FDIC's Home Ownership Preservation Loan Proposal

(From the horse's mouth...) The FDIC is proposing that Congress authorize the Treasury Department to make loans to borrowers with unaffordable mortgages to pay down up to 20 percent of their principal. The repayment and financing costs for these Home Ownership Preservation (HOP) loans would be borne by mortgage investors and borrowers. This approach is scaleable, administratively simple, and will avoid unnecessary foreclosures to help stabilize mortgage and housing prices.

This proposal is designed to result in no cost to the government:

• Borrowers must repay their restructured mortgage and the HOP loan.
• To enter the program, mortgage investors pay Treasury's financing costs and agree to concessions on the underlying mortgage to achieve an affordable payment.
• Treasury would have a super-priority interest -- superior to mortgage investors' interest -- to guarantee repayment. If the borrower defaulted, refinanced or sold the property, Treasury would have a priority recovery for the amount of its loan from any proceeds.
• The government has no continued obligation and the loans are repaid in full.

Mortgage Restructuring:

• Eligible, unaffordable mortgages would be paid down by up to 20 percent and restructured into fully-amortized, fixed rate loans for the balance of the original loan term at the lower balance. New interest rate capped at Freddie Mac 30-year fixed rate.
• Restructured mortgages cannot exceed a debt-to-income ratio for all housing-related expenses greater than 35 percent of the borrower's verified current gross income ('front-end DTI'). Prepayment penalties, deferred interest, or negative amortization are barred.
• Mortgage investors would pay the first five years of interest due to Treasury on the HOP loans when they enter the program. After 5 years, borrowers would begin repaying the HOP loan at fixed Treasury rates.
• Servicers would agree to periodic special audits by a federal banking agency.

Process:

• Mortgage investors would apply to Treasury for funds and would be responsible for complying with the terms for the HOP loans, restructuring mortgages, and subordinating their interest to Treasury.
• Administratively simple. Eligibility is determined by origination documentation and restructuring is based on verified current income and restructured mortgage payments.

Funding:

• A Treasury public debt offering of $50 billion would be sufficient to fund modifications of approximately 1 million loans that were "unsustainable at origination." Principal and interest costs are fully repaid.

Eligible Mortgages:

Applies only to mortgages for owner-occupied residences that are:

1. Unaffordable – defined by front-end DTIs exceeding 40 percent at origination.
2. Below the FHA conforming loan limit.
3. Originated between January 1, 2003 and June 30, 2007.

Home Ownership Preservation Loans: Questions and Answers

Home Ownership Preservation Loans: Examples

Related Link: Financial Times, April 29, 2008 – Op Ed: How the State can Stabilise Housing Market

FDIC Proposes $50 Billion Mortgage Pay Down Program; Questions Abound

(Housing Wire) The Federal Deposit Insurance Corp. on Wednesday proposed the latest in a string of recent attempts by lawmakers and policyheads to stem growing mortgage losses, suggesting that the Treasury fund $50 billion to help borrowers pay down a portion of principal on outstanding mortgages deemed “unaffordable” by the government.

“Government efforts should focus on helping the market reach equilibrium without overshooting,” wrote Sheila Bair in an op-ed published Wedensday in the Financial Times. “This can be done only through widespread restructuring of unaffordable mortgages into affordable ones.”

The program would see certain borrowers’ mortgages restructured by paying down up to 20 percent of principal via a so-called “Home Ownership Preservation loan” backed by the Treasury; borrowers would then refinance into a fixed-rate traditional mortgage, and pay only on that 80 percent of modified principal for the first five years after restructuring.

Investors, in turn, would agree to take a 20 percent haircut on their existing position — sort of. Under the FDIC proposal, investors would receive funds from the Treasury’s HOP loan and agree to pay interest at the Treasury’s rate for the first five years of the loan (making the loan free to consumers). After five years, borrower would then pay on the full 100 percent owed, with the 20 percent HOP loan amortized at below-market, Treasury-specific rates.

If the borrower defaults, sells or refinances, the HOP debt is in the super-senior position, putting the Treasury in the pole position for any recovery.

“The housing crisis is a national problem,” Bair said. “Painful as it is, we must be prepared to apply government efforts now.”

The program would only be available to borrowers whose loans are defined as “unaffordable” — that is, borrowers whose debt-to-income was above 40 percent at the fully-indexed rate when the loan was originated, borrowers whose mortgage fits within current FHA lending limits, and who took out their loan between 2003 and mid-2007.

The FDIC said in press materials that it expects that one million borrowers would qualify for the program.

Industry response tepid
There appear to be a number of concerns about the FDIC’s proposal, according to senior executives that spoke with HW on strict condition of anonymity — not to mention some apparent confusion as to implementation and contingencies.

“We’re talking about underwater borrowers, which means most of these people either have a second lien or they’ve got MI [mortgage insurance],” said one source, an exec at a large servicing operation. “Why would a second lien holder voluntarily agree to be completely and immediately wiped out in a transaction, when they could get more by collecting even one more payment from a borrower that will ultimately default?”

“And what does this mean for a mortgage insurer? That the Federal government is taking up their loss position?”

A review of the proposal materials provided by the FDIC did not answer that question directly, saying only that under the proposal, “the underlying loan is modified within the mortgage pool and does not worsen the position of subordinate lien holders.” Which, we suppose, is another way of saying that you can’t do worse than zero. As our sources have suggested, however, it’s when you reach zero that matters, too.

An attorney that spoke with HW raised different concerns, suggesting that the program could expose the Federal government to various levies and fees that various local municipalities are now charging lien-holders on mortgages.

Most sources had a tough time believing that the program would be costless to the government, a stance the FDIC reiterated numerous times in materials detailing the HOP plan.

“What happens if an investor goes belly up in year two of five? What happens if payments are missapplied?” another source said. “Is the Treasury going to repossess its secured interest because whomever refinanced the loan went out of business or filed bankruptcy? Or are they going to eat the losses? Or are they going to recap that lost interest onto what the borrower owes?”

It’s certainly not out the realm to consider such scenarios, given the number of lenders/noteholders/investors that have run aground in the past 12 months alone.

An ABS analyst that spoke with HW focused on the distribution of proceeds from the HOP loan, saying that it’s unclear which investors would support such a deal and which would not — support would likely depend on the relative status of a given transaction, we were told, and where current and expected losses stacked up against structural keys, like overcollateralization triggers.

“All investors and all deals are not created equal,” said the analyst.

A week in the life of mortgage "reform"

Here's a mortgage crisis chronology for this week, as reported by the New York Times and Washington Post. Can you guess what these articles have in common?

On Sunday, Michelle Singletary's The Color of Money column discussed Treasury Secretary's Henry Paulson's recommendation to create a Mortgage Origination Commission that would promulgate standards for mortgage loan officers and would rate and report state efforts to license and regulate mortgage brokers. In her view, a new Commission isn't needed. Instead, she argues that what we need to do is send some of these people to jail. Rather than have a commission talk about their fraudulent acts, she suggests that we need to criminally prosecute loan officers who have engaged in fraudulent lending activities.

On Monday, the New York Times reported that the mortgage industry has stepped up its attack on proposed Federal Reserve regulations that are designed to regulate certain mortgage lending practices. These regulations would require lenders to disclose all fees (including broker's yield spread premiums), would require lenders to show that customers can actually afford the mortgage, would ban certain types of advertising, and would regulate other practices viewed as abusive. The mortgage community argues (of course) that tighter regulations will increase the cost of credit and ultimately will harm creditworthy borrowers. The Times reports that the industry's aggressive attack on the regulations and their flood of comments have been successful in convincing the Fed to narrow the proposed regulations.

Yesterday (Tuesday). An editorial in the Times criticized the government for waiting too long to respond to the foreclosure crisis and sharply criticizes the pro-mortgage industry aspects of the bill the House recently passed. It specifically notes that the bill relies too heavily on the voluntary participation of lenders, and stresses that lenders can choose whether to reduce the mortgage loan balances or whether to continue with a pending foreclosure. The editorial urges Congress, especially the Democratic leadership, to push forward with legislation that would let borrowers modify their mortgages in bankruptcy.

Today. An article in the Times reports that fewer than 1,800 homeowners have been helped by the Federal Housing Administration program that was designed to provide relief to homeowners who have fallen behind on their mortgage payments. Though FHA officials contend that more than 150,000 people have benefited from the program, the program has largely helped homeowners who are current on their mortgage payments (and who anticipated that they might have problems in the future), not the folks who were in default and at risk of losing their homes in foreclosure. Surprisingly, housing officials seemed surprised by the number of homeowners who sought to benefit from the program. It's surprising that they were surprised by the homeowner interest in the program, since over a million people have fallen behind on their mortgage payments.

Why so few homeowners are benefiting from the FHA program is anyone's guess. Perhaps it's the design of the program, which provides relief only to borrowers who have made 10 timely payments in the 12 months before they went into default. Maybe it's because the program hasn't been well publicized. Or, perhaps officials at the Department of Housing and Urban Development, which oversees the FHA, have been a tad distracted of late by the scandals involving the former-HUD chief (who resigned recently but is still being investigated for questionable business practices). One thing we don't have to guess is that this program is going to do little to help most struggling homeowners this year, unless the program is radically revamped.

So what do these news reports have in common? First, the mortgage industry seems unwilling to voluntarily reform itself. Second, any attempt to regulate the industry will be met with the claim that doing so will do no good and will only exacerbate the credit crisis. Third, no one in the government seems to want to take truly bold steps to do anything meaningful anytime soon, and everyone seems happy to engage in long discussions (in committees or on commissions) about the housing crisis. Fourth, the Fed and members of Congress appear unwilling to alienate the powerful financial services industry.

Of course, the week's not over yet. Things can only go up.

Predatory borrowing, and recidivism

(Housing Wire) We’re probably not going to make a lot of friends on the consumer side with this, but more than a few analysts have asked us here at HW when we’re going to take up the issue of “predatory borrowing,” since the cards have pretty much been dealt on predatory servicing and predatory lending.

How about now?

An earlier story Tuesday on HW covered an upcoming Senate Judiciary subcommittee hearing on foreclosures and bankruptcy, and cited a story in the New York Times. It was penned by Gretchen Morgenson, and we chose to ignore the more — ahem, how shall we put it — misguided portions of her story. We wanted to focus on the news itself.

But those misguided portions that we ignored? They drove Calculated Risk’s Tanta off of a ledge, in a way that only Gretchen seems to have a way of doing as of late. The result is well worth anyone’s time to read, especially if you are in the camp that says all servicers are out to screw borrowers utterly and completely — what you learn just might conflict with your world view.

Tanta went ahead and researched the entire Atchley case history, or at least as much of it was publicly available — the case is the center of the U.S. Trustee’s case against Countrywide — and what she finds is another case of a classic borrower filing bankruptcy to stave off foreclosure and then struggling to make a mortgage payments post-petition, not to mention a lender who managed to screw up on filing Proofs of Claim with the court.

Not exactly the sordid tale of Countrywide and its attorneys quashing a blameless borrower, is it?

Yet somehow, we have a feeling that on May 6, Robin Atchley will be there in front of a nodding Senator from New York named Chuck Schumer — and, oh, did we mention that Diane Feinstein is on the Judiciary subcommittee too? — telling the whole world how wronged she was by that evil, bad and uncaring lender named Countrywide and their nefarious lawyering types.

Bush Homeowner Rescue Program Falls Short of Low Expectations

(NY Times) Fewer than 2,000 homeowners at risk of foreclosure have been helped by a Federal Housing Administration program that President Bush promised would help homeowners who had fallen behind on their mortgage payments, federal housing statistics show.

F.H.A. officials have asserted in recent weeks that more than 150,000 people have benefited from the program, which was intended to help troubled homeowners refinance into stable, government-issued loans. But the vast majority of participants have been homeowners who have made their mortgage payments on time, not the borrowers in crisis who were the targets of the president’s plan, the statistics show.

Housing officials, who initially expected that 60,000 or more delinquent borrowers would benefit, say they greatly overestimated the demand from troubled homeowners.

But they say the program, known as F.H.A. Secure, has helped people who were anticipating difficulties in paying their mortgages. Such homeowners were able to refinance before they fell behind, officials say.

“They came to us before they got into trouble,” said Stephen C. O’Halloran, a spokesman for the Department of Housing and Urban Development, which oversees the F.H.A. “We’d rather have them come to us before they fell behind on their loans.”

But some lawmakers and industry analysts say that the statistics prove that the program, which was announced by Mr. Bush in August, has failed to help the most vulnerable homeowners and, consequently, has failed to ease the foreclosure crisis significantly.

Democratic lawmakers estimate that at least 1.5 million people have fallen behind on their mortgage payments. Yet from October 2007 through the end of March, only 1,729 delinquent mortgages were refinanced by F.H.A., housing statistics show. Officials project that 4,000 such mortgages will be refinanced by the end of September.

More than 400,000 mortgages will be refinanced through F.H.A. Secure this year, officials say. Of those, only about 4,000 will be held by homeowners who have fallen behind on their payments, the statistics show.

“F.H.A. Secure, while a good idea, is not addressing the magnitude of the problem,” Senator Christopher J. Dodd, the Connecticut Democrat who is the chairman of the Banking Committee, said at a hearing this month. He is calling for legislation that would help many more troubled borrowers.

Scott Stern of Lenders One, an alliance of mortgage bankers based in St. Louis, called the program’s record with the neediest homeowners “a tragedy.”

“F.H.A. is helping borrowers who aren’t currently in trouble and that is fine,” Mr. Stern said. “But there is a specific subset of borrowers right now who are in trouble. The program needs to be helping people who need the help immediately.”

Housing officials say they have worked hard to reach such borrowers. In August, the program was tailored toward low-income homeowners who were falling behind because of interest rate increases on their adjustable-rate mortgages. The officials say that interest rate cuts by the Federal Reserve reduced the number of such people.

Homeowners who were not delinquent on their loans, however, were hearing about the F.H.A.’s refinancing programs for the first time as HUD expanded its outreach. The phones at F.H.A. started ringing as consumers and lenders tried to get more information about the new program.

“I think a lot of people thought we were the Federal Highway Administration,” Brian Montgomery, the F.H.A. commissioner, told lawmakers this month.

Until recently, Mr. Montgomery said, “we were almost an afterthought for many borrowers.”

The publicity surrounding the program led to a surge of refinance business for F.H.A., mostly from homeowners in good standing with their mortgage companies. From October 2007 through the end of March, F.H.A. refinanced 131,881 conventional loans. Only 43,397 conventional loans were refinanced in the period a year earlier, statistics show.

This month, the Bush administration announced that it would broaden the eligibility criteria for F.H.A. Secure to help larger numbers of troubled homeowners.

Under the original program announced in August, homeowners were eligible to refinance only if they were current on their mortgages before their interest rates spiked. Under the new plan, homeowners who fall behind because of extenuating conditions — lost jobs, declining wages, family illnesses — are eligible, regardless of whether their rates have increased or not.

Officials say the change would allow an additional 100,000 people to refinance this year.

“We’re trying to figure out how to serve consumers caught up in economic circumstances,” said Meg Burns, director of F.H.A.’s single family program development.

“Interest rates are no longer spiking,” Ms. Burns said. “People are going into delinquency not as a result of the resets, but because of the local economy.”

Advocates for homeowners say the changes represent some progress, but not enough.

The F.H.A. still requires borrowers hoping to refinance to have made 10 on-time payments in the 12 months before they went into default. That will block many borrowers, said John Taylor, president of the National Community Reinvestment Coalition, which helps people in underserved communities get credit.

More Subprime, Alt-A Mortgages May Head `Underwater'

(Bloomberg) -- About half of recent subprime and Alt-A borrowers may soon owe more on their mortgages than their houses are worth or hold minimal equity, putting $800 billion of debt at greater risk of default, according to Barclays Capital.

Subprime loans from 2006 and 2007 that exceed the value of the homes jumped 5 percentage points to 19.8 percent in the fourth quarter, and may reach 26 percent by midyear if prices drop at the same pace, Barclays analysts wrote in a report yesterday. Alt-A loans, a grade better than subprime, would grow to 23 percent from 16.3 percent.

Many of the loans are in areas where prices are falling faster than the U.S. average, so the size of the shift is underappreciated, New York-based analysts Ajay Rajadhyaksha and Derek Chen wrote. The odds that a borrower will default, saddling lenders and bond investors with losses, rises when a homeowner owes more on a property than it can sell for, they wrote.

``Mortgage loans are moving underwater at a very sharp pace, far more than suggested by aggregate home price data,'' they wrote. Home mortgages held by households totaled $10.5 trillion on Dec. 31, according to Federal Reserve data.

The analysts used quarterly home-price data from the Office of Federal Housing Enterprise Oversight, which showed a 0.3 percent dip in prices nationwide in the fourth quarter from a year earlier, and tumbles of more than 14 percent in Modesto, California, and Port St. Lucie, Florida. S&P/Case-Shiller indexes tracking areas around 20 cities have shown more severe declines, including a 9 percent nationwide drop in the same period.

`Better to Sell'

Borrowers on about 26 percent of subprime loans from 2006 and 2007 will have equity of less than 10 percent by midyear, down from 29.4 percent at yearend, according to Barclays, as more borrowers slip underwater. The percentage on Alt-A mortgages should hold steady at about 23.5 percent. The report said 10.8 percent of Alt-A loans were underwater on Sept. 30.

``If they have home equity left, borrowers are hesitant to default, even if in trouble,'' the analysts wrote. ``If the house is worth more than the loan, why default and leave money for the bank? Better to sell the house instead.''

Borrowers with poor or limited credit records or high debt used subprime mortgages to buy properties or tap home equity by refinancing. Lenders made Alt-A home loans to borrowers who want atypical terms such as proof-of-income waivers, delayed principal repayment or investment-property collateral, without having to offer sufficient compensating attributes.

Walking Away

Among two-year-old Alt-A mortgages that are underwater, 33 percent are at least 60 days late, the analysts wrote. That compares with 7 percent delinquency on similar loans in which homeowners have equity of at least 20 percent. For corresponding subprime loans, the delinquency rate is 58 percent for underwater debt and 29 percent where equity exceeds 20 percent.

Borrowers who have never been delinquent on a subprime mortgage are three times more likely to miss a payment if they have less than 20 percent equity in their homes, when compared with similar borrowers with more equity, according to a report last week from Credit Suisse Group. These homeowners then catch up only half as often as their counterparts, the report said.

Home prices in 20 U.S. metropolitan areas fell in February by the most on record, according to a report released today. The S&P/Case-Shiller home-price index dropped 12.7 percent from a year earlier, more than forecast and the most since the figures were first published in 2001. The gauge has fallen every month since January 2007.

Senate Panel to Look at Foreclosure Management Practices

(Housing Wire) If anyone needed proof that default servicing is now headed towards the spotlight, look no further than yesterday’s announcement by the Senate Judiciary Committee that it will hold a session focusing on recent high-profile bankruptcy management missteps. The Judiciary Committee’s Subcommitree on Administrative Oversight and the Courts will hold a hearing titled “Policing Lenders and Protecting Homeowners: Is Misconduct in Bankruptcy Fueling the Foreclosure Crisis?”

The hearing, scheduled for May 6, was called by chairman Charles Schumer (D-NY) — who has said that he wants legislation enacted to protect borrowers from servicer missteps in and after bankrupcty proceedings.

Schumer has invited Countrywide Financial Corp. (CFC: 5.85, +0.34%) Angelo Mozilo to testify, the New York Times reported Tuesday. Also invited were representatives from McCalla, Raymer, Padrick, Cobb, Nichols & Clark in Atlanta, a creditor’s rights law firm and one of the largest such firms in the default servicing industry. Both the law firm and Countrywide have been at the center of a highly-publicized series of case involving the United States Trustee, in which the Trustee has alleged “abuses of the bankruptcy process” by Countrywide and its associated counsel in Georgia, Florida and Ohio.

A similar case, a putative class action suit filed in February by a group of borrowers in Texas, was thrown out by a judge in a federal bankruptcy court in Houston this past March.

While it’s unknown whether Mozilo or McCalla Raymer will be attending the hearing, the New York Times reported that three others will be testifying: Robin Atchley, the borrower at the center of the Countrywide bankruptcy brouhaha in Atlanta, as well as Clifford J. White III, director of the executive office for the United States Trustee, and Katherine M. Porter, an associate professor of law at Iowa University. Porter published a study in 2006 that found half of foreclosures contained “questionable fees.”

The New York Times covers more details:

What the hearing is going to show is what an ongoing, awful enterprise some of these companies ran, not just taking advantage of the terms of the mortgage, but when they control the mortgage how they continue to squeeze and squeeze and squeeze,” Mr. Schumer, Democrat of New York, said.

Bank of America Unveils Mortgage Aid Plan

(Housing Wire) Continuing efforts to fast-track its acquisition of Calabasas, Calif.-based Countrywide Financial Corp. (CFC: 5.83, -0.17%), executives at Bank of America Corp. (BAC: 38.18, -0.31%) unveiled an aggressive mortgage aid plan Monday morning, ahead of scheduled testimony at the Federal Reserve in Los Angeles. The bank also confirmed its plans to mothball the Countrywide brand upon completion of the merger, and said that it will centralize its mortgage operations in Countrywide’s Calabasas-based headquarters.

The plan includes a commitment to workout $40 billion in troubled mortgage loans over the next two years, keeping at least 265,000 borrowers out of foreclosure, as well as a doubling of the bank’s commitment to community development lending, according to a press statement released Monday morning. Monday’s announcement comes on the heels of last week’s announcement that the bank would be pulling back on key lending programs once the merger is complete, in an effort to focus on high-quality mortgage originations.

“We believe the financial strength, security and stability of the combined company will allow us to enable people to buy homes and stay in homes, and to assist many of those affected by the current mortgage troubles,” said the bank’s top global consumer and small business banking exec Liam McGee during testimony.

Monday’s testimony also featured remarks from Rep. Maxine Waters (D-CA), as well as representatives from prominent community groups and public offices, including the office of the California Attorney General. The California Reinvestment Coalition sponsored testimony from witnesses with troubled mortgages who have said that the Calabasas-based lender hasn’t done enough to help them, and scheduled a demonstration outside of the Los Angeles Fed branch for after the hearing as well.

Critics have said that BofA needs to make a strong commitment to working with troubled borrowers and minority communities in the wake of the proposed acquisition, which would ostensibly create the nation’s largest mortgage banking operation.

