize an insured depository's capacity under the cap.

For insured depositories which had no senior unsecured debt outstanding at September 30, 2008 the alternative debt guarantee cap is 2% of total liabilities. For other participating entities that had no senior unsecured debt outstanding at September 30, 2008, the cap will be determined on a case-by-case basis. The cap for any entity that becomes an eligible institution for the program after October 13, 2008 will also be evaluated on a case-by-case basis.

Tuesday, November 25, 2008

Modifications Rise Despite Subprime, Prime Disparity

(Housing Wire) The gap is slowly being closed — despite continuing evidence that prime borrowers are less likely than their subprime counterparts to receive a loan modification, data from industry coalition HOPE NOW on Tuesday suggested that at least some progress is being made to close the gap. Overall, the coalition said that servicers had executed more than 225,000 workouts foreclosures in October, 13,000 more than the record set last month.

But it’s been the growing plight of prime-credit borrowers that has, more than anything, stood out in the monthly HOPE NOW datasets. And that’s a disparity that isn’t going to go away overnight, even if evidence now suggests it is improving ever-so slightly.

In particular, loan modifications represented 30.8 percent of all workouts offered to prime borrowers in Oct.; among subprime borrower workouts, 56.8 percent were loan modifications. In Sept., those percentages were at 29.8 percent and 58.6 percent, respectively. The disparity suggests in many ways that the political help and attention given to those least likely to be able to afford their mortgage has paid off, while many better-credit borrowers have been left to wither on the vine.

As we’ve suggested before, it’s awful hard to argue that subprime borrowers need assistance because they were targeted by unscrupulous lenders when even those with a better credit profile are running into the same sort of difficulty paying their mortgage; and the data suggests, as well, that those with lesser credit profiles are often receiving the most assistance, to boot.

Repayment plans have been largely panned by critics who have said that their use often doesn’t prevent a default, and merely provides the sort of reporting wiggle room needed to massage default statistics for investment pools; in particular, to limit roll rates. Most pooling & servicing agreements limit the use of loan modifications, but place no such restrictions on the use of repayment plans, as HousingWire covered in a story in January of this year (see below).

That said, progress is clearly being made to shift more focus to prime borrowers in distress. HOPE NOW’s data shows a more than 10 percent increase in the number of prime modifications on a month-to-month basis since September. The data also shows a 9.9 percent monthly decrease in all foreclosure sales — not surprisingly, as a result from recent foreclosure moratoria.

Over the past three months, according to the data, the number of modifications has increased by 24 percent while the number of payment plans has increased by 9.8 percent, a trend that Faith Schwartz, HOPE NOW’s executive director, said indicated the industry’s focus towards keeping borrowers in their homes.

“The growing use of loan modifications is not an accident,” Schwartz said. “The U.S. economy is still troubled and that means that changing the terms of a loan is an increasingly appropriate way to keep more homeowners in their homes.”

From the American Banker:

According to these observers, widespread use of repayment plans is keeping serious delinquency rates artificially low. For example, a loan classified as 30 days past due will not progress to the 60-day category as long as it is on a repayment plan; a 60-day delinquency put on a plan will not move to the 90-day category, and so on …

Kevin Kanouff, the president of the Clayton Holdings Inc. unit, said servicers are using repayment plans as “one way to reduce default rolls.”

Repayment plans are “only a temporary fix for the servicers if they do not fit the borrowers’ capabilities to repay,” he said. “Eventually the real numbers will come out on bad plans.” …

Cheryl Lang, the president of Integrated Mortgage Solutions, a Houston consulting firm, said, “Many times, repayment plans are used to minimize or mask the 90-day-plus category of delinquencies.”


Monday, November 24, 2008

NAR: Re-default Rate 50% of Modifications

(Calculated Risk) Here is a video report from CNBC's Diana Olick: Existing Home Sales. Listen to the end (hat tip Hal)

"The Realtors are reporting that foreclosure sales - that is distress sales being foreclosures or short sales - have risen from what they thought was 35% to 40% of all existing home sales, now they are saying it is 45% of all existing home sales. They also are saying they are seeing further softening toward the November numbers.

And they are hearing from the Realtors they talk to that the re-default rate on a lot of these loan modifications are running at 50% - that is half those of modifications aren't working."
emphasis added

ING DIRECT Suspends Foreclosures

(Housing Wire) Wilmington, Del.-based ING DIRECT, the nation’s largest direct bank, said Monday morning that effective immediately, it will suspend foreclosure sales on occupied single-family properties through the end of March 2009. The company also said it would suspect all evictions on occupied single-family properties through Jan. 15, 2009, “in the spirit of the holidays,” according to a press statement released by the firm.

The eviction freeze formalizes a previously informal, internal process, ING officials said. Eviction freezes are relatively common at most lenders, although many previously weren’t publicized; although ING’s eviction freeze is clearly much longer than similar freezes at other lenders.

“As a responsible lender, ING DIRECT keeps the mortgages we originate; we do not sell them to Wall Street,” said Arkadi Kuhlmann, ING DIRECT CEO.

“We help customers buy homes with mortgages only if we believe they are suitable and affordable. Consequently, once we get customers into a home, we work hard to help them stay there. We hope this foreclosure suspension will provide some relief during the holidays to those experiencing financial hardships.”

Connecticut Gov. Calls for Six Month Foreclosure Moratorium

(Housing Wire) Add Connecticut governor M. Jodi Rell to the list of state and local officials determined to “do something” about the bad decisions made by borrowers and lenders during the nation’s housing boom. Last week, her office announced that it was seeking legislation that would institute an immediate six-month moratorium on all foreclosures, as well as implementing a mandatory 60-day mediation period on all contested foreclosures going forward.

The proposals are part of a broad plan her office said will “safeguard both homeowners and renters amid one of the biggest housing crises in recent history.”

But it’s worth noting that Rell isn’t expecting local government to share in the cost burdens associated with a moratorium: borrowers would need to continue to pay interest and property taxes during the proposed moratorium, her office said. (Likewise, there was no word on whether the mandatory 60-day mediation period being proposed would extend to tax liens, as well).

