(Realtor Magazine) If the unemployment rate is historically low yet your customers are waiting for home prices to drop 30 percent before they buy, you’ve just been Case-Shillered. The S&P/Case-Shiller Home Price Index is the benchmark the financial press uses to tell us how terrible the housing market is. One must wonder why. The index’s findings are notoriously softer than the indexes used by the Office of the Federal Housing Enterprise Oversight, NAR, and even Realogy.
In 2007, home prices went down for the first time in decades, but by how much? OFHEO said by 0.3 percent, NAR 1.4 percent, and Realogy 1 percent. Case-Shiller? 8.9 percent. Yale economist Robert Shiller, cofounder of the index, is scaring home buyers with proclamations that home prices “will fall further than the 30 percent drop in the historic depression of the 1930s,” as he told the Associated Press in April. Prognostications like that are a problem because financial journalists such as Michael Grynbaum of The New York Times, Les Christie of CNN, and Rex Nutting of CBS MarketWatch, as well as securities investors and analysts, call his index “the best gauge” of real estate values.
Since when do reporters feel the need to fluff a source, and why are analysts so enthralled with the index? One reason might be its Wall Street seal of approval: It was launched to provide information for hedge funds. Created by Shiller and Karl Case, an economics professor at Wellesley, the index is licensed exclusively to Macromarkets LLC for “developing, structuring and trading financial instruments,” says the Macromarkets Web site. Among Macromarkets’ products is the Housing Futures and Options index, which forms the basis for “directly investing in and hedging U.S. housing” on the Chicago Mercantile Exchange, where futures and options on the index are traded. “Every time a CME hedge is made, revenue flows to Macromarkets,” says NAR’s chief economist, Lawrence Yun. “People would hedge only if they believe price movements will be volatile.” Shiller is a founder and chief economist of Macromarkets.
So, is the index biased to the negative? Its divergence from OFHEO’s findings is so wide that Andrew Leventis, the agency’s senior economist, has undertaken studies to find out why. A January 2008 study, “Real Estate Futures Prices as Predictors of Price Trends,” showed that while “implied price forecasts” were reasonably accurate for the most recent round of expiring futures contracts, the index’s contract prices have tended to significantly “overshoot” actual price declines. A February 2008 paper, “Comparison of House Price Measures,” found the index uses a very different mix of markets and weights than OFHEO. Among other things, it gives more weight to the Pacific Coast, where prices have been volatile.
A third paper, “Revisiting the Differences between the OFHEO and S&P/Case-Shiller House Price Indexes,” tried to overcome the differences in outcome by mimicking how Shiller weights its data. For example, it added data on nonconforming loans, which are dominated by subprime loans. Even after these changes, OFHEO’s test index only came within 4.7 percentage points of Case-Shiller’s 8.9 percent plunge. By making other adjustments such as adding weight to faster selling homes, OFHEO whittled the difference even further, but still came within only 1.6 percentage points of the index.
What this shows is that the “weights” are selective. In any case, OFHEO researchers admit that they don’t really know the source of divergence between their index and Case-Shiller’s; indeed, NAR’s Yun has said that the lack of transparency with the Shiller index has been a problem for economists.
Case-Shiller might be lauded by the financial press, while NAR is assumed to be promoting a positive spin, but let’s be clear: OFHEO and NAR don’t have relationships with hedge funds on the side.
Last week’s Investor’s Business Daily painted a pretty rough picture of everyone’s favorite industry whipping post Countrywide Financial Corp., after getting wind of a servicing policy that requires some delinquent borrowers to pay 30 percent of arrearages before the lender will begin discussing loan modification options — fees that the reporter, Kathleen Doler, called “a steep entrance fee.” . . .
It’s not a blanket policy, as Doler notes, but some borrowers are seeing this policy while others are not. And, of course, Doler finds a few consumer advocates more than willing to demonize the policy, and Countrywide as well. Not hard to do these days.
For its part, Countrywide told IBD that the policy was intended to be a good-faith demonstration, and suggested that the 30 percent policy is only applicable to borrowers staring down a scheduled foreclosure auction. . . .
Allow us to paraphrase what we think the nicely-worded press statement really says: look, if we’ve tried and wasted our resources trying to contact a borrower anywhere from the past 8 to 12 months and they don’t bother to return any of our calls, read any of their mail, or answer the door when we send countless loss mit specialists out there in person, you’ll have to forgive us for calling bullshit when they decide to call asking for a loan mod the day before the foreclosure sale.
I'm pretty sure Angelo was in favor of using "bullshit" in the statement but his PR people told him he's already in enough trouble over "disgusting."
As far as the policy itself, of dealing with eleventh-hour workout requests from borrowers who have been blowing you off until the week before the trustee's sale? I have two words to respond to that: Laura Richardson. You will recall that the good Congresswoman let three homes go into the foreclosure process--and she has admitted that she made no attempts to work with the servicer until all three foreclosures were well advanced and the legal fees had started piling up--and then got all righteous with WaMu because her request for a modification the week before the scheduled sale didn't magically make everything go away. I am not suggesting that Richardson is a "typical American borrower," but she suggested that, so there. Would I make her put cash down on the table before bothering to start a last-minute workout with her? You bet your sweet eclair I would.
What really frustrates me about the criticisms of this specific policy is the complaint that it's "inconsistent": it is exactly a policy that is applied only in certain circumstances. On a case-by-case basis. When appropriate. (I am not affirming excessive faith in Countrywide's ability to determine what is and is not "appropriate" in all situations. But saying they need to do better at that is not to say the policy is wrong.) But as I have argued since the "Hope Now" thing first emerged last year, one-size-fits-all paint-by-numbers workout strategies are doomed to fail.
The fact of the matter is that not all borrowers are the same, and not all circumstances are the same. I am reminded of this article from the Washington Post we looked at several weeks ago, which contained some pretty level-headed advice from Diane Cipollone, of the Sustainable Homeownership Project:
Then, said Cipollone, contact a nonprofit housing counseling agency or an attorney. Avoid any unsolicited offers from people who say they can save your house. Do not avoid mail or phone calls from your lender. And if your lender stops accepting payments because it is moving toward foreclosure, save that money for a contribution toward the loan workout. "If you've missed eight mortgage payments and have spent all that money because the lender stopped accepting payments, that is not a good outcome [nor] a good way to start negotiations," said Cipollone.
The article then describes the successful modification workout that a couple named Ramsey received, after having made a $3000 "down payment" to the servicer.
The fact of the matter is that no one is going to modify your mortgage payments down to zero in any scenario. If you have made no payments for months on end, and have made no attempt to contact your servicer to request a repayment plan or anything else during those months, and at the last minute before foreclosure you do not have any money in savings--the equivalent of several months' worth of a reasonably modified payment--why should the lender bother with you? You can try telling the lender that for the last six months or more your other expenses were so high that you could not set aside even two or three hundred dollars a month that would otherwise have gone toward the mortgage payment, but in that case, how will you afford the modified payments? If you can document a "temporary" financial hardship, why haven't you contacted the servicer until now?
I am personally willing to bet that if Countrywide asked you for 30% of back payments, late fees, and legal charges, and you were only able to scrape up 20%, they'd probably play ball with you, assuming you have a good story about why there is reason to believe that you can and will make the modified payments. Workouts are a process of negotiation; that's the point. And I'll eat my blog if it turns out that Countrywide is the only servicer with a policy similar to this for late-stage modification requests. My sense is that the animus here is against Countrywide, not any coherent objection to a policy of asking borrowers to put down some "earnest money" before being given a deal that may be in everyone's financial best interest, but which is inevitably beset by moral hazard.
(Housing Wire) Last week’s Investor’s Business Daily painted a pretty rough picture of everyone’s favorite industry whipping post Countrywide Financial Corp., after getting wind of a servicing policy that requires some delinquent borrowers to pay 30 percent of arrearages before the lender will begin discussing loan modification options — fees that the reporter, Kathleen Doler, called “a steep entrance fee.”
From the story, an indictment:
They said Countrywide is requiring homeowners to pay 30% of the amount they are in arrears on payments, plus 30% of accrued late fees and 30% of attorney fees already incurred in the foreclosure process.
The payment doesn’t guarantee a loan modification, they said. It is only the price some consumers must pay to begin discussions with Countrywide, based in Calabasas, Calif.
The policy seems to go against Countrywide’s advertising and public statements about its efforts to help troubled borrowers stay in their homes. It comes amid a major drive by Congress and the Bush administration to steady the housing market and help homeowners avoid foreclosure.
It’s not a blanket policy, as Doler notes, but some borrowers are seeing this policy while others are not. And, of course, Doler finds a few consumer advocates more than willing to demonize the policy, and Countrywide as well. Not hard to do these days.
For its part, Countrywide told IBD that the policy was intended to be a good-faith demonstration, and suggested that the 30 percent policy is only applicable to borrowers staring down a scheduled foreclosure auction:
“It is Countrywide’s fiduciary duty to our investors to ensure that borrowers seeking workouts have the wherewithal to stay in their home,” the statement said. “For those who have not contacted the company and are seriously delinquent, the company views a 30% payment as good faith towards a modification and a demonstration of the borrower’s ability to resume and make payments in the future.”
Which is another way of saying that this policy likely doesn’t even enter into the equation with a one month delinquent borrower. Probably not even a 3 month delinquency. (It probably would behoove Countrywide’s press folks to learn the value of actually communicating with the press, but that’s a story for another day.)
Allow us to paraphrase what we think the nicely-worded press statement really says: look, if we’ve tried and wasted our resources trying to contact a borrower anywhere from the past 8 to 12 months and they don’t bother to return any of our calls, read any of their mail, or answer the door when we send a countless loss mit specialists out there, you’ll have to forgive us for calling bullshit when they decide to call asking for a loan mod the day before the foreclosure sale.
That’s what we’d suspect the policy really is, although we can’t be sure, since Countrywide has decided to play coy with the press on this.
I’m sure, given Countrywide’s recent track history in the servicing arena, that some borrowers have been assigned the 30 percent fee erroneously; I’m also pretty sure that many borrowers can’t negotiate Countrywide’s maze of a loss mitigation department fast enough to formally request a loan modification before their account gets flagged for the 30 percent requirement. And that’s a real problem — problem enough even to suggest that the up-front loan mod fee should be rescinded.
But that’s a very different argument than simply suggesting that the policy is inherently wrong to begin with, and that Countrywide’s policies “change with the wind” — an allegation made by one Glenn Neely of American Mortgage Resolution Advocates LLC in the story. (I tried to find the company on the Web, but apparently they have no Web site.)
Loan modifications are costly, and can be time consuming — if you’ve ever worked in servicing for a meaningful period of time, you learn pretty quickly that the borrowers who go AWOL until right before the foreclosure sale, or right before an eviction, aren’t usually the ones interested in keeping their home and negotiating in good faith. It may not be pretty to say, but it’s absolutely true, and it happens all the time.
Beyond that, by deciding to hide from the servicer for months on end, fees and arrearages have been piling up — totals that must be paid by the servicer and/or borrower regardless of whether the loan is restructured or not. Which means qualifying for a viable loan modification is that much harder to do, even if the borrower isn’t playing games; after all, isn’t the entire point here for servicers to invest their limited resources in preventing avoidable foreclosures?
If so, I’d argue that such a policy — unpopular as it may seem — could be helping Countrywide do just that; and borrowers making good-faith and early efforts to work with their servicer on a solution should be thanking their lucky stars that it exists.
(Housing Wire) HOPE NOW, the well-known alliance of mortgage servicers, counselors, and investors pulled together by Treasury officials last year, said Friday morning that mortgage servicers provided loan workouts to approximately 183,000 homeowners in April 2008, up 23,000 from the total recorded in March — the highest monthly amount since the program was begun in July 2007. Since July 2007, nearly 1.6 million troubled homeowners have been extended loan modifications and repayment plans, the group said in a press statement.
“These numbers clearly demonstrate that HOPE NOW is succeeding at helping homeowners avoid foreclosure and stay in their homes,” said HOPE NOW executive director Faith Schwartz.
Estimates from the group show that approximately 106,000 of the prime and subprime loan workouts conducted by mortgage servicers in April were repayment plans, while approximately 77,000 were loan modifications. The current pace set in April would translate into just over 548,000 loan workouts in the second quarter; that total would be well above the 502,520 recorded during Q1.
Like most housing news these days, however, the good news comes with requisite ominous; HOPE NOW also reported 80,926 foreclosures in April, a total that would translate into 242,778 if extrapolated through the second quarter. That total would be an 18 percent jump in foreclosures during the quarter — meaning that while more borrowers are getting help, more borrowers are troubled in total as well.
To normalize comparisons, it’s worthwhile to look at total workouts against foreclosure activity.
In 2007’s third quarter that ratio stood at 2.95, meaning that for every 3 borrowers helped, one lost their home. By Q4, that ratio had risen to 3.13 — good news. In the first quarter of this year, the workout:foreclosure ratio fell to 2.44 despite an increase in workouts, suggesting servicers were having trouble keeping up with an influx of troubled borrowers.
April’s ratio? 2.26 borrowers in workout per foreclosure, the worst reading yet.
(Tanta @ Calculated Risk) Meanwhile, the Hope Now folks released a pathetic set of data charts on mortgage loss mitigation through April 2008. For heaven's sake, we're the financial industry, people. We're supposed to be able to use Excel properly.
There are some really puzzling features of this data, like why the total loan counts have not changed since October (see the first page). Since those loan counts are used to calculate the 60+ day delinquency percentage, the failure to update the total count makes those numbers rather dubious. On page two, I found myself unable to make sense of the completed FC sales/FC starts calculation using any possible definition of "five months" I can think of. Perhaps I am misreading the footnote. In any event, I gave up on my ambition to put this data into a more sensible format for you, after I lost confidence in the data integrity.
So here's from the press release, instead:
The April report from HOPE NOW estimates that on an industry-wide basis:
* Mortgage servicers provided loan workouts for approximately 183,000 at-risk borrowers in April. This is an increase of 23,000 from the number of workouts in March 2008 and is the largest number of workouts completed in any month since HOPE NOW’s inception.
* The total number of loan workouts provided by mortgage servicers since July 2007 has risen to 1,558,854.
* Approximately 106,000 of the prime and subprime loan workouts conducted by mortgage servicers in April were repayment plans, while approximately 77,000 were loan modifications.
Maybe next month the report will be cleaned up a little and we can look in more detail at these numbers. If we can shame Hope Now into issuing something readable.
(Housing Wire) Clearly seeking to buttress its proposal to reform the Real Estate Settlement and Procedures Act, the U.S. Department of Housing and Urban Development released a study late Thursday suggesting that brokered loans are, on average, more expensive for consumers than borrowing direct from a lender — and that brokers were pocketing nearly all of the benefits of so-called yield spread premiums for themselves, rather than passing any cost savings on to consumers.
According to the study, which was conducted by researchers at the Urban Institute and used data on originations from May and June of 2001, borrowers saw no reduction in out-of-pocket fees when they agreed to higher interest rates and a yield spread premium. In fact, many borrowers saw no reduction at all in fees and often paid more in total loan fees, compared to borrowers that did not agree to pay a higher interest rate.
The study suggested that loans made by mortgage brokers were approximately $300 to $425 more expensive than those made by direct lenders, other loan characteristics being held equal. Depositories (banks, thrifts, and credit unions) were the lowest cost originator, followed by large mortgage banks. Smaller mortgage banks were found to have terms closer to those of mortgage brokers than to large mortgage banks and depositories, according to the study.
The Urban Institute’s study found significant disparities in closing costs even when it compared borrowers with identical credit scores, loan terms and mortgage amounts; in addition, variations appeared to be based on education level, geography, race and ethnicity as well. Even after accounting for these factors, there remain very substantial variations in what consumers pay at settlement.
“This report demonstrates once and for all that the process consumers endure when they buy their homes is entirely too confusing,” said HUD Deputy Secretary Roy A. Bernardi. “Clearly, we need to open the window and allow consumers to understand the fine print and shop more effectively for the largest purchase of their lives.”
Minorities still paying more? The study found evidence — sure to fire up consumer advocates — that both Hispanic and African-American families paid more for their mortgages, on average, than did non-minorities. African-American families paid an average of $415 more in total loan origination fees than non-minorities, according to the study; Hispanic borrowers paid an average of $365 more.
A closer inspection of the study’s findings in this red-hot area, however, suggests that the conclusions are less than conclusive evidence of predatory lending practices than one might think. The study’s author cautions as much.
“The interpretation of the race differentials cannot be entirely clear from the data available in this study,” the study’s author, Dr. Susan Woodward, writes. “The discussion in the later chapter on defaults will reveal that borrowers who live in neighborhoods with a high fraction of African Americans have higher default likelihoods than do other borrowers, other things equal, while Latino borrowers have lower default likelihoods than other borrowers.”
Woodward notes that “default patterns are in the same direction as some of, but not all, the differences in pricing by race.”
Brian Montgomery, HUD Assistant Secretary for Housing and Federal Housing Commissioner, said the study paints an overall picture suggesting that informed consumers pay less.
“The core problem is that too many Americans sign a mountain of documents they don’t understand and pay thousands of dollars for services that they’ve probably never heard of. This report proves that the more informed you are, the less you pay.”
HUD’s proposal to reform RESPA is part of the agency’s effort to reduce what it calls “junk fees” at origination. In particular, HUD wants to change what information is provided in the so-called Good Faith Estimate that lenders provide to borrowers prior to mortgage closing; HUD wants a standard GFE for both brokers and lenders that discloses key elements of the loan and sources of compensation for third-party brokers.
The proposed GFE would consolidate closing costs into major categories, and display total estimated settlement charges prominently on the first page, a move HUD says will help a borrower more easily compare loan offers. In addition, HUD’s new proposed rules would specify the charges that can — and cannot — change at settlement; for those fees that can change, HUD also would limit the amount of allowable changes.
(Tanta @ Calculated Risk) Forgive me for once again falling into despair over the media's inability to report sensibly and critically on foreclosure and delinquency numbers. I should be immune by now. If you are wiser than I, just skip to the next post. If you still cradle to your wounded heart the battered but indomitable belief that even media outlets like Bloomberg can learn to spot the flaws in a reported statistic, and that there is a point to doing this, click the link below.
May 30 (Bloomberg) -- Newly delinquent mortgage borrowers outnumbered people who caught up on their overdue payments by two to one last month, a sign that nationwide efforts to help homeowners avoid default may be failing.
In April, 73,880 homeowners with privately insured mortgages fell more than 60 days late on payments, compared with 39,584 who got back on track, a report today from the Washington-based Mortgage Insurance Companies of America said.
The last of eighteen paragraphs:
Last month's 54 percent "cure ratio" among defaulted mortgages compares with 80 percent a year earlier and 87 percent in March. The comparison may not be valid because one lender changed the way it calculated defaults and cures reported to the insurers.
So we start with an eye-popping number, and then only at the very end do we note that this number may mean much less than meets the eye. This is, in fact, what MICA said in its data release:
WASHINGTON, D.C. May 30, 2008– Mortgage Insurance Companies of America (MICA) today released its monthly statistical report for April which includes a one-time adjustment to the number of defaults and cures and also notes an 11.7% increase in new insurance written year-over-year.
As a result of a major lender’s change to its methodology for recording delinquencies, and to how it reports them to MICA’s members, there was a sharp increase, to 73,880, in reported defaults in April. The increase includes both newly reported defaults for the month, as well as previously unreported defaults by this lender.
MICA’s members reported 39,584 cures in April. This statistic also reflects the above noted change in reporting defaults.
I assumed when I read this that somebody--a large somebody, since it significantly impacts the data--switched over from the OTS method to the MBA method of delinquency reporting. I do not know if this is the case or not. Before I published this article, however, I might have called MICA for a comment. In any case I might have been more cautious with headlining a number that is described as a "one-time adjustment" to the data collection. Burying that in the last paragraph is . . . disingenuous.
I'm also a touch troubled by the statement that "Last month's 54 percent 'cure ratio' among defaulted mortgages compares with 80 percent a year earlier and 87 percent in March." That is literally true. However, the cure rate in December of 2007 was 54.1% and in January of 2008 was 51.4%. Could there be some seasonality in these numbers? Another confounding factor besides new delinquencies?
So what about the second half of the claim?
"Modifications are not occurring nearly at the numbers necessary to stem the foreclosure crisis," Allen Fishbein, housing director for the Consumer Federation of America in Washington, said in a May 19 interview. "People are still going into foreclosure when, with a writedown on existing principal, they could still stay in their homes."
In the first two months of 2008, lenders modified loans for 114,000 borrowers while starting 346,000 foreclosures, according to a study by the Durham, North Carolina-based Center for Responsible Lending. In April, 22 percent of the homes in the foreclosure process had been taken over by lending banks; a year earlier, that figure was 15 percent, according to Irvine, California-based data provider RealtyTrac.
Did you assume, when you read that second paragraph, that the 114,000 modifications were exclusive of (not the same loans as) the 346,000 foreclosure starts? It seems you were supposed to assume that. But is is true? "Foreclosure start" simply means that a legally-required preliminary filing (a Notice of Default, Notice of Intent, or Lis Pendens, depending on the state and the type (judicial or non-judicial) of foreclosure) has been made. That is a "start" because in most jurisdictions it will be another 90 to 180 days, or even more in some states, until the auction can be scheduled, the home sold, and the foreclosure "completed." My own view is that the "best practice" is to work hard to negotiate a modification, if possible, in the early days of delinquency before starting the foreclosure process. However, that is not always possible, and it is also "best practice" to continue to attempt reasonable workouts during the foreclosure process all the way up the day before sale, if necessary. There are certainly cases in which a borrower simply cannot be brought to talk to the servicer until the initial FC filing galvanizes him into it. All of this means that it is impossible to look simply at modifications completed in a period compared to foreclosures started in a period and conclude that the starts will never get a mod or that the mods were not effected after the FC start.
Besides that, where is the data to back up the idea that a 30% ratio of modifications to foreclosure starts is poor performance? I am personally not sure that much more than 30% of recent vintage loans can be saved. Back out fraud, flippers and speculators, and borrowers whose loan balances would have to be reduced by half in order to get a workable payment--which would most likely exceed the cost to the investor of a foreclosure--and 30% doesn't sound so shabby.
As far as the second claim--the increase from 15% to 22% of homes in foreclosure "taken over by lending banks," I'm prepared to read that literally. There is no jurisdiction in which a foreclosed home must be purchased by the lender at the foreclosure sale; all jurisdictions require public auctions in which third parties can bid. An increase in REO (lenders "winning" the auction) does not necessarily mean an increase in completed foreclosures; it can mean that fewer third parties care to bid on foreclosed homes. All the data I have seen recently suggests that this is the case: buyers are still wary of further price declines, and lenders are still bidding higher than potential RE investors. One therefore expects the FC-to-REO numbers to increase. But they can do that even in the absence of an increase in total foreclosures. In order for this statistic to mean much, we have to know how much of the increase is due to more foreclosures, and how much due to fewer third-party bidders.
So put these dubious statistics together--the rest of the Bloomberg article is basically filler--and you get anomalous data on new delinquencies, ambiguous data on modification-to-foreclosure-starts, and a claim about REO rates substituting for a claim about foreclosure completion rates. How about taking back that headline, Bloomberg?
You know, last year I might have had some more sympathy for these reporters. We were just newly into the whole problem and a lot of concepts--delinquency reporting methodology, foreclosure processes, various ways of reporting "cures" and "starts"--were all new to everybody except industry insiders and a handful of totally Nerdly blog readers. But surely by now we can have moved the ball forward a couple of yards? I am here to affirm that if you have been reporting on "the foreclosure crisis" for a year or more and you still can't ask basic questions about the press releases you read, you aren't doing your job.
(Housing Wire) Despite an absolute dearth of ARM resets, the number of severely delinquent Alt-A borrower continues to grow, according to a report released late last week by Clayton Holdings, Inc. (CLAY: 5.89, 0.00%). The number of troubled Alt-A borrowers in the 2007 vintage rose an eye-popping 26.5 percent from March to April alone, nearly reaching 17 percent of loan volume.
The 2007 vintage isn’t the only Alt-A vintage facing problems, of course: 19.3 percent of borrowers with loans originated in 2006 were more than 60 days delinquent at the end of April, a jump of nearly 10 percent from March. Cumulative losses percentages for 2006 vintage Alt-A first liens continued what Clayton analysts called a “concerning upward trend,” with losses for 2006 issues running at more than three times the pace set by the 2004 and 2005 issues.
The troubles in Alt-A are appearing despite the fact that very few borrowers in any vintage are yet to face a strong wave of rate-reset activity. The graph to the right shows that, if anything, lenders and policymakers should be concerned about a wave of pending Alt-A resets that are looming in the back half of 2009.
click for larger view (source: Clayton)
That wave looming wave of resets may be particularly troubling, given the current U.S. interest rate and LIBOR outlook held by most economists and bank officials; most see interest rates flat to increasing over that time frame, both within the U.S. and abroad, a pattern that could bode poorly for borrowers facing rate adjustments.