“We will continue to work with distressed borrowers to match the customer’s repayment ability with the appropriate loss mitigation option, including loan modifications, forbearances, repayment plans, lower rates and principal reductions,” McGee said. “We will not assess new late charges for customers in foreclosure and we will waive certain other associated fees, when permitted.”

McGee said that Bank of America would invest $1.5 trillion in community reinvestment funds over the next ten years, an amount equal to double BofA’s previous community development goal. The bank also said it will invest an additional $2 billion over 10 years in housing-related philanthropy.

“This new goal raises the bar and is certain to enhance quality of life for millions of Americans in need,” McGee said.

Interestingly, Bank of America also touted a commitment to tenants of former owners in a foreclosure — saying that it had instituted a national policy of allowing tenants to remain in a subject property for up to 60 days after the completion of a foreclosure sale. BofA also runs an aggressive cash-for-keys program in which tenants vacating within 30 days post-foreclosure will receive $2,000 to help defray the cost of relocation.

Legal sources told HW that the plan was relatively aggressive, and a good response to increasing policital pressure tied to lease holders caught in a foreclosure.

For more information, visit http://www.bankofamerica.com.

Servicers Increase Focus on Modifications; Foreclosures Jump 35 Percent in First Quarter

(Housing Wire) Almost 503,000 prime and subprime homeowners were able to stay in their homes during the first quarter of 2008 because of loan workouts provided by mortgage servicers, according to a report released Monday morning by the HOPE NOW coalition.

Of 502,500 total loan workouts booked in the first quarter of 2008, the group said that approximately 323,000 were repayment plans and 179,500 were loan modifications; loan modifications represented roughly 44 percent of all subprime workouts, double the rate recorded in 2007, but were just 23 percent of prime workouts.

“I guess it’s almost better to be a troubled subprime borrower these days,” said one source, who suggested that political pressure to help subprime borrowers has not extended to prime borrowers. “There’s an easy reference point for someone categorized as subprime, whether right or wrong, which means that more effort and focus has gone into programs to help this group of borrowers,” she said.

The difference in workouts offered to prime and subprime borrowers is likely not due to a plan announced in December by the American Securitization Forum that would fast-track solutions for subprime ARM borrowers who could afford their starter rate, but could not afford the reset rate — resets have since become a minimal problem for borrowers, as rates have dipped significantly, essentially eliminating payment shock as a key problem for every class of borrower.

That sentiment is borne out in the data, as well. There were 431,171 subprime 2/28 and 3/27 loans scheduled to reset during the first quarter of 2008, according to HOPE NOW’s data; 14,418 were modified, while 203,000 of these loans — that’s 47 percent of scheduled resets — were paid in full via refinancing or a sale. Many of those prepayments might have been defaults in a different rate environment, industry experts that spoke with HW suggested.

A self-inflicted foreclosure surge?
While total workouts increased roughly 6 percent quarter over quarter — and servicers clearly have focused on more permanent loan modification activity — the increase was not nearly enough to keep pace with a 35 percent quarterly jump in foreclosure activity. The industry recorded a ratio of 2.4 workouts per foreclosure during the first quarter, below the 3.1:1 ratio recorded in Q4 and the 2.9:1 ratio recorded in Q3.

Some sources have suggested that an over-reliance on repayment plans earlier in the current cycle is now coming back to bite servicers and, potentially, investors. Borrowers that might have defaulted in Q3 or Q4 are finally seeing what was essentially an inevitable foreclosure take place in early 2008 instead.

“The pressure on many servicers is just enormous,” said one source, an MBS analyst who asked not to be named. “I’m sure the consumer side will latch onto these numbers as proof that servicers aren’t doing enough, when the real question ought to be: what percentage of these foreclosures were actually preventable, and were they prevented?”

“Mortgage servicers continue to focus on doing everything possible to help troubled homeowners avoid foreclosure,” said Faith Schwartz, executive director of HOPE NOW. “While there is still more work to be done, concrete progress is being made, and HOPE NOW members will continue their efforts and work to help as many borrowers as possible.”

For more information, visit http://www.hopenow.com.

While You Weren’t Looking: FHA-Insured Jumbos on the Move

(Housing Wire) While the financial press — including HW — and others in the industry have been focused on the new market for so-called conforming jumbos at Fannie Mae and Freddie Mac, none other than Ginnie Mae went ahead and published their first “FHA jumbo” pools on April 15. Industry insiders say that the FHA loans have been moving, while activity on higher-limit jumbos at either GSE has yet to register on anyone’s radar screen.

Under the Economic Stimulus Act of 2008, The Federal Housing Administration received a huge shot in the arm when it saw its lending limits boosted, along with those of Fannie Mae and Freddie Mac. All three are temporarily authorized to purchase mortgages up to $729,500 in certain high cost areas — and while activity thus far has been slow, FHA jumbos have clearly been the first to market as borrowers have flocked to the revitalized government-sponsored lending program.

Ginnie published its guidelines and multi-issuer pool types for the higher balance loans on March 6. The first pools under the new lending limits included three jumbo conforming 30-year fixed rate pools with an issue date of April 1 (pool prefix is JM, for jumbo), led by a $10.9 million issue offering a 5.5 percent coupon; according to eMBS, a provider of mortgage data and analytics, the pool’s collateral is 43 percent in California with average original loan (AOL) amount of $436,907.

Other pools include $3.4 million of a 6 percent coupon, 45 percent in New Jersey; and $2.8 million of a 6.5 percent coupon, 30 percent in Washington, DC.

Small activity compared to the dollar volume other issues, to be sure, but also proof that the market for jumbo conforming loans is beginning to finally move forward.

The FHA was — prior to the emergence of private-party subprime — the traditional vehicle for subprime lending and first-time homebuyers, established during the Depression era to help stabilize a faltering housing market. As the current housing crisis has rolled on, Bush administration officials and Congressional leaders alike have looked to revitalize the program.

That revitalization effort has paid dividends, and quickly. Ginnie Mae said last week that MBS issuance increased to nearly $15 billion during March — it’s highest issuance rate since November of 2003. For the first quarter, issuance totaled $39.1 billion, more than doubling year-ago volume.

“Ginnie Mae has seen a steady increase in our issuance since October of last year,” said Theodore B. Foster, senior vice president for MBS at Ginnie Mae. “As the mortgage credit market tightened, and the subprime mortgage market and the private label MBS market collapsed, investors began moving toward the safety and stability of Ginnie Mae MBS, just as borrowers began moving back to the security of government loans — particularly Federal Housing Administration loans.”

Ginnie Mae also securitizes loans from the Veteran’s Administration — one government program that, oddly enough, was left out of the Economic Stimulus bill. Congressional legislators have proposed an amendment that would see VA lending limits raised to match those of Fannie, Freddie and Ginnie.

Real estate lenders fight tough rules

(Naked Capitalism) The New York Times, in "Loan Industry Fighting Rules on Mortgages," tells us that the real estate creditors are fighting tooth and nail to gut new rules that the Fed intends to impose.

The Times, apparently reflecting the sentiment of sources in the Fed, Capitol Hill, and consumer advocates, seems surprised at the vehemence of the effort.

What did they expect?

This is an industry that has been minimally regulated for at least the last dozen years, which given high turnover in many banks, is almost a lifetime. Anyone who remembers life in the bad old days is by definition a dinosaur.

But what amazes me is not the reaction of the industry, which was predictable, or the litany of arguments against new rules. Some of my favorites:

“We have heard from commenters who have expressed concern that in the current market environment, the proposed trigger could cover the market too broadly, and we will carefully consider the issues they raise and other possible approaches to achieve our objective,” Mr. Kroszner said last month at a conference of the National Association of Hispanic Real Estate Professionals.

Please. By definition, there is never a good time to implement new rules, at least according to those who will have to live with them. Either the industry is suffering, so it's not the time to inflict more pain, or it's doing well, and therefore the rules are obviously misguided and unnecessary. The intent IS to cover the market broadly; anything else leaves the barn gate open for the horse to leave again.

The new rules would apply extra protection to any mortgage with an interest rate three percentage points above Treasury rates. Officials said that they would cover all subprime loans, which accounted for about a quarter of all mortgages last year as well as many exotic mortgages known in the industry as “Alt-A” loans.

These loans are made to people with relatively good credit scores but who might provide little documentation of their income or assets, or who make smaller than usual down payments or purchase loans that have unusual terms, like interest-only payments for an initial period.

Many mortgage brokers and bankers complain that the lower threshold would unnecessarily include many borrowers who are not at risk from abusive practices.

Oh, no, those borrowers are merely at risk of becoming deadbeats, which means society as a whole has to eat the risk due to costly rescue operations that involve hidden or explicit taxpayer subsidies. Alt-As are showing high default rates; to maintain that no docs are a good practice that should continue boggles the mind.

One common industry criticism is that at a time of tight credit, tighter rules could make many mortgages more expensive by creating more paperwork and potentially exposing lenders to more lawsuits.

Um, expensive new paperwork? Much of this is a requirement to do the sort of documentation and analysis banks did once upon a time, when it was understood that lending was a risky business. And the protests confirm that the industry want the right to make risky loans (note the lawsuits point is valid, and by design: Sheila Bair believes the current standards are skewed too far in favor of lenders. So greater risk of being sued is a feature, not a bug.

But what is most surprising about the piece is the spin the Times puts on it, It voices surprise at the vehemence of the response (the only thing that is surprising is how shameless and self-serving it is), when what is really stunning is how fast the powers that be are making concessions. Is this a symptom of how we really do have the best government money can buy, or of how deeply anti-regulatory sentiment has been internalized?

From the New York Times:

The mortgage industry, facing the prospect of tougher regulations for its central role in the housing crisis, has begun an intensive campaign to fight back.

As the Federal Reserve completes work on rules to root out abuses by lenders, its plan has run into a buzz saw of criticism from bankers, mortgage brokers and other parts of the housing industry. One common industry criticism is that at a time of tight credit, tighter rules could make many mortgages more expensive by creating more paperwork and potentially exposing lenders to more lawsuits.

To the chagrin of consumer groups that have complained that the proposed rules are not strong enough, the industry’s criticism has already prompted the Fed to consider narrowing the scope of the plan so it applies to fewer loans.

The debate over new mortgage standards comes in response to a severe crisis in the housing and financial markets that many economists trace back to overly loose credit and abusive loans. Those practices, combined with low interest rates, led to inflated market values that have declined rapidly in recent months as investors have begun to lose confidence in the financial instruments tied to those loans.

Four months ago, the Fed proposed the new standards on exotic mortgages and high-cost loans for people with weak credit. The Fed’s proposals came after it was criticized sharply as a captive of the mortgage lending industry that had failed over many years to supervise it adequately.

Proposals are pending in Congress on mortgage standards, but it is not clear whether they will be adopted this year. The Fed has its own authority under housing and lending laws to adopt mortgage standards.

The plan presented by the Fed was proposed by its chairman, Ben S. Bernanke, and Randall S. Kroszner, a former White House economist in the Bush administration who is now a Fed governor and leads the Fed’s consumer and community affairs committee.

The plan would not cover existing mortgages but would apply only to new ones. It would force mortgage companies to show that customers can realistically afford their mortgages. It would require lenders to disclose the hidden fees often rolled into interest payments. And it would prohibit certain types of advertising considered misleading.

The Fed is expected to issue final rules this summer.

Earlier this month, as the comment period was about to close, the Fed was deluged with more than 5,000 comments, mostly from lenders who said the proposals could affect loans that have not presented problems. Some bankers and brokers also said the rules would discourage them from lending to some creditworthy borrowers.

The plan was criticized in separate filings by three of the industry’s most influential trade groups — the American Bankers Association, the Mortgage Bankers Association and the Independent Community Bankers of America. More modest concerns about some of the provisions were also raised by the National Association of Home Builders and the National Association of Realtors.

Regulators have been meeting about the proposals with bankers, brokers and consumer groups in recent weeks and are continuing to do so.

Some of the groups seeking changes maintain that the proposals threaten to make borrowing for a home far more expensive and would unfairly deny mortgage brokers the right to earn certain fees.

Small community banks, which have played no significant role in the housing crisis, have urged the Fed to limit the scope of the proposed rules so that they do not discourage them from issuing loans. Lending groups have also raised concern that they would lead to frivolous and expensive litigation.

“We support many of the provisions in the proposed rule, but we do have concerns about the increased regulatory burden, liability and reputational risks that lenders might face,” said Kieran P. Quinn, chairman of Column Financial, Credit Suisse’s mortgage lending subsidiary in Atlanta, and the chairman of the Mortgage Bankers Association.

On at least one major aspect of the proposed restrictions — how broadly they should apply — the industry appears to be making headway. In a recent speech, Mr. Kroszner suggested that in response to criticism that the plan was including too many kinds of loans the Fed was considering whether to narrow the plan.

“We have heard from commenters who have expressed concern that in the current market environment, the proposed trigger could cover the market too broadly, and we will carefully consider the issues they raise and other possible approaches to achieve our objective,” Mr. Kroszner said last month at a conference of the National Association of Hispanic Real Estate Professionals.

Before this year, the Fed had applied an extra set of protection from abusive lending practices to a subset of subprime borrowers under the Home Ownership Equity Protection Act of 1994. The Fed has applied the law to fewer than 1 percent of all mortgages — those with interest rates at least eight percentage points above prevailing rates on Treasury securities.

Some economists and housing experts say the Fed’s lax oversight helped enable lending companies to reap enormous profits by providing millions of unsuitable and abusive loans to homeowners who often did not fully understand the terms or appreciate their risk.

As of January, the most recent month of available data, about a quarter of all subprime adjustable mortgages were delinquent, twice the level of the same period last year. Lenders began foreclosure proceedings on about 190,000 of these mortgages in the last three months of 2007.

The new rules would apply extra protection to any mortgage with an interest rate three percentage points above Treasury rates. Officials said that they would cover all subprime loans, which accounted for about a quarter of all mortgages last year as well as many exotic mortgages known in the industry as “Alt-A” loans.

These loans are made to people with relatively good credit scores but who might provide little documentation of their income or assets, or who make smaller than usual down payments or purchase loans that have unusual terms, like interest-only payments for an initial period.

Many mortgage brokers and bankers complain that the lower threshold would unnecessarily include many borrowers who are not at risk from abusive practices.

“There are a lot of community banks that have shied away from these loans because nobody wants to be a higher-priced lender,” said Karen Thomas, a lobbyist for the Independent Community Bankers. “With the trigger being set so low, it is encroaching on traditional, common sense mortgages. Our fear is it will result in less credit availability, which is not what we need in an already tight credit market.”

But consumer groups say that the proposed rules are already weak and that efforts to further weaken them would render them all but useless.

“The Fed has accurately diagnosed that this is a brain tumor and responded by prescribing an aspirin,” said Kathleen E. Keest, a former state regulator who is now a senior policy counsel at the Center for Responsible Lending, a group supporting home ownership. “In the industry, there is a fair amount of denial. They just don’t get it. There is a calamity within the industry, and they don’t have a new script yet, so they rely on the old script, which is that regulation will raise costs.”

But, she went on, “What we now see is that the unintended consequences of deregulation are worse. Their line is that regulation will cut back access to credit. That’s been their line ever since the small loan laws were adopted in the early 1900s.”

At the same time, letters urging the Fed to further tighten the rules were sent by Sheila C. Bair, the Republican head of the Federal Deposit Insurance Corporation, as well as senior members of the House Financial Services Committee.

In her letter, Ms. Bair, whose agency regulates many banks, urged the Fed to apply the proposed restrictions to loans that are three percentage points or higher than equivalent Treasuries. To prevent lenders from evading the limit by creatively structuring the loan and fees, she also suggested that the Fed impose the tighter restrictions if the loan fees exceeded a dollar amount.

While the Fed plan would require disclosures that could make it harder for lenders to include hidden sales fees that are usually paid to the mortgage broker, Ms. Bair suggested that the plan go further and ban some practices.

The plan, for instance, would require subprime lenders to explicitly describe fees that are now hidden. But Ms. Bair has proposed the elimination of such fees, saying such a ban would “eliminate compensation based on increasing the cost of credit and make the amount of the compensation more transparent to consumers.”

Ms. Bair also proposed making it easier for borrowers to sue lenders without having to show that they were engaged in a pattern of abusive practices, which is a requirement under the proposed Fed rules. She said that forcing borrowers to show a pattern of abuse “clearly favors lenders by limiting the number of individual consumer lawsuits and the ability of regulators to pursue individual violations.”

Ms. Bair also recommended that the Fed eliminate a so-called safe harbor provision in the proposal that protects lenders who fail to verify the income or assets of a borrower in some circumstances.

Did Hedge Funds Help Stabilize the Mortgage Market?

(Felix Salmon) Brad DeLong approvingly quotes a correspondent:

The fact that there was an ABX index and thus an easy way for people to bet that the mortage-backed securities market would crash probably cut short the bubble--the true hedge funds were stabilizing speculators; the destabilizing speculators were (i) the funds that were long CDOs and (ii) the banks and other issuers who retained the CDOs because their portfolio managers believed their marketeers. A world without derivatives but with mortgage-backed securities would probably be a world in which we have a bigger problem than we have now.

I've heard this argument made before, by Sebastian Mallaby; I didn't buy it then, and I don't buy it now.

It's easy to be awed by the sums of money made by John Paulson and the Goldman Sachs mortgage desk. But compared to the amount of money tied up in RMBS, the profits made by shorting mortgage-backed securities have been tiny. For Paulson to have played a significant role in stopping the mortgage-backed credit bubble from continuing to exapand, he would have had to have been orders of magnitude larger than he was.

But more to the point, the ABX index is an index of CDS spreads referencing subprime RMBS. The chain of arbitrage which would lead from shorting the ABX to RMBS prices falling is long and convoluted: first any drop in the ABX would have to be arbitraged by buying the ABX whilst selling buying protection on the underlying CDS contracts. Then any widening in those underlying CDS contracts would have to be arbitraged by selling protection on the RMBS while at the same time shorting the underlying bonds. (Good luck trying to do that. And of course this isn't a risk-free arbitrage, since CDS and bonds have been behaving in idiosyncratic and dissimilar manners of late.) Then any drop in the price of the specific RMBS which underlie the CDS which underlie the ABX would have to be arbitraged by buying up those bonds while selling the broad mass of other RMBS, creating generalized downward pressure on the secondary-market prices of subprime RMBS. Then a drop in secondary-market RMBS prices would have to be arbitraged by investors buying up secondary-market securities rather than the primary-market securities being offered to them by the investment banks structuring the RMBS deals, and this would have to be a common enough occurrence that the yields on primary-market RMBS deals would rise as a consequence. Finally - as if all that wasn't improbable enough - the higher yields on these RMBS deals would have to somehow feed through into fewer of those deals being done, and less demand from investment banks for securitizable mortgages.

I'm quite sure that's not what happened in reality. Yes, the people who shorted the ABX made a lot of money, but they made money because the RMBS market imploded for reasons utterly unrelated to - and not even precipitated by - the fact that a few hedge funds and prop desks were shorting the ABX. In other words, a world without derivatives but with mortgage-backed securities would probably be a world in which the RMBS market would still lie in tatters, and the only real difference is that John Paulson would be a great deal less wealthy than he is now.

Barriers to Reducing Needless Foreclosures

(Jack Guttentag in the Washington Post) Needless foreclosures are happening all around us.

Note that I am using a coldblooded business definition of "needless foreclosure," not a bleeding-heart one. Under my definition, if it costs the holder of the loan more to foreclose on a mortgage than to make it viable, it is a needless foreclosure. I am not counting the human toll exacted by foreclosures, which can be very high.

For example, it can cost the investor who held the mortgage about $40,000 to foreclose on a home. It might have cost only $25,000 to make the mortgage affordable to the borrower through a reduction in the interest rate. Modifying the loan contract in this way would have kept the person in his home and saved the investor money.

Mortgage contracts are modified, at some cost to the investor, to prevent the larger cost of a foreclosure. Loan modifications include adding the unpaid interest to the loan balance, called "interest capitalization," and calculating a new payment. To make the payment more affordable, the term may be lengthened or the interest rate reduced. In cases where the property is worth less than the loan balance, the balance may be reduced.

The problem is that there are major impediments to loan modifications, including:

· Borrower denial. Developing a new loan contract that a distressed borrower can live with requires the full participation of the borrower. But many borrowers in trouble don't contact their servicers and may not respond when contacted.

· Moral hazard. Investors are concerned that if modifications are offered too easily or too early, some borrowers will pretend to need one even though they really don't. This is a major reason investors restrict the discretion of servicers to modify contracts.

· Restrictions on servicers. Third-party servicing in which the firm servicing the loan does not own it is more often the rule than the exception. In the case of loans that have been packaged and sold to investors, it is always the case.

Investors restrict the discretion of servicers to modify loan contracts because their interests are different. Investors want modification only if the alternative is a more costly liquidation or foreclosure. They want to avoid early modifications that would prove unnecessary, and they want to avoid encouraging borrowers to default who might not otherwise. Servicers, in contrast, want to protect their servicing fees, which they receive only from loans in good standing. Their general preference, therefore, is for early intervention.

A common contractual restriction on servicers is that modifications are permitted only for loans in default or for which default is imminent or reasonably foreseeable. Another is that any modification must be in the best interest of the investor. These create potential legal liability for the servicer. To be safe, some servicers limit modifications to loans already in default, which means 90 days delinquent or more.

· Scarcity of staff. Most interactions between mortgage borrowers and servicers are handled by computers and relatively unskilled employees. Borrowers in serious trouble are referred to a smaller number of more skilled and specialized employees. With the onset of the mortgage crisis, servicers were caught short of this critical but costly resource. While they now claim to have expanded their staffs to handle the workflow, a financial disincentive to staff adequately remains.

· Mortgage insurance. On mortgages carrying mortgage insurance that go to foreclosure, investors are protected up to the maximum coverage of the policy, which is usually enough to cover all or most of the loss. This discourages modifications. Why do a modification for $15,000 if the $40,000 cost to foreclose is going to be paid by the mortgage insurer? Even if the insurance coverage falls short of the foreclosure cost, the shortfall has to exceed the modification cost before modification becomes more attractive financially.