Some of the more common-sense ideas coming from Rell’s office, however, involve renters: owners of properties with five or fewer rental units would be required to notify tenants within seven days of receiving a notice of foreclosure or filing for protection from creditors under bankruptcy laws, under her proposal.

An increasing number of renters are coming home to find a foreclosure sign in front of their duplex or small apartment building — the first indication any of them have had that the place where they live is in any kind of jeopardy. In the meantime, the landlord has been skimming their rent payments.

The issue of rent skimming became national news when Cook County, Ill. sheriff Tom Dart suspended all evictions over the issue on Oct. 10. (The current issue of HousingWire Magazine tackles rent skimming troubles, as well. Click here to learn more.)

“These are common-sense protections and precautions that will help Connecticut residents hang on to the single greatest asset most of us will ever have — our homes,” Rell said. “They will also ensure that renters are not inadvertently caught up in a financial whirlwind over which they have no control at all.”

“Connecticut has so far been relatively fortunate – we have not seen the disastrous decline in real estate prices the communities in places like New York and California have faced,” Governor Rell said. “But we will take no chances.”

The state also has already drafted a plan to use its allocation of $4 billion in state-level funding under the Housing and Economic Recovery Act of 2008. Under the current proposal, much of the federal money will go to the state’s largest municipalities — Hartford, New Haven, Waterbury, Bridgeport, Meriden and New Britain — while about $2.1 million is being made available to assist smaller communities, including many hard-hit towns in eastern Connecticut.

Bernanke Admits Misjudging Mortgage Crisis

(Housing Wire) There are few times in life when one can say with authority that they were ahead of the curve — I mean, really, really ahead of it. But the reason so many of you are reading HousingWire today is because this blog-turned-news agency was among the first to call the global fallout from quickly souring mortgages.

We weren’t alone, of course — Nouriel Roubini, in particular, comes to mind, as does the retired executive that pens the well-read Calculated Risk blog — but we were clearly among the first to focus so intently on the interplay between the primary and secondary mortgage markets. I still remember as far back as Dec. 2006 arguing that the failure of the capital markets would portend a grave crisis for the nation’s economy.

Now that it’s become reality, nearly everyone takes it as gospel that lax lending standards along with a retrenchment in home prices can have a global effect — one, it should be noted, we’re still facing. And that’s what makes recent admissions of key regulators all the more stunning, particularly when the guys who were supposed to be the “smartest in the room” now turn to the press and admit freely that they didn’t see any of this coming.

Add Federal Reserve chairman Ben Bernanke to that list of revisionist historians. “I and others were mistaken early on in saying that the subprime crisis would be contained,” Bernanke said in an cover feature in the Dec.1 issue of The New Yorker magazine. “The causal relationship between the housing problem and the broad financial system was very complex and difficult to predict.”

Read the full New Yorker feature.

It may have been “very complex,” as Bernanke suggests, but the current crisis was by no means “difficult to predict.” And anyone selling that line of logic now misses the myriad of voices that wrote in detail about this mess well before it took place. A very basic shift in economic awareness has taken place as the crisis has worn on; nearly everyone has, by now, been introduced to the originate-and-sell model of mortgage securitization, the engine that provided liquidity on a global scale (and reached well outside of the housing sector, it should be noted).

But I can recall in late 2006 hearing economists pontificate that the “subprime mess will be contained,” blissfully unaware of just how embedded mortgage financing had become into the economic and broader financial markets. And, frankly, there is simply no excuse for that sort of oversight; understanding the economic landscape is their primary job, for God’s sake. The size of the bond markets geared towards mortgages alone was/is beyond substantial. The idea that problems in that market could resonate throughout the entire system should not — I repeat, NOT — have been a surprise to anyone.

Least of all the guy that is now being painted by his peers as “the smartest guy in the room.”

Of course, Bernanke’s not alone now in trying to wipe the regulatory slate clean. Fed vice chairman Don Kohn is happy to echo the same sort of flawed logic. “We knew that banks were creating conduits,” he told The New Yorker. “I don’t think we could have recognized the extent to which that could come back onto the banks’ balance sheets when confidence in the underlying securities—the subprime loans — began to erode.”

Really, Don? And why is that? The bitter truth — the pill that no regulator wants to swallow right now — is that most economists and regulators were asleep at the wheel. The idea of self-regulation permeated the environment, perhaps thanks to Greenspan, sure. But even if regulators had decided to clamp down on what was happening, they would have had to at least have some idea of what was actually taking place.

The picture being painted in the rearview mirror now suggests a far worse transgression than a policy misstep: it suggests that key regulators and economists understood little about the secondary mortgage markets to begin with. The reason so few in the financial markets saw this coming is because so few actually understood either how the market was structured, or how far it really reached. And that, to me, is far more troubling than a debate over regulatory ideology and course.

Yet that’s the sort of line of questioning that’s missing from most journalistic inquiries these days, where reporters are more content to dig into how the Fed put its current policies together to respond to the crisis, and where everyone takes it at face value that regulators moved as aggressively as they knew how as part of some decisive response to the financial crisis.

So we have to read about the genius behind Bear Stearns and AIG and Lehman Brothers. We have to read, too, about how the NY Fed’s Tim Geithner — recently tabbed by Barack Obama to lead the Treasury in the next administration — describes Bernanke as “very good at making decisions.”

“We’ve done some incredibly controversial, consequential things in a remarkably short period of time, and it’s because he was willing to act quickly, with force and creativity,” he told The New Yorker.

All of which may be true, but it also obscures the fact that Bernanke didn’t see this coming. (Neither, it should be noted, did Geithner.) And that sort of quick, forceful, creative decision making that’s now being lauded as a character strength? It wouldn’t really have been needed at all, if instead, just one key regulator possessed an altogether different quality: foresight.

BusinessWeek: FHA-Backed Loans: The New Subprime

The same people whose reckless practices triggered the global financial crisis are onto a similar scheme that could cost taxpayers tons more

As if they haven't done enough damage. Thousands of subprime mortgage lenders and brokers—many of them the very sorts of firms that helped create the current financial crisis—are going strong. Their new strategy: taking advantage of a long-standing federal program designed to encourage homeownership by insuring mortgages for buyers of modest means.