The good news is that one-month roll rates — which measure the transition of loans from one stage to the next (i.e., performing to delinquent, delinquent to severely delinquent, etc.) — for nearly every Alt-A vintage decreased for the month, with only the 2003 vintage showing an increase. That sort of respite may end up being short lived, however, given the sharp increase in deliqnuencies and continued downward trending of cure rates for troubled borrowers.
Subprime woes, renewed? Subprime mortgages aren’t sexy to most financial media any more, and numerous reports lately have suggested that the problem in subprime mortgages has largely been mitigated by lower interest rates that have limited payment shock for the most vulnerable borrowers.
click for larger view (source: Clayton)
All of which is true; but that shouldn’t hide the fact that 60 day delinquencies in the 2006 subprime vintage rose 5.4 percent in April and now stand at 34.6 percent of remaining collateral; in the 2007 vintage, 23.1 percent of collateral is more than 60 days in arrears, as well.
While resets are an immediate problem, there are yet a good number of resets that need to work their way out of the financial system (see graph to the right).
Perhaps more telling, toll rates increased in April on both subprime first and second liens after sharp declines in recent months, marking perhaps a renewed cycle for troubled subprime borrowers. Many media pundits have pointed to declining roll rates as evidence that the worst of the subprime crisis is behind us; the jump in rolls might suggest otherwise.
(Calculated Risk - Tanta) As a general rule I do not recommend reading "Realty Times" at 6:00 a.m., but I'm blaming twist.
It's not that people don't want homes, it's that they can't buy them under the stricter lending standards. . . .
Lenders are turning the clock back to 1975, requiring larger downpayments and higher credit scores to qualify for low interest rates. That's only prudent, but what they're also doing is tightening appraisals on properties that are being sold or refinanced.
In 1975, it was not unknown--it was in fact only made illegal that year by the Equal Credit Opportunity Act--to inquire about a married woman's future childbearing plans, her use of contraception, and her religion before deciding whether to "count" any income she might produce for purposes of qualifying for a loan. (If she said "Catholic," forget it.) If you think we are experiencing 1975 mortgage loan underwriting, you were born yesterday.
So why is it "prudent" to require larger downpayments and higher credit scores, but another thing entirely to tighten up on appraisals? And how is this nefarious appraisal tightening preventing people from buying homes? *****************
There must be an anecdote, and we actually get a twofer:
Dallas Realtor Mary O'Keefe was hit with the new lending realities in a double whammy just this week.
"I had a closing that was delayed because the lender wanted a second appraisal," says Mary O'Keefe, a Dallas broker. "I told my clients absolutely no way would they pay for a second appraisal."
That deal finally closed, but O'Keefe lost another. A client wanted to take out some equity on her townhome, buy another property to live in, and save the townhome for mailbox money. The client had an 800-plus credit score, was approved by a lender, but went to her personal banker for the HELOC. She had an appraisal from the year before for $467,000 giving her about $155,000 in equity.
Because banks want to use appraisals no less than six months old, the personal banker called for a drive-by appraisal, which came in at $400,000, more than $20,000 below the lowest priced home in the community, and $75,000 below a home that sold a year ago three doors down.
So the purchase transaction actually did close, although it was--gasp!--"delayed," but this poor lady who wanted to cash out the "equity" in a townhome she was not going to occupy was stymied by some evil bank who--get this--wouldn't use a year-old appraisal. Turn on the disco ball and haul out your lava lamps! It's the seventies!
I confess to being somewhat alarmed, by the way, about a Realtor who tells a buyer that "no way" are they going to pay for a second appraisal. You would not, in the current environment, even consider paying another $350-$400 to assure yourself that you are not overpaying for your property by thousands of dollars?
The real problem here is that Realty Times wants to continue to perpetrate the view that establishing reliable appraised values is not in a homebuyer's best interest as well as a lender's. For some reason this reminded me of a story we posted just a year ago, in which the Wall Street Journal waxed outraged about some poor rich doctor who was having trouble getting his loan approved to buy a property for $1.05 million when the lender had gotten a broker price opinion stating that it was only worth $750,000. I did a bit of looking in the county real estate records, and it appears that our man did indeed buy the home on April 17, 2007 for $1.05 million. On April 27, 2007, the county assessed the property for tax purposes at $793,400. Per the WSJ he borrowed $885,000. I wonder if he still feels ripped off by the lender who told him he was overpaying for that home.
(Felix Salmon) Many congratulations to David Leonhardt, who has just bought a house in Washington. Leonhardt is the person behind the NYT's truly wonderful rent vs buy calculator, which should be the first stop of call on the internet for anybody thinking of buying a house.
The reasons Leonhardt always rented, when he was in New York, were very good ones - and the reasons why he's buying, now, are good as well. Even though he believes the value of his house is going to fall, it can still make sense to buy, since a house is not an investment, or not wholly, and moving house if and when you think prices have bottomed is not easy or fun, and in any case only fools ever try to time the market. Plus, of course, in an inflationary environment, a fixed-rate mortgage is a much better bet than rents which are liable to rise at least in line with inflation and quite possibly even more.
Of course, just because Leonhardt is renting doesn't make this a good time to buy, necessarily. Like most sensible buyers, Leonhardt is buying now because he's moving, and not the other way around. And he also says that while he did decide to buy in Washington, he still thinks that renting is almost certainly still the better option in New York.
What he doesn't mention is that he a very, very rare bird these days: a long-time renter, who has been saving up his down-payment for years, who is now buying his first home. Nationally, the opposite is much more common: people who bought homes they couldn't afford, who are losing those homes, and who are finding themselves back in the rental market.
Most potential house buyers, then, aren't just buying a house; they're selling one, too. In this market, with sales plunging, that can be very difficult indeed. Leonhardt doesn't have to worry about liquidating his old house in order to be able to make the downpayment on the new one; most Americans don't have that luxury.
And of course Leonhardt has that downpayment, which, these days, is very likely to be at least 20%. Again, this is very rare: Americans got used to the idea of buying houses with no money down, or at least very little. They're quite shocked when they discover, today, that even though they could affford a mortgage, no mortgage company is willing to lend to them unless they come up with a large downpayment - one which, most of the time, they don't have.
The history of the housing boom is one in which potential buyers were perfectly happy to pay as much as the bank was willing to lend them. That's still the case. Demand has fallen, but not enormously. The thing which has really dropped precipitously is the supply of home credit. Which is another reason why people like Leonhardt aren't going to help turn the housing market around. In order for house prices to rise, we don't need more would-be buyers, we need looser lenders. That isn't going to happen any time soon - and nor should it.
Home equity loans, which had been used in at least one of every nine deals, when lenders were more generous, are no longer a source of easy money for many prospective buyers. ... As home values have declined, millions of consumers have maxed out on home equity debt. In hot markets like California, nearly 30 percent of all consumers tapped into the value of their homes to help finance their new cars, according to CNW Marketing Research. In Florida, about 20 percent used home equity loans. New car sales in both states are down about 7 percent.
According to the NY Times graphic "Mortgaging the House to Buy a Car" (see article), about 1.9 million new cars were purchased using HELOCs in 2007, or 11.8% of the 16.2 million total new cars sold in 2007.
Although HELOCs were used for a variety of household expenditures, probably the two most common uses were for new cars and home improvements. It's not surprising that these two areas are being severely impacted as lenders sharply restrict HELOC borrowing.
(Calculated Risk - Tanta) This is an update to post below on Rep. Linda Richardson's foreclosure woes.
Gene Maddaus of the Daily Breeze kindly forwarded today's additions to the saga. There are not two, but three homes owned by Richardson in foreclosure. And yes, she appears to have cashed out her primary residence back in 2006 to fund her campaign for State Assembly. So it looks like a pattern.
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I have been watching the story of Representative Linda Richardson and her foreclosure woes for a while now, while heretofore hesitating to post on it. For one thing, the original story--a member of Congress losing her expensive second home to foreclosure--had that kind of celebrity car-crash quality to it that I'm not especially interested in for the purposes of this blog. For another thing, posting about anything even tangentially related to politics invites the kind of comments that personally bore me to tears.
All that is still true, but the story has taken such an unfortunate turn that I feel obligated to weigh in on it. Specifically, Rep. Richardson is threatening us:
Rather than shy away from voting on mortgage-related bills, Richardson said her experiences could help her craft legislation to make sure others don't experience what she did. For example, she sees a need to add steps to inform property owners before their property can be sold.
"We have to ensure that lenders and lendees have the tools with proper timing to resolve this," she said.
If Rep. Richardson is going to base legislative proposals on her own experience, then it matters to the rest of us what that experience was. So click the link below if you can stand to hear about it.
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The story was originally reported in the Sacramento Capitol Weekly, and picked up by the Wall Street Journal, and thence covered by a number of blogs, with the storyline being that Rep. Richardson "walked away" from her home, a second home she purchased in Sacramento after being elected to the State Assembly. The "walk away" part came from a remark made by the real estate investor who purchased the home at the foreclosure auction, not Rep. Richardson or anyone who could be expected to understand her financial situation, but that didn't stop the phrase "walk away" from headliningblogposts.
Rep. Richardson has variously claimed at different times that the house was not in foreclosure, that she had worked out a modification with the lender, and that the lender improperly foreclosed after having agreed to accept her payments. Frankly, unless and until Rep. Richardson gives her lender, Washington Mutual, permission to tell its side of the story--I'm not holding my breath on that--we're unlikely to be able to sort out this mess of claims to my satisfaction, at least. It's possible that WaMu screwed this up--that it accepted payments on a workout plan with the understanding that foreclosure was "on hold" and then sold the property at auction the next week anyway. It's possible that Richardson's version of what went on is muddled, too. Without some more hard information I'm not inclined to assume the servicer did most of the screwing up, if for no other reason that we didn't find out until late yesterday, courtesy of the L.A. Land and Foreclosure Truth blogs, that Richardson's other home--her primary residence--was also in foreclosure proceedings as recently as March of this year, a detail that as far as I can tell Richardson never disclosed in all the previous discussion of the facts surrounding the foreclosure of her second home.
What part of this I am most interested in, right now, is the question of what in the hell exactly Richardson was thinking when she bought the Sacramento home in the first place. Since the story is quite complex, let's get straight on a few details. Richardson was a Long Beach City Council member who was elected to the state legislature in November of 2006. In January of 2007 she purchased a second home in Sacramento, presumably to live in during the Assembly session. In April 2007, the U.S. Congressional Representative from Richardson's district died, and Richardson entered an expensive race for that seat, winning in a special election in August of 2007. By December 2007 the Sacramento home was in default, and it was foreclosed in early May of 2008. The consensus in the published reports seems to be that Richardson spent what money she had on her campaign, not her bills. According to the AP:
Richardson, 46, makes nearly $170,000 as a member of Congress and was paid $113,000 during the eight months she served in the state Assembly in 2007 before her election to Congress. She also received a per diem total of $20,000 from California, according to a financial disclosure form she filed with the House of Representatives clerk.
It seems to me that all this focus on what happened after she bought the Sacramento home--running for the suddenly-available Congressional seat, changing jobs, etc.--is obscuring the issue of the original transaction.
In November of 2006, Richardson already owned a home in Long Beach. As a newly-elected state representative, she would have been required to maintain her principal residence in her district, but she would also have had to make some arrangements for staying in Sacramento during Assembly sessions, given the length of the commute from L.A. County to the state capitol. She seems to have told the AP reporter that "Lawmakers are required to maintain two residences while other people don't have to," which is not exactly the way I'd have put it. Lawmakers are required to maintain one primary residence (which need not be owned) in their district. They are not required to buy a home at the capitol (of California or the U.S.); many legislators do rent. Richardson is a single woman with no children, yet she felt "required" to purchase a 3-bedroom, 1 1/2 bathroom home in what sounds like one of Sacramento's pricier neighborhoods for $535,500, with no downpayment and with $15,000 in closing cost contributions from the property seller. (The NAR median price in Sacramento in the first quarter of 2007 was $365,300.)
I have no idea what loan terms Richardson got for a 100% LTV second home purchase in January 2007, but I'm going to guess that if she got something like a 7.00% interest only loan (without additional mortgage insurance), she got a pretty darn good deal. If she got that good a deal, her monthly interest payment would have been $3123.75. Assuming taxes and insurance of 1.50% of the property value, her total payment would have been $3793.13.
The AP reports that Richardson's salary as a state representative was $113,000 in 2007, and she received $20,000 in per diem payments (which are, of course, intended to offset the additional expense of traveling to and staying in the Capitol during sessions). I assume the per diem is non-taxable, so I'll gross it up to $25,000. That gives me an annual income of $138,000 or a gross monthly income of $11,500.
The total payment on the second home, then, with my sunny assumptions about loan terms, comes to 33% of Richardson's gross income. I have no idea what the payment is for her principal residence in Long Beach. I have no idea what other debt she might have. I am ignoring her congressional race and job changes and all that because at the point she took out this mortgage, that was all in the future and Richardson didn't know that the incumbent would die suddenly and all that. I'm just trying to figure out what went through this woman's mind when she decided it was a wise financial move to spend one-third of her pre-tax income on a second home. (There's no point trying to figure out what went through the lender's mind at the time. There just isn't.)
"I'm Laura Richardson. I'm an American, I'm a single woman who had four employment changes in less than four months," Richardson told the AP. "I had to figure out just like every other American how I could restructure the obligations that I had with the income I had."
Yeah, well, I'm Tanta, I'm an American, I'm a single woman, and I say you're full of it. You need to show us what your plan for affording this home was before the job changes, girlfriend. You might also tell me why you felt you needed such an expensive second home when you had no money to put down on it or even to pay your own closing costs. As it happens, the Mercury News/AP reported that by June of 2007--five months after purchase--you had a lien filed for unpaid utility bills. You didn't budget for the lights?
But what are we going to get? We're going to get Richardson all fired up in Congress about tinkering with foreclosure notice timing, which is last I knew a question of state, not federal, law, and which has as far as I can see squat to do with why this loan failed.
Quite honestly, if WaMu did give Richardson some loan modification deal, I'd really like to know what went through the Loss Mit Department's collective and individual minds when they signed off on that. Sure, Richardson's salary went up to $170,000 when she became a member of the U.S. Congress, but what does she need a home in Sacramento for after that? Where's she going to live in Washington, DC? And, well, her principal residence was also in the process of foreclosure at the same time. I suppose I might have offered a short sale or deed-in-lieu here, but a modification? Why would anybody do that? Because she's a Congresswoman?
I'm quite sure Richardson wants to be treated like just a plain old American and not get special treatment. Well, I was kind of hard on a plain old American the other day who wrote a "hardship letter" that didn't pass muster with me. I feel obligated to tell Richardson that she sounds like a real estate speculator who bought a home she obviously couldn't afford, defaulted on it, and now wants WaMu to basically subsidize her Congressional campaign by lowering her mortgage payment or forgiving debt. And that's . . . disgusting. At the risk of sounding like Angelo.
I know some of you are thinking that maybe poor Ms. Richardson got taken advantage of by some fast-talking REALTOR who encouraged her to buy more house than she could afford. According to Pete Viles at L.A. Land,
She likes the Realtors, and they like her. She filed financial disclosure forms with the House Ethics Committee reporting the National Assn. of Realtors flew her to Las Vegas in November to help swear in the new president of the association, Realtor Dick Gaylord of Long Beach.
In suggested remarks* at the NAR gathering, also filed with the House, Richardson's script read: "I might be one of the newest members of Congress but I am not a new member of the REALTOR Party. When I needed help to win a tough primary, REALTORS stood up and backed me even though I was the underdog."
--Real estate industry professionals have given her $39,500 in campaign contributions in the current election cycle, according to Open Secrets.
(Housing Wire) Lewis Ranieri, the mortgage-backed bond market pioneer that made headlines earlier this week for his involvement in troubled Franklin Bank Corp., is the latest to jump into the distressed mortgage space with news Friday that a fund he manages has been seeking to raise $1 billion in fresh capital.
Selene Residential Mortgage Opportunity Fund LP, which counts Ranieri among its managing partners, has raised just $151 million so from investors in New York, Ohio and Pennsylvania as of April 15, according to a report published by Bloomberg News.
Further research by Housing Wire shows that the $28 billion South Carolina Retirement System, a pension fund, also invested $200 million with Selene earlier this month. The fund is one of the few U.S. pensions with permission to invest in alternative funds.
“Our plan is to raise $1 billion and buy delinquent mortgages that we will recast and refinance and try to keep the borrower in the house without a foreclosure,” said David Creamer, a Selene managing partner and former GMAC executive, in an interview.
Interestingly, Ranieri seems, if anything, to be late to the distressed mortgage asset party. Other large players have been aggressively attempting to stake out positions in distressed mortgages since earlier in the first quarter of this year.
BlackRock Inc. (BLK: 207.35, +1.96%), the biggest publicly traded U.S. asset manager, said in March it was backing a new company called Private National Mortgage Acceptance Co. LLC, also known as PennyMac, that will buy mortgages at a discount and look to make money in the so-called scratch-and-dent business. PennyMac has a $2 billion war chest to step in and start buying, and will bankroll its own in-house servicing platform; BlackRock also recently negotiated a deal to snap up $15 billion in mortgages from Swiss bank UBS AG (UBS: 29.13, -2.61%).
Beyond BlackRock’s move, Marathon Asset Management, LLC, a global investment manager with $10.6 billion under management and over $20 billion in assets, is also buying up distressed mortgages and is also pumping the mortgages it buys to its own captive servicing operation, Phoenix-based Marix Servicing, LLC. The company has said in recent weeks that it has been buying well over a billion dollars in bad mortgages for the platform to service.
Selene snapped up the mortgage servicing platform of bankrupt Aegis Mortgage Co., a former Cerberus Capital Management LLC venture that went belly-up in August last year.
Q: I am a concerned homeowner who is currently locked into an adjustable first mortgage and a second mortgage with our credit union. I have done all of the things you suggested in your articles -- to no avail.
The rate on the ARM is locked in for the first three years. We did not want to buy out early because of the penalties, so we stuck it out until the three years was almost up. The market has since taken a serious nosedive. We were all approved and ready to close when we were given the bad news that our house is now worth $70,000 less than it was the year before and $20,000 less than what we originally paid.
Our mortgage did adjust in December and is due to adjust again in November. I spoke to our lender who said the rate would be going up 1.5 percent. That's at least $200 more per month, making our payment a total of $350 more per month since December. I spoke to three different departments -- refinance, retention and modification -- but, of course, none could help us out.
We were also told that we were not candidates for a rate freeze. I guess it's easier for them to foreclose on the homeowner. Any suggestions?
A: No, it's not easier for lenders to foreclose. It's an expensive, time-consuming process, from which arise no winners -- only losers, you and your lender. You are out on your fanny, and while your lender will eventually find someone else to buy your house, the company will be out thousands by then. So, no, foreclosure is a tale of woe for all parties -- except perhaps for the middlemen who are paid to fix up the house, keep it in good working order while it is sitting empty and sell it.
But that doesn't answer your question. As far as suggestions go, I am running out of ideas. You didn't say you couldn't afford to make the higher payments, so if you can continue to pay your mortgage, than do so. If you get behind, your lender will eventually come calling but by then your credit record will be laced with late payments and perhaps even a foreclosure.
Lenders are so overwhelmed right now with problem loans that they aren't even returning calls unless the borrower is at least 60 days past due. I have been telling people for years that if they can't make their payments, call their lenders right away. Now people are doing just that and their lenders aren't returning their calls. They just don't enough trained people to handle the deluge.
Besides, if you can afford to make the higher payments, your lender won't be very cooperative. You are going to have to prove you are now in over your head, perhaps way over your head. If you are in trouble, then be persistent. Call your lender every day if you have to. Don't take no for an answer, and don't take no answer for an answer, either. Keep trying until you find a sympathetic ear.
Once you get behind on your payments, you will have a better chance of being heard. If not by your current lender, then hopefully by an investor who is purchasing troubled loans from lenders for 60 to 70 cents on the dollar. These kinds of investors have what's called "patient money," which means they can work with borrowers until the market returns to "normal," whatever that is.
Because they are buying mortgages at deep discount, they can afford to rework the loans so borrowers like you can remain in their homes or sell them for what they're currently worth without incurring any sort of penalties. I've spoken to a number of this kind of investment bankers over the last few weeks, and they all say they have the dough to wait out the down market and the leeway to work with borrowers no matter what they want to do, sell or stay.
Another possibility is the Federal Housing Administration, Uncle Sam's mortgage insurer. The agency, which protects lenders in case of borrower defaults, has a program under which people like yourself can refinance their homes. There are some limitations to the FHASecure program -- it can back loans only up to $729,750, for example -- but so far, the FHA says it has helped some 200,000 owners who were either current on their loans or overdue avoid foreclosure.
There's one more point I'd like to make. As I mentioned earlier, foreclosure is a long, drawn-out "process." You aren't going to get a notice until you are at least 90 days past due, and then it could take months longer for the case to go to court, depending on the state in which you reside.
On top of that, if you don't move out, the lender will have to evict you, which could take several more months. In other words, foreclosure is a process, not a sudden event. So you will have plenty of time to get your affairs in order and take the steps that are necessary to move on.
(Naked Capitalism) Ken Funnell at Bank Laywer's Blog fulminates about an idea to deal with the burgeoning homeowner debt crisis, namely a proposal by House Representative Raúl M. Grijalva based on (but different in some key respects) from a Dean Baker proposal called "own to rent".
While there are problems with the idea, there is more than a germ of something useful here, but Funnell resorts to harrumphing and class snobbery rather than deal with the plan substantively.
The House bill is worse than Baker's suggestion. Baker wanted homeowners facing foreclosure to be offered the option of continuing as tenants as long as they want at a "fair market rate" as determined by appraisal. The shortfall of Baker's proposal is that the tenant has an openended right to remain, and the rent adjustment is not to a "fair market" rate but based on local market inflation. Thus the proposal looks a great deal like rent stabilization in New York City. (We'll return to why even that may not be as bad as that appears in due course).
The problem is that the bank-as-landlord now has no security. True, someone who bought a home and presumably fixed it up a bit (at a minimum curtains) won't be as casual as a typical renter would be. I might tweak the proposal to give the tenant a somewhat better deal if they put up a one-month deposit over time, and had the lease renewals go to a true market rate rent, not inflation indexed from the base rent.
But as ideas go, this isn't a bad one (and it turns out some conservative economists support it). The bank was going to wind up owning the property anyhow. This move saves them the considerable expense of foreclosure (reported to commonly be $50,000) and gets them cash flow right away. It saves them the hassle of disposal in a down market and the burden of certain aspects of property maintenance (the tenant will mow the lawn). It also prevents the specter, which is apparently happening in some neighborhoods, of empty properties creating an image of desperation (highly damaging to the sales process) and in some cases, squatters moving in.
It is also simpler than a mod (you offer the tenant the rental deal and it's go or no go rather than having to see what you can do given the homeowner's financial state). In areas with strong renter protection (like the communist city of New York) you might get them to agree in the rent agreement to accelerated eviction in the case they miss more than two or three rent payments (note in some places they can't be waived but a lot of tenants won't know that and will comply with an eviction notice).
Now how does the House bill screw this up? Ironically, the critics get bent out of shape with the rent control aspects, when the real fly in the ointment with the House version (as reported in Housing Wire) is that the homeowner has to have had his mortgage foreclosed. He can then petition the judge to stay.
Lovely. This is a lose-lose. The bank will have incurred all those foreclosure expenses, the now-former owner has to incur costs of his own to file to get the rental offer, and has had his already-bad credit record completely trashed by the foreclosure. And the indignities of the foreclosure process guarantees he will not have a good relationship with his new landlord. The original Baker process might leave the former owner feeling good that he was able to stay in his home and neighborhood; good will is likely to produce good behavior. Having the homeowner have to endure the foreclosure process to win the right to rent will assure acrimony and increase the odds of the property being trashed upon vacancy.
it's not been my personal experience that "home renters" save a single family neighborhood; it's "home owners" who do that. The value of emotional pride of "ownership" should not be underestimated, nor should the fact that ensuring that upkeep, maintenance and repairs are performed promptly as needed protects the owner's monetary investment in the home. The worst neighbors I've had have been renters of single family homes situated in neighborhoods consisting primarily of owner-occupied houses.
Let's look at the logic here, It's "Ownership Society" plain and simple. Those who own homes are responsible and take good care of it; mere tenants are low-lifes and bad for property values.
And what's the basis for his assertion? Funnell's experience with some (perhaps as few as one) bad neighbors.
Gee, when I was growing up, we moved a lot. Once we had to rent because no suitable homes were available for purchase. And the home we rented was not only in a neighborhood of primarily owner-occupied homes, it was the best neighborhood in that town. And we didn't undergo a behavior change and trash the house because we were tenants. In fact, my mother re-did the downstairs half bath and papered the walls in one of the bedrooms without a concession from the landlord (she did get approval).