· Second mortgages. Many of the borrowers in trouble have two mortgages with different lenders, which complicates matters. The servicer looking to modify the first mortgage must make sure that the borrower can afford both mortgages and that the second mortgage lender does not upset the apple cart by foreclosing. My mail from borrowers in trouble suggests that some servicers are prepared to work with second-mortgage lenders, and some are not.

· Lack of public disclosure. Nothing in connection with modifications is publicly disclosed except what servicers wish to disclose, which invariably is whatever presents them in a favorable light. There is no way for the public to know who is doing a good job and who isn't.

Because of these impediments, modifications are making only a modest dent in the foreclosure problem. Other remedies will be discussed in a future article.

Jack Guttentag is professor of finance emeritus at the Wharton School of the University of Pennsylvania. He can be contacted through his Web site,http://www.mtgprofessor.com.

House Panel Approves Two Housing Bills; FHA Reform on the Floor

(Housing Wire) A House panel Wednesday approved two foreclosure-specific housing proposals, including one that would see $15 billion in federally-funded loans and grants given to local governments to purchase and rehab foreclosed properties, as part of a broader package of housing reform measures being pushed by House Democrats.

The House Financial Services Committee voted 38-26 in favor of H.R. 5818, the Neighborhood Stabilization Act of 2008, which would established a loan and grant program administered by the Department of Housing and Urban Development that would fund the purchase of foreclosed properties by local governments.

Related links:

• read the text of H.R. 5818
• read the text of H.R. 5579

Funds would be distributed to areas with the highest foreclosure levels, and would be used to turn foreclosed properties into housing for low-income families.

The bill does not have the strong support of House Republicans, including Rep. Spencer Bachus (R-AL), who has said he thinks the bill incentives foreclosures and rewards lenders, investors and speculators in possession of the vacant and foreclosed property. Committee Chairman Barney Frank (D-MA), who strongly pushed for the bill’s passage, has said that he believes the bill contains protections that will prevent its abuse.

Earlier Wednesday, the House panel also passed H.R. 5579, the Emergency Loan Modification Act, without a vote. The proposed bill would seek to shield mortgage servicers from legal liability arising out of bulk loan modifications that may violate existing Pooling and Servicing Agreements, and is strongly opposed by many industry groups.

Congressmen Michael N. Castle (R-DE) and Paul E. Kanjorski (D-PA) originally introduced the bill in mid-March.

“I think it’s in the best interests of at-risk homeowners and investors to work out payment terms that give a homeowner financial stability and the investor some return for their investment,” said Castle. “Without this legislation, I am concerned that lawsuits could bring modifications to a halt.”

FHA reform work begins
The House Financial Services Committee begins work today on FHA reform via the H.R. 5830, FHA Housing Stabilization and Homeowner Retention Act. The bill would allow the Federal Housing Administration to back as much as $300 billion in refinanced loans for homeowners who are facing foreclosure, a move that its supporters say would help troubled borrowers stave off foreclosure.

Early debate from House panel members on Thursday morning focused on counseling requirements, with local lawmakers suggesting that more Federal funds would need to be appropriated for troubled borrower counseling — some House representatives even argued that new Federal funds were needed to fund consumer attorneys who would defend homeowners against foreclosure and eviction actions.

“These people are at the mercy of the lender and servicers in this case,” said Rep. Melvin Watt (D-NC). “They don’t have the legal background that the lenders have needed to defend themselves.”

Watt said consumer counseling doesn’t help borrowers completely, and that he wanted funds appropriated from the Neighborhood Reinvestment Corp. to fund the defense of foreclosure and eviction actions.

Frank voiced supported the proposed amendment as well, in a heated exchange between Housing Republicans and Democrats that set off what is expected to be over a weeks’ worth of discussions covering FHA reform.

“Some legal work is necessary,” Frank said. “The emphasis here is on legal work, not advocacy work.”

Death to the servicers!

(Naked Capitalism) As the housing/mortgage crisis has progressed, homeowner advocates and legislator have to get mortgage servicers to offer more loan modifications to struggling borrowers. Even though this housing recession has a far higher proportion of borrowers seriously underwater than past downturns, the logic of loss mitigation is still valid. It's still better for the bank to keep the homeowner in place, even at a reduced payment, than foreclose (although in some communities where home valued have plummeted, the banks seem content for the moment not to take action against defaulting debtors).

Some observers have taken the view that it's impractical for banks to negotiate on a case-by-case basis (gee, that's how they used to make loans and do workouts before they decided to go for efficiency at the expense of quality). And that may be a valid objection: serivcers are factories. Even by some affordable housing experts report that they are unable to do one-offs.

Another impediment is that securitized transactions often limit the ability of the servicer to do loan modifications (although no one seems to have good estimates on how often that is operative).

Last year's Treasury sponsored Hope Now Alliance was a cosmetic rescue program to address those issue, offering a "one-size-fits-few" template that was anticipated to offer servicers a legally defensible ground for making mods. However, few have happened.

Now legislators are considering another approach: require servicers to attempt loss mitigation before foreclosing. From Credit Slips:
I

n my prior post on mortgage servicing, I talked about the potential of mortgage servicers to be harmful barriers between homeowners and investors, both of whom may want to negotiate a loan modification. Recognizing such a problem raises the question of a solution. U.S. Representative Maxine Waters recently introduced legislation that would profoundly alter the duties of mortgage servicers. The bill, HR 5679, The Foreclosure Prevention and Sound Mortgage Servicing Act of 2008, would prohibit the initiation of a foreclosure if the mortagee or servicer has failed to engage in "reasonable loss mitigation activities." The bill lays out exactly what counts as loss mitigation and offers up non-binding guidance on standards of affordability for loss mitigation. Servicers would have to report data on their loss mitigation activities, disaggregated by the type of mitigation activity (separately accounting for things like modifications, deeds in lieu of foreclosure, or repayment plans).

The bill also takes aim at the communication problems between servicers and homeowners. The bill requires services to provide a toll-free number that provides borrowers with direct access to a person with the information and authority to fully resolve issues related to loss mitigation and specifies that such a person must be physically located in the United States. Servicers are also required to forward borrower's information to HUD-certified housing counselors whenever a borrower is 60 days or more overdue.

In the hearing last week on the bill (which you can watch as an archived webcast), Chairwoman Waters kept returning to a fundamental point--mortgage servicing is an unregulated industry. The witness testimony was essentially unanimous that mortgage servicing has a tremendous impact on American families and on the resolution of the current crisis. Of course, the debate was over whether this regulation was the right approach. The bill hasn't gotten much publicity yet, but I encourage readers who are interested in the foreclosure crisis to take a look and post their feedback.

Mind you, I skimmed the text only quickly, but several thing stood out. This bill is clearly thought out, and is tough. Not only do the servicers have reporting obligations as discussed, but there are explicit requirements regarding communication with the borrower. For instance:

`(2) INCOME USED IN DETERMINING AFFORDABILITY- In making a determination of affordability for purposes of this subsection, a mortgagee or servicer shall use the income information furnished by the borrower at the time of loan origination, except that the borrower or mortgagor may elect to provide the mortgagee or servicer with current information and, if so provided, such current income information shall be used for purposes of determining affordability. The mortgagee or servicer shall advise the borrower or mortgagor of any right under this paragraph to provide current income information. If current income information is used, all sources of income shall be verified by tax returns, payroll receipts, bank records, or other third-party verification; the best and most appropriate documentation shall be used....

`(4) WRITTEN NOTIFICATION OF AFFORDABILITY CALCULATION- The mortgagee or servicer shall notify the borrower or mortgagor in writing of the results of the determination of affordability under this subsection and the income on which the determination was based. Such written notice shall be provided by mail not later than 7 business days after such action is taken or as part of the written notice required under subsection (c)(1), whichever is earlier.

The bill also permits servicers to recover "reasonable fees" (although they are subject to review) and applies to any "federally related mortgage loan that is secured by a lien on the principal residence of the borrower or mortgagor" that defaults after the bill is enacted.

My initial reaction is schadenfreude: the industry has brought this sort upon themselves. If it can't figure out a way to do mods despite the mounting pressure to do so (and in cases where a mod might be possible, lose/lose to borrower and investor for failure to do so), it will be imposed on them, and as this bill delineates, in a way that offers them little wriggle room. My second is that it won't be passed; there appears to be no Senate version of this bill. My third is that that's a shame, the credible threat of the passage of a measure like this would light a fire under servicers (although that might only be to mobilize lobbying against it).

But to the more serious question: is this bill a good idea? Given the track record so far, it may be that servicers need something this confining to force them to act, and to give them cover with their investors to do so. Mods, however, typically favor certain tranches over others, so this might produce some sharp repricings.

Moreover, even if the team at the servicer has the best of intentions, it has to start with the mit plan from the income records at the time of the loan. With no docs, low docs, and generally lousy standards, that information is generally terrible. And while the debtor can provide current information, it isn't clear they will be forthcoming. Servicers aren't particularly well liked or trusted in borrower land.

But as much as I have little sympathy for companies that made a lot of money during the gravy days of the housing bubble and now plead poverty as an excuse for inaction, this bill would an industry under stress to the wall. It will have to incur the costs of notification and reporting for all defaulting borrowers, but will be able to collect fees only out of continuing cash flow from the borrower or a foreclosure sale. Most of these activities (setting up a call center, creating methods, forms, and supporting systems for borrower communication and regulatory reporting) have high fixed and low variable costs. It will be hard to determine the right fee levels up front (and you can't readily go back if you got it wrong). And its quite possible the fees will look disproportionate, even if they are costed properly.

Plus there's a big cash flow problem: the costs are incurred up front, the fees recovered over time. And servicers are already having big time cash flow problems. I have been told that servicers, which in most cases are part of large banks, are hemorrhaging cash. Notes from a conversation with informed parties:

The servicer has guaranteed to pay whatever interest is promised to the investors for at least 90 days after default. Some agreements also require them to pay principal during that period. Even after the 90 days, the servicer has to continue to pay real estate taxes and insurance. The servicer can use any late payment or other penalties from the borrower to offset these costs.

The idea was that if you were good at collecting and efficient at serciving, the overcollateralization would give you enough of a cushion. But they assumed 5% loss rates, not 20%.

And the cash flow drain is worse in prime or mixed pools than in subprime pools. The defaults relative to assumptions are far worse there.

As we noted, the banks will probably dodge this bullet. But a measure like this is an indicator of how sentiment about regulation is changing, Expect to see more tough-minded proposals, some of which will stick.

The Future of Mortgage Servicing

(Housing Slips) In my prior post on mortgage servicing, I talked about the potential of mortgage servicers to be harmful barriers between homeowners and investors, both of whom may want to negotiate a loan modification. Recognizing such a problem raises the question of a solution. U.S. Representative Maxine Waters recently introduced legislation that would profoundly alter the duties of mortgage servicers. The bill, HR 5679, The Foreclosure Prevention and Sound Mortgage Servicing Act of 2008, would prohibit the initiation of a foreclosure if the mortagee or servicer has failed to engage in "reasonable loss mitigation activities." The bill lays out exactly what counts as loss mitigation and offers up non-binding guidance on standards of affordability for loss mitigation. Servicers would have to report data on their loss mitigation activities, disaggregated by the type of mitigation activity (separately accounting for things like modifications, deeds in lieu of foreclosure, or repayment plans).

The bill also takes aim at the communication problems between servicers and homeowners. The bill requires services to provide a toll-free number that provides borrowers with direct access to a person with the information and authority to fully resolve issues related to loss mitigation and specifies that such a person must be physically located in the United States. Servicers are also required to forward borrower's information to HUD-certified housing counselors whenever a borrower is 60 days or more overdue.

In the hearing last week on the bill (which you can watch as an archived webcast), Chairwoman Waters kept returning to a fundamental point--mortgage servicing is an unregulated industry. The witness testimony was essentially unanimous that mortgage servicing has a tremendous impact on American families and on the resolution of the current crisis. Of course, the debate was over whether this regulation was the right approach. The bill hasn't gotten much publicity yet, but I encourage readers who are interested in the foreclosure crisis to take a look and post their feedback.

Subprime Mortgage Litigation Continues to Explode

(Housing Wire) The number of subprime mortgage-related cases exploded in the first quarter of 2008, increasing 85 percent from the fourth quarter of 2007. A staggering 170 cases were filed during the quarter, enough to approach the 181 subprime-driven filings recorded over the final six months of 2007, according to a study released Wednesday by Navigant Consulting, Inc (NCI: 20.00, +5.49%).

“Like the credit crunch itself, the litigation is unrelenting,” said Jeff Nielsen, Managing Director of Navigant Consulting. “In this most recent quarter, we are looking at approximately two filings per day, including weekends. What we saw in 2007 was a mild breaking wave compared to the tsunami we are witnessing now.”

Over a 15-month span ending in March, the number of subprime-related cases filed totaled 448, up from 278 previously reported at year-end 2007.

“The cases are piling up at a rather prodigious rate and, at this point, appear to be going nowhere fast,” said Nielsen. “Like the S&L cases, this is a process that will likely take years to play out.”

The first quarter cases were comprised of borrower class actions (46 percent), securities cases (26 percent), and commercial contract disputes (10 percent), among other case types. Class actions accounted for 76 percent of the 170 cases filed in the first quarter; however, there were also some atypical plaintiffs entering the subprime litigation scene, such as municipalities like Baltimore and Cleveland.

The report found that in 42 percent of the filed 448 cases, at least one Fortune Global 500 company was named as a defendant. Ten percent of the cases named at least one non-U.S. Global 500 company as a defendant, with U.K. firms accounting for approximately half of the non-U.S. total.

Geographically, approximately half of the first quarter cases are still being filed in California and New York courts.

For more information, visit http://www.navigantconsulting.com.

Subprime Mortgage Losses: Not Destined to Pitch World into Abyss, After All

(Bankstocks.com) Here’s a question for the subprime mortgage geeks in the house: which is bigger, the dollar amount of realized losses on 2006-vintage subprime mortgages, or the dollar amount of loans that have been repaid?

Take your time; I’ll get to the answer in a minute. The reason I ask in the first place, though, is that the question is a good first step in getting at a reasonable estimate of how high cumulative losses from the subprime mortgage debacle will ultimately be. That happens to be a number, you’ll agree, an awful lot of people on Wall Street are interested in knowing. Yet estimates are all over the place. For its part, Moody’s says its best guess for eventual 2006-vintage losses is between 14% and 18% of originations. Its “stress case” is more like 21%. Some of the more hysterical numbers I’ve read put the eventual cumulative loss at 80% or more.

It’s hard to not get the impression that people are using all kinds of methods to estimate, some sensible and some not, while others are simply sticking their fingers in the air.

But I believe it is possible at this point to get to a reasonably accurate cumulative loss estimate. How? By looking at the credit performance of the $120 billion of bonds that make up the ABX subprime mortgage indices (in particular, by looking at the bonds that underlie the ABX indices created in 2006, when the lending looniness was at its peak) and extrapolating to the market at large. On the one hand, the bonds were hand-picked to represent the market overall; they should behave the same way the market does. On the other, they constitute a small enough universe that an analyst trying to glean future credit performance can take into account details such as loan-to-value ratios and loan originator.

Bond by bond

So we’ve gone through 2006-vinatge ABX bonds in a fair amount of detail to arrive at an eventual cumulative loss estimate. And (not to give away the ending completely) the number is materially lower than the base cases the agencies have in mind, and much, much lower than the apocalyptic predictions you keep hearing on CNBC.

I’ll get to the details in a second. But first, the answer to my question: which is bigger, realized losses or paydowns on the class of 2006? It’s not even close. Of the $600 billion or so of subprime mortgages originated in 2006 (again, by the lights of what have gone on with ABX bonds), $282 billion have already been repaid, while realized losses have come to just . . . $12 billion.

Surprised? Understandable. That’s not to say, of course, that that $12 billion of realized losses to date isn’t destined to balloon to a much bigger number, and that the ultimate losses on the 2006 vintage won’t be many times higher than the subprime losses of prior years. Of course they will. It does, though, give some perspective on how to most accurately predict what the future will bring.

Anyway, allow me to walk you through how I came up with a loss number I believe will turn out to be reasonably accurate, and not especially scary.

We’ll start at the beginning. First, take the $600 billion in subprime loans originated in 2006 and put them into three imaginary piles: 1) loans that have been paid down, 2) loans that have already resulted in losses, and 3) balances still outstanding.

OK? We already know what the losses are on 1 and 2. They are, respectively, $0 and (as I’ve already mentioned) $12 billion.

So the question as to ultimate losses on the 2006 vintage comes down to what happens to 3, the $306 billion in balances outstanding. And actually, we have a pretty good idea what will happen to a big portion of those loans, as well. Of the $306 billion, $100 billion is delinquent by 60 days or more. As any subprime-mortgage banker will tell you, once a loan gets past 60 days past due it’s pretty much doomed these days. So we’ll assume that fully 93% of those delinquent loans go into foreclosure (a much higher rate than is typical, but hardly uncommon recently) and generate a loss severity of 45% (compared to last year's rate of 35%). Estimated losses from past-due 2006 outstanding balances, therefore: $42 billion.

$206 billion performing

That leaves the $206 billion of outstanding balances that are still performing. Obviously, some of those are destined to default, as well. The question that has the financial markets transfixed is: how many?

To get an answer, I looked at which lenders originated the remaining performing loans, where the properties are located, and other relevant factors, and extrapolated past performance into the future. I came up with an estimate that 26% of remaining loans now current will eventually default, which will in turn lead to (again, assuming a 93% roll rate into repossession and 45% severity) $23 billion in losses. The other, 74% of the remaining outstanding balances will sooner or later pay down. The losses from those loans will of course be zero.

So. Let’s add up all the actual and estimated losses and see how the numbers shake out. Here goes:

Realized 2006-vintage subprime losses to date: $12 billion

Estimated future losses on outstanding balances 60 days or more past due: $42 billion

Estimated losses on outstanding balances still current: $23 billion.

Add those three numbers up, and you get $77 billion in cumulative realized losses on the 2006 vintage. Divide it by originations and you come to a loss rate of . . . .

Actually, before I get to that number, let’s go back and revisit the loss estimates the rating agencies and the bears have in mind. Moody’s base case for 2006 losses, recall, is between 14% and 18%. Its stress case is 21%. Fitch’s stress case is 21%, as well, while S&P’s is 18.8%. The Charlie Gasparino/Bill Ackman/George Soros Axis of Doom, meanwhile, surely has a number in mind that is much, much higher.

$77 billion in expected losses

But, as we’ve seen, if you actually go through the numbers trust by trust, look at what’s happened so far, and make some conservative assumptions about what will happen in the future, you get to estimated total losses of $77 billion. Divide that by the $600 billion in 2006 originations and you get to a total loss rate of just 12.8%. That’s well short of Moody’s base case, and nowhere near the stress cases that the agencies have put out.

You might object to some of my numbers here. Fine, but you can only object to a few of them. You can’t dispute, for example, that nearly half of the subprime class of 2006 has already been paid down, for instance, or that, of the remaining balances, roughly two-thirds are still performing. Those are simply facts.

You might, on the other hand, argue that my 45% severity assumption is too low, or that more than 93% of 60-plus-day delinquent loans will eventually roll into foreclosure. In fact, that’s what Zach did. But even if you assume delinquency roll rates that are even more severe than the elevated numbers I'm using, as he did, you still only come up with an ultimate loss rate of just shy of 16%. As far as that goes, UBS, the only firm on the sell-side that’s analyzed the credit performance of the ABX bond by bond, uses loss estimate embedded in the price of the ABX itself and comes to an estimate of 18%.

It’s notable, I believe, that all these numbers, even the ones based on hyper-severe assumptions, aren’t terribly different from one another. And it’s even more notable that they’re all well short of the agencies’ base cases, let alone their stress cases.

Or let’s turn things around. How bad would things have to get for the Moody’s base case to actually happen? Unbelievably bad—literally. The 16% midpoint of Moody’s base case translates into $96 billion in eventual losses. Twelve billion dollars has already happened. Fine. But, as we’ve seen, $282 billion of the $600 billion in 2006 originations has already been paid down. Those loans won’t default. Of the $306 billion that’s still outstanding, $100 billion is seriously delinquent. We have a good idea of what’s in store for those loans; they’ll likely generate another $42 billion in losses. That still leaves us $42 billion short of the $96 billion needed to get to a 16% loss. By definition, it can only come from the $206 billion in remaining, performing loans. If you assume 50% severity, that means that of the remaining performing loans—the strongest horses in the field so far—fully 41% would have to default.

Stress case losses would be stratospheric

And that’s just to get to the base case. To get to the agencies’ stress cases of a 21% cumulative loss, 71%--yes, that number starts with a “7”--of the remaining performing loans would have to go bad.

I don’t buy it. I don’t buy it, in particular, because at the margin the news from the subprime mortgage credit front seems to be improving. The rate of loans moving from current to 30-days delinquent has slowed over the past few months. And the rates at which delinquent loans are rolling into later-stage buckets seems to have stabilized. It’s as if—can you believe it?—things have finally stopped getting worse. That’s something else you won’t be hearing on CNBC anytime soon.

For months now, investors’ default habit has been to assume the worst regarding subprime mortgage credit. It’s been the profitable habit, too. But this whole time, people seem not to have noticed that a lot of subprime borrowers have paid down their loans completely, and that most others are still current. Guess what? That will keep on happening. And as it does, the subprime mortgage crackup will at last come to an end. In the end, I suspect, the wild-eyed losses being thrown around by the bears will turn out to be way, way off the mark. Don’t take my word for it. Just look what’s happened to the 2006 vintage so far.

Walking away and out-of-the-money options

(Underbelly) Just got through explaining to my students how equity is an option on the assets, where the exercise price is the payoff cost of the debt. Made the point that it might be rational to pay a positive sum for equity on an upside-down/underwater balance sheet (that would be you, BS) as lottery ticket value against the prospect that Something May Turn Up. (“Maybe I die! Maybe the king dies! Maybe a horse learns to talk!). In the jargon, it’s not valueless, it is just “out of the money.” Out of the money options trade all the time.

I also make the point that in a place like here in California, where most of our mortgage debt is “nonrecourse”—the creditor can look to the property only, no deficiency right against the debtor—then the real estate is just another option play.

Then back to the aggregator, where I read more about default rates, foreclosure epidemics, blah blah, and this fascinating thread at Kevin Drum that leads from arson to cannibalism (link).