You read that correctly. Some of the same people who propelled us toward the housing market calamity are now seeking to profit by exploiting billions in federally insured mortgages. Washington, meanwhile, has vastly expanded the availability of such taxpayer-backed loans as part of the emergency campaign to rescue the country's swooning economy.

For generations, these loans, backed by the Federal Housing Administration, have offered working-class families a legitimate means to purchase their own homes. But now there's a severe danger that aggressive lenders and brokers schooled in the rash ways of the subprime industry will overwhelm the FHA with loans for people unlikely to make their payments. Exacerbating matters, FHA officials seem oblivious to what's happening—or incapable of stopping it. They're giving mortgage firms licenses to dole out 100%-insured loans despite lender records blotted by state sanctions, bankruptcy filings, civil lawsuits, and even criminal convictions.

More Bad Debt

As a result, the nation could soon suffer a fresh wave of defaults and foreclosures, with Washington obliged to respond with yet another gargantuan bailout. Inside Mortgage Finance, a research and newsletter firm in Bethesda, Md., estimates that over the next five years fresh loans backed by the FHA that go sour will cost taxpayers $100 billion or more. That's on top of the $700 billion financial-system rescue Congress has already approved. Gary E. Lacefield, a former federal mortgage investigator who now runs Risk Mitigation Group, a consultancy in Arlington, Tex., predicts: "Within the next 12 to 18 months, there is going to be FHA-insurance Armageddon."

The resilient entrepreneurs who populate this dubious field are often obscure, but not puny. Jerry Cugno started Premier Mortgage Funding in Clearwater, on the Gulf Coast of Florida, in 2002. Over the next four years, it became one of the country's largest subprime lenders, with 750 branches and 5,000 brokers across the U.S. Cugno, now 59, took home millions of dollars and rewarded top salesmen with Caribbean cruises and shiny Hummers, according to court records and interviews with former employees. But along the way, Premier accumulated a dismal regulatory record. Five states—Florida, Georgia, North Carolina, Ohio, and Wisconsin—revoked its license for various abuses; four others disciplined the company for using unlicensed brokers or similar violations. The crash of the subprime market and a barrage of lawsuits prompted Premier to file for U.S. bankruptcy court protection in Tampa in July 2007. Then, in March, a Premier unit in Cleveland and its manager pleaded guilty to felony charges related to fraudulent mortgage schemes.

But Premier didn't just close down. Since it declared bankruptcy, federal records show, it has issued more than 2,000 taxpayer-insured mortgages—worth a total of $250 million. According to the FHA, Premier failed to notify the agency of its Chapter 11 filing, as required by law. In late October, an FHA spokesman admitted it was unaware of Premier's situation and welcomed any information BusinessWeek could provide.

You'd think the government would have had Premier on a watch list. According to data compiled by the FHA's parent, the U.S. Housing & Urban Development Dept. (HUD), the firm's borrowers have a 9.2% default rate, the second highest among large-volume FHA lenders nationally.

Now, members of the Cugno family have started a brand new company called Paramount Mortgage Funding. It operates a floor below Premier's headquarters in a three-story black-glass office building Jerry Cugno owns in Clearwater. In August 2007, only weeks after Premier sought bankruptcy court protection, the FHA granted Paramount a license to issue government-backed mortgages. "I am the only person in the country who really understands FHA," Cugno says with characteristic bravado.

One day recently, Nicole Cugno, his 27-year-old daughter and a Paramount vice-president, was on the phone at her desk, giving advice to new branch managers. Despite past troubles with Premier, the family says Paramount dutifully serves borrowers. The Cugnos stress that the two companies are legally separate organizations.

Similarly worrisome stories are playing out around the country. In Tucson, First Magnus Financial specialized in risky "Alt-A" mortgages, which didn't require borrowers to verify their income. State and federal regulators cited the company for misleading borrowers, using unlicensed brokers, and other infractions. It shut down last summer and laid off its 5,500 employees. But in May, the FHA issued a group of former First Magnus executives a new license to make taxpayer-insured home loans. They have opened a company called StoneWater Mortgage in the same office building that First Magnus had occupied.

G. Todd Jackson, an attorney for StoneWater, said in a written statement that the new company "is not First Magnus." StoneWater employs "a new business model, with different loan products, in a different market," he added. First Magnus had "a long record of compliance," he said. "Isolated incidents and personnel problems occurred, but none were remotely systemic, and all were promptly addressed and corrected by management when discovered."

Back to Life

Nationstar Mortgage, based in suburban Dallas, closed its 75 retail branches in September 2007 after the subprime market crashed. But in August, Chief Information Officer Peter Schwartz told the trade paper American Banker that Nationstar now plans to emphasize FHA-backed loans, which he called a "high-growth channel." The lender received federal approval in March to offer government-guaranteed loans. Just a year earlier, it agreed to pay the Kentucky Financial Institutions Dept. a $105,000 settlement—one of the largest of its kind in that state—to resolve allegations that Nationstar employed unlicensed loan officers and falsified borrowers' credit scores. Nationstar didn't admit wrongdoing in the case.

"All loans we originate conform to industry best practices, as well as all applicable federal and state laws," says Executive Vice-President Steven Hess. The settlement in Kentucky, he adds, isn't "relevant to our FHA status."

Lend America in Melville, N.Y., uses cable television infomercials and a toll-free number (1-800-FHA-FIXED) to encourage borrowers in trouble with adjustable-rate mortgages to refinance with fixed-rate loans guaranteed by the FHA. Anticipating the real estate crash, the Long Island firm switched its strategy in 2005 from subprime to FHA-backed mortgages, says Michael Ashley, Lend America's chief business strategist. This year, the company will make 7,500 FHA loans, worth $1.5 billion, he says. "FHA is a big part of the future," Ashley adds. "It's the major vehicle for the government to bail out the housing industry."