I've been a tenant and homeowner myself, and have also been a landlord. I happen to live in New York where a lot of people rent. I have friends in other cities who are landlords of residential property as well as some who are tenants in precisely the same sort of neighborhood that Funnell claims are damaged by renters.
My observations (and yes, this is anecdotal):
1. I've never heard anyone complain about "they trashed the property" tenant problems or that they neglected routine care you'd expect of a tenant. Deposits are good insurance against that. (The big issue is that tenants are sometime late in payments, but from what I have heard, small commercial tenants are worse in that regard than residential).
2. I've rented my apartment furnished (my own stuff, which is very nice, while I was overseas). An now-ex friend did more damage staying there for two weeks than two tenants did in a two-year period.
3. People are house-proud whether they own or rent. Yes, a renter will focus his expenditures on things he will take with him, but people who are slovenly will live in a slovenly fashion whether they own or rent.
My other observation is that rent stabilization is not the disaster to property owners that opponents like to say it is. Yes, landlords don't get the upside they would with market rents. so they do face an opportunity loss. But guess what? Give people property rights, and they act like they have property rights.
For instance, I know of two buildings in the area (Upper East Side on or near Park). One has quite a few rent stabilized apartments; the other has some rent controlled units (for rent control, the increases are more restricted than in rent stabilization). As long as the tenant i current on the rent in either setting, he is guaranteed a lease renewal (indeed, the tenancy rights can be passed to immediate family members).
Consider these examples: one tenant painted the entire apartment, re-did the floors, and put a new (fancy) refrigerator in the kitchen. One put in marble floors and new carpeting; another redid the wood floors, re-did the bath (including marble floors and tile), put in marble in the entryway and kitchen, put in new light fixtures, and re-did all the walls (paper or wall treatments). One re-did an entire three-bedroom apartment, which included entirely new kitchen with steel counters, new library (with built in wooden bookcases), new wooden herringbone flooring, new pocket doors with frosted glass (she reports the cost at over $1 million). Yes, these were all in rentals. I know other tenants in both buildings have made considerable improvements; I just don't have the details.
True to what you'd expect with rent control or rent stabilization, the public spaces in these two buildings are pretty dreary. And in at least one of these buildings, I am told that the landlord makes no effort to decontrol the rent controlled apartments (once the rent exceeds $2,000 a month, the landlord can attempt to destablize the apartment). In other words, the owner likes having established tenants who pay reliably even if he might in theory be able to extract more (and yes, this is an old New York landlord who owns a massive office building on Park midtown, plus other rental buildings, not a bleeding heart who inherited a building).
That suggests in other settings where tenants have strong protection of their property rights and know they have a deal, they too might (contrary to popular image) act in an owner-like fashion. They may not have the disposable income that Manhattanites do to throw money at the problem, but they might do more than one would anticipate via Home Depot and elbow grease (note that I am NOT advocating the rent control aspects of the Baker proposal, but am merely pointing out that some elements of the critique are overdone).
That is a very long winded way of saying aspersions of renters and renting should be made with great caution.
Comptroller Dugan Tells Lenders that Unprecedented Home Equity Loan Losses Show Need for Higher Reserves and Return to Stronger Underwriting Practices
WASHINGTON — Comptroller of the Currency John C. Dugan said today that accelerating losses in the home equity business show the need to build reserves and to return to the stronger underwriting standards of past years.
Home equity loans and lines of credit grew dramatically in recent years, more than doubling, to $1.1 trillion, since 2002. In part, that’s because of the rapid appreciation in house prices, the tax deductibility feature of home equity loans, and low interest rates.
“But another contributing factor was perhaps not so obvious: liberalized underwriting standards,” Mr. Dugan said, in a speech to the Financial Services Roundtable’s Housing Policy Council. “These relaxed standards helped more people to qualify for loans, and more people to qualify for significantly larger loans.”
These relaxed standards included limited verification of a borrower’s assets, employment, or income; higher debt to equity ratios; and the use of home equity loans as “piggyback” loans that helped borrowers qualify for first mortgages with low down payments and without mortgage insurance, resulting in ever-higher cumulative loan-to-value ratios.
Consequently, once house prices began to decline in 2007, home equity lenders began to experience unprecedented losses. While losses have traditionally run at about 20 basis points, or two tenths of a percent of loans, they shot up to nearly 1 percent in the fourth quarter of 2007 and to 1.73 percent in the first three months of 2008.
Looked at in dollar terms, losses on all home equity loans, including HELOCs and junior home equity liens, rose from $273 million in the first quarter of 2007 to almost $2.4 billion in the first three months of 2008 – a nine-fold increase. And the largest home equity lenders are now saying that they expect losses to continue to escalate in 2008 and beyond, Mr. Dugan said.
The Comptroller said these loss numbers need to be viewed in perspective. Though accelerating quickly, they are still much lower than the loss rates for other types of retail credit, such as credit card loans.
“It’s true that home equity credit was priced with lower margins than these other types of credit, and it’s true that the product has become a significant on-balance sheet asset for a number of our largest banks,” he said. “Nevertheless, the higher level of losses and projected losses – even under stress scenarios – are what we at the OCC would describe generally as an earnings issue, not a capital issue. That is, while these elevated losses, depending on their magnitude, could have a significant effect on earnings over time, with few exceptions they are not in and of themselves likely to be large enough to impair capital.”
For the near term, Mr. Dugan said, the OCC expects national banks to continue to build reserves.
“I can’t stress enough how crucial reserves will be in helping the industry manage its way through this situation,” he said. “At some banks, the portion of reserves attributable to home equity loans just barely covers 2007 chargeoffs. With losses accelerating, those reserves are simply not going to be adequate, and that’s why our examiners are encouraging more robust portfolio analysis and loss reserve levels.”
In assessing loan loss reserves for home equity loans, he said, banks need to recognize that they are in uncharted territory. “New product structures, relaxed underwriting, declining home prices, potential changes in consumer behavior – all of these factors make it difficult to predict future performance of home equity loans,” he said.
Circumstances have changed fundamentally, and historical trends have little relevance in estimating credit losses. As a result, qualitative factors such as environmental analysis and changing consumer behavior clearly should be factored into the reserve calculation. Likewise, lenders should take into account the very real possibilities that unemployment or interest rates will increase from their quite low current levels.
Mr. Dugan said that while lenders have begun to take steps to improve underwriting on new home equity loans, more needs to be done.
“Even as banks begin to work their way through the current problems, we need to ask some hard questions about home equity product structure and underwriting criteria,” he said. “In particular, we need to revisit the problems that landed lenders where we are today – particularly some of the “shortcuts” established in reaction to aggressive competition.”
Among the practices that warrant close scrutiny are:
The use of home equity lines to finance down payments.
The appropriate use of collateral valuation tools, such as asset valuation models, which the Comptroller said must be closely managed, periodically validated, and supported with sound business rules.
Income documentation. Although the overt use of stated income has been largely abandoned, some lenders now ask for income information and authorization to verify it, but do not follow through. “This practice is only marginally better than expressly relying on stated income, since it is questionable whether the borrower’s belief that income will actually be verified will really induce a higher level of honesty in providing information,” Mr. Dugan said. “We need to think carefully about whether anything short of actual verification of income is acceptable from a safety and soundness perspective for most borrowers.”
The extended interest-only structure that home equity credit lines have in the early years of the loan term. Payment patterns can only be a proxy for a borrower’s capacity to handle a given debt level if he or she is asked to make payments that are meaningful. “Interest-only payments reflect a borrower’s capacity to pay interest on a debt, but not the debt itself,” Mr. Dugan said. “Further, this lack of structured payment discipline encourages borrowers to assume greater levels of debt, often to the limit of their ability to make minimum monthly payments. In contrast, higher payments that reduce principal address both these concerns.”
(NBC Mad Cap Recap) When it comes to the U.S. mortgage mess, was it the lenders or the borrowers that caused the problem?
Ask Sen. Chris Dodd, D-Conn., and he’ll tell you that at this point it doesn’t matter all that much.
There are between 9 million and 12 million homes where the debt exceeds the equity, Dodd told Cramer during an interview Wednesday, and “those numbers are growing.”
A “contagion effect” has taken hold, Dodd said, and now the weakness in residential mortgages is bleeding into other areas of the economy such as commercial mortgages, municipal finance and student loans.
But “the heart of the problem is housing,” Dodd said. And “the heart of the housing problem is the foreclosure issue. Until you address that, all of this is going to continue and get worse.”
The homeowner-rescue bill Dodd helped to push through the Senate banking committee, among other things, will provide cheaper, government-backed loans to Americans in danger of foreclosure. The full Senate still has to pass the bill and then President Bush, who's not necessarily a proponent, has to sign off on it.
Dodd admitted that the White House does at times seem insensitive to the troubles of homeowners.
“There’s this notion somehow of these people got into the mess themselves,” he said, as if “it’s their fault. There is something called ‘mortgage malpractice’ here,” meaning predatory lenders.
Many Americans seem to share the same attitude. Right or wrong, though, Dodd points out, the housing problem needs to be solved. Those who complain about their neighbors being “rescued” should consider this, he said: Foreclosures don’t just hurt the owner – they hurt the whole neighborhood.
There were 8,100 foreclosure filings a day in April, Dodd said. That means over 16,000 next-door neighbors watched their home values decline as a result. In fact, home values drop at least 1% a day as long as that foreclosure sign next door stays up.
“So everybody benefits when we get something like this [bill] moving,” Dodd said.
As for a veto, “I’m more optimistic now than I was a few weeks ago” about the bill being passed, Dodd said. Both Republicans and Democrats have come together on the measure, which includes the foreclosure fix, an affordable housing trust fund, and a new regulatory body to oversee Fannie Mae
Federal National Mortgage Association (Fannie Mae)
(Housing Wire) We’ve all heard of rent-to-own, but a new idea from House Rep. Raúl M. Grijalva (D-AZ) would turn troubled former homeowners into renters, sort of an own-to-rent housing proposal. On Thursday, Grijalva unveiled the proposal — H.R. 6116, the Saving Family Homes Act of 2008 — ahead of a House Committee on Oversight and Government Reform subcommitee meeting. The Subcommittee on Domestic Policy, headed up by Dennis Kucinich (D-OH), had scheduled a hearing for Thursday afternoon to discuss how to target federal funds towards managing vacant and abandoned properties.
Grijalva’s proposal would grant homeowners whose mortgages have been foreclosed the right to petition a judge to allow them to remain in the home as renters, and pay a fair market rent. The rent would be set by a court-appointed appraiser and adjusted annually for inflation, the Congressman’s office said in a press statement.
The proposal would limit eligibility to mortgages on single-family, principal residences, occupied for at least 2 years, which sold for less than the median home value in the metropolitan statistical area in which the home resides, or the median value in the state, if MSA-level pricing information is not available.
“This bill is urgently needed for the millions of American families facing risk of foreclosure, and I am glad to have had the opportunity to make this statement that the sanctity of the American home and family should take precedence in this time of crisis,” said Grijalva.
The bill incorporates many of the ideas put forth by housing policy wonk Dean Baker, co-director of the Center for Economic and Policy Research, an economic think-tank. Baker first proposed his “Own to Rent” strategy for subprime borrowers in an op-ed last year.
Of course, more than a few in the industry see the bill as a form of rent control; which is a pretty bad word for anyone that has spent time in the mortgage servicing industry, to say the least.
“Sure, let’s just let the government manage rents and set allowable charges,” said one servicing manager sarcastically, who asked not to be named. “That’s worked out really well for places like Oakland [California].”
Nonetheless, the idea of “own-to-rent” is one that enjoys some support from from conservative economists, including American Enterprise Institute (AEI) Fellow Desmond Lachman and former economic advisor to President Bush, Andrew Samwick.
(Housing Wire) U.S. home prices fell in the first quarter of 2008 — and at a record pace, too, if you look only at purchases and exclude refinancing activity. The Office of Federal Housing Enterprise and Oversight said Thursday morning that its seasonally-adjusted first quarter index for purchases dropped 1.7 percent from the fourth quarter of 2007, the steepest quarterly decline in the purchase-only index’s 17-year history.
Annually, purchase prices have fallen 3.1 percent between Q1 2007 and Q1 2008, OFHEO said — also the largest annual price decline on record.
Refinancing activity remains problematic Those sharp price decline numbers contrast with an all-transactions index, however, which adds in refinancing activity. OFHEO reported that its all-transactions house price index fell just 0.2 percent on a quarterly basis, and was actually flat on an annual comparison basis.
It’s not immediately clear why refinancing transactions would so strongly moderate price declines in the purchase only index. Sources that spoke with Housing Wire Thursday said that one reason may be that borrowers in neighborhoods less affected by the housing slump would be likely more able to refinance; others suggested that the pressure to hit target values could lead to inflated home prices in refinancing transactions.
Housing Wire has asked OFHEO for comment on the divergence between refinancing and purchase prices in the past; the agency has yet to issue a formal comment on the matter.
OFHEO researchers did note, however, that refinancing activity has been a “important factor that has affected” the overall HPI in recent quarters. Approximately 82.3 percent of all transactions in the first quarter all-transactions HPI were refinancings, OFHEO said, the highest such share of activity since the third quarter of 2003.
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A look at the effect of appraisal data from refinance loans on the OFHEO HPI (right) shows that refinancings led the OFHEO HPI to significantly overshoot the purchase-only HPI during the housing boom, and that now refinancing activity is leading the HPI to undershoot purchase-only transactions during the bust.
“I’d call that [graph] a smoking gun,” said one MBS analyst, who asked that his name not be used. “Appraisers were inflating home values on refis during the boom, enabling the home ATM, and now they’re faced with trying to keep homeowners in their home in many cases.”
While the refinance/purchase divergence remains unsolved from a substantive standpoint, OFHEO directory James Lockhart did offer commentary on why OFHEO’s price index appears to show less severe price corrections relative to other indices, such as the Standard & Poor’s/Case-Shiller price index.
“While house price declines are widespread, homes financed with prime, conforming mortgages continue to hold up better than those financed with other types of mortgages, a phenomenon we’ve been observing for the last several quarters,” Lockhart said.
Between February and March, OFHEO purchase-only figures show that home prices have fallen 0.4 percent nationally, and are now 3.7 percent below the April 2007 peak in conforming home prices. Looking at purchase-only transactions, eight states posted quarterly price declines above 3 percent; two states — California and Nevada — saw prices fall more than 8 percent.
Every Census Division experienced a price decline in the latest quarter when looking at purchase-only transcations, OFHEO said; declines were strongest in the Pacific Census Division, which saw purchase prices fall 5.9 percent. Using the all-transactions index, however, 164 of 292 MSAs tracked by OFHEO posted positive quarterly price gains — underscoring the wide divergence in price trends when refinancing activity is included in the data.
(Housing Wire) In what should be good news for both troubled borrowers and servicers alike, the American Securitization Forumsaid Tuesday afternoon that it had released operational guidelines for mortgage servicers and counseling organizations, designed to help both parties implement procedures for reimbursing expenses associated with borrower credit counseling services.
The ASF represents the interests of third-party/private-party securitization in the secondary mortgage market. Its guidelines apply to a vast number of subprime and Alt-A mortgage pools that were structured into bonds by issuers other than those named Fannie Mae (FNM: 27.44, -1.08%), Freddie Mac, (FRE: 26.17, -0.53%), or Ginnie Mae.
“Servicers are legally obligated to mitigate losses and maximize recoveries on each mortgage loan, acting in the best interests of the investors in a securitization trust comprised of these loans,” said Tom Deutsch, deputy executive director of the American Securitization Forum. “Borrower credit counseling is one of several tools servicers can use to preserve homeownership and prevent foreclosure, which is the best solution for borrowers and investors alike.”
The ASF had first signaled in October of last year that credit counseling fees should be interpreted as “servicing advances,” and considered for reimbursement out of a securitization trust, but did not at the time establish formal policies and procedures surrounding when and how trusts would cover the fees. The upshot, HW was told, was that servicers couldn’t really act on the notion that counseling fees would be reimbursed.
“It really depended on whatever trust was involved in the deal,” said one source, who asked not to be named.
Fannie Mae introduced a formal policy for HOPE Hotline referrals by servicers in January, in a move that signaled an industry-wide shift towards support for credit counseling — especially in the face of loss mitigation departments that have been simply overwhelmed by calls from troubled borrowers.
“This should come as a help for some servicers,” said HW’s source, a servicing exec who asked that his name not be used. “Knowing what is considered an advance, when, and how much is allowable sets some sort of standard going forward.”
Most of the subprime mortgages that comprise the lion’s share of default activity thus far are involved in so-called private-party securitizations that fall outside of the purview of the GSEs — in fact, during the go-go years of 2005-2007, the third-party securitization market actually trumped the GSE-led MBS market in terms of issuance volume.
The new ASF guidance recommends that servicers reimburse up to $150 out of securitization trust proceeds for any approved counseling session. Other specific recommendations include “contracting with quality and trusted counseling organizations,” ensuring that the counseling organization involved help servicers collect information relevant to loss mitigation evaluations. Counseling expenses should be reimbursed regardless of the outcome of a loss mitigation effort, as well, the ASF document says.
Loans are eligible for counseling reimbursement if they are in delinquency, current but where default is imminent or reasonably foreseeable, in loss mitigation with extenuating circumstances such as a rate reset coming in six months, within 30 days of a foreclosure sale, or where the servicer documents the individual counseling expense had a net present value benefit, the ASF said.
(Calculated Risk) Last night I posted a video from Jim the Realtor showing an area of Oceanside, CA with numerous REOs. Jim has an REO listing in the area and he sent me the details.
260 Securidad, Oceanside, California 2 Bedroom 1 Bath, 820 sq ft The house sold for $318,000 in July 2004, and the owner refinanced a year later for a total of $375,000 in loans.
The house is now listed (REO) at $127,900, and there are several bidders (investors and owner-occupant buyers) and Jim believes the property will sell for between $140,000 and $150,000. Note: the house is in good condition (for what it is) and appears to be move-in ready.
This is about 55% off the previous sales price and even more off the apparent appraised value when the homeowner refinanced.
This brings up a key point: house price changes vary widely by area, not just by state, but even within cities.
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Click on graph for larger image.
This graph shows the Case-Shiller Home Price Index for San Diego. Prices are off by about 24% from the peak in 2005 according to the Case-Shiller index, but the Oceanside REO is off by about 55%.
Obviously areas with numerous foreclosures have seen larger price declines than areas with fewer foreclosures.
The following map of Denver, from an article by Luke Mullins at U.S. News and World Report, illustrates this point. Some areas of Denver are being devastated by foreclosures, others are mostly untouched.
Foreclosures are ripping through the rows of new homes in the flatlands where Denver turns to prairie. Every week, 10 more families here need to find someplace else to live. ... On some blocks, as many as one-third of the residents have lost their homes, making this one of the worst hotspots in a city that was among the first to feel the pinch of the foreclosure crisis. Many houses here remain empty, bank lockboxes on the front doors.
But prices in the areas untouched by foreclosures are actually flat, or in some cases have even increased slightly.
What does this mean for future prices? First, some areas are probably close to a price bottom. Looking back at the REO in Oceanside, we can see that this property is now attractive to investors. According to Jim, this property will rent for between $1000 to $1200 per month. Here is a simple cap rate calculation:
Cost: $140,000 Rent: $12,000 to $14,400 per year Expenses: Taxes (1% in California): $1,400 (note: no Mello Roos or HOA fees) Vacancy: 5% or $600 to $720 depending on rent. Maintenance and Insurance: $1,400 per year.
This yields a cap rate of between 6.1% and 7.8% depending on the rent. Investors provide a floor for house prices, and these are attractive cap rates for some small investors.
But what about prices for areas with fewer foreclosures? These prices are still sticky, but will continue to decline. From Peter Hong at the LA Times yesterday: At the luxury end, home prices are falling
You can't have one market hugely cheaper than another forever," said UC Berkeley professor Thomas Davidoff, who specializes in real estate.
Davidoff and others say the time lag stems from the fact that affluent homeowners generally don't have to sell under duress, unlike struggling borrowers facing escalating mortgage payments. But wealthy homeowners are increasingly finding out that if they want to sell their homes, they will need to discount the prices.
In the end, the housing market is linked as shown by this graphic.
Not all chain reactions start with a first time buyer using a subprime loan, but the loss of a large number of first time buyers will eventually impact the entire chain.
Over time the equilibrium between different price ranges will return, but the price dynamics will be different. Areas with a large number of REOs have seen much faster price declines - and are probably closer to the price bottom. Areas with fewer REOs will exhibit "sticky prices" and the prices will probably decline for some time.
(eFinance) The National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI) was released today. The index determines the percentage of residents who can afford a median priced home in a given area.
Without further ado, here are the least and most affordable housing markets according to the HOI:
As always, the most affordable housing markets are concentrated in Ohio, Michigan and Indiana. More than 90 percent of the people who live in the metros on this list can afford a median priced home.
The Los Angeles area tops the list of the least affordable housing markets for the 14th consecutive time. Only 10 percent of the people who earn the median household income of $59,800 can afford a median priced home.
It is interesting to note that homes in Los Angeles sell for almost five times more than homes in Kokomo, IN (the most affordable housing market.) Yet, the median household income for both areas is almost exactly the same.
(FT - Wilbur Ross) The US federal government has tried to stabilise residential real estate, but nationwide prices have dropped by 13 per cent in the past 12 months. Analysts have forecast that by June 30, 10.6m families will have either no equity in their homes or a negative equity.
This problem seems likely to become more severe. The solutions proposed so far have been directed mainly towards helping delinquent borrowers avoid foreclosure, but the incentives have been weak. Remedies are needed to reduce delinquent mortgages to present property values, provide lenders with possible future recovery of the amounts by which they discounted their loans, restore mortgage lender liquidity and make mortgages available for future home buyers.
Many lenders would reduce the principal amount of troubled loans to the present value of the house if they could liquefy part of the loan and share in the eventual upturn in property values. To provide some liquidity, the Federal Housing Administration, the government insurer for low-income housing, should be authorised to guarantee $1 of existing troubled mortgages on primary residences for each $1 forgiven by the lender. The lender would be able to resell the guaranteed portion of its principal amount.
The FHA would receive an insurance premium, as it already does on other mortgages, and on the first resale of the home would receive the lesser of 25 per cent of the gain or the amount it guaranteed. The total of the premiums and appreciation on some sales would more than offset losses on foreclosed homes. The FHA would require that government-approved appraisers confirm the house’s market value. Also, if there were a shortfall on foreclosure and resale, the FHA would not pay a lump sum but instead make the payments when originally due. Therefore, at worst the FHA’s payments would be spread over many years and the FHA’s risk would decline whenever the borrower made payments.
Lenders would be able to sell the guaranteed portion of the loan, thereby restoring their liquidity. Lenders also would receive on the first resale of the home the lesser of 25 per cent of the gain or the amount forgiven. This would enable them to recapture some of the principal amount they forgave, thereby providing them with an incentive to restructure the mortgage rather than foreclose. Appreciation sharing would not carry over to the next owner, but qualified home purchasers would be able to assume these favourable mortgages. Thus the resale market for these properties would be largely self-financing for several years and this would stabilise or improve property values. Meanwhile the original borrower would retain 50 per cent or more of the appreciation on a property that otherwise would have been foreclosed. It would be unreasonable for homeowners to expect a totally free ride on concessions granted by lenders, but retaining half of the upside would motivate the homeowner to make monthly payments even though there initially would be no equity value.
If a mortgage had been $180,000 against an original home value of $200,000 and the loan were now reduced to $160,000, the lender would have lost $20,000. If the home later were sold at its original $200,000 value, the lender would have recovered $10,000, or half of the concession. The FHA would have gained $10,000 and the homeowner would have made $20,000, thereby restoring his original equity position.
This co-operation between public and private sectors would provide both lenders and borrowers with a rational, incentivised alternative to foreclosure.
The government’s present voluntary plan of restructuring brings neither added incentives to the lender nor liquidity to the mortgage market. This FHA-based plan would do both. Lenders and borrowers would negotiate interest and repayment terms without government intervention and existing servicers would continue to service the loan. All parties would benefit from stabilisation of housing markets.
Most important, the process would be voluntary and therefore would not chill the willingness of lenders to make loans in the future. In contrast, the proposed remedies incentivise all parties to negotiate but do not create moral hazard by bailing out reckless lenders or borrowers. The lenders will write down their loans and borrowers initially will lose their original equity. Both will have a chance to recoup and substantial liquidity will be brought back to the mortgage market.