And it occurs to me—wait a minute, whoa. A lot of these owners are underwater now, in the respect that the loan value exceeds the market value. And a lot of them simply can never expect to get current on their obligations; might as well walk. But for some unknown percentage—but it can’t be that small—for some unknown percentage here, what we are talking about is an out-of-the-money option. Shouldn’t we/they be giving some value to the possibility that “something might turn up?”

For Extra Credit: Felix Salmon’s instructive piece on an effort by the Ohio attorney general to force workouts on lenders, against their will and for their own good (link).

Arson to avoid foreclosure?

(Los Angeles Times) Some folks celebrate their last home mortgage payment by setting fire to their loan agreement. Lately, some people behind on their mortgages are simply setting fire to their homes.

In what appears to be the latest symptom of the nation's mortgage meltdown and credit crisis, insurers, law enforcement officials and state agencies nationwide report a jump in home and automobile fires in the last year believed to have been set by owners unable to pay their debts. The numbers are small, but they're leading the insurance industry to scrutinize more closely what seem to be accidental blazes.

"We've seen a dramatic increase in this kind of fraud," said Dan Bales, director of fraud investigations at Mercury Insurance. "People upside-down on their house with variable-interest-rate loans, or upside-down on their cars, are pretty quick to burn their property right now."

Last week, a Sacramento-area couple were arrested on allegations that they burned their Jeep and drove their Nissan pickup into a river, then filed fraudulent insurance claims. According to investigators, the wife admitted she was trying to escape her $600 monthly car payment.

On April 1, police arrested a woman in Easley, S.C., accused of deliberately setting fire to her home just three days after the bank hung a foreclosure notice on her door. And in January, an Omaha man was arrested on suspicion of arranging to have his three-bedroom house burned down as he was facing foreclosure.

The fires are keeping fraud investigators such as Anne Luce occupied.

"I'm busier now than a one-armed paper hanger," said Luce, who works on auto cases for the special investigations unit at Bristol West Insurance, part of Farmers Insurance Group. "What is happening is terrifically economically driven."

These financially motivated fires are surprising some officials because they come after a decade-long decline in overall arson rates nationwide. Few state or federal agencies categorize arson in terms of the financial status of liens on the property, making nationwide figures elusive. Still, pockets of the country are showing a significant increase.

Insurers referred 14 cases of questionable home fires, with foreclosure as a possible factor, to the California Department of Insurance last year, up from seven in 2006 and two in 2005. In the same three-year period, reports of auto arson increased by a third, to 343 cases last year. On Friday, the Department of Insurance announced the arrests of seven people in two investigations of possible automobile arson and insurance fraud.

In Ohio, the total number of reported "auto owner give-ups" -- insurance jargon for fraudulent car fires and staged car thefts -- rose 150% from 2005 to 2007, to 245 cases last year.

Insurers say they're meeting this month with California investigators to discuss potential fraud during last fall's wildfires -- including the prospect that some of the 2,000 burned homes were in fact cases of opportune arson by owners. State Insurance Commissioner Steve Poizner acknowledged that his agency was investigating a number of such cases but would not provide further details.

One recent fire of note was set in September in Gaines Township, Mich., by Sheryl Christman, who hoped to use the insurance money to get out of a troubled marriage, not to mention a house that was four days from being seized by the bank.

The 38-year-old mother ignited a mattress in the garage of her two-bedroom home, for which she had paid $150,000 in 2006, then sat outside as the house burned. She was ultimately arrested, convicted and sentenced to 1,000 hours of community service and five years of probation. In interviews afterward, Christman called her actions "rash and stupid" and said she was "very ashamed." The gutted house was eventually sold for $40,000.

Arson of all kinds has been on the decline for years. According to the FBI, total cases of arson fell 9.7% in the first six months of 2007 compared with the same period in 2006, and U.S. Fire Administration statistics show that arson declined by 60% from 1997 to 2007.

In the current economic environment, the temptation to commit arson can be too much for some. There were 2.2 million foreclosures last year, up 75% from the previous year, according to RealtyTrac. In addition, a study by Moody's Economy.com and Equifax found that 4.5% of all mortgages were delinquent in the first quarter of 2008. Auto loan delinquencies hit a 10-year high in January.

Frank Scafidi of the National Insurance Crime Bureau, a membership organization that tracks insurance fraud, says his group has not identified a rise in financially motivated arson. "Everything we've found does not support that," he said.

But some observers say state authorities and insurance companies play down the issue -- perhaps out of fear of copycat crimes.

"The sub-prime crisis began to hit in late 2006. There's been an increasing number of cases since then," said James Quiggle of the nonprofit Coalition Against Insurance Fraud, adding that he has about 20 such cases currently on file. "Will it explode as more mortgages are reset? That's the question."

Insurance companies are usually obligated under state law to report suspicious claims from customers.

"We can prove the property burned, but to prove it's fraud is tough," said Bales of Mercury Insurance, adding that last year the company investigated 64 suspicious car fires or thefts. In 15 of those cases, the owner was behind on payments. Burning a vehicle negates the chance of recovery, making for a total loss.

In the San Joaquin Valley, home to the nation's highest foreclosure rate in March, auto arson has more than doubled in the last three years. San Joaquin County Assistant Dist. Atty. J.C. Weydert said he was working on more than 15 such cases. He estimated that half included a financial component. Two cases involved leased vehicles in which the owner had exceeded the mileage allowance and faced a hefty penalty.

Weydert said his office recently assigned a third person to work on insurance fraud.

"The honest fact is that there are more cases than resources to handle them," he said.

Indebted owners sometimes seek help. Last year, the Fresno County district attorney filed charges against 12 people accused of running a ring that burned cars for clients; late last month a Department of Insurance investigation led to the arrests of three Southland residents who were suspected of arranging for the transport of a woman's Nissan Armada to Mexico, where it was disassembled and sold for parts. The owner was behind on payments.

The more serious problem, because of the costs involved, are home fires. Classic signs of an owner-complicit arson include removal of pets and expensive electronics before the blaze. But lately, investigators say their first step is a call to the bank to ask about the status of the mortgage.

Finances were seen as a possible factor in the case of Texas Supreme Court Judge David Medina, who had refinanced his home three times over five years and was served a foreclosure notice in mid-2006. Last June, the house burned, igniting two neighboring homes. Investigators discovered accelerants on the property.

In January, a grand jury indicted Medina on a charge of tampering with evidence and his wife on charges including arson. The following day, however, the Harris County district attorney dismissed the case, citing a lack of evidence.

"We are innocent. We had nothing to do with this fire," the judge told reporters at the time of the dismissal.

In February, members of the grand jury sued to have the evidence they heard made public.

Two-Thirds of California Defaults End in Foreclosure

(Housing Wire) Borrowers in California — always the Golden State, but now also the center of possibly the worst housing crisis since the Great Depression — are finding loan workouts increasingly tough to come by as price depreciation has put millions upside down on their existing mortgage debt.

Among homeowners in default, only an estimated 32 percent emerged from the foreclosure process by bringing their payments current, refinancing, or selling the home and paying off what they owed during the first three months of 2008; the rest — that’s more than two-thirds of troubled borrowers — ended up losing their homes on courthouse steps throughout the state.

One year ago, the percentage of loan workouts in California stood at about 52 percent, according to La Jolla, Calif.-based DataQuick Information Systems.

Compounding the problem, DataQuick said, was a massive reliance by California borrowers on multiple-loan financing during the housing boom — so-called “piggyback” loans, where a borrower takes out a second (and perhaps even a third) mortgage in order to finance their home purchase. Multiple-loan financing peaked in Q4 of 2006 at 60.9 percent of all financed home purchases, DataQuick said. Last quarter it was 15.9 percent.

click for larger view

Foreclosures soar
Not surprisingly, the number of homes lost to foreclosure in the first quarter of 2008 was the highest in DataQuick’s records, which go all the way back to 1988. Trustees Deeds recorded, or the actual loss of a home to foreclosure, totaled 47,171 during the first quarter, up nearly 50 percent from the fourth quarter alone.

New borrower defaults surged during the first quarter, too, with DataQuick reporting that lending institutions sent homeowners 113,676 default notices during Q1, up by 39.4 percent from the previous quarter and 143.1 percent from one year earlier. Default notices were the highest statewide in more than 15 years.

The graph above — used with permission from the always excellent Calculated Risk blog — shows what California’s 2008 NOD total would look like if volume remains constant at first-quarter levels throughout the year.

“The main factor behind this foreclosure surge remains the decline in home values. Additionally, a lot of the ‘loans-gone-wild’ activity happened in late 2005 and 2006 and that’s working its way through the system,” said Marshall Prentice, DataQuick’s president. “The big ‘if’ right now is whether or not the economy is in recession.

“If it is, the foreclosure problem could spread beyond the current categories of dicey mortgages, and into mainstream home loans,” he said.

The question of a recession really shouldn’t be a question at this point, and it’s worth noting that a recent report from Standard & Poor’s found that prime jumbos were beginning to show clear signs of stress beginning in March.

For more information, visit http://www.dataquick.com.

Viewpoint: Those Who Bury History Are Doomed to Repeat It

(Housing Wire) Ironies abound in the current mortgage mess/financial crisis. One of the most poignant, from my perspective – that’s one with over 20 years in MBS/ABS research — is the fact that, by abandoning the Great Depression as the worst-case benchmark and shifting to models based on contemporary mortgage performance, the ratings companies helped create the current house price crash and credit squeezes that are routinely compared to the Great Depression.

So, for history buffs, I am going to quickly review the basis on which the ratings companies quantified credit support requirements for private issue MBS in the first ten or fifteen years of mortgage securitization. And for those who endure the walk down memory lane, I am going to also highlight a great little study by UBS structured products analysts that addresses the question ‘which companies ratings are the most reliable?’

But first, a comment on terminology: I insist on using the term ratings companies. Calling them “agencies” makes it sound as if they perform some kind of administrative or quasi-governmental function, as if they function as watchdogs or ombudsmen for investors’ interests. The performance of rated subprime, Alt-A and ABS CDOs gives the lie to that notion. These enterprises may assert a freedom of speech defense, model error, or outlier event (like a hundred-year storm or thousand-year wave), but the reality is that each sold their ratings in a competitive marketplace, like any other for-profit firm.

Where it all started
A recent consulting project had me scrambling around the files in my attic, where I unearthed a short piece from S&P, “Texas Default Study Confirms Loan-Loss Assumptions,” originally published in November 1990 and reprinted in February 1993. The title refers to the assumptions that once underlied S&P’s ratings of mortgage-backed securities.

S&P originally defined its loan-loss assumptions in the mid-1970s – it rated the first private MBS in 1977. At the time, there wasn’t much contemporary information on which to base extreme stress scenarios. In the decades following WWII, credit losses on existing mortgage portfolios were insignificant – nationwide foreclosures amounted to fewer than one-half of 1 percent of all conventional loans (not FHA/VA). To develop a worst-case, benchmark scenario of mortgage foreclosures and losses, the company had to look back to the Great Depression.

Although data was very limited by contemporary standards, S&P was able to derive base foreclosure-frequency assumptions from a study of the behavior of urban mortgage loans originated by 24 life insurance companies between 1920 and 1946 (published by the NBER). Based on this study, S&P defined a AAA depression as one in which 15 percent of all borrowers in the lowest risk category will default, a AA depression as one in which 10 percent will default. (In other words, to be rated AAA, a bond would require credit support that would withstand a number of iterations of the AAA depression scenario.)

The benchmark loan is a first-lien mortgage on an owner-occupied, single-family, detached house with an original LTV of 80 percent or less. (At the time, it was also fully underwritten to a borrower with good credit. Loans made in the early 20th century by banks and insurance companies tended to have low LTVs, shorter maturities, partial amortization and bullet repayments. Thrifts, holding about 1/5th of residential mortgages, introduced the 30-year, fully amortizing loan.) Foreclosure frequencies would be adjusted higher for loans with additional risk factors, including historical delinquencies and severities, lien type, loan type, geographic concentrations and borrower quality.

The other component of the loss formula is loss severity, as most in the industry know. Again, S&P’s original benchmark for market value losses was the Great Depression. In an extreme stress scenario, market value declines would be a major component of loss. (Other components include unpaid accrued interest, legal and selling costs, property maintenance, and so forth. The severity of these vary from state to state as well as with economic conditions.) Based on Depression experience, S&P had determined the market value of single-family detached properties would decline by 37 percent under the AAA depression scenario, 32 percent under the AA scenario.

Moody’s began rating RMBS in the 1980s, and it also originally used the Great Depression as the basis for its credit enhancement requirements. Moody’s identified positive correlations between mortgage performance and economic events, which in turn were employed in a Monte Carlo model to generate a worst-case loss distribution for a pool. Credit protection was quantified based on that distribution – for instance, Aaa losses equated to approximately three standard deviations from the mean, Aa losses about 2.5 SDs and A losses 2.0 SDs and so forth. Ultimately, credit enhancement levels were defined such that expected losses would result in maximum declines in annual yield consistent with expected basis point yield changes for similarly rated corporate bonds.

The birth of modern ratings models
The ratings companies got their first look at a contemporary benchmark-quality housing downturn during the mid-1980s in Texas, oil-patch and southwestern states. These regional housing depressions coincided with the collapse of domestic oil and gas booms, accompanied by overbuilding fed by easy credit from competing thrifts and banks. Citing Fannie’s study of loans in its portfolio as well as foreclosure and house price data from other sources for Houston (Harris County, TX, one of the hardest hit markets), S&P affirmed its methodology.

Texas/Oil Belt experience is of particular interest in the present crisis. The Fannie study indicated lifetime default rates of 8.5 percent on Texas loans originated in 1981-1983, while other data indicated foreclosures in Houston between 1980 and 1989 amounted to 16 percent of housing stock. Houston home prices declined about 30 percent. Likewise, S&P found loss severities reported by Fannie (and largely attributed to the Oil Belt states) were easily in the ball park of Depression-based assumptions: the GSE charged off 25 percent of aggregate principal balances of foreclosed loans in 1987, 28 percent in 1988 and 31 percent in 1989.

By law, OFHEO constructs its benchmark loss experience from the worst cumulative losses experienced over a two-year period by 1st lien mortgages on single-family properties experienced by contiguous states containing at least 5 percent of the US population. The current benchmark is based on loans originated in four Oil Patch states, Arkansas, Louisiana, Mississippi and Texas, during 1983-4. Average cumulative default rates for this region were 14.9 percent and the average 10-year loss severity across the region was 63.3 percent. This severe stress is used to set GSE risk capital requirements.

We can all humbly hope that OFHEO does not have the “opportunity” to update its benchmark using the worse experience now being generated in the current foreclosure debacle.

The fresh Texas experience was also reflected in other MBS rating methodologies. Fitch, whose original methodology was similar to S&Ps, devised new benchmarks based on the 1980s Texas depression (using the Fannie as well as FHA data). Moody’s, already using a Monte Carlo model to size credit support, augmented its data sets with the Texas information, as well as its own surveillance data from the early 90s housing downturns in California and the Northeast.

Bear in mind, private MBS issuance was negligible until 1986, when tax code changes enabled issuers to use a senior/sub credit structure. Still, issuance averaged just about $11 billion a year through the end of the decade. The private MBS market exploded with the early 90s rally, jumping from $24 billion in 1990 to $98 billion in 1993 (issuance statistics from Inside Mortgage Finance Publications). This massive increase in rated deals, as well new attention given to reporting by most issuers, gave the ratings companies machine-readable performance data from which to build risk models.

It also provided an excuse to stray from the Great Depression benchmark.

When the Fed brought the mortgage rally to a halt in 1994, originator/issuers shifted from prime to off-prime loans to keep their pipelines full. These were the loans stranded when the thrift industry collapsed in the late 1980s and ignored in the 90s rally. Subprime (called home equity at the time, because borrowers were required to make down payments as large as 50 percent) and Alt-A (originally, good borrowers, but not benchmark, fully documented loans) lending both got their start during this lull.

This watershed change in mortgage lending practices coincided with the transition to newer models at the ratings companies. By 1995, S&P was using the predecessor of its LEVELS model, and Moody’s had refined its model to accommodate the new borrowers and vehicles. At the same time, the GSEs and and big private lenders introduced their automated underwriting systems, beginning the sweeping shift away from fully documented manual underwriting relying on a complete credit history. The age of the machine – and the almighty FICO - had arrived.

Although they may still assert the underlying Depression-style stresses still lurk in the depths of the ratings models, the addition of data has effectively recalibrated those stresses to the performance of thousands of pools issued since 1987, the preponderance of which have enjoyed unprecedented home price appreciation.

The result is that the lessons of the Great Depression ended up buried under an avalanche of more recent good news. Put another way: there is no variable in newer rating methodologies for “originated in a period of free money, easy credit, lite documentation and double digit home price appreciation.”

UBS takes a look at credit risk
Fast forward to the present. A year or so into this disaster, with no end in sight — John Mack’s pep talk to Morgan Stanley shareholders notwithstanding — UBS structured product analysts have performed a fascinating and simple experiment on Moody’s, S&P and Fitch subprime ratings. Taking as their sample the bonds underlying the four rolls of the ABX, they asked which company rates them lowest and, given the bonds UBS expects to default on its model, where do the three ratings companies rate them?

The sample includes 400 bonds, all of which have S&P and Moody’s ratings. Fitch on the other hand, only rated 200. This is a direct reflection of competitive forces in the ratings industry.

Fitch has always been third in terms of market share in the RMBS market, but its share shrank pretty dramatically as the subprime market expanded. In part, this reflects investors’ reflexive reliance on the two larger, older bigger name companies, but most market insiders think it also is a function of Fitch’s tougher credit criteria (which translates into less profitable “execution” for the originator customers of underwriters).

Certainly in UBS’ experiment, Fitch is the most conservative. On average, Fitch currently rates the ABX bonds an average 2.3 rating notches lower than S&P, S&P 2.7 rating notches lower than Moody’s. Of the 400 bonds in the index, UBS analysts predict that 292 will default. Only 134 of those are rated by Fitch, but all are rated AA+ or lower, and 77 are rated CCC or worse. By contrast, of the bonds expected to be written down, Moody’s still rates 35 of them AAA, S&P 24. By both tests, also-ran Fitch is the most conservative.

Which leaves us looking to the future: While the pols, policymakers and public interest groups are busy pushing forward high-profile, spintastic solutions, common sense suggests we start by putting the current mess into historical perspective – a lot of things we used to do in mortgage finance weren’t broke until we fixed them.

OFHEO Finds Surprising Home Price Jump in February

(Housing Wire) Conforming home prices appear to have taken a surprising jump in February, according to data released Tuesday morning by the Office of Federal Housing Enterprise Oversight. An index of purchase-only transactions rose roughly 0.6 percent on a seasonally-adjusted basis in February, the agency said in a press statement, after posting a revised 1.0 percent decline in January. The report clearly bested most economists’ expectations, with most predicting a 1.5 percent monthly decline ahead of the report.

Year-over-year, conforming home prices are still off 2.4 percent; since a peak in April 2007, home prices have fallen 3.1 percent, OFHEO said.

The apparent rise in conforming prices caught more than a few industry participants off guard, and had some wondering if a data quirk might explain the month-to-month rise. Other February price data, including data released Tuesday by First American CoreLogic, suggests that prices continued to head downward nationally during the month.

The OFHEO data is less likely to show severe price downturns because it tracks only the conforming housing market; price corrections during times of market stress are historically more severe in the jumbo lending market.

“There has to be something in the data, or how its collected,” said one source, who asked not to be identified. “Prices did most certainly not go up in California during February.”

The OFHEO monthly index is calculated using purchase prices of houses backing mortgages that have been sold to or guaranteed by Fannie Mae or Freddie Mac, and does not include refinance transactions that might upwardly distort pricing information.

“It’s important to keep in mind that this is the only part of the market that’s moving right now,” said one source, an MBS analyst. “While it’s certainly possible prices increased in general, it’s also possible that many would-be jumbo buyers, unable to get financing, finally caved and bought at the higher-end of the conforming limit.”

One thing that would appear to be clear is that prices were not distorted by the use of so-called jumbo conforming loans, which were added to the GSEs repertoire in February. While both Fannie and Freddie are temporarily authorized to purchase loans up to $729,500 in certain high-cost markets, most sources have made it clear that so called “jumbo-lites” have yet to really move onto either GSE’s books at a meaningful rate.

For its part, OFHEO said that the rise in prices was due in part to a change in the geographic mix — while such changes are usually small, OFHEO said that during February, states with stronger housing markets rebounded strongly, significantly shifting the national mix in their favor. Had the weights for each state been held constant, the national increase would have been only 0.3 percent in February, the agency said.

For the nine Census divisions tracked via the OFHEO HPI, seasonally-adjusted monthly price changes from January to February ranged from -0.6 percent in the Mountain Census Division to 2.2 percent in the New England Division.

Perhaps the most surprising statistic, however, was a 0.3 percent gain recorded for the month in the hard-hit Pacific region, which includes California and Nevada — a gain that homeowners in the state didn’t seem to feel.

“If prices went up here in February, nobody here felt it,” said one homeowner in Southern California’s Huntington Beach.

Jingle Mail: How do you Value Home Equity?

(Felix Salmon) One of the biggest questions overhanging the housing market right now concerns the behavior of underwater mortgage borrowers. If the mortgage is non-recourse - and let's assume for the moment that it is - does it always make sense for such a borrower to walk away from the house? If you listen to the likes of Nouriel Roubini, the answer seems to be yes - he expects as many as half such borrowers to walk away. But many other people, including myself, think that the incidence of "jingle mail" will be much, much lower.

The key concept in this debate is the idea of equity. If you're in a "negative equity" situation, then on a purely economic level there is a strong case to be made for leaving your house and its associated mortgage. But how do you value equity? A blog entry by Buce got me thinking today: when people talk about "equity" in the context of residential housing, they're actually talking about book value. And as any stock-market investor knows, there can be a world of difference between equity valuations and book value.

If your outstanding mortgage is larger than the value of your home, then you're in a situation where liabilities (the mortgage) exceed assets (the house), and book value is negative. But it's entirely possible for a company with negative book value still to have positive equity: look at General Motors, which is trading at $20 per share even as its book value is -$65.

If you sell your house, you're essentially liquidating: you're selling off the assets and paying off the liabilities, to the extent that they can be covered with the proceeds of the asset sale. But most companies are worth more than their book/liquidation value, and there's no reason why home equity shouldn't be thought of in the same way.