But why the federal government would want to do business with Lend America is perplexing. Ashley has a long history of legal scrapes. One of them led to his pleading guilty in 1996 in federal court in Uniondale, N.Y., to two counts of wire fraud related to a mortgage scam at another company his family ran called Liberty Mortgage. He was sentenced to five years' probation and ordered to pay a $30,000 fine. His father, Kenneth Ashley, was sentenced to nearly four years in prison. "I was just a pawn in a chess game between my father and the government," says the younger Ashley, who is 43. "It doesn't affect my ability to do lending." The default rate on Lend America's current FHA loans is 5.7%, or 53% above the national average, according to government records.

Asked about FHA oversight of former subprime firms, agency spokesman Lemar Wooley says: "FHA has taken appropriate actions, where necessary, with these lenders with respect to their participation in FHA programs." First Magnus, Nationstar, and Lend America met all applicable federal rules, Wooley says. But on two occasions since 2000 one office of Lend America in New York temporarily lost its authority to originate FHA-backed loans because of an excessive default rate, he says. Wooley says the FHA wasn't aware that Lend America's Ashley had been convicted. The firm didn't list Ashley as a principal, Wooley says. FHA lenders are required to disclose past regulatory sanctions and are forbidden to employ people with criminal records.

Founded during the New Deal, the FHA is supposed to promote first-time home purchases. Open to all applicants, it allows small down payments—as little as 3%—and lenient standards on borrower income, as long as mortgage and related expenses don't exceed 31% of household earnings. In exchange for taxpayer-backed insurance on attractively priced fixed-rate loans, buyers pay a modest fee. Lenders and brokers can get a license to participate in FHA programs if they demonstrate industry experience and knowledge of agency rules.

During the subprime boom, the FHA atrophied as borrowers migrated to the too-good-to-be-true deals that featured terms such as extremely low introductory interest rates that later jumped skyward. But since the subprime market vaporized in 2007, FHA-backed loans have become all that's available for many borrowers. By fall 2008, FHA loans accounted for 26% of all new mortgages being issued nationwide, up from only 4% a year earlier. As of Sept. 30, the most recent date for which data are publicly available, the FHA had 4.4 million single-family mortgages under guarantee, worth a total of $475 billion.

A Swelling "Tsunami"

Congress and the Bush Administration are strongly encouraging lenders to apply for FHA approval and tap into the government's loan-guarantee reservoir. In September, the agency guaranteed 140,000 new loans, up from 60,000 in January. In October, as Congress and the White House scrambled to respond to the spreading financial disaster, the FHA began to extend $300 billion in additional loan guarantees under the banner of a new program called HOPE for Homeowners. The limit on the amount buyers may borrow will rise in January to $625,000 from $362,790 in 2007.

Some current and former federal housing officials say the agency isn't anywhere close to being equipped to deal with the onslaught of lenders seeking to cash in. Thirty-six thousand lenders now have FHA licenses, up from 16,000 in mid-2007. FHA "faces a tsunami" in the form of ex-subprime lenders who favor aggressive sales tactics and sometimes engage in outright fraud, says Kenneth M. Donohue Sr., the inspector general for HUD. "I am very concerned that the same players who brought us problems in the subprime area are now reconstituting themselves and bringing loans into the FHA portfolio," he adds.

FHA staffing has remained roughly level over the past five years, at just under 1,000 employees, even as that tsunami has been building, Donohue points out. The FHA unit that approves new lenders, recertifies existing ones, and oversees quality assurance has only five slots; two of those were vacant this fall, according to HUD's Web site. Former housing officials say lender evaluations sometimes amount to little more than a brief phone call, which helps explain why questionable ex-subprime operations can re­invent themselves and gain approval. "They are absolutely understaffed," says Donohue, "and they need a much better IT system in place. That is one of their great vulnerabilities."

Joseph McCloskey, a former director of FHA's single-family asset management branch, says workers reviewing lender applications have had difficulty for years tracking whether executives of previously disciplined mortgage firms were applying for new FHA licenses. "Technologically, they are challenged," McCloskey, now a consultant to FHA lenders, says of his overmatched former colleagues.

The FHA's Wooley disputes these criticisms. The agency can cross-check names and thoroughly examine lender applications, he says.

Like Flies to Honey

There are numerous law-abiding FHA lenders and brokers, just as there are subprime mortgage firms that behaved honestly and cautiously in recent years. But the current economic crisis has turned the FHA into a profit magnet for all kinds of financial players. Major Wall Street investment firms are finding their own angles, which are entirely legal.

In April 2007, Goldman Sachs (GS) purchased a controlling stake in Senderra Funding, a former subprime lender in Fort Mill, S.C. Goldman, which has received $10 billion in direct federal rescue money, converted Senderra into an FHA lender and refinance organization. The strategy appears likely to produce hefty margins. In September, Goldman paid 63¢ on the dollar in a $760 million deal with Equity One (EQY), a unit of Banco Popular (BPOP), for a batch of subprime mortgage and auto loans. Through Senderra, Goldman plans to refinance at least some of the mortgages into FHA-backed loans. Because of the government guarantee, it can then sell those loans to other financial firms for as much as 90¢ on the dollar, according to people familiar with the mortgage market. That's a profit margin of more than 40%.

Goldman's dealings suggest another reason FHA-insured lending is booming: The federal guarantee creates an incentive for banks to buy FHA loans and bundle them as securities to be sold to investors. This is happening as the securitization of subprime and conventional mortgages has largely ceased.

Operating far from Wall Street, the Cugno clan of Clearwater exemplifies a certain indefatigable American spirit in the face of economic setbacks. Whether that enterprising drive is always something to celebrate is less clear.

The Cugnos concede that their older mortgage firm, Premier, had its flaws. "My dad's company got too big," says Nicole Cugno. "It was too hard to control." At its peak in 2006, Premier originated $1 billion in loans each month and had annual revenue of more than $200 million. It sold what amounted to franchises to brokers around the country who frequently operated with little supervision from the 200-employee home office. "Everybody had a few bad apples, and I had a few of them," Nicole's father, Jerry, says. "If they got in trouble, we fired them."

Mark Pearce, deputy commissioner of banks in North Carolina, one of the five states that banned Premier, counters that the company seems to have invited abuses. North Carolina investigators concluded that Premier's branch in Charlotte allowed, among other deceptive practices, unlicensed brokers from around the country to "park" loans there for a fee. The aim was to make it appear that the mortgages were associated with a licensed broker trained and supervised by a substantial firm. "This is a company that should not be doing business in North Carolina," Pearce says.