The writer has created the US’s second largest servicer of subprime mortgages by acquiring American Home Mortgage and Option One
(Housing Wire) As REO inventory piles up nationwide, more and more servicers are turning to auctions as a disposition method despite the higher loss severity usually associated with the process, Fitch Ratings said in a report released late Monday. By the end of 2007, 60 percent of the nation’s servicers had used auctions to liquidate REO holdings, underscoring the widespread acceptance the model has gained among the servicing and default industry.
Despite widespread usage, usage ranged from as little as 1 percent of inventory to 44 percent of REO inventory, based on Fitch’s survey of servicing operations, and often varied based on geographic location.
Fitch noted that servicers tended to utilize auctions in areas where loss severities are highest, which in part explains why properties sold via traditional means averaged loss severity of 40 percent relative to unpaid principal balance, while auctioned properties registered 56 percent in loss severity.
From the report:
For certain properties such as those located in distressed geographical areas, that are vacant and exposed to higher instances of vandalism, in poor condition and/ or facing huge repair expenses, or are located in areas already saturated with REO properties, traditional REO liquidation methods may significantly increase holding times and repairs, as well as require multiple price reductions. Therefore, taking an up-front loss through an auction, although appearing larger, may indeed be better than incurring an ultimately greater loss through a prolonged REO liquidation effort.
As widespread as auctions now are in the REO marketplace, servicers suggested to Fitch that the use of auctions is likely to increase even further in the months ahead as inventories continue to swell. Of the 40 percent of services not using auctions, nearly all indicated that they would be exploring the option in the near future.
The REO auction marketplace is a hotly-contested and, ostensibly, relatively profitable business. Heavyweights including Williams and Williams and Hudson & Marshall have been aggressively pushing the auction model as an alternative disposition strategy for servicers and investors.
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The rating agency said in its report that it expects “servicers to establish a process to identify properties for auction, thereby using auctions as a specific and controlled exit strategy and not simply as a means to lower REO inventories, manage staffing levels, or reduce servicing costs.”
The remarks represent the first best practices guidance from a rating agency on the use of auctions in REO management; servicer ratings provided by agencies such as Fitch are a critical part of the secondary market, because higher-rated servicers can effectively reduce the overcollaterization requirements needed to structure a specific deal.
Sources told Housing Wire Tuesday that Fitch’s recommendations could possibly put some servicers into a tougher position than others, given that some servicers have moved towards a strong reliance on auction-based disposition. Fitch’s apparent view that auctions need to remain one of — but not the only — disposition strategy put into place would seem to contradict such as approach, a servicing manager that spoke with HW suggested.
“It really depends on how their view of best practices in REO auctions flows into rating methods,” said the source.
(Housing Wire) In clarification that market participants said will further embolden servicers to modify mortgages that are likely headed for trouble, the Internal Revenue Service on Monday outlined the tax effects on securitized mortgages that have been modified to avoid foreclosures. Under Revenue Procedure 2008-28, the IRS said that it will not challenge the tax status of securitization vehicles when a servicer modifies a loan — even a performing loan — so long as the modification fits within the new scope outlined by the government agency.
The guidance comes as welcome news for servicers and investors in their attempts to implement foreclosure prevention programs for most subprime mortgages; the vast majority of subprime mortgages are securitized, and the implications of loan modifications prior to default a germane issue for the so-called REMIC election.
Many servicers have been looking to work with borrowers proactively, ahead of potential default activity, but have been unsure about whether doing so might jeopardize the favored tax status of a particular securitization trust.
The reason is tied to IRS rules regarding the favorable tax treatment of REMICs, which mandate not only a static pool requirement but a “passive management” requirement that has served to essentially limits servicers’ ability to modify loans to only those situations where a default is deemed imminent — in other words, to those situations where borrowers have already become delinquent on their payments.
In the past, industry consensus was that getting more aggressive with loan modification — such as modifying performing loans likely to default before they became delinquent — would likely have been seen as “active management” of the underlying pool, jeopardizing the favored tax status of the REMIC.
And that is what makes the IRS guidance released Monday so important, at least from a servicers’ perspective. The IRS said it will now allow servicers to freely modify performing loans when “the holder or servicer reasonably believes that there is a significant risk of foreclosure of the original loan,” a sea-change from earlier industry practice.
This new freedom, however, does come with some restrictions: modifications of performing loans must put the holder in a “less favorable” position, and may only be done when less than 10 percent of initial pool aggregate balance is already delinquent.
Servicers must reasonably believe that the modification will result in a “substantially reduced risk of foreclosure,” as well, the IRS said.
The guidance from the IRS dovetails with January clarification from the Securities and Exchange Commission that suggested fast-tracking loan modifications would not jeopardize the so-called QSPE election, which allows the off-balance sheet treatment of REMICs and other securitization trusts.
(Calculated Risk - Tanta) Here's a wee bit of cognitive dissonance with your coffee, courtesy of TheStreet.com:
Neighborhoods across the U.S. are being ransacked.
In fact, about 50% of homes have substantial damage following foreclosure, according to a survey of 1,500 real estate agents by Campbell Communications in Washington, D.C. (This is not just due to homeowners looting their foreclosing properties; some do not have the financial capabilities for the home's upkeep, and other times vandals are responsible.)
To keep real estate agents from being left to sell homes with floor and carpet damages, holes in the wall, and removed appliances, a preventive measure is being offered to homeowners facing foreclosure known as "cash for keys."
I have been wanting some real numbers--not just a few splashy anecdotes--about the "trash out" thing. This is because it's exactly the sort of car-crash story the press loves, so it's the sort of thing always in danger of getting overstated (like the "burn outs").
The thing is, "trash outs" have as far as I know existed ever since the invention of foreclosure; they were simply rather rare. Not that most foreclosed homes were ever in pristine condition. But that's the thing: for most of my experience in this business the vast majority of REO damage was in fact due to the mortgagor's inability to afford repairs (indeed, the exploding water heater that damaged several hundred square feet of carpet might well have been the financial catastrophe that sent a struggling household into foreclosure in the first place). The rest was a function of vacancy: either vandalism or simply weather damage like frozen pipes, green pools, brown lawns, etc.
So I'm a touch skeptical about the claim that 50% of REO has "substantial damage" and most of that is willful trashing of the property. It would have been nice for the reporter to supply the details here. I became even more skeptical when I read this:
Lenders see cash for keys as a small price to pay when compared with the cost of repairs. Indeed, the price impact when people damage their houses can be up to 25% of what the home is worth, according to Campbell Communications. (That means a $400,000 home's repairs might cost around $100,000.)
I freely admit it has been a while since my wrinkled reptilian snout has had to read a lot of detailed repair estimates. However, I think I need someone to explain to me how anyone can do $100,000 worth of damage to a three-bedroom two-and-a-half bathroom home with doors that are not wide enough to admit a backhoe. I suppose it's possible, but can the average repair bill be even close to that?
Then there's this:
How many people are biting?
It depends. Cash for keys is not always considered a bargain by homeowners. Losing their home and credit is a heavy burden.
"Most people don't want cash for keys," says the researcher Popik. "They want their credit ratings to stay intact."
Having been assured by all kinds of people that homeowners are just ruthlessly walking away, I'm struggling with the idea that they're too pissed to collect an extra couple grand for the keys. They'd rather "mail them in" and get nothing? Because this might have something to do with their credit ratings? They really think they can make more than $3,000 net ripping out the furnace and selling it on eBay? That's easier than taking a check from the servicer?
My theory is that whenever the emerging popular narratives are this contradictory--homeowners are cold and calculating enough to just walk away from an upside-down investment, but they are also emotional and irrational enough to prefer the revenge of knocking holes in the drywall to getting a check to cover moving expenses; they can afford their mortgages but choose not to pay them, but they also can't afford basic maintenance before the foreclosure; they care about their credit ratings except they don't care about their credit ratings; they are the victims of servicers who won't answer the phone, but they are also bitter people who thumb their noses at a generous check the servicer is offering--we have an excellent opportunity to recognize that:
1. The category "homeowner" is extremely diverse.
2. All kinds of people do all kinds of things for all kinds of reasons, not all of which are obvious to anyone including the people who do these things.
3. Any discussion of "psychology" that assumes a universal, perfectly consistent and easily-predictable human response to falling home values or foreclosures is not a very sophisticated understanding of human psychology (Hi, Dr. Shiller!).
4. Any argument about "bailouts" that seems to depend on characterizing all homeowners in the same way, and imputing to them all the same experiences and motives and the same responses to incentives or disincentives, is not worth listening to.
5. I wouldn't hang a dog on the basis of a survey of real estate agents at this point.
(Housing Wire) Senator Chris Dodd (D-CT) and Senator Richard Shelby (R-AL), Chairman and Ranking Member of the Senate Committee on Banking, Housing, and Urban Affairs, said Monday evening that they had reached an agreement the so-called Federal Housing Finance Regulatory Reform Act of 2008. The housing package, which had been stalled in committee due to strong objections by Republicans, includes a broad proposal to expand the mortgage insurance offered by the Federal Housing Administration as well as provisions to establish a new regulator for Fannie Mae (FNM: 28.95, -3.14%) and Freddie Mac (FRE: 27.01, +0.15%).
A deal between Senate Democrats and Republicans had been widely expected after both parties suggested they were close to a deal last Friday.
“This legislation is good news for both the markets and homeowners,” said Dodd. “The bill addresses the root of our current economic problems – the foreclosure crisis – by creating a voluntary initiative at no estimated cost to taxpayers which will help Americans keep their homes.”
While no details on the bipartisan legislation were released Monday, Dodd’s suggestion that the bill comes at no cost to taxpayers — and the mention of a “new fund that will help create more affordable housing for millions of Americans” in a press statement Monday evening — buttresses earlier reports that suggested funding for the proposed FHA expansion would come from an affordable housing pool funded by both GSEs.
“I am hopeful that the Banking Committee will deliver both by passing this legislation tomorrow,” Dodd said. The Senate Banking Committee is scheduled to mark up the bill at 10:30am EST on Tuesday.
Shelby, for his part, signaled his support of the package — likely a presage to support from President Bush, as well, sources told Housing Wire on Monday evening.
“I’m proud to join Chairman Dodd in announcing this agreement,” said Shelby. “My primary consideration during negotiations on this package has been to protect the American taxpayer, and I believe we’ve made significant progress toward that goal on each component.”
President Bush has strongly opposed the House’s version of a housing relief package, suggesting that it comes at too high a cost for taxpayers and bails out lenders and borrowers alike. Sources on Capitol Hill informed Housing Wire that the agreement with Shelby likely signals the administration’s implicit approval of the Senate’s version of the housing relief bill.
(Housing Wire) As Senate leaders continue to hash out a housing rescue proposal expected to reach a key committee vote later this week, officials in the Bush administration are touting the growing success of a Federal Housing Administration program launched last August. Called FHASecure, housing officials last week said that the product has helped 200,000 homeowners refinance their mortgages and avoid foreclosure.
“Over the past several months, FHA has been working to help families who want permanent relief from their high cost subprime mortgages,” said Deputy Secretary of Housing and Urban Development Roy Bernardi. “We are proud to have helped these struggling homeowners keep their homes.”
Applications for FHASecure loans are largely what has driven a huge spike in FHA application volume during the past three months, with numerous brokers reporting to Housing Wire that the FHA-led program is often the only resort many subprime borrowers have available to them when looking to refinance and avoid potential problems.
“It’s either that [FHASecure] or hard money,” said one broker, who asked that his name not be used. “There isn’t much else out there right now.”
In the past three months, FHASecure has insured twice as many loans as the program did in the program’s first six months. From September 2007 to February 2008, FHA insured 100,000 refinanced mortgages under the program; since February, FHA has backed another 100,000 loans, it said in a press statement last week.
“The Bush Administration’s FHASecure product has quickly proven to be a responsible solution for 200,000 American families who are in the right house, but the wrong mortgage,” said FHA Commissioner Brian D. Montgomery. “These homeowners have found affordable relief from their exotic loans, and FHA is on pace to help a total of half million families keep their homes by year’s end.”
Administration officials are pumping up the program as a counterpoint to current housing proposals being debated on Capitol Hill, sources within the administration told Housing Wire on Monday morning. A bill under consideration in the Senate, and one already passed by the House, would authorize the FHA insure an additional $300 billion in refinanced mortgages. Critics suggest that the bill amounts to placing the burden of bad loans onto the shoulders of taxpayers, and President Bush has already threatened to veto the package, calling it a bail-out of irresponsible borrowers and lenders.
Who’s being helped? Despite the administration’s suggestion that the FHASecure program is sufficient to backstop troubled subprime borrowers, it’s clear that the program has not met its original objective of helping homeowners in trouble avoid the loss of their home. Via CNNMoney:
… only a small number of the people so far helped by FHASecure - about 3,000, according to FHA - were those in imminent danger of losing their homes. Instead, they were borrowers who were current on their payments who wanted to refinance out of high-cost loans.
“[The original targets] make up only a small portion of the [200,000] people who got FHASecure loans,” said HUD spokesman Steve O’Halloran. Instead, he said, “FHASecure became our de facto refinance product.”
The numbers track with earlier coverage here at HW that first suggested last December that the housing program wasn’t helping troubled borrowers per se, but instead those looking to avoid trouble and/or secure a lower-cost, government-guaranteed mortgage.
FHASecure was sold as a program to primarily help 240,000 delinquent subprime borrowers hit hard by resets avoid foreclosure when it was originally introduced last year, but some sources at HUD that spoke with HW said the shift wasn’t necessarily a bad thing.
“We’re capturing those borrowers who are good credit risks, who have made their payments on time and are simply in the wrong mortgage,” said one official, on condition that his name not be used. “We’re not in the business of assuming bad credit risk.”
But the FHA is certainly creeping towards assuming what one source characterized as “riskier risk.”
Perhaps looking to head off further changes to FHA-insured mortgage programs, the Bush administration announced a broad expansion of the FHASecure program on May 7. The expanded guidelines target more delinquent borrowers, including currently delinquent borrowers post-rate reset who have missed payments prior to their reset — a pretty broad change in program guidelines, clearly designed to make it so that more delinquent borrowers can clear the underwriting hurdle.
Under the new guidelines, borrowers in situations where LTV is 90 percent or less can have a 90-day late payment on record prior to their rate reset and still qualify for refinancing under the government program; all delinquent borrowers in reset ARMs, regardless of LTV, may have a 60-day late payment on record prior to reset and still qualify, according to a mortgagee letter outlining the expanded underwriting standards.
Previous guidelines did not allow borrowers to have late payment histories prior to their rate reset. it’s unclear how many more borrowers are expected to qualify under the expanded FHASecure guidelines, but consumer advocate groups have suggested to numerous press outlets that the expansion won’t be enough.
HUD officials, however, take the stance that those refinancing via FHASecure are those that would have needed help eventually.
“We’re trying to be proactive, and help those that can be helped,” the same official suggested.
(Calculated Risk) First a great quote via CNNMoney:
"On the commercial side, best I can tell the problems are in all of it - offices, retail, hotels. I think we will see a prolonged decline." Kermit Baker, chief economist for the American Institute of Architects, CNNMoney May 17, 2008
Wow. Clearly Kermit Baker is not a NAR economist! I think he is correct, and here is my analysis of three key categories of commercial: office buildings, multimerchandise shopping, and lodging with some estimated declines in investment.
The retail sector is expected to soften through 2009, according to a report by real estate brokerage Marcus & Millichap. The report, obtained by Reuters, forecasts the overall retail real estate vacancy rate will rise 1.4 percentage points this year to 11.1 percent, after a 0.9 percentage-point increase last year. ... While demand slows, the supply of new shopping centers is expected to continue to grow, albeit at a slower pace. Marcus & Millichap forecasts about 131 million square feet of new shopping centers should be completed this year, down from 145 million square feet in 2007. ... Properties in once-hot residential markets of southwest Florida; the California's Inland Empire areas, such as Riverside and San Bernardino; Phoenix; and Las Vegas are of particular concern.
"In some of those markets, what you saw were properties that were built to service a consumer base that never materialized," [Spencer Haber, chief executive of H2 Capital Partners] said.
Another great quote: "a consumer base that never materialized".
For more, here is my recent and somewhat lengthy overview on CRE.
(Tanta at Calculated Risk) Gather 'round, children, because Tanta is about to engage in a curiously hard-headed look at an editorial by a famous economist that demands, in every sincere and decent sentence, our kindness and compassion instead. This is blogging at its finest: nobody should get away un-pissed-off about something. And on a Sunday, too.
It's also long blogging at its finest. You knew I'd have to try to figure out how to use the Read More thingy eventually . . .
* * * * * * * *
The editorial in question is by Robert J. Shiller, who is a professor of economics and finance and famous analyst of speculative bubbles. A specialist in behavioral economics, in the application of psychology to understanding financial markets. A co-founder of Case Shiller Weiss, that house price index we talk about a lot. His editorial, "The Scars of Losing a Home," speaks not of lofty academic economic concepts but of human sympathy, of things that are "really important." With references from famous academic psychologists. I haven't taken this kind of a tiger by the tail since I wentafter Austan Goolsbee last year.
Yes, it was only a year ago that the distinguished Dr. Goolsbee wrote this on the same editorial page:
And do not forget that the vast majority of even subprime borrowers have been making their payments. Indeed, fewer than 15 percent of borrowers in this most risky group have even been delinquent on a payment, much less defaulted.
When contemplating ways to prevent excessive mortgages for the 13 percent of subprime borrowers whose loans go sour, regulators must be careful that they do not wreck the ability of the other 87 percent to obtain mortgages.
For be it ever so humble, there really is no place like home, even if it does come with a balloon payment mortgage.
I actually think Goolsbee's piece was the high-water-mark of the "subprime helps the poor" talking point. You certainly don't hear much about that these days. Less than two months after Dr. Goolsbee's earnest op-ed, we got an interview in the very same NYT with one Bill Dallas, CEO of the famously defunct Ownit Mortgage, effusively testifying to his own burning desire to help out the unfortunate in a way that finally put paid to the respectability of that line ("'I am passionate about the normal person owning a home,' said Mr. Dallas, who is also chairman of the Fox Sports Grill restaurant chain and manages the business interests of the Olsen twins. 'I think owning a home solves all their problems.'") Plus by now we've got some numbers on the 2007 mortgage vintage, the one that Dr. Goolsbee was afraid wasn't going to ever materialize if we tightened up lending standards too much. A year ago we were looking at a 13% subprime ARM delinquency rate. Per Moody's (no link) the Q4 07 subprime ARM delinquencies were running 20.02%. And that is not, you know, "just" another 7%. By now, those delinquent borrowers in Goolsbee's 13% have probably mostly been foreclosed upon and are off the books. The 20% or so who are now delinquent were either part of the 87% that Goolsbee thought were "successful homeowners" last year, or else they're those lucky duckies who bought homes after the publication date of Goolsbee's plea that we not tighten standards too much.
Of course Shiller wasn't exactly spending his time a year ago defending the subprime mortgage industry on the grounds that it put poor and minority people into ever-so-humble homes with balloons attached. I seem to recall him mostly arguing that homebuyers were engaged in a speculative mania. In a June 2007 interview:
Well, human thinking is built around stories, and the story that has sustained the housing boom is that homes are like stocks. Buy one anywhere and it'll go up. It's the easiest way to get rich.
At the time, that kind of statement struck some of us, at least, as not possibly the entire story either, but in any event a useful corrective to the saccharine silliness of the "Ownership Society" and Bill Dallas solving everyone's problems by letting them put Roots in a Community (for only five points in YSP).
So I hope I can be just a tad startled by the New Shiller:
Homeownership is thus an extension of self; if one owns a part of a country, one tends to feel at one with that country. Policy makers around the world have long known that, and hence have supported the growth of homeownership.
MAYBE that’s why President Bush’s “Ownership Society” theme had such resonance in his 2004 re-election campaign. People instinctively understand that homeownership conveys good feelings about belonging in our society, and that such feelings matter enormously, not only to our economic success but also to the pleasure we can take in it.
So it's no longer irrational exuberance or plain old speculating; it's now an instinctive affirmation of some eternal verity of the human psyche? The ultimate patriotism: the definition of self so tied up in ownership of a slice of the motherland that to rent becomes not only psychologically dangerous--these people without selves can't be up to anything good--but politically dangerous as well? Is it possible that Shiller can mean what he is writing here?
If you just scanned the first few paragraphs of Shiller's op-ed you might come away with the impression of a sincere but somewhat hackneyed plea for us all to have a bit of sympathy for the foreclosed among us, foreclosure not in anyone's experience being a walk in the park. Fair enough. It being Sunday in America, I suspect millions of us are being treated to exhortations to take a kinder view of the unfortunate than we often do; we need those exhortations; we are often lacking in sympathy. Hands up all who disagree.
But you keep reading and you find Shiller trying to explain the "trauma" of foreclosure. And that's where this really gets weird:
Now, let’s take the other perspective — and examine some arguments against the stern view. They have to do with the psychological effects of strict enforcement of a mortgage contract, and economists and people in business may need to be reminded of them. After all, too much attention to abstract economic statistics just might make us overlook what is really important.
First, we have to consider that we cannot squarely place the blame for the current mortgage mess on the homeowner. It seems to be shared among mortgage brokers, mortgage originators, appraisers, regulatory agencies, securities ratings agencies, the chairman of the Federal Reserve and the president of the United States (who did not issue any warnings, but instead has consistently extolled the virtues of homeownership).
Because homeowners facing foreclosure must bear the brunt of the pain, they naturally feel indignation when all of these other parties continue to lead comfortable, even affluent lives. Trying to enforce mortgage contracts may thus have a perverse effect: instead of teaching homeowners that they should respect the contracts they sign, it may incline them to take a cynical view of the whole mess.
We need to modify mortgage contracts to keep homeowners from becoming cynical? That's somehow more respectable an idea than the one saying we should throw them out on the street to "teach them a lesson"? If Shiller is serious that all those other parties are "to blame," then why isn't the obvious solution to throw them out on the street? There seems to be an assumption here that nothing can be done to punish those who are "really" to blame, so we're left managing the psyches of those who can be punished. And that's not cynical?
This the point at which Shiller dredges up the most stunningly unfortunate quote from William effing James (1890) to define the "fundamental" psychology of homeownership:
Homeownership is fundamental part of a sense of belonging to a country. The psychologist William James wrote in 1890 that “a man’s Self is the sum total of all that he CAN call his, not only his body and his psychic powers, but his clothes and his house, his wife and children, his ancestors and friends, his reputation and works, his lands and horses, and yacht and bank account.”
Now, that's breath-taking. Horses. Yachts. His wife and his children. Ancestors. The whole late-Victorian wealthy male WASP defining the "Self" (with a capital!) as the wealthy male WASP surveying his extensive possessions, an oddly-assorted list that ranks the family and friends somewhere after the clothes and the house. (Yes, James did that on purpose.) The kind of sentiment that was a caricature of the late-Victorian male even in 1890. And Shiller drags this out in aid of generating sympathy for homeowners? Really? You couldn't find some psychological insight about the emotional relationship of people to their homes that doesn't speak the language of the male ego surveying his domain, sizing himself up against all the other males to see where he ranks?
(James on the psychological effect of losing one's property: " . . . although it is true that a part of our depression at the loss of possessions is due to our feeling that we must now go without certain goods that we expected the possessions to bring in their train, yet in every case there remains, over and above this, a sense of the shrinkage of our personality, a partial conversion of ourselves to nothingness, which is a psychological phenomenon by itself. We are all at once assimilated to the tramps and poor devils whom we so despise, and at the same time removed farther than ever away from the happy sons of earth who lord it over land and sea and men in the full-blown lustihood that wealth and power can give, and before whom, stiffen ourselves as we will by appealing to anti-snobbish first principles, we cannot escape an emotion, open or sneaking, of respect and dread.")
I'm actually, you know, in favor of some sympathy for homeowners, but one thing that does get in the way of that for a lot of us is, well, the rather disgusting shallowness that a lot of them displayed on the way up. There is this whole part of our culture that has sprung into being since 1890 that takes a rather severe view of conspicuous consumption, unbridled materialism, and totally self-defeating use of debt to buy McMansions, if not yachts. We were treated to a fair amount of that kind of thing in the last few years. In fact, we had Dr. Shiller explaining to us last year that a lot of folks just wanted to get rich, quick, in real estate.
It is undeniably true, I assert, that not everyone was a speculatin' spend-thrift maxing out the HELOCs to buy more toys, and that part of our problem today with public opinion is that we extend our (quite proper) disgust for these latter-day Yuppies to the entire class "homeowner." But it is surely an odd way to engage our sympathies for the non-speculator class to speak of it in Jamesian terms as the man whose self is defined by his Stuff, and whose psychological pain is felt most acutely when he recognizes that he is now just like the riff-raff.
It's worse than odd--it's downright reactionary--to then go on to that evocation of homeownership as good citizenship and good citizenship as "feel[ing] at one with [the] country." This puts a rather sinister light on Shiller's earlier insistence that we need to make sure people don't get too "cynical."