Buce points out that the equity can be valued as an out-of-the-money call option: it might not be worth much, but such options are generally worth something. And more generally, just as there's value in operating a company as a going concern, there's value in owning and living in your house, even if your mortgage payments are higher than they would be if you bought the house today.

Why do houses generally cost more to buy than they do to rent? Because there's a speculative component to the price: buyers pay extra for the possibility that they might be able to make a large capital gain when they come to sell. Nowadays, of course, they're likely to do the opposite, and force a discount to compensate for the possibility that they might have to suffer a large capital loss when they come to sell. But if you bought your home to live in it, and if you expected to make the mortgage payments you signed up for, and if you're able to make those mortgage payments, then owning a house does still give you that possibility of future capital gains. And walking away will probably mean you can't buy another house for at least two years, so you lose that option. (Theoretically, of course, you could buy your new house before you walk away from your old one, but I haven't yet heard of anybody doing that.)

So where does that leave us? I suspect that prime fixed-rate mortgage borrowers are not going to walk away in significant numbers. Prime ARM borrowers expected to be able to refinance before their reset, and they might find that impossible if they're underwater, so jingle mail is a possibility there, depending on whether the reset rate is significantly higher than their initial rate or not. Subprime ARM borrowers, of course, are already defaulting in record numbers. Which leaves just subprime fixed-rate borrowers: they'll probably continue to make their payments unless or until they can't.

But the willful jingle mail - can pay, won't pay - I think is still going to be a very rare thing.

Preventing foreclosure Ohio style

(Felix Salmon) Ohio Attorney General Marc Dann has one of the best plans for reducing foreclosures that I've seen yet. It targets homeowners rather than lenders, it costs a known and not particularly large amount of money, and it has the potential to be extremely effective. Luke Mullins has the Q&A, in which Dann says that he thinks he can prevent "the vast majority" of foreclosures. How?

The state has enlisted more than 1,300 lawyers--from state agencies and the private sector--to help struggling homeowners avoid foreclosure by reaching agreements with lenders or, if need be, through litigation.

A good lawyer is a friend indeed to a homeowner facing foreclosure. Dann has already persuaded Ohio's 10th District Court of Appeals that any bank foreclosing needs to have physical possession of the mortgage note, which often is not the case these days. And in general if the foreclosing bank knows it will face expert legal opposition, it's going to be that much more likely to negotiate an alternative.

If this Ohio scheme proves effective, there's no reason why it shouldn't be rolled out nationwide. And the great thing about it is that even the lenders could end up winning in the end. Foreclosing is the lazy way out for a mortgage servicer: swamped by delinquencies, lenders know how to foreclose and have a tendency to do so even if there are better alternatives which take more time and more individualized attention. If the states staff up and make foreclosure more difficult, maybe the servicers will staff up too and make work-outs easier.

Calculated Risk comments on Roubini interview

(Calculated Risk) Yesterday I posted three videos of an interview with Professor Nouriel Roubini on Canadian TV. Professor Roubini believes the U.S. is currently in a recession, and that the recession will be deep and long - "the most severe recession and financial crisis that the US has experienced for decades" - lasting 12 to 18 months.

I agree that the economy is probably already in a recession, but I think Roubini may be too pessimistic. My view is the recession will be less than severe (with unemployment peaking at less than 8%), although I agree the effects - especially related to employment - will probably linger for some time.

Let me point out a few points in the interview where I believe Roubini is too pessimistic:

Professor Roubini on new homes sales vs. starts:

"The production of new homes - housing starts - has already fallen by 50%, but the problem is the demand for new homes has fallen by more, 60%."

Actually the number of single family starts has fallen slightly more than new home sales.

Click on graph for larger image.

This graph shows New Homes sales (seasonally adjusted annual rate) vs single family housing starts (SAAR). These two series can't be compared directly because single family housing starts includes homes built by owners - but the graph does show that starts have fallen as much or more than sales.

If you dig into the data and adjust for cancellations, it appears starts of single family homes (built for sale) have fallen below the current new home sales rate. See: More on Housing Starts

Even though Roubini is correct that inventories are at or near record levels (especially distressed existing home inventory), it's important to note that builders have finally cut production enough to start reducing the inventory of new homes. So we are probably a little further along in the process than Roubini suggests.

Roubini on walking away:

"In the United States, if you walk away from your home - what's called jingle mail because you put the keys in the envelope, you send it the banks and say goodbye - you don't have to pay the remaining balance between the value of your mortgage and the value of your home. So if you are really into negative equity - underwater - you have a huge incentive, especially if you don't have income you've lost your jobs - do to that."

This is not completely accurate.

Although I agree with Roubini that changing attitudes towards default for middle class Americans is a significant risk - something we haven't been able to quantify - the consequences are more complicated than Roubini's description and might limit the number of homeowners who actually engage in ruthless default. Note: anyone considering walking away should probably consult a lawyer and a tax accountant.

In California, purchase money is non-recourse. If the borrower walks away and mails in the keys (Fleckenstein's "jingle mail"), the lender is stuck with the collateral. However, if the California borrower refinanced, then the lender has recourse, and can pursue a judicial foreclosure (as opposed to a trustee's sale), and seek a deficiency judgment.

The lender can enforce that deficiency judgment by attaching other assets, or by garnishing the borrower's wages. Historically lenders rarely pursued (or enforced) deficiency judgments, but that could change if many middle class borrowers, with solid jobs and assets, resort to jingle mail.

For purchase money, state law determines the recourse vs. non-recourse issue. Refis are always recourse, and there was significant refi activity in recent years. So a homeowner who chooses to "walk away" might be liable for some or all of the debt owed the lender. And the home buyers credit will be impacted - and there might be tax consequences too.

I still believe one of the greatest fears for lenders (and investors in mortgage backed securities) is that it will become socially acceptable for upside down middle class Americans to walk away from their homes. But my guess is the fear is far greater than what will really happen.

Roubini on the write down process:

"Major banks in the United States have already done something like $230 billion of write downs, but my estimate is when you are going to add it up those losses are going to be more like the order of $1 trillion. We are only at the beginning of the process of recognizing those losses. We might have a systemic banking crisis."

It's hard to compare the investment bank write downs directly to the potential total losses, since many of the losses will be taken by hedge funds, regional banks, insurance companies, and wealthy individuals and others. The following table shows the IMF's estimate of losses by institutional category.

From the IMF's Global Financial Stability Report (via Econbrowser):


Notice the IMF's estimate of losses at the banks is on the order of $440 to $510 billion. This includes all banks, and my guess is the investment banks are further along in the process than many of the regional banks. I think we are well past halfway in write downs for residential mortgages at the investment banks, although there are many other credit losses still coming (like for consumer credit cards and auto loans, construction & development and commercial real estate loans, and corporate bonds).

Therefore I believe Roubini is a little too pessimistic when he says "We are only at the beginning of the process."

So as bearish as I am - especially on housing - I am less pessimistic than Dr. Doom!

Mortgage plan could cost taxpayers $6bn

(FT) A Democratic proposal to use public funds to guarantee up to $300bn in mortgages could cost the US taxpayer up to $6bn, according to a preliminary assessment by the Congressional Budget office.

Barney Frank, the powerful chairman of the financial services committee, on Thursday unveiled details of legislation to stem the wave of US home foreclosures through an expansion of the Federal Housing Administration.

[House Financial Services Committee Chairman Barney Frank, today released the following statement regarding the reference to a Congressional Budget Office (CBO) cost estimate in the summary of H.R.5830:

“In our efforts to minimize costs to the government, we consulted with the Congressional Budget Office regarding aspects of program design. The cost estimates contained in the summary were based in part on those conversations, but they were ours and should not have been attributed to CBO.”]

A similar bill is being considered by the Senate. While the government could make money depending on the performance of the new loans, it could also incur losses of between 1 and 2 per cent of the total amount, the CBO told lawmakers.

In an interview with the Financial Times this week, Chris Dodd, chairman of the Senate banking committee, conceded that “there is obviously some risk” to taxpayers, but insisted the legislation was necessary to set a floor for house prices and avert contagion across US financial markets and the economy.

Mr Dodd said a compromise between the Bush administration and Congress needed to be reached “fairly quickly if it is going to meaningful”.

The plan proposed by congressional Democrats would allow struggling borrowers to refinance their mortgages based on a lower value for their homes. While the lender would forgive a chunk of mortgage value, it would in return share in the benefits of any appreciation of the home, as would the FHA, which would back the refinanced mortgage.

According to details released on Thursday by Mr Frank’s office, the plan would run for two years and apply only to primary residences. The shape of the bill could change as it moves through the financial services committee in two sessions next week.

In testimony in recent weeks by Brian Montgomery, federal housing commissioner, the Bush administration has signalled its opposition to many aspects of the legislation being proposed by Mr Frank and Mr Dodd.

On Thursday, President George W. Bush said he would work with lawmakers on a bill that would “actually help people”. He added: ”I will take a dim view of legislation that will make it harder for the economy to correct.

A possible approach to the mortgage mess

(Naked Capitalism) On a post yesterday on how well (or more accurately, how badly) various state efforts to rescue homeowners were faring, reader Richard Kline offered a suggestion.

Note that while I still favor the apparently destined-never-to-see-the-light-of-day idea of permitting bankruptcy judges to write down mortgages to the current market value of the collateral (the rest becomes unsecured), Kline's idea is elegant. One change I'd recommend is to have his markdown from the index vary by either state of MSA.

Hoisted from Kine's comments:

I don't mean to frown any excessive frowns on the issue, but there is simply NO solution to the bad mortgage problems that exist as they are presently constituted. The problems are too diverse; there are too many lenders, and worse diffused standing with respect to the actual mortgates; the volume of property is, well, vast. That's just on the lender side. Borrowers have many and various problems so there is no one-size or even middle-of-the-curve solution to implement. These mortgages need to be, literally, re-negotiated one at a time. But it gets worse: with asset values plunging to well south of the face value of many loans there is no sane way to 'save the loan' as written. You want the lender to eat 40% of the loan? It might be easier for them to walk away---or there may be no 'lender' to walk away, they're dead. For troubled mortgage holders, it's a big blot on their credit, a life-changing event. For lenders, it's often going to be a blot on an x-ray; a life-ending event.

Don't expect a fast resolution to this issue; three years from now, we'll still be unwinding it, in my view. Federal legislation does nothing to solve the problems. 'The guvmint buys all notes?' They don't got that kind of dough.

The government can't solve the problem---but the government just might be able to change the problem. Here is the outline of a coherent solution process; it won't happen, and I'm not going to propose offhand the means to get there, but since this all is a mess, and we'll have some time to kick arouond issues, here is one way to go about it.

Take the market or appraised value of the property as of a set, market top date; oh, March, '07 for an index. Now take 60% of that: this is the new value of the property. Take the loss, and apportion it between mortgage holder and lender based on their equity shares as of today; this means most, but not all of the writedown goes to the lender. Many mortgage holders will end up with negative equity, but at much lower total dollar value; the property is worth less, but by the same token the amount which will have to spend to pay it off and own it clear is much less, too. That's a situation which may keep an owner willing to stay in the property and pay off that smaller negative equity; they take some loss, but they can end up with whole credit and a home, not a bad outcome. Refi the loan into a traditional loan structure. If the owner can't meet that payment, well the loan is dead anyway, we've done all we can. The advantage to the lender is that they now have an asset again, rather than a rotting, unoccupied structure against which they owe taxes after foreclosure costs in a horrible property market without viable mortgage lenders and huge inventory overhangs.

No one forces this solution on either party to a locked up, upside down squat, but it's a package deal, go/no-go, with little or no side dickering over terms: you go to court and say, "We both agree to this change in our pre-existing contract by the terms of the Somebody Help Me Jesus Act of '09," judge raps the gavel, ever'body clap hands, and walk out the door with chins up and best foot forward. Once a mortgage holder at a viable payment is signed on, the lender can sell the package or hold it to term, but the mortgage is a tradable instrument again at known value. This is for first liens only. I have no solution to propose for second and third mortgage situations other than the Darwinian solution: stupidity means your equity dies stillborn without reproducing.

Rather than a total loss-loss, cut cards and do a re-deal, but 'automate' the process with shared pain.

For non-foreclosure situations. Supposing that you were one of the few responsible borrowers who actually got an loan they could afford, no further liens, but now with a 40% decline in value you will be massively underwater. However, you can still afford your payment, so the loan doesn't go into foreclosure, and as things stand _you alone_ are expected to bear the full burden of the loss. You can't refi or sell without paying out the full losss now upfront, either. If you go in to your lender and ask them to write down the principle, and share the loss, you'll hear, We lent X amount; you can pay at y schedule; we expect to recover X amount: no deal.

Well, that's a capital loss, right? It isn't reasonable that you, or anyone get to write off _all_ of that loss against your taxes, but it could be established that for homes sold over thus-and-so years which experienced a loss of value of y% a capital, something well less than half the total loss can be written off against taxes over a period of time; a substantial mitigation even so. If you, the mortgage holder claim the loss, however, the lender has to immediately write down the collateral and with it the loan value, even though over time more than the collateral is worth is going to be paid. On the other hand, if they renegotiate the loan, they (the lender) can claim the capital loss over time.

This is less than ideal. It requires public funds (the capital loss against taxes). It may be hard to find a formula getting the mortgage holder out of the neg eq prison, too. Also structuring the accord so that it was as automatic as possible with as little room for maniupulation by either party would not be easy. The key is that the trigger should be placed in the hands of the one currently taking the loss, the mortgage holder, giving the lender reason to share in the loss. Under no circumstances, though, should the whole value of the asset depreciation be laid off on the US Treasury, though. Something like a third should be the max, with the actual parties to the contract splitting the rest, one way or the other. The time period to qualify for this should be only at the very market top, perhaps '02-'07, still a huge portion of outstanding mortgages, but.

How Jingle Mail Might Help Make Short Sales Easier

(Felix Salmon) Remember youwalkaway.com? It was $995. Sound a bit too expensive? Well, do I have good news for you! Youwalkaway.com now has a competitor, walkawayplan.com, which is only $495! And the new site quotes bloggers, to boot! Apparently, if you go by Mish, homeowners don't have a moral obligation to honor their mortgage agreements, which is good news for those websites trying to cash in on the nascent jingle-mail phenomenon.

I'm actually quite glad that these sites are popping up, if only because it might help light a fire under the rear ends of mortgage servicers who are being unconscionably slow in approving short sales. The WSJ has a good article on short sales today, which lists some of the silly reasons why short sales are so hard:

Gathering all the information needed to evaluate a short-sale offer can take time, says Patrick Carey, an executive vice president with Wells Fargo. The loan servicer must first determine whether the homeowner really can't continue meeting the loan payments, then get an appraisal or broker's opinion of the home's value.
Mortgage servicers also try to ensure that the proposed sale is an "arm's length" transaction between two parties rather than, say, a sale to a relative on sweet terms. They must also determine whether the buyer has sufficient funds or the ability to get a loan. If all those hurdles are cleared, the servicer may still need to get approval from the investor that owns the loan and provide an analysis showing that the investor will be better off with a short sale than with another solution.
There are additional complications if the borrower has a mortgage and a home-equity loan. In that case, both parties must approve the deal -- which is a challenge when the sales price may not even be enough to cover the mortgage balance.

The idea that the servicer has to confirm that the homeowner is in real financial distress is, I think, a relic from the housing-boom days which ought to be unceremoniously jettisoned. Remember that most mortgages, including pretty much all mortgages in California, are, to all intents and purposes, non-recourse. If servicers were reminded that the alternative to a short sale was jingle mail rather than continued timely payments, then they might be more inclined to help the market in short sales get a bit smoother.

I also don't see why the servicer should worry about the buyer's ability to get a loan. The worst case scenario is that the buyer loses their deposit if a loan doesn't come through -- and that deposit will just increase the amount of money available to the homeowner to pay down their mortgage.

As for the Helocs, those lenders are very likely to have written off everything, and will generally be quite happy to take some small positive sum for their trouble if asked nicely by the first lien holder.

It seems to me that mortgage lenders are just coming up with excuses, here, not to accept short sales. With any luck, as the likes of walkawayplan.com catch on, those excuses will rapidly evaporate.

Misinformation from Fannie and Freddie on walking away

(Mish's Global Economic Trend Analysis) The San Francisco Chronicle is reporting Fannie warns homeowners who walk away.

The country's two largest sources of mortgage money have a blunt warning for anyone thinking about joining the growing "walkaway" trend, where homeowners stop making payments and months later send the house keys back to their lender: You will feel the pain.

On March 31, Fannie Mae (FNM) sent out new guidelines to lenders intended for walkaways and other foreclosure situations. Fannie will now prohibit foreclosed borrowers from getting another mortgage through the giant investor for five years, unless there are "documented extenuating circumstances." In those cases, the mortgage prohibition is for three years.

Freddie Mac (FRE), Fannie's rival, counts foreclosures as major credit blots for seven years, and a senior official said the company is now aggressively pursuing some walkaway borrowers "to preserve our deficiency rights" where permitted under state law.

My Comment: Walk away borrowers in non-recourse states do not have a problem on the original loan with Fannie's threat "to preserve our deficiency rights". Where permitted by state law is key. California is a non-recourse state.

Furthermore even if a state is a recourse state, that does not imply that every loan in that state is a recourse loan. Consider this answer from Bryan Whipple, Attorney at Law Re: Non Recourse Loan, Recourse State Florida

(1) Just because a state permits recourse loans doesn't mean it forbids non-recourse loans! In general, parties to loan transactions are allowed to agree on whatever terms they are able to negotiate. It's a freedom-to-contract principle.

(2) However, just because a document is stamped "Non-Recourse" doesn't necessarily make it such. A stamp on a document may be part of its terms, or it may be legally meaningless. To be sure the loan is truly non-recourse, I would suggest reading the entire document pretty carefully.

It pays to consult an attorney. Continuing with the article...

The walkaway trend is particularly noteworthy in former housing boom markets - including California, Florida and Nevada - where many homeowners find themselves upside down on their loans, owing tens of thousands more than the current market value of their houses. If they invested little or nothing in down payments, some owners reason, continuing to make payments - even if they can afford to - may be throwing good money after bad.

My Comment: The walk away trend is highest in the bubble areas. Not surprisingly, those are the areas with the largest numbers of walk-aways and those are areas where walk aways make the most sense.

Robin Stout Migala, consumer outreach manager for Freddie Mac, said in an interview that "there are so many bad reasons for walking away" from a home loan. Not only are borrowers' credit standings wrecked - forcing them into excessively high interest rates on any credit they can manage to obtain. But they also face other potential problems, including federal income tax liabilities.

Federal legislation enacted last year allows homeowners who negotiate loan modifications with lenders and have portions of their principal debt eliminated to escape income tax liability for the amount forgiven. Walkaway borrowers, by contrast, have nothing forgiven, and the IRS may demand income taxes on the balance they never paid, according to Migala.

My Comment: In my opinion Robin Stout Migala is spreading misinformation. I leave it to the reader to decide if this is on purpose or though ignorance.

Migala is misrepresenting the Mortgage Forgiveness Debt Relief Act. There is a provision allowing tax free debt forgiveness, even in recourse states, for reasons of insolvency. Note the following question and answer from the IRS.

If part of the forgiven debt doesn't qualify for exclusion from income under this provision, is it possible that it may qualify for exclusion under a different provision?

Yes. The forgiven debt may qualify under the "insolvency" exclusion. Normally, a taxpayer is not required to include forgiven debts in income to the extent that the taxpayer is insolvent. A taxpayer is insolvent when his or her total liabilities exceed his or her total assets. The forgiven debt may also qualify for exclusion if the debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm indebtedness or qualified real property business indebtedness. If you believe you qualify for any of these exceptions, see the instructions for Form 982.

Inquiring minds may also wish to read Mortgage Workouts, Now Tax-Free for Many Homeowners; Claim Relief on Newly-Revised IRS Form.

The article continues ....

For borrowers who faced genuine financial hardships leading to foreclosure, underwriters are likely to be more sympathetic a few years down the road. But if you walk away, here's the deal: Don't expect to get a new home loan - certainly not one with favorable terms - for five to seven years.

That's no matter what some promoter promised you online.

My Comment: Robin Stout Migala is talking his book. That book is to get you to keep paying your mortgage whether it makes any sense or not. Threats of "preserving deficiency rights" may be hollow.

Anyone who is deep in the hole on a mortgage should do what is in their best interest. That may mean a work out, it may mean bankruptcy, it may mean walking away. Walking away is not the right solution for everyone, and it does have consequences. On that I agree with Migala. However, the picture Migala presented is far from accurate.

I happen to believe the folks at You Walk Away are providing a valuable service at a reasonable price. They have turned down clients attempting to "game the system". There are times walking away makes sense and times it does not.

I have talked about walking away on many occasions. Here is a recap:

• 60 Minutes Legitimizes Walking Away
  
• The Business of Walking Away
• Businesses Advised To Walk Away
• Moral Obligations Of Walking Away

In the end, everyone has to decide this issue for himself. However, the one thing that makes absolutely no sense is to struggle for years as a debt slave, attempting to hang on, tapping out credit cars or heaven forbid IRAs, then only to lose the house anyway.

Fannie and Freddie are attempting to stigmatize walking away. Worse yet, they are doing it by spreading misinformation. There is one thing I want to be clear on: I am not promoting walking away for walking away's sake. I am promoting people do what is in their best interest. That may or may not be walking away. Sadly, I suspect walking away makes sense far too often.

Corporations are doing what is in their best interest even if they have to spread misinformation to do it. Why shouldn't people do what is in their best interest and tell businesses where to go? I am sick of seeing people being turned into debt slaves. If walking away makes sense, then by all means do it.

Fannie and Freddie's big threat seems to be if you walk away they will require a big down payment, higher FICO score, and ability and willingness to pay the loan back.

Had Wall Street, banks, homebuilders, the Fed, Congress, GSEs, etc., shown any sense of responsibility in the first place, this never would have happened. Yes, consumers were greedy too, but who bears the lion's share of the blame? Now consumers, especially innocent bystanders, are bearing the brunt of a sinking US$, of low interest rates on CDs, of bailouts of banks, etc.

To hell with em.