But the Cugnos are very much staying in business. While Premier's bankruptcy proceedings continue in Tampa, members of the family are employing essentially the same model with their new company, Paramount. Only this time they are stressing federally guaranteed FHA loans. Paramount charges branches $1,625 a month to use its name, FHA license, and software. On its Web site, it tells brokers that FHA loans are "the new subprime."

"We're taking some of the things Premier did and tweaking [them]," says Barry McNab, a former Premier executive who now heads FHA lending for Paramount. About 9 out of 10 Paramount loans have FHA backing, he explains. It's difficult to evaluate most of those guaranteed loans, since they are so new. But a look at the experiences of some past Premier borrowers isn't encouraging.

U.S. District Judge Richard Alan Enslen in Kalamazoo, Mich., began a June 2007 written opinion about Premier's practices with this observation: "The crooks in prison-wear (orange jump suits) are easy to spot. Those in business-wear are not, though they do no less harm to their unsuspecting victims."

The case before Judge Enslen concerned Marcia Clifford, 53. She won a civil verdict that Premier had violated federal mortgage law when it replaced the fixed-rate loan it had promised her with one bearing an adjustable rate. Enslen also found that Premier had misrepresented Clifford on her application as employed when she was out of work and living on $700 a month in disability payments. Despite his ire, the judge decided to award Clifford, who did sign the deceptive documents, only $3,720 in damages, an amount based on unauthorized fees Premier had pocketed.

Clifford's name now appears along with a lengthy list of Premier's other creditors in the bankruptcy court in Tampa. Unable to make her $600 monthly mortgage payment, she received an eviction notice in June and says she is likely to lose her three-bedroom house in Belding, Mich. "It was a bait and switch," Clifford says, sobbing. "The folks at Premier are coldhearted."

Janice Dixon is also owed money by Premier. In March 2006 an Alabama jury awarded her $127,000 in damages related to a fraudulent refinancing in which, she alleged, the company didn't disclose the full costs of her borrowing. "Who will fix this?" Dixon, 49, asks. "They will continue to do these same things over and over."

Wooley, the FHA spokesman, says the agency noticed Premier's default rate rising earlier this year. But he adds that both Premier and Paramount met FHA requirements.

Low Income? No Problem

Like the Cugnos, Hector J. Hernandez lately has shifted his mortgage business away from subprime and toward FHA loans. The Coral Gables (Fla.) lender has a different twist on the business: He uses FHA-backed loans to help hard-pressed borrowers buy condominiums in buildings he owns.

Sascha Pierson was an unlikely borrower. She had no employment income when she bought a three-bedroom condo in Palmetto Towers, a Hernandez property in Miami, in July 2007 for $318,000. She borrowed almost the entire purchase price from Great Country Mortgage Bankers, Hernandez's loan company. Pierson, 29, says she is pursuing a psychology degree online from Kaplan University. She lives on a $42,000 annual educational grant from the government of the Cayman Islands, where she is a citizen. But the grant ends this year, and even with two roommates, she doesn't know how she's going to pay the $2,600 monthly bill for her mortgage and condo fee. "I am seriously worried about defaulting on my loan," she says.

Less extreme versions of Pierson's situation seem common at Palmetto Towers, a pair of eight-story stucco buildings Hernandez acquired in 1996. BusinessWeek interviewed eight condo owners at the complex, all of whom had obtained FHA-backed loans from Great Country. All eight, including Pierson, say they agreed to terms that required them to make mortgage and condo-fee payments that total considerably more than the FHA's guideline of 31% of their monthly income. Four of the eight owners say they received cash payments at closing of $10,000 or more as incentives to buy. The payments, which the FHA says are prohibited, were included in the loans. Pierson says she received $19,500. "They called it a 'cash-back opportunity,'" she explains.

Her neighbor, Lorena Merlo, 27, received a Great Country check for $14,640 at the closing in April on her $316,375 three-bedroom unit. Merlo, a part-time legal assistant, and her husband, Renny Rivas, a drywall laborer, earn a total of $52,000 a year and have two young sons. Their monthly home payments amount to 58% of their gross income, way over the FHA limit. "We are four months behind on our mortgage," says a mournful Merlo.

Defaults and Denials

Of the 158 units in Palmetto Towers, 66 are in foreclosure, records show. An additional 33 are unsold. Great Country has originated 1,855 FHA mortgages since November 2006; 923 of those were in default proceedings as of Oct. 31. The firm's 50% default rate is the highest in the entire FHA program.

Hernandez blames the high failure rate on the disastrous South Florida real estate market, not Great Country's practices, which he says are all legitimate. Asked in a phone interview whether he encourages buyers to purchase condos they can't afford, paying them questionable cash incentives, he says flatly, "That is not true." He adds: "[The buyers] are lying. They are disappointed by falling prices."

In October, however, the FHA decided it had seen enough. It ended Great Country's guaranteed-lending privileges in the Miami and Orlando markets where it had been active. Borrowers on nearly half of the company's defaulted loans made payments for only three months or less; 105 borrowers never made any payments at all. Brian Sullivan, another FHA spokesman, says the agency has referred the case to its inspector general's office. In response to BusinessWeek's questions, the Florida Financial Services Dept. has started a separate investigation, a person close to the state agency says.

But don't assume that Hernandez is through with FHA-guaranteed loans. At the Palmetto Towers sales office, Alexis Curbelo, a loan officer for Great Country, explains in an interview that buyers can now obtain FHA loans through Ikon Mortgage Lenders in Fort Lauderdale. Public records show Ikon closed a Palmetto Towers FHA loan in September for $222,957. Edgard Detrinidad, Ikon's president and a former business associate of Hernandez, denies he is financing any other loans for Hernandez's buyers.

Friday, November 21, 2008

The U.S. New Asset Securitization Market’s Revival Hinges On Investors’ Reassessment Of Risk

(Standard & Poor's) It may take a year, or maybe more,  but U.S.
securitizations of esoteric assets are expected to return. However, the
dynamics of how these types of bonds come to market may dramatically change.