I see that Yves at naked capitalism was just as disgusted by Shiller as I am:
Now admittedly, this is not a validated instrument, but a widely used stress scoring test puts loss of spouse as 100 and divorce at 73. Foreclosure is 30, below sex difficulties (39), pregnancy (40), or personal injury (53). Change in residence is 20.
Note that if we as a society were worried about psychological damage, being fired (47) is far worse than foreclosure (30), and if it leads to a change in financial status (38) and/or change to a different line of work (36) those are separate, additive stress factors. Yet policy-makers have no qualms about advocating more open trade even though it produces industry restructurings that produce unemployment that does more psychological damage than foreclosures. As a society, we'll pursue efficiency that first cost blue collar jobs, and now that we've gotten inured to that, white collar ones as well (although Alan Blinder draws the line there).
But efficiency arguments don't apply to housing since we are sentimental about it. And it's that sentimentality that bears examination, since it engendered policies that helped produce this mess.
I would only add that we are about five years too far into a war that has not made a majority of us "feel at one with that country." I think of another really important policy change we could be pursuing right now to shore up everyone's psychological estrangement from their patriotic self-satisfaction. But "efficiency arguments" don't apply to wars, either.
My fellow bleeding heart liberals like Goolsbee found themselves defending the subprime industry in the name of increasing minority homeownership. Now we're treated to the spectacle of Shiller arguing for homeowner bailout legislation in the same terms that Bush used to defend the "Ownership Society." Housing policy, I gather, makes strange bedfellows. It certainly makes strange editorials.
(Washington Post - Kenneth Harney) Who have better credit scores on average -- home buyers with higher or lower incomes?
Inside the country's fastest-growing home-mortgage program, the surprising answer is: People with lower incomes have slightly higher FICO scores. That finding, which emerged from a statistical analysis of all approved mortgages insured by the Federal Housing Administration during fiscal 2007, is buttressing a forthcoming major policy switch that could affect thousands of buyers and refinancers.
The FHA, which for decades has used a one-size-fits-all approach to price its insurance on home loans, plans to shift to a "risk-based" system keyed to FICO scores and down payments, beginning as early as mid-July. Private-sector lenders and insurers have priced interest rates and premiums using sliding scales of FICO scores and down payments since the mid-1990s.
The FHA's move, which will cover all new applications including "jumbo" loans up to $729,750 in high-cost markets through December, will bring the agency in line with the private sector's predominant approach.
FHA Commissioner Brian D. Montgomery outlined the impending change in a speech here May 8 to the annual conference of the National Association of Real Estate Editors. Under the old approach, he noted, buyers with stellar FICO scores paid the same premiums as borrowers with poor scores. That was a pricing inequity for applicants who presented low risk of default on their loans and an inappropriate subsidy of applicants who were likely to default.
A study of an entire year's applications turned up the additional fact that the FHA's lower-income borrowers typically had higher FICO scores than buyers with larger incomes.
"Is it counterintuitive? Yes," Montgomery said. According to the study, applicants with FICO scores of 680 to 850 had a median income of $48,756 last year, while those with scores of 500 to 559 had a median income of $53,388. Fair Isaac Corp.'s FICO scores range from about 300 to 850 -- the higher the better -- and are predictive of future defaults and foreclosures.
Even at rock-bottom down-payment levels of 3 percent, applicants with lower incomes had higher credit scores than applicants with bigger incomes making similar-size down payments.
All of which underlines the key reason for making the switch to risk-based pricing: Why should people who have demonstrated superior credit -- irrespective of their income levels -- pay the same mortgage insurance premiums as loan applicants who have seriously flawed credit histories?
Under the new system, according to the FHA's outline of its plan, "a larger number of low-income borrowers [will] benefit from premium reductions than . . . moderate-, middle- and upper-income borrowers combined." On 30-year loans with down payments of 10 percent or more, applicants with FICO scores above 680 will qualify for the lowest premiums -- 1.25 percent of the loan amount upfront and annual renewal premium payments of 0.5 percent. Borrowers with down payments under 5 percent and poor credit scores -- FICOs ranging from 500 to 559 -- will be charged premiums of 2.25 percent upfront and 0.55 percent annually. All borrowers will continue to receive the same market-based interest rate. Under the current system, borrowers pay uniform 1.5 percent premiums upfront and 0.5 percent annually.
To set premium rates by credit standing, the FHA plans to use the middle score of an applicant's three FICOs generated by the national credit bureaus -- Equifax, Experian and TransUnion. If only two scores are available, it will use the lower. For applicants with thin or "nontraditional" credit histories on file at the bureaus, the FHA will underwrite and price the loans without reference to FICOs, with heavier emphasis on rent and utility payments, among other measures of creditworthiness.
Though FHA mortgage volume has more than doubled in the past year, the move to risk-based pricing is expected to make it more attractive to buyers and refinancers. During the housing-boom years, the FHA lost much of its business to subprime lenders and insurers that offered zero-down, low- or no-documentation loans at high interest rates and fees, including prepayment penalties. The FHA, by contrast, always has required at least a 3 percent down payment and full documentation of income and assets, but it has never permitted prepayment penalties.
Since taking over as FHA commissioner in 2005, Montgomery has emphasized "modernizing" the administration and winning back market share. That has included pushing for higher loan limits to serve greater numbers of borrowers in high-cost areas such as California and along the East Coast. The FHA also is now the government's key vehicle for refinancing borrowers stuck with unaffordable -- and often toxic -- subprime mortgages.
(Felix Salmon) Floyd Norris today finds one of the worst bonds ever underwritten: a securitization, by Merrill Lynch, of second-lien mortgages mostly originated by Ownit. The kicker? When the bond was sold, Ownit had already gone bust, a victim of the fact that far too many of its loans were delinquent out of the gate.
But what's bad for bondholders might be good for homeowners.
Let's say you're a Californian who bought your $200,000 house with a $160,000 first mortgage at 6.5% and a $40,000 second mortgage at 11.2%. Your annual interest payments are $10,400 on the first, and $4,480 on the second, for a total of $14,880, or $1,240 a month.
When the housing market implodes, you can simply stop making payments on the second mortgage. As Norris explains:
"In light of the pressure on home prices and limited or negative borrower equity in their homes, many second liens were simply written off" after several months of payments were missed, Moody's said. With these loans, it turns out, foreclosure is seldom worth the effort, since all the money would go to the first mortgage holder.
With no fear of foreclosure and being kicked out of your house, your monthly mortgage payments have dropped from $1,240 to $867 - a fall of 30%. And that's before you try to renegotiate your first-lien repayments.
It's walking away without walking away: you can default on your second lien, stay in your home, and see a large reduction in your monthly nut. And since you're in California, where mortgages are de facto non-recourse, you don't need to worry about the owner of the second lien trying to get a court judgment against you.
Of course, as Floyd Norris points out, you do give up any upside if and when you decide to sell the house. The second lien is still there, and unpaid interest payments are accumulating: should the house ever get sold, the second lien owner will take anything the first lien owner doesn't. And for the same reason, you'll never be able to use your house as security for a new loan.
Even so, the idea of walking away from a second mortgage seems much more compelling, especially in California, than the idea of jingle-mail, or walking away from a first mortgage. Which is one reason, I'm sure, that this bond of Merrill's is performing so badly.
(Calculated Risk) From Bill Fleckenstein's Daily Rap: HELOCs: The New Subprime (Here is Fleck's Site for the Daily Rap):
Note: excerpted with permission.
The following is from Fleck's source: "The Lord of the Dark Matter"
"A couple of us tuned into Dexia's conference call yesterday, looking for clues on HELOCs. We got plenty, and they were important. In February Dexia said the absolute worse case loss for their monoline subsidiary FSA was going to be $125 million. Yesterday, they added $195 million to that. The reason given on the conference call for the poor guidance is that the servicer on their wrapped HELOC portfolio, Countrywide, had such a backlog that FSA didn't get the news that delinquencies were skyrocketing until very recently.
There is no doubt that US mortgage servicers are swamped right now, but I think there is a bigger story here, which ties in with BAC quietly announcing their HELOC loss estimates have gone up from a 2.0% to 2.5% range to 'over 2.5%.' Servicer backlogs could well be the reason why so many CEOs and CFOs are running around telling investors they are not seeing deteriorations in HELOC delinquencies.
The truth is their data is wrong. The market has, obviously, taken the view that the worst of the writedowns are behind us, and if anything it's now just a macroeconomic problem we face. I think that's dead wrong. We're now entering the phase where the macro impacts earnings, but also the stage where real cash losses start to hit the banks (subprime and Alt-A is primarily a mark-to-market issue, but HELOCs are going to be large, outright losses). Once WAMU, WFC, BAC and JPM start to get data through on how rapidly their HELOC portfolios are deteriorating, watch the losses pile up. I'm talking realised losses, not mark-to-market writedowns." emphasis and link added
Watch HELOCs closely! Fleck's source nailed subprime last year, as an example on January 30, 2007:
Turning to the subprime industry, once again I heard from my friend who has been staggeringly accurate. He continues to feel that things are about to really get worse. In an email to me, he wrote: "Scratch and dent loans are killing everybody. Bids that were 92 or 93 are now low to mid-80s. It is a bloodbath, and is pressuring even strong companies to buckle. NO ONE is making any money in the market right now. We are at a point of no return for many. The next two weeks will be wild."
Note: A wild two weeks indeed as subprime blew up in early February.
(WSJ) Fannie Mae is expected to announce Friday that it is scrapping a policy requiring higher down payments on home mortgages in areas where house prices are falling.
The change comes in response to protests from vital political allies of the government-sponsored provider of funding for mortgages, including the National Association of Realtors, the National Association of Home Builders and organizations that promote affordable housing for low-income people. ... The current policy, adopted in December and now due to end June 1, limits loan amounts in areas with declining home prices, including most of the densely populated parts of the country. ... Under the new policy that is taking effect next month, Fannie will have the same maximum loan percentages across the country for people purchasing single-family homes that they intend to occupy, according to people familiar with the plan.
(Naked Capitalism) I'm sure readers know of other super turkeys, but Floyd Norris in the New York Times did find a prime example of crappy paper. Note that he limited himself to securities, so CDOs were not candidates for this Hall of Shame award.
The Merrill deal was a pool of seconds ("piggybacks"). Moody's noted that this type of loan was typically written off after serious delinquency, since they had little or no equity from the outset. Key terms of the Merrill deal per Norris:
Fewer than 30 percent of the loans were made to borrowers who provided full documentation of their income and assets. Many of the other borrowers probably lied about their income. Nearly all had borrowed the full appraised value of the home, either for the purchase or for refinancing, and it is possible that some appraisals were unreasonably high even before home prices began to fall.
One hates to say it, but so far, this sounds only-somewhat-worse-than-usual late subprime practice. But they we get to the doozy:
...the mortgages had rates averaging 11.2 percent. Yet investors who put up most of the money were willing to accept a floating rate of just 30 basis points — three-tenths of one percentage point — over the London interbank offered rate.
And this paper was sold institutionally....or at least some of it was. Remember, Merrill would up retaining the super senior tranches on later deals because it couldn't find enough suckers takers. And yes, super senior means AAA.
Moody's still rates this dreck as investment grade (barely), while Standard & Poor's cut it to junk, and has now ceased publishing ratings on this and similar instruments.
The amazing thing about an issue like this is at a large institution, you can't blame a deal like this on a rogue investment banker. A lot of people are involved in underwritings: the investment banking department, bond salesmen, traders, sometimes research. Pricing is a formal process. So this means a bunch of supposed professionals either got very high together or were subject to collective delusion.
(Reuters) - Leaders of the U.S. Senate Banking Committee said on Thursday they have agreed to the underpinnings of a housing rescue plan that will create a federal backstop for failing loans.
"We feel very optimistic we can have a very significant bill, a bipartisan bill, to present to the rest of our colleagues on the floor of the United States Senate," committee Chairman Christopher Dodd told reporters Thursday evening after a full day of negotiations.
The plan would create a $300 billion mortgage insurance fund administered by the Federal Housing Administration and a new regulator for Fannie Mae and Freddie Mac, the two largest U.S. sources of mortgage finance.
Under a deal hammered out on Thursday, Fannie Mae and Freddie Mac will partly finance the mortgage insurance program through contributions to a new affordable housing fund, industry sources close to the talks said.
Late Thursday, Dodd said he would reconvene the banking panel on Tuesday to finish its work on the bill.
The Congressional Budget Office in a report estimated the fund would cost $1.7 billion and finance up to 500,000 loans worth $85 billion. The independent agency said it does not expect the fund to insure the $300 billion worth of loans that lawmakers would authorize.
Since last spring, the nation's mortgage market has been shaken by sinking home values that have erased billions of dollars of investor wealth. An estimated 2 million foreclosures are forecast for this year.
Developing a mechanism to fund the program was seen as key to getting the rescue plan out of the Banking Committee and to the Senate floor for final approval, although that could still be a distant prospect.
Aides said Senate leaders are not yet engaged in the housing package debate. Still, the formula did win the support of Sen. Richard Shelby, the banking committee's top Republican, who has said that he does not want taxpayers to foot the bill for the plan.
"We're together on a good concept of the whole thing. We're working on language right now, so be patient," Shelby told reporters Thursday afternoon.
Dodd and Shelby also agreed on language to create a new regulator for Fannie Mae and Freddie Mac, the government-sponsored enterprises that hold federal charters to nurture the housing market, the sources said.
Under the deal reached by Dodd and Shelby, Fannie Mae and Freddie Mac would direct money from a new affordable housing fund to backstop the mortgage insurance fund. The sources said that in the first year, 100 percent of their contributions would go to the new FHA program. That would fall to 75 percent in the second year and 50 percent in the third.
The formula was crafted by Sen. Jack Reed, a Democrat from Rhode Island, to satisfy Shelby, who objected to any taxpayer subsidy for the rescue plan, lobbyists said.
WHITE HOUSE DECLINES COMMENT
The White House has threatened to veto a similar rescue package passed last week by the House of Representatives, partly because of the cost to taxpayers. But the Bush administration has left open the door to discussions.
White House spokesman Scott Stanzel said on Thursday: "We're not commenting on any discussions we may or may not be having. If a bill comes to the president's desk it should meet the principles he has outlined."
The administration wants to ensure Fannie Mae and Freddie Mac face tougher oversight and want to see legislation retool the FHA with a system that sees riskier borrowers pay a higher mortgage insurance premium.
Both the Senate and House packages contain approaches to address those key White House goals. But both packages also propose setting up the FHA mortgage insurance fund, an idea that the administration dislikes.
(Housing Wire) The Senate Banking Committee is set to tackle proposed housing legislation on Thursday, and a key Democratic lawmaker said this morning that a deal with Republicans was nearing fruition. Committee Chairman Christopher Dodd (D-CT) told the press Thursday morning that a deal was “very close” during an interview on Fox Business Network; last second negotiations involving GOP leaders shuttled a scheduled committee markup on the Senate’s housing package from 10am EST to 11:30EST.
Dodd has been working hard to gain the support of key Republicans for a tentative housing relief package, postponing earlier committee markups in the face of stiff GOP opposition.
The House of Representatives last week passed its own sweeping version of housing relief as part of a revised Foreclosure Prevention Act. House Financial Services Committee Chairman Barney Frank (D-MA), who originally pushed for the proposed legislation, has said he wants to authorize the Federal Housing Administration to insure up to $300 billion in refinanced mortgages for troubled borrowers, when the investor agrees to take a haircut on a portion of the outstanding debt.
Critics suggest such loans are significantly more likely to default than those mortgages already on the FHA’s books, essentially pushing the housing mess into the lap of taxpayers.
The primary roadblock in the Senate so far has been Sen. Richard Shelby (R-AL), the ranking Republican on the Senate Banking Committee, who is seen as either the last bastion of sensibility or a troublesome holdout.
It’s not clear if Dodd and Senate Democrats have made progress in gaining Shelby’s support, or if an effort to go around the leading Republican is in the works — talks between Shelby and Dodd had broken down late last week, according to media reports, although the Republican Senator’s office signaled that the door might yet be open for further negotiation.
Sources suggest to Housing Wire that the housing package will have little hope of passage in the Senate without Shelby’s stamp of approval. President Bush has already threatened to veto the package.
(Credit Slips - Katie Porter) Last week, I testified before a subcomittee of the U.S. Senate Judiciary committee about mortgage servicing in bankruptcy. You can read the written testimony or watch a webcast. Both the Chair of the subcommittee, Senator Schumer, and the Ranking Member, Senator Sessions had some harsh words for the current state of mortgage servicing in bankruptcy. Apparently (and encouragingly, at least to me), charging people only what they owe is a bipartisan issue.
In 2004, Robin and John Atchley put down $22,000 to buy their first home, moving out of a single-wide mobile home with their four children. After her sister died, Robin took some unpaid leave from her work. The family fell three months behind on their mortgage and filed bankruptcy to catch up on their house. At two points in the bankruptcy, Countrywide filed motions for relief from the bankruptcy stay to foreclose on the house. Each time, the Atchleys provided proof that the payments had been made and Countrywide withdrew its motions. But as Ms. Atchley explained the "legal papers became weapons. . . . No person with Countrywide or McCalla Raymer (Countrywide's attorneys) could ever give us clear information on what they claimed that we owed and why we owed it. It was as if all they wanted was to take our house."
Two years into their bankruptcy, the Atchleys told their children to pack everything in their bedrooms. With suitcases in hand, the family stuffed the car with their belongings and moved in with Ms. Atchley's parents. They sold the house but had to pay money out of their pocket. In the eighteen months between when Countrywide filed its claim in the bankruptcy and the sale of the house, the amount of debt had grown by $14,108--despite the Atchleys and their bankruptcy trustee making many post-bankruptcy mortgage payments. The payoff statement included a $2,793.00 charge for “fees due”--more than 10 times the fees owed by the Atchleys at the time of their bankruptcy filing! Far from being a tool for saving their home, bankruptcy was where the Atchleys lost their home.
The Atchleys' story is important. It demonstrates the human cost of the mortgage servicing industry's misbehavior--the psychological drain and disillusionment that comes from battling a large financial company. The Atchelys didn't lose their home because they truly couldn't pay. They lost their home because they truly couldn't fight anymore.
The hearing covered a lot of substantive ground as well, including the possible incentives of mortgage servicers to overcharge consumers in financial trouble and possible solutions to the problems with bankruptcy mortgage servicing. I'll post on these topics in the next few days.
Analyst: Quick question on your direction in terms of housing price declines and the impact on credit costs. Have you looked at the impact of rising LTV's have on the projected credit cost. In other words, if people get close to and then get under water, does the propensity for them to default, does that go up geometrically, and is that captured in your numbers?
Freddie Mac: Yes, clearly it is. And you know you have identified one of the key attributes of the loans in '06 and '07 that are contributing to the higher defaults. As I said in that remarks it has caused us to look hard at what the maximum LTV we're willing to purchase, and it also results in our raising delivery fees to that portion of the population. So it clearly is contributing to higher default costs. It is captured in our numbers. And we have responded both with tightening of terms and raising prices.
Analysts: What do you see? Is it in line with historical default rates as they get underwater or does it ...
Freddie Mac: No, it is different. The rate of increase in defaults in that part of the population is much steeper. For those borrowers that bought a home based on rapid house price appreciation as a way to grow wealth, if they find themselves quickly underwater - you know we're even seeing it when we try to modify and renegotiate those loans - they are walking away. They're finding it not constructive. I do think the raft in defaults for that portion of the population is steeper than historical observations, and we are reflecting that in our expectations. emphasis added
(Housing Wire) The subprime mortgage mess is mostly over, as global banks have already written down more than 80 percent of their losses from subprime mortgages and related assets, Fitch Ratingssaid in a report released Wednesday. The rating agency estimated that total market losses from subprime mortgage assets at $400 billion, though losses could go as high as $550 billion, depending on the method of calculation used.
The loss estimates come as many market participants have jumped in recently to assess the damage inflicted thus far by subprime mortgage bonds and CDOs of ABS backed by subprime RMBS.
Fitch’s own calculations of losses, based on its internal estimates of loss rates for RMBS and CDOs of ABS, suggest that subprime losses will reach $401 billion. Analysts at the rating agency said they believe that roughly 50 percent of subprime-driven exposure — anywhere from $200 to $275 billion — are held by banks, with the remainder held by financial guarantors, insurance companies, asset managers and hedge funds.
Given $165.3 billion in reported losses at banks thus far — or 80 percent of its own estimate of banks’ collective exposure — Fitch suggested that the subprime mortgage mess is nearing an end; to say nothing, of course, of larger credit problems plaguing the mortgage sector.
Fitch’s internal models assumed an average loss rate of 17 percent and 53 percent, respectively for subprime RMBS and CDOs of ABS; declines in the ABX and TABX, two indices broadly used as a proxy for subprime MBS and CDO market trending, suggest that investors have priced in a far more severe loss experience for subprime RMBS than Fitch said it believed to be appropriate.
“Subprime mortgage-related losses for the total market vary considerably depending on the methodology used,” says Krishnan Ramadurai, managing director in Fitch’s financial institutions group.
“Given the problems associated with methods of calculation based on ABX and TABX indices, we believe that Fitch’s internal loss estimate of $400 billion is a more appropriate reflection of losses, though they are also sensitive to assumptions made on underlying loss rates.”
“To the extent that institutions have effectively hedged their exposures with financially sound counterparties, these loss figures may be over-estimated,” says Gerry Rawcliffe, managing director and group credit officer for Fitch’s financial institutions group. “Nevertheless, for those institutions that did not hedge a sufficient portion of their super-senior exposures, mark-to-market losses on these residual exposures have been so large that their capital ratios have come under acute stress.”
The subprime market originated as much as $1.4 trillion of loans voer the course of the past three years, Fitch estimated.
(Tanta at Calculated Risk) I didn't think there was anything particularly earth-shattering in this report, but I did think some of you might be amused by this:
According to the FBI:
The above photos are from condos that were involved in a mortgage fraud. The appraisal described “recently renovated condominiums” to include Brazilian hardwood, granite countertops, and a value of $275,000.
It does make you wonder whether some of these reports of pre-foreclosure "trash outs" don't involve a few properties that were trashed from the get-go.
(Washington Post) Hope dimmed yesterday that Congress would act quickly to rescue homeowners at risk of foreclosure after key Republican and Democratic negotiators in the Senate said they could not reach agreement on a plan.
Yesterday, Dodd unveiled his own housing bill, which would help troubled borrowers trade exotic mortgages with escalating monthly payments for more affordable loans backed by the federal government. It also would strengthen regulation of mortgage giants Fannie Mae and Freddie Mac. Dodd scheduled a committee drafting session for Thursday.
The bill is similar to legislation that passed the House last week despite a White House veto threat. It is unlikely to win approval in the Senate without Shelby's support.
Last night, Jonathan Graffeo, a spokesman for Shelby, left the door open to further talks, saying "it remains to be seen whether an agreement can be reached."
Congress has been struggling for months to respond to a mortgage crisis that has left more than 1.2 million homes in foreclosure, with an additional 3 million forecast to join them over the next two years. Most involve subprime loans that established terms the borrowers could not afford. As homeowners defaulted and fell into foreclosure, home prices fell more than 10 percent. Many borrowers who are having trouble making payments find that they cannot sell or refinance their homes because they owe their banks more than their homes are worth.
The Bush administration has tried to help such borrowers by urging banks to reduce their mortgage debt. The administration also has eased eligibility standards so borrowers who have missed a few payments can qualify for cheaper loans insured by the federal government through the Federal Housing Administration. But those initiatives have helped relatively few families.
Under Dodd's proposal, the FHA would respond more aggressively by offering to insure mortgages for less creditworthy borrowers if their banks forgave a portion of the debt. The measure would require lenders to take a significant loss by permitting borrowers to pay off their original loans with new loans worth no more than 90 percent of their homes' current, lower value.
Borrowers would get smaller monthly payments and an immediate equity stake in their property. But if home values rise, the plan requires homeowners to share their profits with the federal government when they sell or refinance.
The FHA would be authorized to insure up to $300 billion worth of such loans, which are far more likely to default than loans in the FHA's current portfolio.
Dodd's proposal also would seek to improve regulation of Fannie Mae and Freddie Mac, the nation's largest financiers of home mortgages. Shelby has been pushing to require the companies to hold more capital against potential losses. But Democrats have been reluctant to force the companies to significantly enlarge that cushion.
In a statement, Dodd said the bill would establish a new regulator for the government-sponsored enterprises, such as Fannie Mae and Freddie Mac, "that has robust new powers to regulate safety and soundness, capital, portfolio holdings, and internal management." He added that the measure would also ensure that "the GSEs can better meet their mission of providing a source of affordable financing for homeownership."
(Washington Post) The mortgage industry may be in meltdown, but at least one class of lender appears to be flourishing: Islamic finance companies that offer Muslim home buyers alternative arrangements such as lease-to-own deals so they can avoid making the sort of interest payments that many believe their religion forbids.