California Attorney Chimes In

I have been in communication with "HCL", a California attorney over real estate law in California. HCL writes:

As a California real estate attorney I can tell you this:

1) Mortgage debt, whether its a first or second loan, is nonrecourse if it is "purchase money", used initially to purchase the property;

2) Mortgage debt that exists due to a refinancing and/or to second loan taken out after purchase is recourse, but -- and its a BIG but -- only if the lender elects to file a lawsuit for judicial foreclosure rather than going through the usual foreclosure process;

3) Suits for judicial foreclosure are in my experience of 28 years extremely rare, due mostly to the fact that any buyer at a judicial foreclosure sale has to give the foreclosed-upon party a full year to redeem the property. This of course is a complete deal-killer.

An interesting side-note: California's anti-deficiency law originated during the Depression years, in order to place the burden of properly valuing real property and risk of loss on lenders (who presumably were more sophisticated and able to assess value) rather than buyers. Fast-forward to now, when it turns out that rampant greed prevented lenders from acting rationally in their own self interest. Now they are paying the price with walk-aways and "jingle mail".

If walking away makes sense to you, then by all means do it, just consult your tax advisor first.

Is anyone speaking for the mortgage "lenders"?

(Credit Slips) Katie Porter makes an incredibly important point in her recent post about how securitization structures may be impeding mortgage modifications because the ultimate holders of risk on the mortgages are not the ones involved in the modification decision. Mortgage servicers, who typically hold a small interest (if any) in the loans are the ones making the modification decisions. When servicers do hold positions in the mortgage-backed securities, they are first lost positions, so the servicers likely takes a loss regardless of a modification or foreclosure, meaning that their interests are not aligned with the other MBS holders.

Let me take Katie's post a step further and suggest that the relevant voices on the lending side of the mortgage market have not been heard. The ultimate risk on mortgages is held by mortgage-backed securities holders, private mortgage insurers, and pool-level bond insurers. These parties have been entirely absent from the conversation on modification and bankruptcy reform.

Instead, we have been hearing servicers and originators (such as the Mortgage Bankers Association) speaking for the entire mortgage lending industry. But there is strong evidence that servicers are themselves part of the problem and that some may be faithless agents to the MBS holders they represent.

If Congress is concerned about the impact of foreclosure legislation on the mortgage lending industry, it should make sure that the conversation includes parties who bear the ultimate risk in mortgage loans--the private mortgage insurers and the bond insurers and the major pension plans and mutual funds that hold MBS. For that matter, the state regulators of insurers should also be involved in this as a safety-and-soundness issue. Limiting mortgage loan losses limits the insurers losses.

There seems to be little disagreement that foreclosure would result in a larger loss on a mortgage than a modification. One would think, then, that the market would respond by modifying non-performing mortgages to a level that homeowners could afford. But this hasn't been happening on a large scale. As we think about why this market isn't working, securitization structures should get a lot of attention.

As Katie noted, securitization structures can create impediments to modification. Sometimes it is contractual, such as pooling and servicing agreements (PSAs) that forbid servicers from modifying mortgages or severely constrain the modifications that are allowed. Other times the PSAs create incentive structures that lead servicers to prefer foreclosure to modification.

Going forward, one hopes that the securitization market will fix this--MBS purchasers will recognize the importance of good servicing in portfolio performance and will be willing to pay a premium for MBS with PSAs that give servicers the ability to make necessary modifications and the incentives to do so. I say hopefully because I am not at all convinced that many MBS purchasers understood exactly what they were purchasing. (Maybe signaling works, but maybe not...)

But for existing mortgages, the contractual and incentive impediments created by securitization pooling and servicing agreements remain a problem, and the only clearly Constitutional way to overcome them is via bankruptcy. If mortgage modifications were allowed on all properties in bankruptcy, it would allow a bypass to the obstacle created by modification. Bankruptcy modification is an involuntary workout that should be possible when there are market problems preventing voluntary workouts. This is essentially a parallel to companies with public debt using bankruptcy to restructure the terms of their bonds. Many bond indentures forbid the indenture trustee from modifying the terms of the debt absent unanimous consent of the bondholders, raising a huge structural obstacle to loss-minimizing modifications.

Notably, the loss calculus for MBS holders or PMI insurers or bond insurers should not change depending on whether a workout is voluntary or not--it will still produce a smaller loss than foreclosure. The Bankruptcy Code's best interest test guarantees that, and in the current market especially foreclosure outcomes are brutal.

This, of course, is just my evaluation of the market. But the voices that should be heard from the mortgage industry about this are the MBS holders and the insurers, not the servicers and originators.

OFHEO: Fannie, Freddie Still a Regulatory Concern

(Housing Wire) On the heels of a Standard & Poor’s report that managed to suggest that both Fannie Mae and Freddie Mac could endanger the rating agency’s view of U.S. sovereign debt, the Office of Federal Housing Enterprise Oversight on Tuesday issued a report to Congress that characterized the GSEs as “a significant supervisory concern.”

Related links:

• read the full report

“Fannie Mae and Freddie Mac should be commended for the timely filing of their 2007 annual statements,” said Lockhart. “While they have made progress in fixing many of their systems, internal controls and risk management problems, they still have much work to do, especially with the continuing challenges of today’s mortgage market.”

As Congress and housing officials look to both GSEs to “do even more,” Lockhart argued that the need to put a stronger regulatory structure in place has become critical.

“As I noted in my transmittal letter, last month both GSEs agreed that a ‘world-class regulatory structure’ is needed and they renewed a shared commitment to work for comprehensive GSE reform legislation,” he said. “The time to act on the legislation is now.”

The House Financial Services Committee originally passed H.R. 1427, the Federal Housing Finance Reform Act of 2007, in March of last year, after its introduction by Congressman Barney Frank, along with Reps. Richard Baker (R-LA), Mel Watt (D-NC) and Gary Miller (R-CA). Industry pundits and pols alike have been calling for its approval by Congress ever since, to no avail.

The OFHEO Congressional report highlights the many risks both Fannie and Freddie face as the mortgage market continues to roil: deterioration in the market value of RMBS held in each GSE’s portfolio and increasing counterparty risk as seller-servicers, deritivative issuers, and mortgage insurers have seen their core ratings taking a hit.

It also warns on the uncharted territory both GSEs are now in, especially as it relates to model risk.

“[R]apidly changing market conditions significantly increased model risk, particularly for credit and
prepayment models,” the report warned. “Given the lack of historical precedent for current conditions and the fact that models are estimated based on historical experience, Enterprise models have become less reliable and require greater management judgment, increasing the potential for error in pricing and other metrics.”

Reuters reported late last week that Treasury Secretary Henry Paulson has scheduled a meeting with the heads of both Fannie Mae and Freddie Mac for this week, to discuss the proposed legislation.

Richard Syron and Daniel Mudd, the chiefs of Freddie Mac and Fannie Mae, respectively, will meet Paulson along with Sen. Christopher Dodd (D-CT) Sen. Richard Shelby (R-AL), according to the news agency.

U.S. Foreclosures Jump 57% as Homeowners Walk Away

(Bloomberg) -- U.S. foreclosure filings jumped 57 percent and bank repossessions more than doubled in March from a year earlier as adjustable mortgages increased and more owners gave up their homes to lenders.

More than 234,000 properties were in some stage of foreclosure, or one in every 538 U.S. households, Irvine, California-based RealtyTrac Inc., a seller of default data, said today in a statement. Nevada, California and Florida had the highest foreclosure rates. Filings rose 5 percent from February.

About $460 billion of adjustable-rate loans are scheduled to reset this year, according to New York-based analysts at Citigroup Inc. Auction notices rose 32 percent from a year ago, a sign that more defaulting homeowners are ``simply walking away and deeding their properties back to the foreclosing lender'' rather than letting the home be auctioned, RealtyTrac Chief Executive Officer James Saccacio said in the statement.

``We're not near the bottom of this at all,'' said Kenneth Rosen, chairman of Rosen Real Estate Securities LLC, a hedge fund in Berkeley, California and chairman of the Fisher Center for Real Estate at the University of California at Berkeley. ``The foreclosure process will accelerate throughout the year.''

Rising foreclosures will add more inventory to an already glutted market, keep home prices down through at least next year and thwart efforts by Congress and President George W. Bush to help homeowners avoid default, Rosen said in an interview.

`Drag' on Prices

About 2.5 million foreclosed properties will be on the market this year and in 2009, Lehman Brothers Holdings Inc. analysts led by Michelle Meyer said in an April 10 report. U.S. home price declines will probably double to a national average of 20 percent by next year, with lower values most likely in metropolitan areas in California, Florida, Arizona and Nevada, mortgage insurer PMI Group Inc. said last week in a report.

Borrowers who owe more on their mortgages than their homes are worth may be buffeted by increasing job losses in a ``very substantial recession,'' Rosen said. About 8.8 million borrowers had home mortgages that exceeded the value of their property, Moody's Economy.com said last week.

``At least 2 million jobs will be lost because of this recession, so we'll get a cumulative negative spiral,'' Rosen said. ``A normal recession is 10 months. We think this one may be twice as long.''

Bank seizures climbed 129 percent from a year earlier, according to RealtyTrac, which has a database of more than 1 million properties and monitors foreclosure filings including defaults notices, auction sale notices and bank repossessions. March was the 27th consecutive month of year-on-year monthly foreclosure increases. In February, foreclosure filings rose 60 percent.

Nevada Leads

A surge in defaults among subprime borrowers, those with poor or limited credit, spurred the collapse of the U.S. home loan market and has led more than 100 mortgage companies to stop lending, close or sell themselves. As the value of securities tied to mortgages plummeted, lenders and securities firms have reported writedowns and credit losses of at least $245 billion since the beginning of 2007, according to data compiled by Bloomberg.

Nevada had the highest U.S. foreclosure rate in March at one for every 139 households, almost four times the national rate, RealtyTrac said. Filings there increased almost 62 percent from a year earlier to 7,659.

California had the second-highest rate at one filing for every 204 households, and the most filings for the 15th consecutive month at 64,711. Foreclosure filings more than doubled from a year earlier and were up about 21 percent from February.

Florida, Ohio

Florida had the third-highest rate, one filing for every 282 households, and ranked second in total filings at 30,254. Foreclosures increased 112 percent from a year earlier and decreased almost 7 percent from February, RealtyTrac said.

Ohio ranked third in filings at 11,273 and had the seventh- highest foreclosure rate, one for every 448 households. Georgia, Texas, Michigan, Arizona, Illinois, Nevada and Colorado also ranked among the top 10 states with the most filings, RealtyTrac said.

``The continued increase in new foreclosures implies an even larger drag on prices in 2008,'' Goldman Sachs Chief U.S. Economist Jan Hatzius wrote April 8. Home prices fell 8.9 percent in the fourth quarter, the biggest decline in 20 years as measured by the S&P/Case-Shiller home price index.

Some borrowers are ``hanging on at the margins'' in the face of resets, said Mark Goldman, a loan officer at Windsor Capital Mortgage Corp. in San Diego.

Goldman said one of his clients is a self-employed contractor whose adjustable-rate mortgage rose by two percentage points two months ago. His mortgage payment has increased to $7,200 from $4,900.

``I've had people sitting in my office in tears because there are no loans available,'' said Goldman. ``There are no loans for someone who's upside down on their house.''

Fannie and Freddie try to get tough on walkaways

(Naked Capitalism) While it isn't clear whether homeowners with the ability to pay abandoning mortgages is as widespread a problem as the press would lead one to believe (Tanta at Calculated Risk has been skeptical), Freddie and Fannie appear to be taking no chances.

The Chicago Tribune reports on measures taken by the two government sponsored enterprises (hat tip Doug) to combat this activity. As publicized earlier, Fannie has issued a blanket prohibition against lending to those who have a foreclosure on their record (five years unless there were "documented extenuating circumstances"). Freddie is even more tough-minded, with a longer ban against borrowers with foreclosures in their file, plus efforts to pursue deadbeats in states with laws that allow for it.

Nevertheless, it isn't clear what to make of this alleged trend. The reason for Tanta's doubt is that she suspects the borrowers in question in many cases aren't as able to make payments as the media alleged; my thought is that given the large number of no-docs, these walk-aways may have been speculators who are abandoning investment properties that they claimed were primary residences on their mortgage applications.

However, Credit Slips has suggested another angle: this trend, to the extent it is a trend, may be an unintended consequence of the 2005 bankruptcy law changes. If you don't qualify for a Chapter 7 bankruptcy (in general, if you have more than median income), it's easier to walk from your mortgage debt than your credit card liabilities.

From the Chicago Tribune:
The country's two largest sources of mortgage money have a blunt warning for anyone thinking about joining the "walkaway" trend, where homeowners stop making payments and months later send the house keys to their lender: You will feel the pain.

On March 31, Fannie Mae sent out new guidelines to lenders aimed at walkaways and other foreclosure situations. Fannie will prohibit foreclosed borrowers from getting another mortgage through it for five years, unless there are "documented extenuating circumstances." In those cases, the prohibition is three years.

Even after five years, borrowers with foreclosures in their files will have to put at least 10 percent down and need minimum FICO credit scores of 680.

Freddie Mac, Fannie's rival, counts foreclosures as major blots for seven years, and a senior official said the company is aggressively pursuing walkaways "to preserve our deficiency rights" where permitted by state law....

A number of Web sites have popped up claiming to cut the hassles of bailing out of a mortgage....

Federal legislation enacted last year allows homeowners who negotiate loan modifications with lenders and have portions of their principal eliminated to escape income-tax liability for the amount forgiven.

Walkaway borrowers, by contrast, have nothing forgiven, and the IRS may demand income taxes on the balance they never paid...

For borrowers who faced genuine financial hardships, underwriters are likely to be more sympathetic a few years down the road. But, regardless of what some promoter promises, don't expect to get a new home loan for five to seven years after walking away.

Wachovia on walking away

(Calculated Risk) Here are some comments from the Wachovia conference call (hat tip Brian).

On "walking away":

Q: Kevin Fitzsimmons, Sandler O'Neill: Could you give a little more detail on -- you cited dramatic change in customer behavior or consumer behavior and that led to the decision to cut the dividend, increase capital and so just wondering if you could be particular by -- I'm assuming it's California, but are you talking about people walking away from houses and if you can give any specific examples, thanks.

Ken Thompson, Wachovia Corporation - CEO: I'll let Don talk specifically but I would just say that what we are seeing is that when equity in the home approaches zero, behavior changes. And that's what the model tries to do is to then take that behavior along with house price depreciation and factor that into future losses. Don?

Don Truslow, Wachovia Corporation - SEVP, Chief Risk Officer Ken, that's exactly right. And Kevin, it's just this pattern almost that somewhere -- I don't know where the tipping point is, but somewhere when a borrower crosses the 100% loan to value, somewhere north of that and they presumably run into some sort of cash flow bump, whether it's reduced income or kind of normal things in life that have created past dues before, their propensity to just default and stop paying their mortgage rises dramatically and I mean really accelerates up and it's almost regardless of how they scored, say, on FICO or other kinds of character, credit characteristics.

It's difficult on the walk-away part of the question, that is going on, clearly and there's lots of evidence of that in the market. It's hard to quantify though, from the standpoint of how many of our defaults are just walk-away and the reason is people, they don't tell you. And so we do our best to try to gauge but that portion of the defaults is just kind of hard to quantify. But that behavior is going on. We're seeing in our portfolio the most significant declines and defaults activity in California and of course it's the largest concentration for us in the pick a payment portfolio by far. What I don't know and I guess we're just learning over time is whether the same sort of behavioral trends and patterns will spread to other markets or be observed in other markets at the same pace that they have been in California. But in essence, it built our correlations in the model to assume that they do.

Ken Thompson, Wachovia Corporation - CEO: I might just add that you also see evidence of what Don is talking about if you look across our industry and look at credit statistics on equity loans and equity lines. Because there, at many banks, you're seeing those loans going obviously above 100% loan to value and you're seeing dramatically increasing default rates and losses.”

On REOs and outlook for the housing market:

Truslow (Risk Officer): “[W]e are focused in our efforts to quickly move foreclosed properties related to the pick a pay portfolio as we've talked about before and during the quarter, we took in about 1100 homes and the team did a great job of getting over 800 sold during the quarter in a tough time of the year and in a tough market. So we ended the quarter with just over 900 homes in inventory originated through the pick a payment channel and part of this aggressive action basically served to provide the severity that we recognized on average in the first quarter up to about 32% from about 24% in the fourth quarter and I would just also remind people that included in those severities, we have accounted for basically the disposition cost such as the brokerage fees and even costs that are normally accounted for in period costs such as mowing the grass and fixing up the homes.”

“... the overarching assumption here is that we're about halfway through the decline in housing prices with the trough expected to occur sometime around the middle of 2009.”

On the dramatic change in outlook and "shadow" inventory:

Q: Jonathan Adams, Oppenheimer Capital - Analyst: [I]f I look on page 19 of your presentation, it strikes me that there's nothing in the 90 day past due trends that would justify the kind of change that you have made in your outlook. You can pick a different -- a number of different metrics, whether it's the dividend in suggesting that over a broad range of scenarios it wouldn't need to be cut and then five or six weeks later coming to a different conclusion, or it's some other metrics as well. But it just strikes me as difficult to understand how management's view of the environment has changed so dramatically.

Don Truslow, Wachovia Corporation - SEVP, Chief Risk Officer: Well, I guess -- this is Don. One thing that doesn't show on the chart is the level of cures between 90 days and further severities and defaults have been dropping. The severities in the market place when we take a house back, it takes a lower price to get homes sold and our outlook is -- and as I think everybody has been reading, there is an expectation that there's a broad accumulation of foreclosed properties that haven't hit the market yet and perhaps even some shadow foreclosures that haven't emerged as yet. So our concern, looking forward is that -- and again, what we're beginning to see more evidence of and sense more of in the first quarter is that conditions are going to continue to get tougher and there's an overhang of inventory out there that is going to be costly for the industry to work through.

So on the default rates at 90 days, not a dramatic change in pace but it's more the role rates, the propensity to go all the way to foreclosure, the higher severities taken on disposing of properties and then the, just further understanding and recognition that there is an inventory of foreclosed properties building out there that are eventually going to have to get dealt with.

HELOC Nonsense

(Tanta on Calculated Risk) Wow. Yesterday I disagreed with PJ over at Housing Wire. This morning I find myself taking issue with Barry Ritholtz at The Big Picture. If this keeps up, tomorrow I'll be arguing with God.

Yes, children, it's time for another installment of Picking on Poor Gretchen. And what a doozy it is this time, "You Thought You Had an Equity Line":

IT was the nation’s lending institutions and mortgage originators that got us into this credit mess, but it is consumers, taxpayers and those companies’ shareholders who will end up shouldering most of the costs.

The latest example of this is in the mass freezing of home equity lines of credit going on across the country. Reeling from losses on their wretched loan decisions of recent years, lenders are preventing borrowers with pristine credit and significant equity in their homes from tapping into credit lines that they paid dearly to secure.

I see. The inability to make a withdrawal from the home ATM is . . . "shouldering most of the costs" for the credit crash. Yeah, right.

In the last 30 days, lenders have sent several hundred thousand letters advising borrowers that their home equity lines of credit are frozen, estimated Michael A. Kratzer, president of FeeDisclosure.com, a Web site intended to help consumers reduce fees on home loans.

You'll want to pay attention to Mr. Kratzer, since he's The Sole Source for most of the real nonsense in this article. I'd suggest pausing for a moment to read what Mr. Kratzer has to say about himself on his own website. You may also ask yourself how FeeDisclosure.com makes its money, since "intending to help consumers" does not, as far as I can see, mean that this is a non-profit. You could also ask why the website is identified as "beta." Don't worry, I'll wait here for ya to come back.

Well, then.

Banks have the right, of course, to rescind these credit lines at any time under the terms of the contracts they struck with borrowers. And as home prices have tumbled in many parts of the country, banks are undoubtedly trying to protect themselves from exposure to additional losses.

But these actions are being taken even in areas where property prices are rising, Mr. Kratzer said. What’s worse, the letters provide no explanation for how the lenders determined that the property values underlying the equity lines had fallen.

This Kratzer--unless he's lying about his credentials on that website--has to have heard of this thing called an "AVM," or automated valuation model that a HELOC servicer can run on a specific property, to determine current value. What's with kicking up sand here? In fact, if he wasn't born yesterday he has to know that most HELOCs were originated with an AVM used to establish value, not an old-fashioned formal appraisal (unless they were originated at the same time as a first lien, and the appraisal for that loan--paid for in that loan's closing costs--was re-used for the HELOC).

One especially exasperating aspect of now-you-see-them, now-you-don’t equity lines is that borrowers are not receiving refunds for fees they paid to secure the credit in the first place.

These fees can be significant, Mr. Kratzer said: on a $50,000 line, for example, fees of $1,500 are common. If the line is being frozen at, say, $25,000, why shouldn’t the borrower be entitled to receive a refund of $750?

Where, when, in what dimension of physical space was it "common" to pay THREE HUNDRED BASIS POINTS to get a HELOC? Gretchen printed that claim in the Times?

Consumer Reports, from last August:

HELOCs generally have few if any fees because the market is so competitive. According to HSH Associates, a publisher of financial information, the average closing fee charged for HELOCs is about $60. Some lenders make you pay a maintenance fee, typically about $50 per year, if you don’t keep an outstanding balance.

The Mortgage Professor:

Upfront costs are also relatively low. On a $150,000 standard loan, settlement costs may range from $ 2-5,000, unless the borrower pays an interest rate high enough for the lender to pay some or all of it. On a $150,000 HELOC, costs seldom exceed $1,000 and in many cases are paid by the lender without a rate adjustment.

Go ask Mr. Google for more, if you want. But I'm still convinced that most people with a recently-originated HELOC didn't pay ANY closing costs on the HELOC itself over about $100. That's not even pointing out that the "LOC" part of the name, meaning "Line of Credit," implies that these lines revolve. Somebody with a "current balance" of $25,000 may have borrowed $25,000 six times. You know, like your credit cards. Whatever.

Borrowers who have an excellent credit score may also find that status hurt when a home equity line is frozen. That is because when a lender suddenly caps a $50,000 line at $25,000, the borrower will appear to have tapped the entire amount of the loan, a factor that can reduce a person’s credit score. Never mind that, based on the original amount of the credit line, the borrower is using only half of it.