These were among the points industry panelists made at a recent Standard
& Poor's Ratings Services conference on new assets and commercial assets
securitizations, which include aircrafts, catastrophe risk, franchise loans,
triple-net leases, insurance premium loans, life settlements, patent and
trademark royalties, film revenues, music royalties, oil and gas production
payments, timber assets, small business loans, structured settlements, tobacco
settlements and related legal fees, corporate securitization, shipping
containers, railcars, and equipment loans and leases.

"Clearly, the market is going to come back," said Usama Ashraf, senior
vice president at CIT Group, an issuer of structured bonds. "It's certainly
not going to be in the next couple of months. It's a fundamental question of
how long will it take to get through all the issues that we're dealing with,
like deleveraging," at the banks. Also, "everyone's very conscious of their
own liquidity positions, and the fact that there might not be a ready market
for them to get out of that position," he said.

For now, many asset classes appear to be nearly inactive. In response to
a question as to whether they would participate in the new issue market given
the attractive spreads available in the secondary markets, Ed Fitzgerald,
managing director at New York Life Investment Management LLC and an investor
of structured debt, indicated that they have been working on several
transactions but that the ongoing market volatility continues to derail
transactions. In essence, "We didn't leave the new issue market. It left us."

In this environment, the securitization market—-the issuers, chiefly—-has
to be "tremendously flexible," said Mr. Ashraf. That means being open to
reversing the traditional issuance process by determining investors' appetite
for a particular bond before that bond has even been structured. "You may find
that a deal that makes sense to one investor doesn't make sense to another,"
he said, noting that "the game around structuring and negotiating deals has
completely changed."

According to Mr. Ashraf, some of the major changes in the new assets
sector result from a turn away from their earlier reliance on monoline
insurance. And now that the monolines have been more removed from the
securitization process, the fundamental assessment of risk is "coming back
in-house," he said, with investors increasingly taking on the responsibility
of due diligence and risk analysis to better understand their investments.

Now, it comes down to whether investors are comfortable with that
particular asset class, Mr. Ashraf said, and if "they don't fundamentally
understand the risk, they are probably going to stay on the sidelines because
the last thing a lender or investor wants in this market is the risk of
principal loss."

Part of the reason investors are moving toward their own risk analysis is
not just the need for increased disclosure and transparency of the underlying
assets, but to ensure the timeliness of obtaining that information, according
to Russell J. Burns, managing director at Credit Suisse. "These are the
absolutely critical things to restore confidence" in the market. "How do you
trade a bond if you don't know the underlying information? How are you
supposed to get comfortable?"

Nevertheless, Mr. Fitzgerald said that although his team performs their
own credit and risk analysis as part of their due diligence process, investors
still reach out to securitization industry groups and rating agencies because
they've been a "very good sounding board to talk through the types of analysis
they've done, and also the stress work they've done. It's an extra group of
people to work with to discuss the risk and rewards of the transaction."

Mr. Burns said "securitization is a taboo word right now in a lot of
different quarters," but he added that securitization is a necessary part of
the U.S. economy. "At the end of the day, banks' balance sheets are not going
to be large enough and there are not going to be enough banks to finance these
assets, whether they're financial assets or hard assets. You could call it
asset-based lending, or call it securitization, or whatever you want to call
it. This plays a very key and critical role in financing a lot of businesses
in America."

Thursday, November 20, 2008

FDIC Announces Availability of IndyMac Loan "Mod in a Box" Road Map

The Federal Deposit Insurance Corporation (FDIC) announces the availability of a comprehensive package of information to give servicers and financial institutions all of the tools necessary to implement a systematic and streamlined approach to modifying loans based on the FDIC Loan Modification Program initiated at IndyMac Federal Bank (IndyMac). The Program is designed to achieve affordable and sustainable mortgage payments for borrowers and increase the value of distressed mortgages by rehabilitating them into performing loans. Under the terms of the Program, borrowers receive a loan modification with a maximum 38% down to 31% housing-to-income ratio through the use of interest rate reduction, amortization term extension, and in some cases, principal deferment. This loan modification process improves the value of the troubled mortgages for investors while helping many borrowers experiencing financial difficulties remain in their homes.

The FDIC implemented this approach to loan modifications on August 20th after IndyMac Bank, FSB failed on July 11, 2008. As of November 20th, 2008 IndyMac has sent out more than 23,000 modification letters to eligible borrowers and has completed more than 5,300 modifications after verifying the borrowers' income. Thousands more are in the pipeline.

Although foreclosures are costly to lenders, borrowers and communities, the number of foreclosures continues to rise while the pace of modifications remains too slow. Currently, 1.6 million total loans are over 60 days delinquent. Through the end of 2009, the FDIC estimates that there will an additional 3.8 million new loans over 60 days past due. Today's release of the FDIC's "Mod in a Box" guide will provide the industry with the necessary tools to facilitate streamlined and systematic loan modifications to help stem foreclosures, halt the decline in home prices and provide needed stability to the broader economy.

FDIC Chairman Sheila C. Bair said, "The IndyMac loan modification framework is an effective loss mitigation strategy for both portfolio and securitized mortgages. I have long supported a systematic and streamlined approach to loan modifications to put borrowers into long-term, sustainable mortgages—achieving an improved return for bankers and investors compared to foreclosure. Implementing widespread loan modifications based on the Program used at IndyMac will strengthen local neighborhoods where foreclosures are driving down property values and will help stabilize the broader economy. I would encourage all industry participants to adopt the FDIC Loan Modification Program as the standard approach in dealing with the grave problems facing us with continued mounting foreclosures."

The FDIC Loan Modification Program guide is available at:
http://www.fdic.gov/consumers/loans/loanmod/loanmodguide.html

HUD Relaxes Hope for Homeowners Requirements

(Housing Wire) With fewer than 100 applications for FHA loans through Hope for Homeowners since the program’s effective start date of Oct. 1, it was clear some “meaningful changes” were needed. The U.S. Housing and Urban Development secretary Steve Preston on Wednesday announced that the Hope for Homeowners (H4H) Board of Directors has approved changes to the program to help more distressed borrowers refinance into affordable, government-back mortgages.