Officials at Guidance Residential, a Reston company that has financed more than 5,000 home purchases since it began in 2002, said the company is having its best year yet, with business up 7 percent in the first quarter of 2008 from the first quarter of 2007.
At University Islamic Financial, which began in Ann Arbor, Mich., and expanded its operations to Maryland, Virginia and five other states last year, officials said the number of home-financing applications quadrupled from last March to this March.
Representatives of the four major Islamic home-finance institutions in the United States said they do not track the reasons customers choose them over conventional mortgage brokers. Several speculated that it was due to the natural growth of what is still a fledgling retail industry, as well as two side effects of the mortgage crisis: The drop in prices in many regions has brought homes back within reach of first-time buyers, who make up a sizable chunk of Islamic financiers' customers. And the drumbeat of negative publicity about the practices of subprime mortgage lenders has amplified the distrust and discomfort the conventional mortgage industry already inspired in many Muslims.
"Folks have to be questioning the methods used by conventional mortgage companies over the last three or four years based on what's happening today," said Hussam A. Qutub, a spokesman for Guidance. "And I think that makes more people think, 'Well what about the emergence of this [Islamic-] compliant financing industry? Let me give it a look and educate myself about it to see if it could perhaps be more beneficial to me.' "
That was the prevailing sentiment among potential customers who approached an advertising booth staffed by Guidance representatives at the annual spring fair held by the All Dulles Area Muslim Society in Sterling on a recent weekend.
Nabila Zerrarka, an Algerian-born woman wearing a white-and-green headscarf and pushing a stroller, wanted to find out if Guidance's home-finance options were more straightforward than those offered by traditional mortgage brokers.
"Deep down, I don't feel comfortable paying interest because it is against my beliefs," said Zerrarka, 29, who is searching for her first home and has already obtained a prequalification letter for a conventional loan from Bank of America. "But I also feel it's against my financial interests to pay interest. . . . What we've seen is that with interest-bearing loans, there are all these gimmicks and hidden costs and tricks that they can surprise you with. . . . If there is a possibility of doing it the Islamic way, we'd like to explore it."
Mounir Elhaj, 45, a native of Sudan who works at a moving company, wanted to know how Guidance deals with customers who fall behind on their payments. He said he recently helped move a woman whose house was foreclosed on after she missed payments.
"She had been paying her mortgage for 17 years, and the bank still took her house," Elhaj said to the Guidance sales representative. "So I want to know if I bought a house and then fail to pay, can you help me?"
The representative, Amr Mohamed, smiled magnanimously. "Yes, we can," he said, adding that Islamic law, known as sharia, forbids businesses from profiting from a customer's financial hardship. So if a customer is late on payments, Guidance charges him or her a flat administrative fee to cover processing costs but none of the percentage-based penalties and additional fees that conventional mortgage companies can pile on.
Islamic home financing aims to offer Muslim buyers the same opportunities as conventional lenders but with a twist that gets around sharia's prohibition against the payment of riba. Generally defined as excessive gain, riba has over the years come to be considered the equivalent of making money by renting money -- in other words, charging interest -- because the borrower shoulders risk while the lender is guaranteed a return.
In one of the alternative arrangements offered by Islamic finance companies, the company buys the house, then sells it to the home buyer in fixed monthly installments at an agreed-upon marked-up price. The markup rate is kept competitive with the prevailing interest rate on a conventional mortgage. So apart from a few additional transaction costs from the atypical nature of the arrangement, the buyer's monthly payment is roughly equivalent to what it would be with a conventional mortgage.
A second option is for the financier and the home buyer to enter a lease-to-own contract similar to those used to buy cars. Once again, the rental portion of the monthly payment is kept equivalent to prevailing interest payments. The third model, which is favored by Guidance, is also based on a lease-to-own arrangement, except that the buyer and the finance company form a limited-liability entity to own shares of the property.
All three arrangements got a major boost in 2001 when Freddie Mac agreed to begin buying them on the secondary market, ultimately including not just Guidance and University Islamic, but also Devon Bank in Chicago and American Finance House Lariba of Pasadena, Calif. Last year, Freddie Mac bought more than $250 million in Islamic home loans -- a tiny fraction of the corporation's $1.77 trillion business but nonetheless a slight increase over previous years, according to spokesman Brad German.
While Islamic finance companies have convened boards of prominent scholars to certify that their finance arrangements comply with sharia, not all Muslim thinkers are convinced that they are necessary.
Mahmoud Amin el-Gamal, an economics professor at Rice University specializing in Islamic finance, noted that even in Muslim countries, sharia-based financing was developed in only the past several decades. And he argued that because conventional mortgages are secured by a physical good, namely the home, that is usually the only asset the lender can repossess if the borrower fails to repay, such loans should not be considered the equivalent of making money by renting money.
In any case, el-Gamal maintained, Islamic home-finance products are so closely modeled on conventional mortgages as to constitute a distinction without a difference.
"This is an industry that preys on people's religious insecurities by selling them a product that they claim is different when it's not. It's false advertising, and it's a case of supply creating demand," El-Gamal said.
But Hirsi Dirir, a Somali-born technology analyst who recently obtained financing from Lariba to buy a townhouse in Annandale, said such objections pale in comparison with the peace of mind he has gained from making the extra effort to adhere to his faith.
"I wish I could avoid everything that Islam doesn't allow, but I can't," said Dirir, 32. "So if I have the opportunity and the choice to avoid interest, then it's very important to me not to mess with it."
Rizwan Jaka, 35, president of the All Dulles Area Muslim Society and one of the first to buy a home with Islamic financing in the Washington area, also said the emergence of such arrangements constitutes an important milestone in the integration of Muslims in the American mainstream.
"It definitely marks a coming of age for us. . . . It's part of the whole process of being a part of this country while being able to have our faith accommodated," he said. "The American dream is to purchase a house, and the American Muslim dream is to be able to do so in an Islamic manner."
(Housing Wire) The PMI Group, Inc. (PMI: 6.21, +4.02%) said late Friday that it had loosened its previous restrictions on loan modifications, in a clear effort to empower servicers to do more to keep troubled borrowers in their home. Essentially, the new guidelines allow mortgage servicers more leeway in determining a workout strategy than in the past, when most were bound by what was described by one servicing executive as a “lock-step” approach to loss mitigation.
The new guidelines — which apply to all delinquent loans insured by PMI — allow a servicer to modify loan terms without PMI’s prior consent, and do not allow penalty or late charges to be capitalized into what a borrower owes.
One source noted that few outside the industry understand just how large a role the MI companies play in any loss mitigation scenario. Since much of the servicer’s and investor’s ultimate loss severity totals are tied to a claims payment from the insurer, it’s the insurer’s guidelines that largely drive loss mitigation strategies offered to borrowers.
“These are huge, empowering changes,” said one executive at large servicing shop. “In the past, we were sort of stuck with whatever program was outlined in the master policy, and had to wedge that around investor negotiations.”
Perhaps just as powerful, PMI said its premium rate will remain unchanged — meaning that the extra leeway isn’t likely to come at an extra cost for servicers, investors, or borrowers.
“Our servicing partners are working hard to modify qualified loans as quickly as possible,” said John Jelavich, PMI’s vice president of homeownership preservation initiatives. “This expansion of our servicing partners’ delegated authority to modify loans will expedite the loan modification process and assist our servicers’ efforts to keep more borrowers in their homes.”
(Tanta in Calculated Risk) In the New York Times, too! I think we're going to have to make Vikas Bajaj an honorary UberNerd.
Millions of Americans are “upside down” on their mortgages — they owe more on their homes than their homes are worth. So far, however, there is little evidence that people who have the means to pay are walking away from their homes as values sink.
The blogosphere is full of tales of homeowners who supposedly are choosing to mail the house keys to their lenders rather than keep their depreciating homes. And yet “jingle mail,” the term for those tinkling packages of keys, appears to be far rarer than many seem to think.
I think this is my favorite part:
Jon Madux, a founder of the site YouWalkAway.com, which helps borrowers leave their homes, said a majority of the site’s clients default because of financial hardships. But in the Southwest and Florida, more of its customers are investors who bought multiple condos or houses and are now not able to find renters or sell for more than they owe.
Speculators always cave in quickly in a declining market, especially when they weren't required to make a down payment and the rents were never realistic. This, we always knew. It does not constitute a "sea change" in borrower behavior, whatever the hoocoodanode crowd wants you to believe.
The interesting question is why this insistence that walk-aways are widespread is being, apparently, pushed by real estate brokers (they and some mortgage brokers seem to be the sources for most of the claims I've read in this regard).
“These markets are driven by psychology,” Mr. Barry [the real estate agent] said. “If people see that the market will continue to decline and they are already in the hole by 50 to 100 grand” they will leave.
Is it just the salesperson's preference for "psychology" as the all-purpose explanation? Classic projection? An attempt to spook the banks into negotiating with borrowers who wouldn't, typically, qualify for a workout? I'd really like to know.
BUSH ADMINISTRATION TO IMPLEMENT FHASECURE EXPANSION USING FAIR, FLEXIBLE PREMIUM PRICING FHA prepares to assist more struggling homeowners while protecting taxpayers from risk
WASHINGTON - The Bush Administration today issued final guidance that will permit its flagship mortgage insurance program to assist more homeowners who are struggling to keep up with their high-cost subprime adjustable rate mortgages. To ensure taxpayers do not assume the cost of this expansion, HUD's Federal Housing Administration (FHA) will implement a fair and flexible premium pricing structure beginning July 14, 2008.
Modifications to FHASecure will help homeowners who can no longer afford their mortgages and missed up to three monthly mortgage payments over the past 12 months. As an alternative to foreclosure, eligible borrowers can refinance with FHA and lenders can voluntarily write down the outstanding subprime mortgage principal balances. Implementation of FHA's new premium pricing plan on July 14 will coincide with the start date to expand FHASecure.
"With a flexible premium structure, FHA can fulfill its mission of assisting families who do not have access to prime-rate financing. Fair pricing will allow FHA to reach more troubled homeowners without placing excessive risk on its insurance fund,"; said HUD Deputy Secretary Roy A. Bernardi.
Currently, FHA has a 'one size fits all' premium structure that charges borrowers 1.50 percent of the loan balance upfront and .50 percent annually regardless of their credit standing. FHA feels this approach does not treat borrowers equitably and may put the FHA insurance fund at risk. Under the new rule, FHA's upfront mortgage insurance premium will range from 1.25 percent to 2.25 percent. Borrowers must continue to adhere to FHA's strict underwriting criteria. By charging different premiums, FHA will operate like most other insurance companies. This premium structure will preserve lower premium costs for FHA's traditional borrowers, including low-income and minority families who have a strong credit history and save for a downpayment.
By charging slightly higher premiums based on risk, FHA will be able to extend the benefits of its FHASecure program to more homeowners affected by the volatility in the mortgage market. Borrowers refinancing into FHA from the subprime market are better off, even with slightly higher mortgage insurance premiums, because FHA insurance gives them access to substantially lower interest rates, and lowers their overall mortgage costs. The difference between the existing 1.50 percent upfront premium and a 2.25 percent premium for a $150,000 mortgage is only about $7 per month. With families turning to FHA in record numbers, the agency is on pace through its expansions to help approximately 500,000 families refinance into its affordable mortgage product by the end of this year.
"Charging borrowers a fair premium based on their credit risk means that they pay their own way, allows FHA to reach more borrowers, and helps create a more financially sound FHA. That's good news since FHA, like any other insurance company, supports its flagship program through its premiums - not taxpayer dollars,"; said Assistant Secretary for Housing - Federal Housing Commissioner Brian D. Montgomery.
FHA has the statutory authority to charge as much as 2.25 percent for the upfront premium and .55 percent for the annual premium. This premium structure will give borrowers an incentive to improve their credit and thereby pay lower premiums. Today's announcement will allow FHA to offer a range of premiums, depending on the level of risk borrowers represent based on their credit profile and the amount of their downpayment. In other words, to determine a fair premium, FHA will look at the borrower's financial responsibility and how much they are willing to invest in their home.
To make this information available as soon as possible, HUD is posting guidance on risk-based pricing electronically on its website in advance of the Federal Register publication on May 13, 2008.
(Housing Wire) The market for residential mortgage securities is now essentially two markets: distressed assets that new funds are popping up to feast on, and a traditional agency/GSE MBS market performing “on mission” – that is, funneling funds from institutional investors back to housing markets. This traditional market has also served an “off mission” function – one not really anticipated by the law and policy makers who designed Ginnie, Fannie and Freddie – by providing liquidity to a range of investors and other market participants as the subprime meltdown drained liquidity from much of the structured products market.
Indeed, it was the supply absorbed by MBS markets doing business-as-usual that forced pass-throughs to cheapen dramatically between summer 2007 and mid-March of this year. For instance, the yield spread between swaps and the 30-year Fannie Mae current coupon (a theoretical par-priced security commonly used to benchmark mortgage yields) actually TRIPLED between June 2007 and the peak in mid-March 2008.
In general, these are spread levels not observed since the mid-80s, when the first prepayment/new supply assault swamped fledgling MBS markets. The widening in the face of supply explains why mortgage rates, which reflect where loans trade in MBS market, have generally failed to keep pace with declining Treasury yields.
Some commentators have not understood that the widening reflected market technicals, and not investors’ view of the GSE guarantee. If it did, Ginnie-backed MBS – guaranteed by a true government agency – would outperform, which is not the case. In fact, it is likely that GSE pass-through spreads would widen on any regulatory oversight that would reduce GSE portfolio purchases.
Instead, the widening is largely a response to the technical forces generated by the subprime crisis: waves of new originations sold into pools as “conforming” and FHA/VA mortgages have become, for all practical purposes, the only mortgages available to borrowers. In addition, the market has seen spurts of heavy supply on sales by various MBS holders to raise cash and meet margin calls.
As a matter of fact, the shut-down of subprime and Alt-A loan markets has returned the agency/GSEs to their traditional preeminence. From about half of RMBS issuance before subprime hit the fan, the GSEs now account for well over 90 percent of securitized mortgages.
But the traditional MBS market is more important than most realize. A fact often overlooked in the brouhaha is the sheer size and liquidity of the traditional MBS market. For example, the US Treasury market is larger – $4.9 trillion of securities outstanding versus $4.3 trillion in MBS at the end of 2007, according to the Federal Reserve Flow of Funds – but coupons in mainstay programs exceed the size of any Treasury issue.
For example, the largest Treasury issue currently outstanding is probably the last 2-year note, which came in at $30 billion. By contrast, the tradeable amount of 30-year Fannie 5.5s is $472.2 billion – a number of other 30-year coupons are outstanding in smaller, but still comparable, amounts. Although specific characteristics (such as seasoning, indicators at the loan level of credit-related impediments to refinancing or of greater incentives to refinance, etc.) could give a specific pool extra value, any pool with sufficient remaining principal could be delivered in a TBA trade.
In addition to liquidity implied by the amount of outstandings, TBAs trade with a bid-ask spread similar to that of Treasuries, and that bid-ask spread has been reasonably stable throughout the market turmoil.
Admittedly, losses, write-downs and financing squeezes have taken their toll upon Street dealers. It’s well known that one very large dealer, Bear Stearns (BSC: 10.27, -5.26%), has left the mix, but sales and trading personnel have been sharply reduced at a number of other shops as well. Sources in the market generally agree that of 12 or 13 “full service” RMBS shops before the crisis, only six or seven are still fully active. (The other side of the coin is that regional dealers, unmarked by the mayhem in big investment bank structured products, are in a position to acquire market share. For example, market insiders point out that Jeffries Securites, a New York firm, has pulled a group of seasoned mortgage salespeople from RBS, while RBS has replaced them with a group of Bear Stearns pros.)
Bottom line, crisis or not, the dealer community has not lost the ability to make markets in traditional MBS. Trading volumes and dealer positions bear witness to the resilience of the traditional agency/GSE MBS market. Total clearing par value of trade settlements are up year over year, according to the Depository Trust & Clearing Corporation. MBS transactions have oscillated in the same range for the last year, according to the Federal Reserve Bank of New York (not all transactions result in settled trades – for instance, originators use forward TBA sales to hedge their pipelines).
Likewise, the FRBNY reports that dealer positions have swelled from levels posted last August, reflecting supply from originators and sellers. In mid-March, dealer MBS positions surpassed the previous peak seen in 2003, when historic lows in mortgage rates were accompanied by massive new supply.
Signs that the market’s tone – and investor appetites – have improved abound everywhere, but one of the earliest signs that recovery was imminent in “spread” product was the sharp tightening of pass-through spreads from the mid-March historic wides. Versus swaps, for instance, the current coupon 30-year Fannie has retraced about 60 basis points – or half of its previous widening.
Whether credit spreads (and equities) are as attractive as the markets have implied in the last week or so of trading remains to be seen. But with a firmer tone in the market, MBS investors have come back to the basic strategies of mortgage investment, many of which are explicitly prepayment plays.
With that in mind, the short list of trading strategies that make sense in the current environment:
Premium-priced pass-throughs and CMOs as well as Interest-Only strips that would benefit from the slower-than-normal prepayments in a tighter credit environment. The data underlying prepayment models reflects relaxation of credit standards and risk-based pricing, not the current tightening trend. Finer-tuned trades will use loan level disclosures to distinguish better values from TBA trades within any given coupon.
Discount-priced pass-throughs with underlying loan characteristics that suggest prepayments can keep pace with historical norms. For example, pools with concentrations of loans on owner-occupied properties with low loan balances, high FICOs, and geographical locations outside of “distressed markets.”
Equal duration trades, to take advantage of inconsistent pricing of risks across MBS sector to another. For example, CMOs versus “collateral” (underlying pass-through as a TBA) or otherwise comparable pass-through sectors such as hybrid ARMs or 15-year TBAs. As the market firms, investors will become increasingly sensitive to relative value opportunities across comparable “sets” of mortgage cash flows.
Trading of outstanding agency/GSE CMO bonds implies, ultimately, a willingness to trade private-issue CMOs and other marginalized paper. Not a lot of paper is trading yet, but color from market players suggests bids for super-senior jumbo and Alt-A paper have begun to come in from the stratosphere.
Editor’s note: Linda Lowell is a mortgage market veteran, and principal of Offstreet Research LLC.
(Tanta in Calculated Risk) Just yesterday Fannie Mae mentioned in its Q1 2008 Earnings Release that, as part of its "Keys to Recovery" initiatives, it would offer "a new refinancing option for up-to-date but 'underwater' borrowers with loans owned by Fannie Mae that will allow for refinancing up to 120 percent of a property's current value." That, so far, is all the information I have directly from Fannie Mae on this subject.
Unfortunately it got Dean Baker worked up. I respect Dr. Baker a great deal--he was calling the housing bubble long before it was cool--but I think he's got the wrong end of this:
This is a difficult move to justify from the standpoint of either taxpayers or homeowners.
The basic point is that homeowners will start out in these mortgages hugely underwater. Fannie’s policy means that it is prepared to lend $360,000 on a home that is appraised at $300,000. This gap implies that the homeowner can effectively put $60,000 in their pocket by turning the house back to the bank the day after the loan is issued. If the price drops another 10 percent in a year (prices are currently falling at an annual rate of more than 20 percent in the Case-Shiller 20 City Index), then this homeowner will be $90,000 underwater next May. If a seller would face 6 percent transactions costs, then in this example, walking away would provide a $106,000 premium compared with the option of a short sale.
This gap provides an enormous incentive for homeowners to default on their mortgage. Many homeowners will undoubtedly choose this option rather than make excessive mortgage payments on a house that is worth far less than the mortgage. A high default rate will of course lead to large losses for Fannie Mae and increase the likelihood that it will need a taxpayer bailout.
Fannie’s policy does have the effect of aiding banks that made bad mortgages. The new mortgages will allow these mortgages to be paid off. If matters were left to the market, the banks would almost certainly suffer large losses.
Baker is assuming that Fannie Mae will allow cash-out refinances in this program; although the mention in the earnings release doesn't specify that, I certainly assumed when I read it that we were talking about no-cash out refinances. (Fannie Mae's term for those, by the way, is "limited cash out" refinances. By this they mean that the loan balance can increase, but only to pay closing costs or pay off subordinate liens. That is what the rest of world means by "no cash out"--no cash disbursed to the borrower or to pay off non-mortgage debts.)
Fannie does make it clear that we are talking about Fannie Mae-owned loans. That is significant for two reasons. First, if the loans are upside down, it's already Fannie Mae's problem. To use Baker's example, if the borrower already owes $360,000 on a $300,000 home, the situation isn't made worse by refinancing it into a new loan with a lower payment. For Fannie to purchase a refinance of loans it already owns--presumably at a lower rate or payment, which improves the borrower's position and thus the strength of the loan--is not to take on risk you didn't already have. Second, of course, this isn't bailing out banks or anyone else.
That is why I assumed--and will confirm as soon as I find the Announcement from Fannie Mae--that these are no-cash-out refis. It would, indeed, worsen the risk of an existing underwater loan to let the borrower take more cash out.
Finally, it is specifically limited to performing loans. These are borrowers who are not, generally, eligible for a "workout" because they're not delinquent. But if they have hybrid ARMs coming up on a reset, or fixed rates that are higher than current market rates, this gives them the opportunity to get into a lower rate and payment while other costs--gas, anyone?--are taking more out of their pocketbooks. It isn't clear to me why this would increase any incentive to default, or increase Fannie Mae's losses if the borrowers did subsequently default. The loans are already underwater; even putting them 5% more underwater by rolling in closing costs seems to me, under the circumstances, to be less frightening than letting performing underwater ARMs get to a reset that will be hard for the borrower to bear. Not every borrower who is upside down will default, but every borrower with an unaffordable payment will in the current environment.
So there's a whole lot wrong with a whole lot of pressure to make the GSEs bail out the problems of the mortgage and housing markets, but so far this one sounds to me like Fannie Mae "bailing out" Fannie Mae, and, well, they ought to do that if it makes sense. Fannie Mae certainly does need to get a press release out clarifying the cash-out issue right away, before more nothingburgers get supersized.
(Felix Salmon) In many countries there aren't any long-term mortgages, either because local law makes it difficult to foreclose on a house, or else because of the very real risk that local laws will change and make it difficult to foreclose on a house. The latter is essentially legislation risk, and it's something that every bank needs to be aware of.
Unfortunately, US banks seem to have forgotten all about legislation risk, until now. It turns out that foreclosure law is set by the states, not by the federal government - and that a number of states are talking about passing laws which will make it very hard for banks to foreclose on properties.
The banks don't like this, of course. But they're bound by state law on such matters, and there isn't any federal foreclosure law, so they're taking their lumps with equanimity they've decided that they're going to try to rewrite the law on the fly.
There's this wonderful doctrine called pre-emption, you see, which is used by national credit-card companies and which says that nationally-regulated banks don't need to worry about state laws, they can just answer to federal regulators and obey federal rules. So the banks' latest bright idea is that they can do the same thing with foreclosure, even though there aren't any federal foreclosure rules or regulations.
Of course, this would apply only to nationally-chartered banks. But any local bank wanting to foreclose could simply sell its broken loan to a national bank and get around the state laws that way. Essentially, all state foreclosure laws would be rendered toothless overnight if banks successfully pre-empt state laws.
Fortunately, a pair of Congressmen - Brad Miller (D, NC) and Steve LaTourette (R, OH) - are introducing a bill which will stop the pre-emption racket. As Elizabeth Warren puts it:
If banks don't like the state laws, they remain free to fight them in the state legislatures or the state courts. They can even make constitutional arguments about takings. But congressmen Miller and LaTourette say they can't claim that Congress gave them a free pass.
There's really no reason why national banks should have more free rein to foreclose than local banks, in any state. So with luck the Miller-LaTourette bill will pass. But expect the vote to be close: the financial services industry has a lot of clout in Washington.
(Housing Wire) A hotly-contested bill at the center of a proposed housing aid package, scheduled to begin debate in the House of Representatives on Wednesday, won’t get the support of President Bush, the White House said late Tuesday. The president issued a clear a veto threat to legislation proposed by House Financial Services Committee Chairman Barney Frank (D-MA) that would seek to significantly expand the scope of insured mortgages offered via the Federal Housing Administration.
“I will veto the bill that’s moving through the House today if it makes it to my desk,” President Bush said Tuesday, “and I urge members on both sides of the aisle to focus on a good piece of legislation that is being sponsored by Republican members.”
Frank’s bill, H.R. 5830, the FHA Housing and Homeowner Retention Act, would allow the government to guarantee up to $300 billion in refinancing activity tied to distressed mortgages over the next two years. The Massachusetts Democrat has said earlier this week at a Mortgage Bankers Association conference that he expected the legislation to move through Congress to the President’s desk by June.