First of all, if you have this "pristine credit" thing here, the hit to your FICO for having a high "balance to limit ratio" on your HELOC all of a sudden might take you from 800 to 780. That's from "infinitesimal probability of default" to "infinitesimal probability of default." Only if you just assume that lenders' calculation of the value of the property is flat-out wrong--that there really is this "equity" there--is that somehow "unfair." You went from owing a smaller percent of the value of your home to owing a larger one, because the value of your home changed. This is called "marking to market," and I thought Gretchen liked that idea. I guess only when it's banks. When it's middle-class people with their "pristine credit," fantasy should be allowed.

Mr. Kratzer said he had heard from frozen-out borrowers in 11 metropolitan areas where the median home price actually increased in the last quarter of 2007, the most recent figures available from the National Association of Realtors. They include Yakima, Wash.; Appleton, Wis.; Raleigh-Cary, N.C.; and Champaign-Urbana, Ill. Borrowers in areas where prices remained flat have also contacted him.

Oh, well, sure, if the median price in a region is going up, that must mean that the value of all homes is going up. What, you say? It might be a function of no sales at the low end and a few sales at the highest end, pushing up that median? What is that, some kinda statistical wankery you're trying to confuse us homeowners with?

The whole article, besides depending on Kratzer's unsourced assertion of "common fees" and his innuendoes about lender valuations, merely begs the question: this is "unfair" because the equity is there, even though the lenders say the equity isn't there. There isn't one homeowner quoted who actually got an appraisal or AVM that shows something other than the bank's valuation. Kratzer seems to think the bank is obligated to pay for a new appraisal and send you a copy when they lower your line limit. For him, I got bad news: that would, indeed, bring average closing costs on HELOCs up to 300 bps.

Maybe it will help everyone who is all up in arms about this to ponder the fact that since 2005 the federal regulators have required banks to engage in exactly the behavior Gretchen thinks is so unfair. We will stare into the pitiless gaze of the Board of Governors of the Federal Reserve's "Credit Risk Management Guidance For Home Equity Lending":

Effective account management practices for large portfolios or portfolios with high-risk characteristics include:

· Periodically refreshing credit risk scores on all customers;
· Using behavioral scoring and analysis of individual borrower characteristics to identify potential problem accounts;
· Periodically assessing utilization rates;
· Periodically assessing payment patterns, including borrowers who make only minimum payments over a period of time or those who rely on the line to keep payments current;
· Monitoring home values by geographic area; and
· Obtaining updated information on the collateral’s value when significant market factors indicate a potential decline in home values, or when the borrower’s payment performance deteriorates and greater reliance is placed on the collateral.

The frequency of these actions should be commensurate with the risk in the portfolio. Financial institutions should conduct annual credit reviews of HELOC accounts to determine whether the line of credit should be continued, based on the borrower’s current financial condition. 10 Where appropriate, financial institutions should refuse to extend additional credit or reduce the credit limit of a HELOC, bearing in mind that under Regulation Z such steps can be taken only in limited circumstances. These include, for example, when the value of the collateral declines significantly below the appraised value for purposes of the HELOC, default of a material obligation under the loan agreement, or deterioration in the borrower’s financial circumstances.

Claiming or implying that the only reason a lender can or should reduce or freeze a HELOC is when the borrower's ability to repay has changed is not just a total misunderstanding of federal banking regulations, it's dumb. The "HE" in "HELOC" stands for Home Equity. This is not just any old revolving line of credit, it's secured credit.

If you have problems with paying a grand or two for a line of credit you may never use, I suggest not doing it. If you wish to consider that you paid an option fee and your option expired, well, you can feel like one of the professional hedgers. If you think any closing costs you paid should be refunded to you because you're now "out of the money," I posit that you do not understand finances enough to get quoted in a newspaper.

A Tale of Two Markets: Housing Price Risk Diverges During Fourth Quarter

(Housing Wire) The risk of housing price corrections in key metropolitan statistical areas continued to show a split during the fourth quarter of 2007, a new report released Thursday found. PMI Mortgage Insurance Co. said that the risk of housing price declines remains unevenly distributed across the U.S., and centered on former “bubble” markets.

Related links:

• read the full report

“Risk is beginning to mitigate in some areas of the country while it continues to increase in others,” the company said in a press statement. “Risk continues to increase in states where price growth dramatically exceeded historical norms and began to decline in areas where prices grew at a sustainable rate.”

Thirteen of the nation’s top 50 MSAs are now in PMI’s highest risk rank, up from 12 one quarter ago, representing a greater than 60 percent chance that home prices in these areas will be lower in two years. Risk remains largely concentrated in a number of MSAs in California and Florida, PMI said, as well as in Las Vegas, NV, and Phoenix, AZ. The MSAs with the highest risk scores were Riverside/San Bernardino/Ontario, CA (93 percent), Las Vegas (91 percent), and Orlando (85 percent), according to PMI’s report.

click for larger view

“Excess supply is responsible for much of the risk we’re seeing in the market,” said David W. Berson, chief economist and strategist for the PMI Group (PMI: 5.50, 0.00%).

“The excess supply of housing in the United States is 9.2 months for existing homes (the 20-year average has been 6) and 9.8 months for new homes (the 20-year average has been 5.5), which will continue to depress prices [in the highest risk markets].”

In the report, PMI said that it expects the housing market to stabilize “sometime in the second half of this year,” and that the inventory of unsold homes would likely peak later this year. Nonetheless, the mortgage insurer expects prices to fall well into 2009 as historically high levels of inventory will take time to run off.

Berson said he expects the S&P/Case-Shiller housing price index to fall 20 percent from peak-to-trough, translating to an 8 percent decline in the OFHEO housing price index. Both indexes are widely watched by market participants, but measure different aspects of the U.S. housing market.

For more information, visit http://www.pmi-us.com.

More picking on mortgage brokers

(Calculated Risk) This is a rather startling NPR piece about NACA, a non-profit housing assistance outfit, recruiting former subprime brokers (on the "it takes a thief" model, apparently). I was struck by the phrasing here (I see this a lot):

Barbosa says she was pretty fair to her clients and got them the best deal she could in the marketplace. But she says there was plenty of incentive not to put the customer first: Lenders would offer her 1 percent or 2 percent of the price of the loan as a kickback if she persuaded her client to take a higher interest rate. That was legal and commonplace.

Then there were the negative-amortization or "pick-a-payment" loans. Those offered low payment options to begin with but often exploded on the homeowner. As interest rates reset, often at much higher levels, homeowners faced larger payments. That's because the minimum payment required at the introductory rate didn't even cover the interest on the loan, let alone the principal.

"The bottom line is that the lender offered an incentive of 3 percent to the broker if they put [a client] into that particular loan," Barbosa says.

I truly wonder how people who have never been a wholesale lender or a mortgage broker think this works. Read it with naive eyes: it rather sounds the lender is doing a real sales job on the broker, doesn't it? As if the lender called up and said something like, "I see you have here a 7.00% loan. You know, I could pay you a couple of points if you can change this to 8.00%. Or, you know, three points if you can go with the "Pick A Payment." What do you think? Want to be rich today?"

However. Unless things changed markedly in this business in the few years since I worked in it, it doesn't really play out that way. Brokers get rate sheets faxed to them by wholesale lenders. Those "premium" rates with the 102-103 pricing are simply printed on the rate sheet along with the "par" rates. Certainly you can conclude that if wholesalers didn't want brokers to use those premium rates, they wouldn't have published them on the rate sheet. On the other hand, I'm a touch doubtful about the implication that these rate sheets did such a high-pressure sales job on these brokers. After all, you can conclude that if the wholesalers didn't want brokers to use the par or discounted rates, they wouldn't have published them on the rate sheet either.

It is a bit tendentious of NPR to use the term "kickback" here for what is, currently, a perfectly legal practice. I suggest that this is a measure of how disgusted the public has become with mortgage brokers: the public, unlike the regulators and the industry, fails to see any meaningful difference between an illegal unearned "referral fee" (the classic definition of the "kickback") and "Yield Spread Premiums" or "normal" broker compensation. I suspect, however, that a lot of brokers will want to shoot the messenger.

Sheila Bair on foreclosures and spirals

(Calculated Risk) Luke Mullins at the U.S. News & World Report interviews FDIC chairwoman Sheila Bair today: FDIC Chief Calls for a Housing Rescue

Bair believes the Bush / Paulson voluntary approach to loan modifications is insufficient, and that government intervention is needed. Here is her justification:

Q: Why does the foreclosure problem warrant government intervention?

Bair: I am increasingly concerned about the foreclosure rate and the potential for a downward spiral, where we have too much inventory, additional foreclosures adding to inventory, which forces home prices down, meaning fewer people can refinance—leading to more foreclosures and more downward pressure on home prices. If this downward spiral takes hold, there could be much broader ramifications for the economy as a whole. So I think we need to come to grips with the need for government intervention. It's not politically popular. We just need to be honest with people that we have a significant problem here and that additional measures are going to have to be taken. And yes, it may cost money.

Brokered B&C Loans More Costly

(Housing Wire) New research from a well-known consumer advocacy group, released earlier this week, claims that subprime borrowers with brokered loans end up paying significantly more than their counterparts who deal directly with lenders. The study is the latest blow to the brokered mortgage model, which industry critics have argued help fuel questionable lending practices now threatening millions of homeowners.

According to a study conduction by the Center for Responsible Lending, in the first four years of a mortgage, a typical subprime borrower who has gone through a broker pays $5,222 more than if he or she obtained the loan directly from a lender.

“These findings confirm that mortgage brokers steer many of the most vulnerable borrowers to higher-priced loans than they deserve,” said CRL president Michael Calhoun. “At a time when one out of five families with a subprime loan is losing their home, we must rid the market of perverse incentives that practically guarantee overcharges.”

The research — the group claims it is the first to empirically examine the effect of broker compensation on a broad spectrum of borrowers — reveals what it calls “troubling patterns.”

Over the 30-year span of a loan, the cost difference between a loan obtained via a broker and a retail-originated loan grows to almost $36,000, the group alleges. The report also argues that for borrowers with better credit, the difference in loan prices is less pronounced — and that borrowers with very high credit scores may actually fare better by going the third-party route.
The CRL said that yield spread premium, which it characterized as “kickbacks from lenders,” gave brokers an incentive to steer borrowers into overpriced products.

The report is an interesting one for industry participants, many of whom are accustomed to a knee jerk reaction against CRL studies. In this case, industry managers interviewed by Housing Wire expressed a different tone.

“I can’t believe I’m going to agree with the CRL,” said one source, who asked not to be named, “but I think most of us on the origination side wouldn’t be surprised by what their study is finding — even if agreeing with the CRL makes me sort of sick to my stomach.”

For more information, visit http://www.responsiblelending.org.

JPMorgan's Flanagan Proposes Subprime Borrower Bailout

(Institutional Investor News) JPMorgan Securities' global structured finance research head Chris Flanagan today suggested easing the credit crisis through a plan that calls for the government to help bail out subprime borrowers by paying for a chunk of their loans' principal.

Speaking at the 2008 JPMorgan Securitized Products Research Conference in New York, Flanagan suggested the government reduce pay for part of the principal of subprime mortgages, reducing the loan-to-value ratio by up to 20% if the LTV is more than 75%. Banks and servicers would be on the hook for any amount above 95% LTV, if it is that high. As a result, the LTV ratios of non-agency borrowers with FICO scores of less than 680 would essentially be reduced to 75%. Flanagan estimates the plan would cost the government about $180 billion. He added borrowers' credit records would still be negatively impacted by the plan.

On investor balance sheets, the loan alterations would be counted as a prepayment. Lenders and the government would have liens on the properties based on the amount paid for. As an incentive to keep borrowers current and from selling their properties, Flanagan suggested that five years after forgiving the debt, the government and lenders' liens be reduced by 50% of the original amounts.

With many delinquent and defaulted loans starting to perform again, under such a plan AAA tranches of moribund collateralized debt obligations of asset-backed securities would even start to see their values increase, Flanagan said.

While several attendees questioned specifics of the plan, one attendee voiced concern that any bailout plan - whether geared toward banks or borrowers - would promote irresponsible borrowing in the future. His question sparked a round of applause from the several hundred conference attendees.

As Defaults Surge, The Need for ‘High-Touch’ Servicing Emerges

(Housing Wire) As hedge funds look to swoop into the mortgage market — HW’s sources suggest that managers see troubled mortgage debt as probably the hottest distressed asset opportunity in a decade — more than a few new servicing shops are springing to life to handle the increased workload.

One such newcomer is Acqura Loan Services, a special servicing outfit that is aiming specifically to target the needs of lenders, hedge funds and investors in distressed debt, according to a press statement released Monday morning.

“At this stage in the credit cycle, lenders, Wall Street and MBS/ABS investors realize they are facing a triple threat: the prospect of recession, the credit/liquidity problems and falling home prices,” said David Vida, CEO of both Acqura and its parent, the Strategic Recovery Group, LLC. Vida, a former executive at Option One Mortgage Company, said that the players now entering the mortgage space are looking for a different kind of approach to servicing that what traditionally would be expected.

“What investors and issuers are looking for now are focused, innovative partners, who can commit to higher service levels and deliver experienced asset managers and the latest technology to achieve better outcomes for both borrowers and investors,” he said.

Industry insiders that HW spoke with agreed, and said that they feel many traditional servicing outfits are stretched to the limit by both existing processes and a flood of troubled borrowers.

“There’s a real need right now for a different kind of servicing, the high-touch approach of working with borrowers that many existing shops are sort of constrained in providing,” said one source, a hedge fund manager who asked not to be named. “We’re looking to make sure that we can protect returns on the assets we acquire, and that means taking a different road in terms of what we want out of the servicers we’ll work with.”

Acqura, which said it began hiring personnel and developing proprietary scoring and servicing technology in mid-2007, currently has three special servicing clients. The company said it specializes in working to develop a customized risk-management solution for each client’s objectives, and has focused on hiring only experienced personnel; REO asset managers at the company have an average of 12 years of experience, for example.

Acqura isn’t the only new entrant into what promises to be a competitive market over the next few years. Phoenix-based Marix Servicing, LLC was founded in February 2007 and has taken a similar tack, employing a “high-touch” special servicing model to help investors manage distressed assets in the subprime mortgage market. Marix is backed by Marathon Asset Management, LLC, a $9.5 billion private equity firm.

“Typically, loss mitigation begins when something bad happens,” explained Acqura’s Vida. “Our approach will allow us to be more proactive in anticipating events, such as resets or deteriorating credit, and to establish a profile and, hopefully, a dialogue with the borrower before the situation escalates.”

“Our high-touch approach is designed to encourage cooperation from the borrowers, and to offer them customized payment plans and loan modification options to help them stay in their homes, if they want to and can afford their payments,” he said.

For more information, visit http://www.acquraservicing.com.

Housing Bust Duration

(Calculated Risk) This first graph shows real Case-Shiller house prices for Los Angeles and the Composite 20 Index (20 large cities). The indices are adjusted with CPI less Shelter.

Click on graph for larger image.

The most obvious feature is the size of the current housing price bubble compared to the late '80s housing bubble in Los Angeles.

The Composite 20 bubble looks similar (although larger) to the previous Los Angeles bubble. (Note the Composite 20 index started in 2000).

Perhaps we can overlay the current Composite 20 bubble on top of the previous Los Angeles bubble and learn something about the possible duration of the current bust.

In the second graph, the real price peaks are lined up for late '80s bubble in Los Angeles, and the current Composite 20 bubble. Note that the real price peak for the Composite 20 was flat for several months, so the real peak was chosen as May '06. It could also be a few months later.

The peak and trough for the Los Angeles bubble are marked on the graph.

Prices are falling faster this time, probably because the bubble was larger.

It might be reasonable to expect that the dynamics of the current bust will be similar to the previous bust. After another year (or two) of rapidly falling prices, it's very likely that real prices will continue to fall - but at a slower pace. During the last few years of the bust, real prices will be flat or decline slowly - and the conventional wisdom will be that homes are a poor investment.

The Los Angeles bust took 86 months in real terms from peak to trough (about 7 years) using the Case-Shiller index. If the Composite 20 bust takes a similar amount of time, the real price bottom will happen in early 2013 or so. (But prices would be close in 2010).

Housing Crisis Hits Renters, Too: Report

(Housing Wire) As Congress debates solutions to the mortgage meltdown and ever more homeowners find themselves facing foreclosure, a new report suggests that policymakers and industry regulators need to move beyond what some are calling a “one-size-fits-all” approach to the current housing and mortgage messes.

A new report released late Thursday by the Center for Economic Policy and Research and the National Low Income Housing Coalition found that the ratio of homeownership to rental costs varies substantially from market to market, and that in many markets, homeownership remains a costly — and risky — proposition. Which means that foreclosures are hitting renters, too.

“This is not just a homeownership crisis.” said Danilo Pelletiere, NLIHC research director and a co-author of the report. “Data shows that nearly 40 percent of foreclosures affect rental properties and in many areas, homeownership markets remain highly uncertain. Any policy to address this crisis must recognize the rental market as part of the solution.”

According to the report, which analyzed data from the Census Bureau’s American Community Survey, the most inflated housing markets still see monthly homeownership costs outpacing rental costs by as much as 300 percent. The study’s authors argue that this creates a substantial and unnecessary drain on household income, especially for middle- and lower-income families.

“This could mean that families may have to forgo health insurance or quality child care as they struggle to make their mortgage payments,” said Dean Baker, Co-Director of CEPR and an author of the study. “Furthermore, since prices are still falling in these markets, many homeowners won’t ever accrue any equity.”

The study projects that in the bubble markets, most homeowners will leave their homes with large amounts of negative equity. For example, it projects that in New York, homeowners will have $179,000 of negative equity and in Los Angeles, the shortfall would be $277,000. In these markets, the study’s authors argue that the best use of government funds would be to provide adequate rental solutions for borrowers losing their homes.

For cities where the costs of owning are much closer to rental costs, however, the study’s authors say it is likely that a small amount of equity will be accrued. In these markets, the study suggests that policies seeking to keep owners in their homes — possibly through some form of government-guaranteed mortgage — are preferable.

From my perspective, regardless of what you think about Dean Baker, he does get at a point I’ve been making since — oh, since August of last year. If we’re going to spend any money on this housing crisis, we should be spending it on how we help people once they’ve already lost their homes. Doubly so in the so-called bubble markets.

A Needle in a Haystack: Where’s the Good News on Housing?

(Housing Wire) There is plenty of bad news on housing, at least transactionally, right now — prices are down, sales volume is down, inventories remain far too high. And that shouldn’t be surprising, given that we’re in the middle of one of the worst downcycles for real estate in our nation’s history.

A report released yesterday by real estate analytics firm RadarLogic highlighted continued problems for housing in January: out of 25 major MSAs studied, only two — Charlotte, NC and New York — remained in positive pricing territory on a yearly comparison basis.

RadarLogic publishes a set of housing prices, on a per-square-foot basis, that serve to drive the Residential Property Index, or RPX; the RPX is one of the tradeable property derivatives out there (the other being the Case-Shiller based housing futures).

Some markets, according to the RadarLogic data, are just seeing prices get hammered. Sacramento, for example, is off -27.8 percent year-over-year; Las Vegas, down 25.4 percent yearly; and San Diego, off 21.2 percent. Those kind of numbers put even prudent borrowers upside down on their mortgages.

The study does find what it calls some “potentially positive influences” worth paying attention to. The first is that monthly price declines did moderate during January, relative to December. Twelve of 25 MSAs tracked saw the rate of price declines either slow or reverse during the month, including Miami and Chicago; five MSAs saw monthly price declines accelerate, including Detroit, which posted a 6.4 percent drop in housing price per square foot during January alone.

The picture is decidedly less positive, however, when you compare annual price changes in December and January on a rolling twelve-month basis; which is to say that a moderation in monthly price declines wasn’t enough to offset poor performance over the course of the past year. Only six MSAs saw the annual rate of price declines improve in January, while fourteen MSAs actually saw their annual price change rates worsen.

RadarLogic suggested that the spring selling season will likely provide a better picture of where the markets are headed in the months ahead.

For more information, visit http://www.radarlogic.com.

Walking Away Without a Foreclosure

(Felix Salmon) Remember youwalkaway.com? The idea there is that you stop making your mortgage payments but you can live in your house for 8 months or more before finally being evicted. Well now Barry Ritholtz has found a couple of articles, in BusinessWeek and the Chicago Tribune, which detail a much less rational behavior: homeowners moving out the minute they get their first nastygram from the bank, before the bank has even decided to foreclose.

What results is particularly gruesome, if the bank doesn't decide to foreclose: an abandoned house with no obvious owner. But what I don't understand is why the homeowners move out in the first place, if they don't have to and nobody's asking them to.

The Mortgage Mess Takes Center Stage on Capitol Hill

(Housing Wire) On Wednesday night, Senators Chris Dodd (D-CT) and Richard Shelby (R-AL), from the Senate Committee on Banking, Housing and Urban Affairs, hammered out a a bipartisan deal designed to address the housing crisis.

The so-called Foreclosure Prevention Act of 2008 proposes a $10 billion increase in tax-free, state-issued bonds to help troubled homeowners refinance, $4 billion in community development block grants to permit states to buy foreclosed properties, and an additional $100 million for housing counseling. The bill would also establish a $7,000 tax credit to buyers of foreclosed homes, and would include FHA modernization provisions designed to further increase the government lending program’s footprint in mortgage banking.

Related links:

• view a summary of the proposed legislation

Industry representatives seemed relieved that the bill didn’t include hotly-contested provisions regarding Federal bankruptcy reform for troubled borrowers, with Kieran Quinn, chairman of the Mortgage Bankers Association, praising the FHA reform provisions.

“A more modern and effective FHA, mortgage revenue bonds for state housing finance agencies, additional money for counseling – these are all things that will be of great help to struggling homeowners,” he said in a statement released earlier this week. “I hope that Senators will keep their eye on that goal, and not attempt to attach to the bill partisan provisions such as bankruptcy cramdown that would increase borrowing costs on all future borrowers and delay progress on this important bill.”

Consumer groups, of course, have soundly panned the housing proposal for that exact reason. More than 15 consumer-led groups put out a press release Thursday suggesting the bill was designed to bail out lenders and builders.

“The Senate Housing package misses the single most significant step needed to help the 20,000 American families with subprime loans that are losing their homes each week through foreclosure: the bankruptcy amendment,” the groups said.

“We are left with a bill loaded with special considerations for mortgage companies and builders that does very little for homeowners who were sold predatory loans by mortgage lenders.”