“Clearly, meaningful changes were needed,” Preston said. “These modifications should increase lender participation and help more families who are having difficulty paying their existing mortgages, but can afford a new affordable loan insured by HUD’s Federal Housing Administration.”

The changes include increasing the loan to value ratio (LTV) from 90 to 96.5 percent for some H4H loans; for borrowers whose mortgage payments represent no more than 31 percent of their monthly gross income and household debt no more than 43 percent. Raising the LTV ratio reduces the gap between the existing loan balances and the new H4H loan and decrease losses to the existing primary lienholders, according to a HUD press release regarding the announcement.

Another change to the program involves simplifying the process to remove subordinate liens by permitting upfront payments to lienholders in exchange for releasing their liens, to permit more borrowers access to the program. Previously, subordinate lienholders who released their liens were only eligible to receive a small recovery payment when the home owned by the H4H borrower was sold, creating a substantial delay and not necessarily guaranteeing any return for subordinate lienholders.

The last change will allow lenders to extend mortgage terms from 30 to 40 years, possibly reducing borrowers’ monthly payments enough to make it possible for them to qualify for the plan and save their homes.

“These changes will further encourage lenders to take a hard look at this program before heading down the path to foreclosure and will provide families with another resource to refinance into a loan they can afford,” said FHA commissioner Brian Montgomery.

Despite more lenient terms, the H4H program will continue to uphold FHA’s requirement that new loans be based on a family’s long-term ability to repay the mortgage, according the announcement, which has already brought sweeping industry support.

“Expanding the eligibility criteria and making the program less expensive for both the borrower and the lenders will allow us help more borrowers,” said John Courson, COO of the Mortgage Bankers Association, in a media statement Wednesday. “By agreeing to immediately compensate subordinate lienholders, HUD is providing additional incentive for those lienholders to release their liens, which will free more borrowers to access the Hope for Homeowners Program.”

HOPE NOW, the private sector alliance of mortgage industry professionals, on Thursday said that it strongly supported the changes in the H4H program because they will make it easier for homeowners to participate and keep homeowners in their homes.

“These changes, including increasing the loan to value ratio, extending the term to 40 years, and allowing for upfront payments to subordinate lien holders, are all improvements which should make the program more accessible and attractive,” said Robert Davis of the American Bankers Association. “The Hope for Homeowners program is very new, and is still evolving. Both HUD and the Congress, which authorized these changes, are to be commended for acting quickly to address borrower and industry concerns and to make these improvements to the program in such a timely manner.”

Home Prices Will Plummet Further (At least, that's what the futures say)

(Index Universe) I spent some time looking at the Chicago Mercantile Exchange's housing futures this week. The futures are tied to the S&P Case-Shiller Home Price Indexes, and are the only liquid way to bet on where house prices are heading.

Right now, the futures all agree: home prices are going lower.

The longest-dated contract available expires November 2012. Using that contract, I looked at the most recent sale to see where the market thinks home prices will be in four years. The data compare November 2012 vs. August 2008, because August 2008 is the last date for which we have index data available.

Predicted House Price Changes,
August 2008 vs. Nov. 2012

City

Price Change

Boston

-10.29%

Chicago

0.00%

Denver

-12.55%

Las Vegas

-12.97%

Los Angeles

-17.22%

Miami

-11.93%

New York

-13.40%

San Diego

-13.21%

San Francisco

-12.57%

Washington, D.C.

-15.32%

Composite

-10.38%

Based on CME House Price Futures, as of Nov. 19, 2008.


Those numbers don't look too bad, until you realize a few things.

First, remember that most people buy their homes on margin. Suppose you're considering buying a $300,000 home in Los Angeles. You've put $60,000 down. Four years from now, you expect the home's value to decline $51,660 (17.22% of $300K). If the home price futures are right, you will lose 86% of your down payment.

No wonder homes aren't selling.

The second thing to understand is that home prices are already down big in all of these markets. The table below shows how far prices are down off their all-time highs today, and how much further they'll decline by November 2012 if the futures markets are right.

Real And Predicated House Price Changes
Peak-to-Trough,
Nov. 2008 and Nov. 2012

City

Actual % Change From High Through 11/08

Predicted % Change From High Through 11/12

Boston

-9.10%

-18.45%

Chicago

-11.31%

-11.31%

Denver

-5.44%

-17.31%

Las Vegas

-35.89%

-44.20%

Los Angeles

-30.94%

-42.83%

Miami

-34.67%

-42.46%

New York

-10.65%

-22.62%

San Diego

-32.60%

-41.51%

San Francisco

-30.67%

-39.64%

Washington, D.C.

-22.39%

-34.28%

Composite

-21.96%

-29.29%

Based on CME House Price Futures, as of Nov. 19, 2008.


Those numbers are scary.

National home prices down 29%? It was just a few years ago when people said we would never have a nationwide home price.

And here's the thing people aren't remembering: These are real dollar prices, not inflation-adjusted values. National home prices hit their peak in September 2006, and based on the CPI, inflation has risen about 5% since then. Build that into the calculator, and national home prices are actually down about 25.67% from their peak.

It's worse if you carry it forward. Consumer inflation is running about 5% per year right now. If you run that through November 2012, national home prices will be down about 44.44% from their peak on a real-dollar basis. Las Vegas home prices will be down 56.19%.

Those are simply incredible figures.

The home price futures are thinly traded, so price discovery might not be perfect. There could be an opportunity here for someone to take the other side of the trade and bet that home prices will stabilize or even rise a little between now and 2012.

Any takers?