“We are committed to a good housing bill that will help folks stay in their house, as opposed to a housing bill that will reward speculators and lenders,” Bush said. The administration has said it prefers competing proposals under consideration by Congressional leaders to modernize the FHA and reform regulation of Fannie Mae and Freddie Mac, as well as a proposal that would allow states to issue tax-exempt bonds for refinancing subprime mortgages.
These are complicated times politically, as Republican opposition to the housing measures being pushed by Congressional Democrats has been anything but united thus far.
Treasury secretary Henry Paulson signaled last week that he supported much of the bill, and remarks by Federal Reserve chairman Ben Bernanke on Monday evening implicitly backed Frank’s proposal as well. HW’s sources informed us also that Republican House and Senate members from hard-hit states, including California and others, may be willing to back Frank’s proposal out of a sense of desperation over the effect of housing in the markets they represent.
House Democrats Tuesday unveiled broad housing package — scheduled to begin debate today on the House floor — that includes some of the proposals backed by the administration, in an effort to secure passage for Frank’s more controversial measure. A similar measure has been proposed in the Senate by Banking, Housing and Urban Affairs Chairman Chris Dodd (D-CT), although Dodd tabled a scheduled committee debate late last week.
Federal Housing Commissioner Brian Montgomery told attendees at a Mortgage Bankers Association meeting in Boston on Tuesday that the Barney/Dodd plan to expand FHA insurance was akin to “throwing the barn doors open” and asking taxpayers to shoulder the bail-out of troubled borrowers. Montgomery, along with other administration officials, have argued that existing programs already in place — such as FHASecure — can be successfully augmented with less risk to taxpayers.
Frank has said that the current housing package taking shape in Congress represents the industry’s “last chance” to solve the mortgage crisis on a voluntary basis. Monday, Frank said that if servicers did not adopt the measures — and in particular, refinance troubled borrowers into the FHA loans his bill proposes — that “much tougher, more intrusive regulation will be on the way.”
The bill, however, faces an uncertain future at this point.
“This is going to be a dog fight,” said one source, a lobbyist that asked not to be identified by name. “Killing this bill may be too high a price to pay, with elections looming.”
(Housing Wire) A reported meeting Tuesday between Treasury Department and mortgage servicing officials focused squarely on the problem of addressing second liens in borrower work-outs, as government officials are realizing that any plan put in place to help borrowers must address the significant challenge presented by second lien holders.
The Wall Street Journal first reported on the meeting yesterday, saying that “about 10 lenders will attend,” including representatives from Countrywide Financial Corp. (CFC: 5.34, -0.37%), Bank of America Corp. (BAC: 39.24, +0.69%), Citigroup Inc. (C: 25.87, +0.47%), Fannie Mae (FNM: 30.81, +8.91%), and Freddie Mac (FRE: 27.33, +7.09%).
The Journal, however, didn’t mention the meeting focus on second liens, saying only that the meeting was part of an overall plan to put more pressure on servicers regarding loan modifications and principal writedowns.
Much of the six-hour meeting is expected to focus on second liens, which are typically held by a different investor group than the holder of a primary mortgage and would need to be terminated to let a refinancing or modification proceed. Bankers said many second-lien holders are getting no return on their loans amid the housing crisis.
Industry representatives said second liens continue to stymie restructuring efforts. Many first-lien holders do not know who owns a second lien, for example.
Of subprime loans originated in 2006, more than half had a simultaneous second lien, said Mark Zandi, chief economist and co-founder of Moody’s Economy.com Inc.
Of course, second liens are far from being just a subprime mortgage problem; a large swath of prime borrowers in California relied on a combination of Alt-A mortgages and second liens to purchase their homes during the recent housing run-up.
On the whole loan side of the business, sources told HW that second liens are currently trading in the 3 to 5 cent range per dollar. More than a few hedge funds are currently planning strategies to buy up second liens in an effort to both keep a borrower in the home and generate a tidy profit — while risky, the profit potential in second liens could be substantial, we’ve been told.
Some of the proposals on the table at today’s Treasury meeting, according to American Banker, included a discussion of the conditions that would be needed to induce second lien holders to resubordinate during a refinance of a troubled borrowers first mortgage, as well introducing “token fees” paid to second lienholders by first lienholders in the event of a short-sale.
“Solving for second liens is the single most critical issue on the table right now,” said one source, a senior executive at a national bank that asked not to be named. “If that doesn’t get handled, it doesn’t matter what the FDIC proposes, or what Barney Frank wants done.”
(Housing Wire) Home prices posted their worst quarterly performance in over a decade during the first quarter, according to a report released Tuesday morning by real estate information Web site Zillow.com. More than half of those who purchased a home in 2006 now owe more on their mortgage than their home is worth, the company said — surely ominous news for mortgage execs fretting over the potential for so-called borrower “walk-aways.”
Home values in the first quarter of 2008 fell 1.6 percent from the fourth quarter and 7.7 percent from the year-ago quarter, marking the most significant year-over-year decline in the past 12 years, Zillow said.
The company’s own index of median housing values fell to $213,000 during the quarter, the lowest median price estimate recorded by the firm since the second quarter of 2005. Zillow’s home value report is based on data from 160 metropolitan statistical areas.
With the exception of Dallas, which returned a one percent year-over-year gain, 30 major markets tracked by Zillow declined from a year ago, with the majority falling back to the median values of three to four years ago. For example, first quarter home values in the Boston area were the equivalent to levels last seen in the second quarter of 2003, down 16 percent from the peak, which occurred in the third quarter of 2005. Values in the Los Angeles MSA have declined to 2004 levels, down 19 percent from the market high recorded in the second quarter of 2006. The Detroit area has been hardest hit, retreating to value levels of 1998, down 24 percent from the market peak in the fourth quarter of 2005.
Stunning numbers, but perhaps more troublesome is what these sort of price declines in key housing markets mean for millions of borrowers.
Of homeowners nationwide who purchased when U.S. home values peaked in 2006, one out of every two (51.6%) now owes more on their mortgage than their home is currently worth, Zillow said. For those who purchased in 2005 and 2007, the situation is only modestly better with nearly 42 percent and 45 percent, respectively, facing negative equity. By comparison, 16 percent of those who purchased in 2004 have negative equity, as do 7 percent of those who purchased in 2003.
“While the high rate of negative equity has little consequence to owners staying in their homes, it can be devastating to those who need to sell immediately or refinance to avoid ARM resets,” said Dr. Stan Humphries, Zillow’s vice president of data and analytics. “The inability to secure refinancing is ultimately contributing to the growing rates of foreclosure in many parts of the country.”
For homeowners who purchased in some of the most volatile markets, such as many parts of California and Florida, as well as Phoenix and Las Vegas, rates of negative equity can be twice the national median and, in some cases, as high as 95 percent. For example, in the first quarter, Zillow said that Las Vegas home values fell 25 percent year-over-year and nine out of 10 (89.9%) homeowners who purchased in 2006, when the median down payment was 2 percent, now owe more than their home is worth.
Despite the incredible price drops in many key markets, Zillow also said Tuesday that nearly 3 in 4 borrowers believe their home has increased in value over the past 12 months — yes, really — which means that many homeowners clearly have not yet come to terms with market reality.
(Tanta at Calculated Risk) Wherein voluntary non-binding criteria are established in order to forestall actual regulation. No, really. Saith the WSJ:
Officials have called a six-hour meeting Tuesday with banking officials to discuss adopting a uniform, but voluntary, set of criteria to speed the time it takes qualified borrowers to modify mortgages they can't afford. Officials also want to make the modification process more consistent across institutions. . . .
The new industry guidelines, if adopted, wouldn't be binding and couldn't be enforced by the government. But, if effective, they could help forestall aggressive action from congressional Democrats, who have lashed out at loan servicers for acting too slowly and threatened to push tougher oversight of the banking industry if results don't improve. . . .
One possible industry "best practice" would have lenders acknowledge the receipt of any request for a modification within five days of a request by homeowners. Some struggling homeowners have complained that it takes two months or longer to hear back from lenders. Also, the companies are considering a policy that would direct lenders to notify borrowers of a decision about whether to modify a loan within five days.
Another tricky issue slowing loan modifications has been the conflict between companies that hold the first and second mortgage on the same home. Treasury officials are also trying to broker a truce between these groups that would make it easier for borrowers with two mortgages on one home to modify the terms of their loans. . . .
Loan servicers are also looking for clarification about the role of Fannie Mae and Freddie Mac. The two government-chartered mortgage companies made it easier for lenders to modify the terms of certain qualified loans, such as the interest rate. But they have been stricter about writing down mortgage principals [sic], saying they will generally do so only on a case-by-case basis. Let's see. Kicking out a form letter within five days to acknowledge the request? That's easy enough; servicing systems are superb at kicking out form letters. What will it say, other than "we got your request"? Until we finally work through this business about "across the board" versus "case by case" processing of these deals, putting a hard and fast timeline on them seems like a problem to me.
If you think there's one consistent mechanical approach that works for any and all loans and borrowers, and you assume that the hold-up is lack of direction from management, then all we need is for the mechanical process to be laid out and the big guys meeting with Treasury to come back to the office and hand out the memos to everyone.
If you think, as I do, that the vast majority of these things have to work on a case-by-case basis, and the hold-up is lack of senior loss mitigation staff who can manage cases all the way through with enough time in their day to take phone calls directly from borrowers in the process, plus the problem of first mortgage loss mit people trying to get somewhere with the second lien people, then we need to be setting "best practice" standards for how and with whom these loss mit departments are staffed at both shops (first lien and second lien).
Furthermore, I really don't see the point of continuing to talk about first mortgage servicers agreeing to do principal write-downs until we have talked more seriously than I have heard heretofore about what junior lien servicers are going to do, exactly, and how they're going to do it. I keep seeing plans--this includes Frank's FHA plan as well as Sheila Bair's "HOP" proposal--that go into great detail about the first lien holder writing down principal but just kinda mention junior liens as an afterthought. Practically speaking, this isn't doing anyone any good: first lien holders can "voluntarily" agree to do just about anything, but if the second lien holders don't agree to modify, subordinate, or charge off and release their liens at the same time in the same time-frame, the whole thing is pointless. But the economics of the two parties are very different: second lien lenders, by and large, don't have big loss mit staffs. You can't afford to on a second lien, not the way the business model of second lien lending was written in the recent past. If you're looking at 100% loss in a foreclosure, but only 110% loss if you spend a lot of time and money negotiating with a first lien lender who ends up pressuring you into charging off the loan anyway, you gain most by doing exactly nothing.
This is not a sympathy trip for second lien lenders; it's a reality trip. Unless this great summit meeting at the Treasury comes up with a public answer to what the second lien lenders are expected to do, and how they're expected to do it, this isn't going to work.
At the Columbia Business School's 32nd Annual Dinner, New York, New York
May 5, 2008
President Bollinger, Dean Hubbard, Co-Chairman Kravis, and distinguished guests, I am very pleased to be here and especially honored to receive the Columbia Business School's Distinguished Leadership in Government Award. This evening I would like to offer a few thoughts on mortgage markets and the recent increase in the pace of delinquencies and foreclosures. My particular focus will be on geographic variation in mortgage performance and how that variation can help us better understand and prevent foreclosures. I will also discuss some initiatives taken by the Federal Reserve to address the foreclosure crisis as well as other policies that might be used to strengthen mortgage and housing markets.
Geographic Variation in Loan Mortgage Performance As my listeners know, conditions in mortgage markets remain quite difficult, and mortgage delinquencies have climbed steeply. The sharpest increases have been among subprime mortgages, particularly those with adjustable interest rates: About one quarter of subprime adjustable-rate mortgages are currently 90 days or more delinquent or in foreclosure.1Delinquency rates also have increased in the prime and near-prime segments of the mortgage market, although not nearly so much as in the subprime sector.As a consequence of rising delinquencies, foreclosure proceedings were initiated on some 1.5 million U.S. homes during 2007, up 53 percent from 2006, and the rate of foreclosure starts looks likely to be yet higher in 2008. Not all foreclosure starts result in the borrower's loss of the home; sometimes the borrower is able to make up the missed payments or other arrangements are made with the lender. But, given the number of borrowers in distress and the weakness of the general housing market, the share of foreclosure initiations that ultimately result in the loss of the home seems likely to be higher in the current episode than customarily has been the case.
Many foreclosures are not preventable. Investors, for example, are unlikely to want to hold onto a property whose value has depreciated significantly, and some borrowers--perhaps because they were put into an inappropriate loan or because personal circumstances have changed--cannot realistically sustain homeownership. However, if a foreclosure is preventable, and the borrower wants to stay in the home, the economic case for trying to avoid foreclosure is strong. Because foreclosures impose high costs, including legal and administrative costs as well as the costs of leaving the property vacant for a possibly extended period, both the borrower and the lender often are better off avoiding foreclosure. Moreover, it is important to recognize that the costs of foreclosure may extend well beyond those borne directly by the borrower and the lender. Clusters of foreclosures can destabilize communities, reduce the property values of nearby homes, and lower municipal tax revenues. At both the local and national levels, foreclosures add to the stock of homes for sale, increasing downward pressure on home prices in general. In the current environment, more-rapid declines in house prices may have an adverse impact on the broader economy and, through their effects on the valuation of mortgage-related assets, on the stability of the financial system. Thus, finding ways to avoid preventable foreclosures is a legitimate and important concern of public policy.
To determine the appropriate public- and private-sector responses to the rise in mortgage delinquencies and foreclosures, we need to better understand the sources of this phenomenon. In good times and bad, a mortgage default can be triggered by a life event, such as the loss of a job, serious illness or injury, or divorce. However, another factor is now playing an increasing role in many markets: declines in home values, which reduce homeowners' equity and may consequently affect their ability or incentive to make the financial sacrifices necessary to stay in their homes.
On the principle that a picture is worth a thousand words, Federal Reserve staff, using detailed, county-by-county information on mortgage performance, have developed a series of "heat maps," which summarize the incidence of serious mortgage delinquencies across the nation as well as some of the key drivers of loan performance. As the examples will make clear, the figures use warmer colors--orange and red--to show counties for which the factor being considered has a higher value or change. Lower values or changes are indicated by cooler colors--shades of green--and yellows indicate areas where the factor under consideration has a moderate value or change.
Nationally, as of the fourth quarter of 2007, the rate of serious delinquency, as measured by credit records, stood at 2 percent of all mortgage borrowers, up nearly 50 percent from the end of 2004.2 The fourth quarter of 2004 is a useful benchmark, because general economic conditions were fairly normal and the lax underwriting that emerged later was not yet evident.
Figure 1 shows the national patterns of serious mortgage delinquency in 2004, which, again, I am taking as representative of a relatively normal period, with orange and red indicating the highest rates of delinquency and greens indicating the lowest. In 2004, the areas of the country with the highest rates of serious delinquency included significant portions of the Southeast; parts of the Midwest, most notably Ohio and Indiana; portions of the Rocky Mountain region; and Texas, Oklahoma, and areas in the Mississippi valley. In contrast, many parts of the country experienced exceptionally good loan performance at that time, including most of the West Coast, New England, and much of southern Florida.
However, conditions in some areas changed greatly in a relatively short period of time. Figure 2 shows the pattern of delinquency rates as of the last quarter of 2007. Many of the areas that exhibited elevated delinquency rates in 2004 continued to show relatively high rates of delinquency in 2007. But some areas that had low rates in 2004 experienced high rates three years later. Figure 3 makes this point more sharply by showing the pattern of increases in delinquency rates between 2004 and 2007, with the largest increases shown in red. The strong regional pattern is evident in the figure. Although many parts of the country have seen significant increases in mortgage delinquencies and foreclosures, a number of areas--such as California, parts of Nevada, Arizona, Colorado, Florida, portions of the upper Midwest, and New England--have been particularly hard hit.
The regional pattern of the recent rise in mortgage delinquencies and foreclosures requires explanation. Again, we can use heat maps to examine the underlying relationships across geographic regions between changes in mortgage delinquency rates and factors identified as driving loan performance. For example, the change in the unemployment rate in a county can be used as a proxy for disruptions in family incomes and subsequent financial stress. Figure 4 shows changes in average annual unemployment rates across counties between 2004 and 2007, with counties indicated in red experiencing the largest increases in joblessness.3 The data suggest that increases in unemployment rates account for at least some of the recent increases in mortgage delinquencies. Parts of New England, states in the Great Lakes region--including Minnesota, Michigan, and Wisconsin--and a number of other states, such as Nevada, show both increased mortgage delinquencies and notable increases in unemployment rates.
However, the behavior of unemployment does not seem sufficient to explain the increased delinquency rates in other areas, including California, Florida, and portions of Colorado, where mortgage delinquencies increased during a period in which unemployment generally decreased. Another important determinant of loan performance, identified by research at the Federal Reserve and elsewhere, is changes in house prices.4Figure 5 shows the regional pattern of changes in house prices between 2006 and 2007, with the sharpest price declines indicated in reds and oranges.5 The figure shows that Florida, California, Nevada, Michigan, and parts of New Mexico and Colorado experienced decreases in house prices between the fourth quarter of 2006 and the fourth quarter of 2007 (a pattern which has continued and intensified in 2008).6 As I noted, sharp declines in house prices, and thus in homeowners' equity, reduce both the ability and incentive of homeowners, particularly those under financial stress for other reasons, to retain their homes.
Other factors affect foreclosure rates, and once again the heat maps can give us a visual impression. Figure 6 shows the share of home purchases by non-owner occupiers--investors or purchasers of vacation homes, for example--during 2005 and 2006.7 Again, there is some correlation with the increase in delinquencies and foreclosures, as purchases by non-owner occupiers were relatively high in the West, Southwest, and in Florida. Figure 7 shows the incidence of junior liens (or piggyback loans), often an indicator of little borrower equity at the time of purchase. The greater use of these mortgages in the West and East Coasts presumably reflects higher house prices in those regions; again, the geographical pattern suggests that the use of piggyback loans may also have contributed to the recent rise in delinquencies and foreclosures.8
What are the implications of these relationships, particularly the linkage of mortgage payment problems and falling house prices? Loan servicers are used to dealing with mortgage delinquencies related to life events such as unemployment or illness, with the most common approaches being a temporary repayment plan or the folding of missed payments into the principal balance. A widespread decline in home prices, by contrast, is a relatively novel phenomenon, and lenders and servicers will have to develop new and flexible strategies to deal with this issue. In some cases, when the source of the problem is a decline of the value of the home well below the mortgage's principal balance, the best solution may be a write-down of principal or other permanent modification of the loan by the servicer, perhaps combined with a refinancing by the Federal Housing Administration or another lender. To be effective, such programs must be tightly targeted to borrowers at the highest risk of foreclosure, as measured, for example, by debt-to-income ratio or by the extent to which the mortgage is "underwater." Finding the right balance--particularly the need to avoid programs that give borrowers who can make their payments an incentive to default--is difficult. But realistic public- and private-sector policies must take into account the fact that traditional foreclosure avoidance strategies may not always work well in the current environment.
The Federal Reserve's Homeownership and Mortgage Initiatives I would like to say a few words about the Federal Reserve's efforts to strengthen homeownership and reduce preventable foreclosures. The Federal Reserve's decisions regarding monetary policy and our efforts to increase financial stability affect housing and mortgage markets, of course. But, as an organization with a national presence in the form of regional Federal Reserve Banks and their Branches, we are also working to address these issues more directly. We are collaborating with other regulators, community groups, policy organizations, lenders, and public officials to identify ways to prevent unnecessary foreclosures and their negative effects on local economies.
Our efforts have taken a variety of forms. First, we have employed economic research and analysis, a particular strength of the Federal Reserve, to increase the sum of knowledge about mortgage and housing issues. For example, we are providing community leaders with detailed analyses identifying neighborhoods at high risk of foreclosures, analogous to the heat maps I showed you this evening.9 These analyses have helped community organizations better focus their scarce resources, such as deciding where to target counseling services or other intervention efforts. A Federal Reserve System work group has prepared overviews of the current state of knowledge about housing and mortgage markets, and further research is currently under way to fill in the most important analytical gaps.
Second, we are collaborating with interested parties across the country, taking advantage of our national presence and our existing relationships with local lenders, community groups, government officials, and other stakeholders, to take practical steps to address the causes and consequences of foreclosures. For example, I mentioned earlier the destabilizing effects foreclosures have on neighborhoods, resulting from factors such as decreased home values and deterioration of vacant properties from neglect. To help address this problem, the Federal Reserve is joining in a partnership with the nonprofit NeighborWorks America to develop materials, tools, and training programs to help communities and others acquire and manage vacant properties. The goal is to support the provision of affordable rental housing and new homeownership opportunities in low- and moderate-income neighborhoods. Federal Reserve Banks and Branches have also hosted numerous meetings and workshops to bring together local officials, lenders, community groups, and others to try to find ways to reduce the incidence of foreclosures and mitigate their economic and social effects.
Third, we are engaged with mortgage servicers to understand impediments they may face when modifying loans or offering other alternatives to foreclosure. Servicers still report difficulty connecting with troubled borrowers, and we have supported efforts to encourage borrowers to contact their lenders or housing counselors. Working with the Hope Now alliance and independently, we have encouraged the industry to increase their efforts to work with troubled borrowers, to develop guidelines and templates for reasonable standardized approaches to various loss-mitigation techniques, and to adopt uniform reporting standards, such as those sponsored by Hope Now. Clear disclosures of loan modifications will not only make it easier for regulators, the mortgage industry, and homeowners to assess the effectiveness of foreclosure-prevention efforts, but they will also foster greater transparency, and hence greater confidence, in the securitization market.
Prospectively, we are committed to promoting an environment that supports the homeownership goals of creditworthy borrowers. To this end, the Federal Reserve Board has proposed new regulations to better protect consumers from a range of unfair or deceptive mortgage lending and advertising practices. To help ensure that the rules are broadly enforced, we are engaging in a program with other federal and state agencies to conduct consumer compliance reviews of nondepository lenders and mortgage brokers. These reviews are targeting underwriting standards, risk-management strategies, and compliance with consumer protection laws and regulations.
The Federal Reserve also is continuing its long-standing practice of providing educational and information resources to help consumers make informed personal financial decisions, including choosing the right mortgage. Through their community affairs offices, Federal Reserve Banks are working to establish foreclosure-mitigation resource centers on their websites to be used by small municipalities, housing counselors, and community groups. For consumers who have questions about banking procedures and rules or who believe they may have been treated unfairly by their lender, the Federal Reserve Consumer Help Center directs queries to the various regulatory agencies so that a consumer has only one call to make to ask questions or file complaints.10
Additional Mortgage Initiatives Additional government policies can help address problems in the mortgage markets. The Congress can take an important step by moving quickly to reconcile and enact legislation permitting the Federal Housing Administration (FHA) to increase its scale and improve its management of risks. Such legislation could help the FHA reach a wider range of borrowers and develop appropriate underwriting and pricing methodologies to deal with any increase in credit risk. Giving the FHA greater latitude to set underwriting standards and risk-based premiums for mortgage refinancing, as well as more flexibility in product development, would allow it to help still more troubled borrowers.
Separately, the government-sponsored enterprises (GSEs)--Fannie Mae and Freddie Mac--could do more. Recently, the Congress expanded Fannie Mae's and Freddie Mac's role in the mortgage market by temporarily increasing the limits on the sizes of the mortgages they can accept for securitization. In addition, because the GSEs have resolved some of their accounting and operational problems, their federal regulator, the Office of Federal Housing Enterprise Oversight, has lifted some of the constraints that it had imposed on them. Thus, now is an especially appropriate time for the GSEs to move quickly to raise significant new capital, which they will need to take advantage of these new securitization and investment opportunities, to provide assistance to the housing markets in times of stress, and to do so in a safe and sound manner.
As the GSEs expand their role in housing markets, the Congress should move forward on GSE reform legislation, which includes strengthening the regulatory oversight of these companies. As the Federal Reserve has testified on many occasions, it is very important for the health and stability of our housing finance system that the Congress provide the GSE regulator with broad authority to set capital standards, establish a clear and credible receivership process, and define and monitor a transparent public purpose--one that transcends just shareholder interests--for the accumulation of assets held in their portfolios.
Conclusion The realtor's mantra is "location, location, location," and, as I have discussed this evening, local variation in housing and mortgage markets is considerable. This variation is useful for understanding the sources of the increase in mortgage delinquencies and foreclosures, and it should be taken into account as servicers and policymakers consider how best to avoid preventable foreclosures.
Most Americans are paying their mortgages on time and are not at risk of foreclosure. But high rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets, and the broader economy. Therefore, doing what we can to avoid preventable foreclosures is not just in the interest of lenders and borrowers. It's in everybody's interest.