Legislators are clearly facing intense pressure to act on current woes in the housing and mortgage markets — and all signs so far suggest that even the current bill won’t be the last.

Robert Schroeder at MarketWatch reports that Dodd is going to delve into the issue of foreclosures in an upcoming hearing:

Sen. Christopher Dodd, D-Conn., said Friday that he will have a hearing about heading off foreclosures, since the broad bill agreed to by senators doesn’t address that issue. He has proposed allowing the government to insure refinanced mortgages.

“We ought to be dealing with the issue of ‘how do we keep people in their homes where we can?’” Dodd told reporters on a conference call Friday.

Sources tell HW that the hearings will likely center on the so-called bankruptcy cram-down legislation, although it isn’t clear yet who will be called to testify before the Senate panel.

“There is too much political pressure for House or Senate leaders to let this [current bill] collapse,” Jaret Sieberg, an analyst with the Stanford Group Company, wrote in a widely-distributed research note earlier this week. “To us, the bigger question is when it passes.”

Sieberg, along with other sources, expects the bill to pass before Congress heads off to its Memorial Day recess.

“Politically, we do not see how the president could veto this bill,” he wrote.

Max and Chuck Show, Cont.

(Steven Pearlstein in the Washington Post) Hold on to your wallets, Mr. and Mrs. America, Max and Chuck are at it again.

Yes, our favorite sugar beet socialist and cornhusk communitarian have decided to ride to the rescue of the nation's troubled housing sector.

It all started on Monday when members of the Senate returned to Washington after another two-week recess in which they apparently discovered that voters actually expected them to do something about the housing crisis rather than just talking about it until the next recess. So Max Baucus (D-Mont.) and Charles E. Grassley (R-Iowa), the chairman and ranking member, respectively, of the Senate Finance Committee, took the opportunity to dust off a quartet of stinky tax breaks that had been rejected by the House and the Bush administration back in February, when Congress was scrambling to show that it was doing something about the gathering recession.

According to congressional tax experts, these tax breaks would cost the Treasury about $28 billion in lost revenue over the next three years, which is a chunk of change, even by federal budget standards. And while some of that might be recouped in the form of higher tax payments in the future, you know tax lobbyists are already burning the midnight oil to make sure such a thing never happens.

One of the provisions would provide a $7,000 tax credit to anyone who buys a house in foreclosure. This won't do a thing to avoid foreclosures, or put a dime in the pockets of owners who lose their homes. But it will provide a direct subsidy to banks and other lenders who, to sell their newly acquired property, would otherwise have to lower the price by another $7,000. Now, thanks to Max and Chuck, they won't have to.

But wait, it gets worse. If you're a homeowner or builder trying to sell a similar house in the same neighborhood, your buyers would not be entitled to the tax credit. So that means that, thanks again to Max and Chuck, you could lose a sale or have to lower your price $7,000 to compete.

Pretty neat, huh?

Another provision would make it possible for taxpayers who don't itemize their deductions to get a $500 deduction ($1,000 for couples) for state and local property taxes. This would mean even greater subsidies for homeowners, on whom we already lavish billions of dollars in tax breaks each year, including the granddaddy of all, the mortgage-interest deduction. While they put a time limit on this provision, the odds are pretty good that Max and Chuck will be back early in 2009 with an extension to this $1.5 billion-a-year goodie.

There's also authorization for states to issue an additional $10 billion in tax exempt bonds that, in theory, could be used by state housing authorities to refinance subprime mortgages at below-market rates. But if Max and Chuck had bothered to check, they would have discovered that interest rates on tax exempts are running higher than they are for taxable federal bonds. So don't look for too many states to go rushing to market with those issues.

The worst and most expensive of the tax breaks were those pushed by the home builders who made record profits during the housing boom but are now hemorrhaging cash. Basically, they would allow any company to take their tax losses from last year, this year and the next, and apply them to their profits of the previous four years rather than the two years now allowed under tax law.

The effect of the provision would essentially allow home builders to get back some or all of the taxes they paid during the years of record profits. No doubt that will be much appreciated by home builders and their shareholders, and maybe even their creditors. But because it won't lower prices or stimulate demand, it will do nothing to stimulate housing sales or production or create a single construction job.

But it's even worse than that. This provision doesn't just apply to home builders -- it's a boon to every company that is losing money now but made huge profits in the preceding four years. And that could include any number of banks, investment banks, mortgage bankers and hedge funds.

Indeed, the irony is that one of the biggest winners from all this may be J.P. Morgan Chase, which is knee-deep in balance-sheet write-downs since its shotgun marriage last month with Bear Stearns. It was only last week that Max and Chuck were all hot under the collar because of risks assumed by the Federal Reserve as part of that controversial transaction. But whatever government subsidy might be triggered by the Fed's involvement should pale compared to the value of the tax break that J.P. Morgan has received as a gift from Max and Chuck.

All this will do little to solve the housing crisis, but it may help to alleviate the campaign funding crisis created when these same tax provisions were jettisoned from the economic stimulus bill. The angry and ham-handed response from Brian Catalde, the president of the National Association of Home Builders, was to very publicly announce the indefinite cutoff of all contributions to federal candidates. Were those same provisions to be enacted now, it would be a stunning acknowledgement by members of Congress of the direct connection between political money and legislative outcomes.

New Housing Bill Criticized As Scant Help for Distressed

(Washington Post) For anyone hoping to buy a home, sell one or hold onto the one they have, the $15 billion housing bill unveiled in the Senate yesterday may mean nothing more than a bit of extra cash in the pocket.

The housing bill, hastily cobbled together by Republican and Democratic leaders, would allow state and local property tax deductions this year of up to $1,000 for families and $500 for individuals who now can't deduct that money.

It also aims to spur demand for homes by providing a $7,000 tax break, split over two years, to anyone who buys a foreclosed home within a year of the bill's enactment.

But many consumer advocates say the Senate's "Foreclosure Prevention Act" does not live up to its name. They say it fails to deliver swift help to the most distressed homeowners and is of limited use to borrowers who may soon be in trouble.

"Anybody who gets money in their hands out of this bill will be happy, but that does not mean it will solve the larger social problem or larger economic problem," said Peter Morici, economist and business school professor at the University of Maryland.

Those who stand to benefit the most are home builders and businesses hit by the economic downturn. Through 2010, the entire tax package would cost about $28.8 billion, of which $25.5 billion would go to money-losing businesses in the form of tax rebates. They would give up other tax breaks, reducing the cost of the entire housing bill to $15 billion by 2018.

The House plans to offer its own version of the legislation, and Democratic leaders said they would focus on different priorities. "Hopefully, the balance will swing to be in favor of the families who are in danger of losing their homes," House Speaker Nancy Pelosi (D-Calif.) said.

For consumer groups, the biggest setback was the Senate's decision to strip the bill of a provision that would have allowed bankruptcy court judges to rewrite the terms of troubled loans for people who filed for personal bankruptcy. The Senate yesterday killed an effort to restore the measure.

The measure could have saved more than half a million borrowers from foreclosure through 2009, according to its supporters, by allowing judges to lower the interest rates of mortgages, extend the life of the loans or forgive part of the debts.

Of all the legislative proposals aimed at helping homeowners, consumer advocates said this one offered the most relief.

But the lending industry lobbied against it, saying it would increase borrowing costs and encourage some to use bankruptcy as a cheap alternative to refinancing.

Without the provision, "there's no guarantee of any help whatsoever for many of the clients I work with," said Nancy Ryan, a bankruptcy lawyer in Fairfax.

Alys Cohen, a staff attorney at the National Consumer Law Center, said the package will do little to stem foreclosures. "What we've got right now is basically voluntary measures and incentives. . . . That's it."

Even the $100 million set aside for housing counselors received only a half-hearted endorsement from some counseling groups, which say they need more options to offer borrowers.

"We want to be able to counsel them into something that's going to help them and get them into good loans," said John E. Taylor, chief executive of the nonprofit National Community Reinvestment Coalition. "But you've got to stop the bleeding before you pump more blood into the system."

On Capitol Hill, the Senate bill's supporters acknowledged its shortcomings but insisted it was useful.

They said the proposed property tax deductions for families and individuals this year would benefit more than 28 million mostly low-income households that pay property taxes but cannot deduct them on their federal tax returns because they do not itemize.

The proposal offers "broad-based tax relief for low-income individuals and those who have already paid off their mortgages," said Senate Finance Committee Chairman Max Baucus (D-Mont.).

The $7,000 tax credit for those who buy foreclosed properties should stimulate demand for them and prevent their prices from falling further, said Sen. Johnny Isakson (R-Ga.).

All this sounds "wonderful" to Elizabeth Garechu of Falls Church, who is shopping for her first home and is more than willing to consider a foreclosure. She wants to move fast, when interest rates are low.

"I'm looking for any kind of break I can get, any kind of incentive I can get, anything at all to get my foot in the door," said Garechu, a waitress and single mother.

Other house-hunters were less enthusiastic, including David Meeker, 40, who is looking for a home in Prince William County in the $500,000 to $600,000 price range.

"A $7,000 tax break, quite frankly, is not going to do a whole lot for a buyer," Meeker said. "It's not cash that's available for the transaction. It comes after the fact."

In the Washington area, where the median price of a home is $420,000, the tax break is "peanuts," said Jim Whitehead, a real estate agent at Lord & Saunders in Woodbridge.

"It might help move lower-priced homes in less expensive areas," Whitehead said. "But in more expensive areas of Northern Virginia, it's going to have minimal impact."

Some states have struck out on their own. Maryland lawmakers this week passed ambitious measures that would make the most egregious mortgage schemes subject to criminal prosecution, extend the foreclosure timetable from 15 to 150 days and prohibit pre-payment penalties and transactions in which homeowners are tricked into signing over their houses to third parties.

To help localities cope, the U.S. Senate bill would make an additional $10 billion in tax-exempt revenue bonds available to state and local housing finance authorities. The proposal would also authorize the agencies to help troubled subprime borrowers.

Sen. John Kerry (D-Mass.) and his co-sponsor, Sen. Gordon Smith (R-Ore.), said the measure could make low-cost loans available to as many as 80,000 families who, on average, earn about $45,000 a year.

"It's not enough money" to solve the nation's housing troubles, Kerry said. "But it's the most we could get."

Lenders Buried By Foreclosures Let Late Borrowers Stay in Homes

(Bloomberg) -- Banks are so overwhelmed by the U.S. housing crisis they've started to look the other way when homeowners stop paying their mortgages.

The number of borrowers at least 90 days late on their home loans rose to 3.6 percent at the end of December, the highest in at least five years, according to the Mortgage Bankers Association in Washington. That figure, for the first time, is almost double the 2 percent who have been foreclosed on.

Lenders who allow owners to stay in their homes are distorting the record foreclosure rate and delaying the worst of the housing decline, said Mark Zandi, chief economist at Moody's Economy.com, a unit of New York-based Moody's Corp. These borrowers will eventually push the number of delinquencies even higher and send more homes onto an already glutted market.

``We don't have a sense of the magnitude of what's really going on because the whole process is being delayed,'' Zandi said in an interview. ``Looking at the data, we see the problems, but they are probably measurably greater than we think.''

Lenders took an average of 61 days to foreclose on a property last year, up from 37 days in the year earlier, according to RealtyTrac Inc., a foreclosure database in Irvine, California. Sales of foreclosed homes rose 4.4 percent last year at the same time the supply of such homes more than doubled, according to LoanPerformance First American CoreLogic Inc., a real estate data company based in San Francisco.

Reluctant Banks

``Some people stay in their houses until someone comes to kick them out,'' said Angel Gutierrez, owner of Dallas-based Metro Lending, which buys distressed mortgage debt. ``Sometimes no one comes to kick them out.''

Banks are reluctant to foreclose on homeowners for a variety of reasons that include the cost, said Peter Zalewski, real estate broker and owner of Condo Vultures Realty LLC, a property consulting firm in Bal Harbour, Florida.

Legal fees and maintaining a vacant property while paying the mortgage, insurance and taxes can add up to as much as 15 percent of the value of the home, and it may take months for the foreclosure to work through the legal system, he said.

``The end result is taking back a property that the bank will have to manage, rent out and or sell,'' Zalewski said.

In many cases, lenders also have to foot the bill for fixing up vacant homes that have been vandalized.

Real estate broker Georgia Kapsalis is offering a home for sale in Birmingham, Michigan, a Detroit suburb, where the owner last wrote a mortgage check in July. He still lives in the house, she said.

Empty Houses

``Some of the banks just don't want the houses to be empty, especially if it's in an area where there's a lot of theft or there are five other houses empty on the street,'' said Kapsalis, who works at Added Value Realty LLC in Livonia, Michigan, another Detroit suburb. ``They'll lose toilets, plumbing, appliances, everything. Banks are getting wise and allowing people to live there longer.''

Alexis McGee, president of Internet database Foreclosures.com in Sacramento, California, said she toured a property where the departing resident tried to make off with the outdoor air conditioning unit by sawing the metal legs off its concrete apron.

``People take what they want to take,'' McGee said. ``They feel that they're owed.''

With home sales dropping and national inventories rising, the lenders have another reason to delay foreclosures, said Howard Fishman, a real estate investor based in Minneapolis.

``What are the banks going to do?'' Fishman said. ``They don't want the house. They have a mortgage for $1 million and the house is worth $750,000.''

Flooded Market

Five million existing homes were sold in February, down 31 percent from the peak of 7.25 million in September 2005, data compiled by the Chicago-based National Association of Realtors show. More than 4 million existing homes were on the market in February, 53 percent more than the 2.6 million average of the past nine years, the Realtors reported.

``Excess inventories pose the biggest risk to the market,'' Michelle Meyer and Ethan Harris, New York-based economists at Lehman Brothers Holdings Inc., wrote in a report last month. ``As long as inventories are high, home prices will fall.''

Growing inventory pulled median home prices down to $195,900 in February, a 15 percent drop from the peak of $230,200 in July 2006, the Realtors said.

The civil court in St. Lucie County, Florida, is getting about 44 foreclosure cases to file every day. That's the same number it averaged in a typical month in 2005, said Clerk of the Circuit Court Ed Fry.

`Moral Hazard'

``It's pretty overwhelming,'' he said.

Fry said he has 12 full-time employees and two temporary workers he just hired handling nothing but foreclosures. Still, the 50-page filings sit in cardboard boxes for three weeks before the court staff can process them, Fry said. Then it takes another two months to get a date on the court docket, he said.

Mortgage servicers, who collect monthly payments and are responsible for starting the foreclosure process, also were caught short-staffed, said Grant Stern, a mortgage broker and owner of Morningside Mortgage Corp. in Miami Beach, Florida.

``The most experienced people you can bring in are origination people,'' Stern said. ``But for a bank it's a moral hazard to have the same people who originated the loans now modifying those loans. That wouldn't be desirable. Once around is enough.''

Servicers Expand

The five largest servicers -- Countrywide Financial Corp., Wells Fargo & Co., CitiMortgage Inc., Chase Home Finance Inc. and Washington Mutual Inc. -- together manage more than half the home loans in the U.S., according to New York-based National Mortgage News, an industry publication.

Home ownership and worker mobility

(Naked Capitalism) Louis Uchitelle, in "Unsold Homes Tie Down Would-Be Transplants," points out that being unable to sell a house can keep people from taking jobs that require them to move. That problem is obviously now more acute given the moribund state of the housing market in many parts of the county. However, Uchitelle implies that the negative-labor-market impact of home ownership is strictly the result of a lousy real estate market.

That isn't accurate. As we pointed a year ago in "Is Owning Your House Bad for You?" we took as a point of departure an article by Tim Harford in Slate:

Even when we look only at internal migration, the barriers are formidable. Wherever people seem particularly keen to own their own homes—as in the United Kingdom, Spain, and some U.S. states—employment suffers as a result. English economist Andrew Oswald has shown that across European countries, and across U.S. states, high levels of home ownership are correlated with high levels of unemployment. More conventional factors such as generous welfare benefits or high levels of unionization don't explain unemployment nearly as well as the tendency to own houses. Renting your home and staying flexible do wonders for your chances of always finding an interesting job to do.

Recent research in the Economic Journal suggests that people who own their own homes form denser local networks, which help unearth local jobs. Still, the jobs tend to be less well-matched and commuting distances are longer. So, professor Oswald is right to argue that we should do everything possible to free up impediments to renting or to selling a house and buying a new one. It would be handy if we were allowed to build houses near Manhattan, too.

Even if we did all this, economists Ed Glaeser and Joe Gyourko argue that one serious barrier remains: Houses do not walk. No matter how bad things get in Detroit or Treorchy, the houses will still be there, and if they are cheap enough, people will want to live in them. The likely result is a gloomy sort of segregation: Those who feel that they can find a good job in the boom cities will move there and pay the higher rents. Those who are less confident of that would rather have no job in a cheap house than no job in an expensive house. Detroit will have residents for a long time to come.

My comments:

It's an interesting thesis, and likely some truth in it too, but there is one huge hole: the data isn't adjusted for age. Older people are more likely to own homes. And unemployed people over 40 (in some fields, over 35) find it much harder to find a job. It's age discrimination, in part, but also the reality that most organizations are pyramid shaped. There are more jobs at the bottom and the middle. Employers don't like hiring people who are overqualified (the subordinate might know more than the boss, or might get bored and quit). And for corporate and professional roles, employers also vastly prefer poaching someone from another company to hiring someone who is out of work, even if through no fault of their own.

But the demands of the workplace are at odds with home ownership and rootedness. I know of someone over 40 who did lose his job. His old employer was in Boston. His new employer is in exurban Philadelphia. He doesn't want to take his kids out of school, so he has a brutal commute. How many people are willing to do that?

The demands of labor mobility are increasingly in conflict with community life of any form. A McKinsey partner requisitioned a study by Yankelovich about 8 years ago, which reported (among other things) that college graduates would work for 11 employers before they retired. More recently, the Bureau of Labor Statistics predicts that current college graduates will have 13 jobs by the time they are 38 (note it is not clear whether this includes promotions). That kind of instability makes home ownership a risky move. It's not just the possible need to relocate, but the uncertainty over income that would get in the way.
.

Yet Uchitelle fails to acknowledge that home ownership has been discussed in the economic literature and found to inhibit labor mobility even in good times. Guess we can't question that American dream.

From the New York Times:

The rapid decline in housing prices is distorting the normal workings of the American labor market. Mobility opens up job opportunities, allowing workers to go where they are most needed. When housing is not an obstacle, more than five million men and women, nearly 4 percent of the nation’s work force, move annually from one place to another — to a new job after a layoff, or to higher-paying work, or to the next rung in a career, often the goal of a corporate transfer. Or people seek, as in Dr. Morgan’s case, an escape from harsh northern winters.

Now that mobility is increasingly restricted. Unable to sell their homes easily and move on, tens of thousands of people ... are making the labor force less flexible just as a weakening economy puts pressure on workers to move to wherever companies are still hiring....

With homes changing hands easily in a booming market, interstate migration reached 2.2 million people in 2006, excluding the effects of Hurricane Katrina. As the economy and home prices began to unravel in 2007, however, interstate migration plunged to 1.6 million people....Worker mobility — or rather immobility — is making a big contribution to this decline....

Corporate transfers contribute significantly to worker mobility, and employers often cover at least some of the cost of selling a home in the old location and buying one in the new. That practice can backfire, says Richard Shaw, a vice president of Applied Industrial Technologies....

Out of 3,500 employees in the United States, Applied normally transfers 25 to 30 each year from one center to another... Despite the opportunity, transfers have fallen by half, Mr. Shaw said. That is mainly because transferred employees too often find themselves owning two homes — one in the old location and one in the new — and paying two mortgages.

Applied tries to minimize the problem by paying one of the two mortgages for up to six months, the expectation being that the old home will sell by then. Increasingly, that does not happen...

He tells of one transferred executive “who ended up owning two homes for more than six months and, finding himself paying two mortgages, opted to move back to his original city, surrendering his new house to the bank.”

Paulson Says Treasury `Flexible' on Housing Measures

(Bloomberg) -- Treasury Secretary Henry Paulson indicated the Bush administration is willing to consider congressional plans to stem foreclosures by expanding government guarantees for mortgages.

``I think you will continue to see flexibility as we learn and go forward,'' Paulson said in an interview today with Bloomberg Television in Beijing after meetings with Chinese officials.

U.S. House Financial Services Committee Chairman Barney Frank said yesterday that the administration is increasingly sympathetic to his plan to widen mortgage guarantees.

Fed releases new subprime and Alt-A mapping tool

(FRB) The Federal Reserve System on Tuesday announced the availability of a set of dynamic maps and data that illustrate subprime and alt-A mortgage loan conditions across the United States.

The maps, which are maintained by the Federal Reserve Bank of New York, will display regional variation in the condition of securitized, owner-occupied subprime, and alt-A mortgage loans. The maps and data can be used to assist in the identification of existing and potential foreclosure hotspots. This may assist community groups, which can mobilize resources to bring financial counseling and other resources to at-risk homeowners. Policymakers can also use the maps and data to develop plans to lessen the direct and spillover impacts that delinquencies and foreclosures may have on local economies. Local governments may use the data and maps to prioritize the expenditure of their resources for these efforts.

To access the data visit: www.newyorkfed.org/mortgagemaps/. Monthly updates are planned.

The maps show the following information for subprime and alt-A loans for each state and most of the counties and zip codes in the United States:

• Loans per 1,000 housing units• Loans in foreclosure per 1,000 housing units•
• Loans real estate owned (REO) per 1,000 housing units•
• Share of loans that are adjustable rate mortgages (ARMs)•
• Share of loans for which payments are current•
• Share of loans that are 90-plus days delinquent•
• Share of loans in foreclosure• Median combined loan-to-value ratio (LTV) at origination•
• Share of loans with low credit score (FICO) and high LTV at origination•
• Share of loans with low- or no documentation• Share of ARMs with initial reset in the next 12 months•
• Share of loans with a late payment in the past 12 monthsAccompanying data tables report further statistics for states.

The maps and data are drawn from the FirstAmerican CoreLogic, LoanPerformance Loan Level Data Set. For more details, see the website's technical appendices to the map and the data tables.

Additional mortgage foreclosure resources, including helpful information and links to agencies and organizations that may provide assistance to consumers experiencing difficulty making their mortgage payments, are available on the Board's website at: http://www.federalreserve.gov/pubs/foreclosure/default.htm