Moral Hazard and Adverse Selection in the O2D Model of Bank Credit

(Paper by Antje Berndt and Anurag Gupta) Over the last two decades, bank credit has evolved from the traditional relationship banking model to an originate-to-distribute model where banks can originate loans, earn their fee, and then sell them off to investors who desire such exposures. We show that the borrowers whose loans are sold in the secondary market under perform other bank borrowers by between 8% and 14% per year on a risk-adjusted basis over the three-year period following the sale of their loan. Furthermore, they suffer a value destruction of about 15% compared to their peers over the same period. This effect is more severe for small, high leverage, speculative grade borrowers. There are two alternative explanations for this underperformance - either banks are originating and selling bad loans based on unobservable private information, similar to the events in the current subprime mortgage crisis, and/or the severance of the bank-borrower relationship allows the borrowers to undertake suboptimal investment and operating decisions, in the absence of the discipline of bank monitoring. Our results also show that borrowers whose loans are not sold in the secondary market do not underperform their peers, reinforcing the inference that bank loan financing is indeed “special”, except for borrowers whose loans are sold. In light of these moral hazard and adverse selection problems, the originate-to-distribute model of bank credit may not entirely be “socially desirable”. We propose regulatory restrictions on loan sales, increased disclosure, and a loan trading exchange with a clearinghouse as mechanisms to alleviate these problems.

Wednesday, November 19, 2008

Amendments to Hope for Homeowners

BUSH ADMINISTRATION ANNOUNCES FLEXIBILITY FOR “HOPE FOR HOMEOWNERS” PROGRAM
Changes will allow more struggling families to use the program and keep their homes

WASHINGTON - U.S. Housing and Urban Development Secretary Steve Preston today announced that the HOPE for Homeowners (H4H) Board of Directors has approved changes to the program to help more distressed borrowers refinance into affordable, government-back mortgages. The changes will reduce the program costs for consumers and lenders alike while also expanding eligibility by driving down the borrower's monthly mortgage payments.

"Clearly, meaningful changes were needed. These modifications should increase lender participation and help more families who are having difficulty paying their existing mortgages, but can afford a new affordable loan insured by HUD's Federal Housing Administration," said Preston.

By taking full advantage of the new authority provided under the Emergency Economic Stabilization Act (EESA) of 2008, HOPE for Homeowners will provide additional mortgage assistance to struggling homeowners.

Modifications to HOPE for Homeowners include:

  • Increasing the loan to value ratio (LTV) to 96.5 percent for some H4H loans;
  • Simplifying the process to remove subordinate liens by permitting upfront payments to lienholders; and
  • Allowing lenders to extend mortgage terms from 30 to 40 years.

"These changes will further encourage lenders to take a hard look at this program before heading down the path to foreclosure and will provide families with another resource to refinance into a loan they can afford," said FHA Commissioner Brian D. Montgomery. "HOPE for Homeowners will continue to serve as another loss mitigation tool that can be used to help families keep their homes."

HOPE for Homeowners will continue to only offer affordable, government-insured fixed rate mortgages. Further, this program will maintain FHA's long-standing requirement that new loans be based on a family's long-term ability to repay the mortgage. Only owner-occupants are eligible for FHA-insured mortgages.

Background

Increasing the Loan-to-Value and Adjusting Debt-to-Income Ratios

The program will increase the loan-to-value ratio (LTV) on H4H loans to 96.5 percent for borrowers whose mortgage payments represent no more than 31 percent of their monthly gross income and household debt no more than 43 percent. This change will expand the number of eligible borrowers. Raising the loan-to-value ratio reduces the gap between the existing loan balances and the new H4H loan and decrease losses to the existing primary lienholders. Alternatively, the program will continue to offer borrowers with higher debt loads a 90 percent loan-to-value ratio on their H4H loans. This LTV ratio will include borrowers with debt-to-income ratios as high as 38 and 50 percent. In conjunction with the LTV change, H4H will eliminate the trial modification that was previously required. This measure was too complicated and required delicate negotiations among the existing lienholders, the new H4H lender, and the borrower.

Immediate Payments to Subordinate Lienholders

H4H will offer subordinate lienholders an immediate payment in exchange for releasing their liens, to permit more borrowers access to the program. Previously, subordinate lienholders who released their liens were only eligible to receive a small recovery payment when the home owned by the H4H borrower was sold. Given the amount of time that would pass between the creation of the H4H and the ultimate sale of the home, as well as the tremendous market uncertainties, subordinate lienholders were not guaranteed any return at all. To address this problem, the subordinate lienholders may now receive an immediate payment at the time the H4H loan is originated.

Extending Loan Terms from 30 to 40 years

To assure that borrowers are put into the most affordable monthly payment possible, HOPE for Homeowners will permit lenders to extend the mortgage term from 30 to 40 years. For borrowers with very high mortgage and household debt loads, extending out the amortization period may reduce their monthly payments enough to make it possible for them to qualify for this rescue product and save their homes.

Consistent with statutory and regulatory requirements, borrowers must continue to meet the following criteria:

  • Their mortgage must have originated on or before January 1, 2008.

  • They cannot afford their current loan.

  • They must have made a minimum of six full payments on their existing first mortgage and did not intentionally miss mortgage payments.

  • The loan amount may not exceed a maximum of $550,440.

  • The Upfront Mortgage Insurance Premium is 3 percent and the Annual Mortgage Insurance Premium is 1.5 percent.

  • The holders of existing mortgage liens must waive all prepayment penalties and late payment fees.

  • They do not own a second home.

  • They did not knowingly or willfully provide false information to obtain the existing mortgage, and they have not been convicted of fraud in the last 10 years.

  • They must follow FHA's long-standing and strict policy of fully documented income and employment.

The HOPE for Homeowners program was authorized by the Housing and Economic Recovery Act of 2008. A Board of Directors was charged with establishing underwriting standards to ensure borrowers, after any write-down in principal, have a reasonable ability to repay their new FHA-insured mortgage. The program began October 1, 2008, and will end September 30, 2011.

The HOPE for Homeowners Board of Directors includes HUD Secretary Steve Preston, Treasury Secretary Henry Paulson, Federal Reserve Board Chairman Ben Bernanke, and FDIC Chairman Sheila Bair. They have named the following people to serve on the board as their designees: FHA Commissioner and Chairman of the Board Brian Montgomery, Federal Reserve Board Governor Elizabeth Duke, Treasury Assistant Secretary for Economic Policy Phillip Swagel, and Federal Deposit Insurance Corporation Director Tom Curry.

Read more about HOPE for Homeowners at www.hud.gov/hopeforhomeowners