1. Based on servicer data from First American LoanPerformance. Return to text
2. This information from TrenData is drawn from the credit records of a geographically stratified random sample of more than 20 million individuals (roughly a 1 in 10 sample of all credit records) for each calendar quarter beginning in 1992. TrenData is a registered trademark of TransUnion LLC. "Serious delinquency" includes accounts that are 90 days or more past due or in foreclosure. Return to text
4. For example, see Gerardi, Shapiro, and Willen (2007). Return to text
5. Displayed is the annual percentage change in the Office of Federal Housing Enterprise Oversight price index for each county from the end of 2006 to the end of 2007. Return to text
7. Information on non-owner occupiers comes from Home Mortgage Disclosure Act (HMDA) data. HMDA is implemented by Regulation C (12 CFR 203) of the Federal Reserve Board. For more information about HMDA, see Avery, Brevoort, and Canner (2007). Return to text
8. For details about the technique used to identify piggyback loans and for more information about their use, see Avery, Brevoort, and Canner (2007). Return to text
(Tanta in Calculated Risk) My attention was arrested by this story in Sunday's Washington Post, which is not, actually, about "walk aways" at all. It's about borrowers getting mortgage modifications--that is, borrowers who are in fact making a real effort to stay in their homes. But one borrower's story here actually has more insight about the "walk away" meme, it seems to me, than any story I've read purportedly on that subject.
[The Ramseys] bought their Burtonsville home for $310,000 in June 2005 with two loans. The first, and larger, mortgage had a 6.4 percent interest rate due to increase after three years to as high as 12 percent. The second had a 10.2 percent rate. Their monthly payment was originally $2,000, not including homeowners association fees and taxes.
The rate jumped last summer. Eventually they were paying $3,050 a month. Her salary as a social worker and his as an insurance salesman wouldn't cover it. In July, they stopped paying.
Ramsey called her lender, Houston-based Litton Loan Servicing, but had trouble getting hold of anyone with decision-making authority. The company then scheduled foreclosure proceedings for Dec. 18. She called again to propose a short sale.
"I was willing to do whatever it took so that we didn't lose the house," she said.
Absorb that statement for a minute: in a short sale, you do "lose" your house. Whatever we're talking about here is psychological, not literal.
Litton turned down the short sale bid--it was only $200,000. Eventually the Ramseys got Litton to agree to a modification:
It took several weeks, but Cipollone got both mortgages down to 7 percent, fixed for 30 years. Litton also dropped the balance to $302,000 after the Ramseys contributed $3,000 for a down payment.
"I'm terribly excited," Ramsey said. "I wanted to pack up and leave my house because I want to, not because I'm going to go through a foreclosure situation, but because it's planned."
She doesn't plan on leaving anytime soon, but if she ever does, she said, it will be on her terms.
In a sense, Mrs. Ramsey understands what a foreclosure is much more clearly than people who talk about "walking away" do: a foreclosure is not "giving the house back to the bank." It is being forced to sell your property at public auction in order to satisfy a debt. To the Ramseys, it isn't actually "losing the house" that seems to be the real fear--they were willing, after all, to sell short. It's simply that a short sale "felt" voluntary; it felt like "a plan."
One of the reasons why nobody is really quantifying the "walk away" problem is that, in reality, there is no legal or logical distinction between a "walk away" and a "foreclosure," because they're both foreclosures. The only difference is that the former can be interpreted, psychologically, to mean that the borrower is "leaving my house because I want to," while the latter acknowledges that the sale of the home has been forced.
I'm guessing that we'll have a least a few commenters to this thread asserting that the Ramseys "should have just walked away." Their mortgage payment is back to its original level--around $2000 a month before taxes and insurance--but their mortgage is still seriously underwater and I for one wouldn't bet on how long it will take for its value to climb over the loan amount. Even in that part of Maryland, the Ramseys could probably cut their monthly housing expense in half by renting.
Such calculating advice, however, ignores the fact that to the Ramseys, foreclosure equals defeat, and they're realistic enough to realize that dressing it up in the euphemism of "walking away" doesn't change that. They are, in their own way, just as "ruthless" as the so-called walkers-away: they would, apparently, have been happy to see their lender take a $100,000-plus loss on a short sale to salve their pride. Human nature is like that; I have no real interest in heaping coals on the heads of the Ramseys. I am more interested in the way this story helpfully scrambles some confident assumptions about what motivates borrowers, and what really stigmatizes foreclosure in our current culture.
Servicers keep going on about a "sea change" in borrower attitudes about foreclosure. I just don't see that. I see borrowers whose actions suggest that foreclosure still carries a very powerful stigma, so much so that they are able to convince themselves that "walking away" is actually an "alternative" to foreclosure rather than a synonym for it. The Ramseys rather usefully remind us that "walking away" is not a financial strategy, it's a defense mechanism. If you can tell yourself that you are the one making the plan and executing the options, you avoid having to admit to being forced.
(Housing Slips) Professor Amir Sufi (University of Chicago), in discussing his paper, Lender Incentives, Credit Risk, and Securitization: Evidence from the Subprime Mortgage Crisis, asks why lenders made such bad decisions when making subprime mortgages. He concludes that securitization reduced lender incentives to scrutinize borrowers, because lenders knew they would sell virtually all the subprime loans they originated and, thus, knew they would shed the credit risk associated with those loans. Professor Sufi argues that this is to be expected, since financial intermediaries overcome information frictions only if they have an incentive to properly screen and monitor borrowers.
Professor Sufi’s paper traces the increase in consumer mortgage debt relative to non-mortgage debt (it skyrocketed after 2002) and the increase in the number of securitized mortgage loans (skyrocketed after 2003). He examined differential securitized mortgage growth rates by zip codes and found that high securitization zip codes had riskier loans. Borrowers in these zip codes had lower incomes, were given more subprime loans, and the loans in these areas had a higher fraction of denied loan applications (all suggesting that the loans were riskier). While brokers should have been exercising greater caution in examining borrower information (income and employment) before approving these risky loans, the data show that lending in these areas increased but that lenders did not appear to consider whether these loans should have been made. This finding confirmed what many have suspected, .i.e., that the subprime lending boom was lender-based and was not created because of borrower demand.
Professor Sufi does not believe that securitization is always bad. He believes, however, that removing lender incentives to scrutinize borrower information coupled with the unrealistically optimistic ratings agencies gave mortgage-backed securities caused investors not to investigate the true risks associated with these mortgage investments. He also suggested that, because the collateral that backed the mortgages (houses, that is) was appreciating, investors also had no reason to consider the actual risks associated with the loans. He, like others, believe that the subprime lending itself caused much of the house price appreciation for the last several years. To fix the problem in the future, Professor Sufi suggests that securitization pools should require the loan originator/arranger to hold more of the credit risk.
Dr. Yuliya Demyanyk, an economist with the Federal Reserve Bank in St. Louis, disagrees that securitization distorted lender incentives. Instead, she argues that lenders had no incentive to screen borrowers because lenders were making the subprime loans specifically for securitization. Her research indicates that lenders understood that they were serving as an intermediary between Wall St. and the ultimate investors (she cites China as an example of an investor that was willing to purchase these high risk, but potentially high return loans). Dr. Demyanyk contends that Wall Street securitizers asked lenders to originate a certain number of loans over a certain period of time, that lenders made the loans and then sold them back to Wall Street. Thus, Dr. Demyanyk rejects the claim that lenders were surprised by the risks, arguing instead that they knew that the loans were risky.
(Washington Post) On the Brink of Foreclosure, They Got Their Loans Changed -- but It Wasn't Easy...
Zena Collins knew she had a serious problem when she could no longer afford electricity.
The mortgage payment on her Gaithersburg house had jumped about $500, to $2,000 a month, not counting taxes and insurance, after her adjustable interest rate increased. When she bought the house in 2000, she was a pension administrator. By the time her company decided to cut her job, she was bringing home $5,200 a month. In April 2006, she managed to secure a similar job -- but not a similar salary. So there she was, earning less but paying more for her house. And that's when the lights went out.
"I simply could not do it," she said. "I was sitting there with battery-operated lights and showering with cold water."
So she contacted her lender, California-based Countrywide Financial, to ask for a loan modification. What followed, she said, were months of unanswered pleas for help.
President Bush, Congress and banking regulators are counting on loan modifications, which involve changing the terms of a mortgage, to prevent millions of people from losing their homes. Lenders say they are stepping up efforts to modify loans. But housing counselors and attorneys say it is a painstaking process that few homeowners can navigate on their own.
"We are all in some cases hitting a brick wall," said Diane Cipollone, attorney and director of the Sustainable Homeownership Project at Baltimore-based Civil Justice. "The response time is months -- months -- to get a workout, and the workout is often unaffordable."
There are conflicting data on how many borrowers are getting permanent loan modifications, such as a reduction in debt, rather than temporary solutions, such as repayment plans that will bring down the level of their delinquency. Decreases in debt are especially rare, according to the Mortgage Bankers Association. Some borrowers settle for short sales, in which they sell the home at a loss and are forgiven the debt.
Hope Now, a nationwide coalition of lenders and housing counselors formed last year, recently reported that in January and February, servicers provided about 309,700 workouts -- basically, a solution that keeps the owner in the home. But most were done through repayment plans, not loan modifications.
The State Foreclosure Prevention Working Group, composed of state attorneys general and state banking regulators, last month reported that seven out of 10 seriously delinquent borrowers aren't even in a workout process.
Consumer advocates and mortgage experts said part of the problem was that too many people got second mortgages, often with a separate lender, so they would not have to make large down payments. "Everyone is going to have to work together to get a modification, and frankly, that's hard," said Julia Gordon, policy counsel for the Center for Responsible Lending, a nonprofit research organization.
The other hang-up is that many mortgages were sold to pools of investors, who are less inclined to take a loss.
So how does one get a loan modification? Here's how Collins, 47, did it.
Yes, she admits, she made some bad financial choices, going from a 30-year, fixed-rate mortgage at an 8 percent interest rate in 2000 to an adjustable-rate mortgage at 8.5 percent two years later so she could use the equity to replace appliances and fix a cracked patio.
When that rate was set to increase, she refinanced again and took out more money to work on her 32-year-old house. In February 2007, she refinanced to a 10.8 percent interest-only mortgage that would soar to as high as 13.8 percent after two years.
She never missed a payment, but she knew it was only a matter of time. "There was a point when I was thinking, 'You know, I'm going to have to walk away from this. I can't keep doing this.' I had seven years in the house. I don't want to do that. But how long do I have to sit here in the dark from night to night?" she said.
The answer was three months. In June 2007, she contacted Countrywide. According to Collins, Countrywide told her she did not qualify for a workout because she was not yet behind on her payments. She kept calling and spoke to many people in different departments. "They would say, 'I'll look into it,' and then I'd get the same response."
That's when she turned to Keith Johnson, director of the District office of NACA, the Neighborhood Assistance Corp. of America.
A friend told Collins about NACA, which has completed thousands of workouts, partly through an agreement it has with Countrywide and CitiMortgage to permanently reduce interest rates and/or loan balances. It is one of many nonprofit organizations working with homeowners.
Johnson asked Collins for W-2 forms, tax returns and bank statements. "We figure out, what can this person afford based on their income?" he said.
He calculated that Collins could handle about $1,300 a month. Last October, armed with all her financial documents, Johnson bypassed Countrywide's customer-service department and went straight to loss mitigation.
Sixty days later, they agreed to a 30-year, fixed-rate mortgage of 4 percent. Her monthly payment would cover both the principal and interest, and she would pay no fees for refinancing.
But her loan grew from $105,000 to $237,000 because she had pulled out so much equity and done so many refinances. "That's fine," she said. "I'm immensely relieved."
A spokesman for Countrywide said he could not provide information about a specific borrower.
In January, Countrywide counselors helped 11,844 borrowers stay in their homes, the company recently reported. The majority of those loans -- 9,921 -- were modified in some way, such as an interest rate reduction. The rest were resolved other ways, such as repayment plans or forbearances, which involve suspending or reducing monthly payments until borrowers regain their financial footing.
The outcome is not always so positive, Johnson said, for "there are some lenders out there who are just not willing to work with anyone."
Consumer advocates and attorneys said homeowners could do a few things to boost their chances.
First, contact your lender, even if you are not delinquent. "The earlier that they know [homeowners] are having a difficulty and a hardship, the easier it is for us to put a plan in place and allow them to get back on their feet," said Patrick Carey, executive vice president of default and retention operations for Wells Fargo.
Then, said Cipollone, contact a nonprofit housing counseling agency or an attorney. Avoid any unsolicited offers from people who say they can save your house. Do not avoid mail or phone calls from your lender. And if your lender stops accepting payments because it is moving toward foreclosure, save that money for a contribution toward the loan workout. "If you've missed eight mortgage payments and have spent all that money because the lender stopped accepting payments, that is not a good outcome [nor] a good way to start negotiations," said Cipollone.
Nakisha Ramsey, 30, and her husband made sure to hoard their money.
They bought their Burtonsville home for $310,000 in June 2005 with two loans. The first, and larger, mortgage had a 6.4 percent interest rate due to increase after three years to as high as 12 percent. The second had a 10.2 percent rate. Their monthly payment was originally $2,000, not including homeowners association fees and taxes.
The rate jumped last summer. Eventually they were paying $3,050 a month. Her salary as a social worker and his as an insurance salesman wouldn't cover it. In July, they stopped paying.
Ramsey called her lender, Houston-based Litton Loan Servicing, but had trouble getting hold of anyone with decision-making authority. The company then scheduled foreclosure proceedings for Dec. 18. She called again to propose a short sale.
"I was willing to do whatever it took so that we didn't lose the house," she said.
Ramsey found a willing buyer, but Litton rejected the $200,000 offer, she said. Instead, she said, the company offered a modification that would bring the monthly payment to $2,290, with the balance increasing to $325,000 because of missed payments and penalties.
She was going to take it, until she met Cipollone at a foreclosure prevention seminar.
Ramsey gave Cipollone documents showing what she and her husband made and owed. Cipollone contacted Litton's loss mitigation department.
Donna Marie Jendritza, a spokeswoman for Litton, said she could not comment on specific borrowers because of privacy laws. But she said the company made multiple offers to Ramsey.
"There are many instances where we'll look at financials and give an offer and the customer will say, 'You know what? This is still squeezing me too much,' and we come back with a different offer," she said.
It took several weeks, but Cipollone got both mortgages down to 7 percent, fixed for 30 years. Litton also dropped the balance to $302,000 after the Ramseys contributed $3,000 for a down payment.
"I'm terribly excited," Ramsey said. "I wanted to pack up and leave my house because I want to, not because I'm going to go through a foreclosure situation, but because it's planned."
She doesn't plan on leaving anytime soon, but if she ever does, she said, it will be on her terms.
(Housing Wire) Congressional Democrats’ efforts to push through a housing aid bill that would expand the Federal Housing Adminstration’s authority to insure refinancing of troubled mortgages hit a snag Friday morning, with Senate Banking, Housing and Urban Affairs Chairman Chris Dodd (D-CT) tabling a planned May 6 markup of his FHA bill and a long-stalled proposal to revamp regulation of mortgage finance giants Fannie Mae and Freddie Mac.
Dodd’s FHA proposal is an analog to a similar proposal by House Financial Services Committee Chairman Barney Frank (D-MA) that was approved by a 46-21 margin earlier in the week.
The roadblock in this case appears to be primarily one man: Sen. Richard Shelby (R-Ala.), the ranking Republican on the Senate Banking Committee, who is either the last bastion of sensibility or a troublesome holdout, depending political affiliation.
Numerous media outlets reported Friday that Dodd chose to stall the planned mark-up because, in the words of his spokesman, he wants “to work toward a bipartisan consensus.”
It’s also likely that he wants to bundle the Frank/Dodd FHA insurance expansion effort with any effort to reform the GSEs, according to HW’s sources on Capitol Hill. Many Republicans and the White House have softened their previously hard stance towards Fannie and Freddie amid the housing crisis— with the notable exception of Shelby, we’re told. The House long ago passed its version of GSE reform, which received White House support, but Shelby’s staunch opposition has kept the Senate’s version of the bill stuck in the Banking Committee.
With Republicans largely balking at the proposed $300 billion FHA refi program— whether House or Senate versions— our sources suggested that a complex effort is now taking place behind the scenes in the hopes that bundling the two proposals will generate strong bipartisan support among both the House and Senate.
“Shelby has been an obstacle, but I think the pressure to get something done here will eventually rule the day, even within the GOP,” said one source, a lobbyist in Washington, DC. “Republicans and Democrats in Congress need to be able to tell their respective voting blocs that they’ve done something.”
(Calculated Risk) I think the British term "scheme" might apply, however.
And what, you ask, is HOP? It is the brainchild of the only Federal Deposit Insurance Corporation you happen to have, that's what. Formally, it is the Home Ownership Preservation Loan:
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:
* Unaffordable– defined by front-end DTIs exceeding 40 percent at origination. * Below the FHA conforming loan limit. * Originated between January 1, 2003 and June 30, 2007.
The FDIC helpfully gives us an example of a $200,000 2/28 loan with 28 years remaining to maturity at a fully-indexed rate of 8.00%. Using the payment provided for the HOP loan of $235 ($40,000 repaid over 23 years, as the first five years require no payment from the borrower), the assumed interest rate is 4.6% or roughly the yield on the 30-year Treasury bond.
So all the investor would have to do is apply for $40,000 in Treasury funds. I have to assume that the first five years of interest to the Treasury is prepaid by the investor, meaning the actual funding would be $30,800 (4.6% interest for five years of $9,200 subtracted from the funding amount). For a securitized mortgage, this would be an immediate charge to the deal's credit enhancement (presumably a write-down to the overcollateralization or most subordinate bond, possibly a partial claim against a mortgage insurance policy). I find it hard to believe that the Treasury would contemplate having mortgage-backed securities remitting monthly interest to the Treasury for five years. But then, I find a lot hard to believe these days, and the FDIC website doesn't really say.
The interest rate on the loan would be reduced to 5.88% for the remaining 28 years. The difference between the fully-indexed rate of 8% and the modified rate of 5.88%, adjusted for whatever anybody happens to think is a plausible average prepayment speed for a loan like this, would be a reduction to the "excess spread" or overcollateralization of the security.
The servicer would execute a modification of mortgage which would adjust the terms accordingly, and record that modification in a junior position to the mortgage given to the Treasury. So, assuming the value of the property was $200,000 at the time, instead of an "80/20" deal this would be a "20/80" deal. In the case of subsequent sale of the home (or default), the Treasury's $40,000 loan would be satisfied first, before any funds were available to the holder of the $160,000 "second lien." (Presumably, if there were a sale or default within the first five years, a portion of the prepaid interest could be deducted from the payoff of the Treasury's lien.)
If, on the other hand, the loan performed for five years and then the borrower sold the property for, say, $220,000, the Treasury would get $40,000, the investor would be paid the outstanding balance on the $160,000 loan (about $147,000), and the borrower would receive the rest of the proceeds. I don't see any provision for the lender to recover the interest it paid on the Treasury loan ($9,200) at this point. As far as I can tell there is no "equity sharing" arrangement on these loans.
What happens if there is lender-paid or borrower-paid MI on the loan? I have no idea. Possibly the mortgage insurer might agree to pay a partial claim when the loan is modified (to cover the investor's loss of the prepaid interest on the Treasury loan), and then the policy would be modified so that the new insured amount is equal to the reduced loan balance (in exchange for a reduced premium). That would reduce the MI's absolute loss exposure in dollar terms. (Suppose the MI coverage on the loan is 35%; the MI's dollar exposure would be $70,000 on $200,000 but only $56,000 on $160,000.) I really have no idea, although I'm sure that insured loans are a small fraction of the loans the FDIC has in mind here.
More likely they have outstanding second liens, and apparently what's supposed to happen here is that the second lien lender just writes off its entire loan amount and goes away quietly. There is only one rather stark sentence regarding second liens: "Under the proposal, the underlying loan is modified within the mortgage pool and does not worsen the position of subordinate lien holders." I gather that means that the second lien lenders are expected to subordinate their liens behind the old first-lien lender's new second lien, making the second a third. (To release the second lien entirely would surely have to be understood to "worsen" the second lienholder's position here.) There is no discussion of the possibility of using the Treasury loan to pay off or pay down the second lien, only to pay down the first lien. HOP may not worsen the second lienholder's position, but it doesn't improve it any.
In the FDIC example loan, the borrower's housing payment-to-income ratio goes from 50% at the time of modification to 35% for five years, and then increases to 39% for the remainder of the loan. These numbers already have a 1.5% annual income increase built into them. If the borrowers have no other debt, that's certainly affordable. Is it affordable enough that the reduced frequency of default in the next five years or so makes up for the increased severity of loss given default to the investor? A borrower whose HTI was 50% and whose DTI was 60% will be going to an HTI of 35% and a DTI of 45%. With the distinct possibility of further declines in home values, that's still a pretty high-risk loan. I'm guessing we will be able to judge whether investors think so by the extent to which they all line right up to participate in this voluntary program. Of course, servicers will be looking at the total debt-to-income ratio, not just the housing payment.
Bottom line: although it's silly to claim this program will have no cost to the government, it is true that the government's exposure is minimal (administrative expenses; either the Treasury services its own loan or the servicer is being asked to do so for free), assuming that I am correct that the first five years' interest will be prepaid. The losses are taken by the lenders and the borrower pays back the full loan amount, albeit at a reduced interest rate. As far as I can tell, the only party who really gets a "bailout" here is the mortgage insurers. That's the real beauty of this plan, and why I cannot for a moment imagine it's going to work.
If you made the assumption that borrowers are entirely insensitive to their equity position--that it is only a question of making the monthly payment affordable--then you could assume that borrowers would like this program and that it would substantially prevent defaults. If you do assume that equity position matters as well as affordability, then this program doesn't do much, since it doesn't change the total indebtedness--even if second lienholders are charging off their loans, if they aren't releasing their liens that money can still be collected from future sale proceeds. Having those liens still out there is likely to make voluntary sale of the property unlikely for some time to come, given the house price outlook.
And the key is a real reduction in the likelihood of default, since it's clear that in the event of default the lender is worse off under the HOP scheme than it would otherwise have been. We can certainly applaud the FDIC for coming up with a plan that protects the taxpayers' contribution in any scenario, but I'm not sure that MBS servicers (or even portfolio lenders) will see this as a sufficient improvement to the risk of default on these loans to take the bait.
(Housing Wire) A bill that would allow the government to guarantee up to $300 billion in refinancing activity tied to distressed mortgages passed a key vote Thursday in the House of Representatives Financial Services Committee, after being approved by a wide margin of 46 to 21. The bill — H.R. 5830, the FHA Housing and Homeowner Retention Act — would expand the Federal Housing Administration’s current mortgage program for a two year timeframe, in an effort to help refinance at-risk borrowers into what bill supporters called “viable mortgages.”
The bill also requires the Federal Reserve Board to conduct a study on the need for an auction or bulk refinancing mechanism.
“It is important that we reduce the number of foreclosures both as a matter of alleviating the pain for some individuals and stabilizing some neighborhoods,” said Committee Chairman Barney Frank (D-MA). “It is my hope that this legislation will restore some stability to the housing market, put liquidity back in the market, and not interfere with the market, but help restore it.”
Frank also said servicers needed to “put a pause in some foreclosures” while the bill was being considered by Congress, and even threatened to bring a heavy legislative hand to future lawmaking should mortgage servicers fail to put borrowers into the refinancing program the bill would create.
“If after this we continue to get very little participation by servicers, I can guarantee you that the servicer industry will look very different a year from now than they do today,” he said.
“If after everything we do in this cooperative way falls short, then you are going to see legislation that puts some very real restrictions on the role of servicers and give many more rights to the borrowers.”
Passage not clear Despite Frank’s threats, sources tell Housing Wire that passage of the proposed bill remains difficult to predict. While the proposal gained bipartisan support within the House committee, it remains unclear if it will receive strong support on the House floor.
Rep. Spencer Bacchus (R-AL) last week signaled Republicans’ official opposition to the FHA reform bill, during his opening remarks when the House panel began debate on the measure.
Thursday, Rep. Tom Price (R-GA) said that the proposed bill represents a bail-out for banks and borrowers alike.
“A dangerous bailout ideology has blossomed under the Democrat leadership in Congress,” he said in a press statement. “This fatally flawed proposal asks already-stretched taxpayers to insure the riskiest mortgages in the marketplace.
“We should not ask the overwhelming majority of Americans meeting their housing obligations to assume the risk for banks and borrowers who entered into unwise mortgage arrangements.”
White House officials have also signaled that President Bush would be likely to veto the measure, should it successfully receive Congressional approval.
President Bush himself even took a hard line with various housing aid proposals earlier this week, saying that many of the proposals under consideration “simply look like political statements,” and suggesting that Congress has “failed” on housing and mortgage aid.
Despite formal Republican opposition, Thursday’s committee vote signals that at least some Republicans may be ready to break from party ranks on key housing measures now being debated on Capitol Hill. That swing party vote, sources tell HW, will be critical in determining where Frank’s FHA refinance proposal goes next.
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