The death of mortgage securitization?

(Naked Capitalism) In yet another example of synchronicity, Jim Hamilton provides a chart from Peter Hooper that illustrates why the housing market is in the doldrums: securitized credit has all but vanished. This topic came up in the previous post as a explanation of why the real estate market is coming to look like a war zone.



The collapse of private sector mortgage securitization hasn't gotten the attention it deserves. To put it in crude terms, securitization became central to how we finance housing in America. Banks held only a small portion of the loans they originated; the rest were sold. As we have discussed elsewhere, securitization depends on credit enhancement. Paul Jackson reported early this year that the revival of securitization depended on having support of some form:

While the monoline business may or may not be less important in the municipal bond markets due to the unbelievably low incidence of defaults, the guaranty business is actually far more important to the MBS business than most have given attention to thus far — precisely because defaults can and do happen.

For secondary mortgage market participants, resolving this crisis isn’t just a piece of the puzzle; it might be the puzzle. At the American Securitization Conference in Las Vegas last week, many investment bankers suggested on panels and in hallways that the bond insurer mess is the single largest issue keeping the private-party market from having a chance at establishing any modicum of recovery going forward.

In fact, regulators do not expect securitization to return to anything like its former level. They expect far more bank originated assets to stay within the banking system, on their balance sheets. That in turn will require them to carry vastly more equity than they do now. It will take financial institutions some time and doing simply to secure enough equity to make up for losses and increase their capital levels to the new more conservative standards that are being implemented.

The impairment of lending capacity suggests that housing prices could overshoot their "fair" value in relationship to incomes. Expect more efforts to socialize the housing market to prevent this outcome

Finally, some sense in the financial press

(Housing Wire) Eric Hovde penned a piece this weekend that deserves a close read, especially if you happen to be a U.S. Senator — and I know that more than a few now read HW each week.

His point is one that our editorial team has been hammering since at least August of last year: that housing prices simply must fall, and a good chunk of homeowners must lose their homes.

Attempting to fight the forces of housing gravity now at work isn’t likely to end well. To wit:

… if homeowners are able to reset their mortgage balance to their home’s current fair market value, less a 10%-15% discount, the real probability exists that borrowers who have the ability to pay their existing mortgage will manipulate the system to receive a similar benefit.

Ask yourself this simple question: If your neighbor is able to stay in their home and also receive a meaningful reduction in their mortgage principal balance, would you not want the same result? The obvious risk is that a significant, further wave of homeowners — who are already on the brink — stop making their mortgage payments …

The banking industry today is not in a position to assume the massive write-downs called for by these proposals…. the proposals place an enormous burden on the FHA, one which it is not capable of handling.

Back in August of last year, when PIMCO’s Bill Gross was crying to Congress for a bailout package, we first noted the fact that all of the Congressional “help” in the world can’t solve for all of the key factors now making key housing markets nationwide: oversupply, unaffordability relative to personal income, a dramatic shift in underwriting standards, and a rising tide of foreclosures.

Here’s what I had to say then:

Imagine if Johnny Subprime sees his $500,000 2/28 ARM forgiven and replaced with a $400,000 30-year fixed mortgage … Now, multiply that effect by at least two million.

You explain to me how the other homes in those neighborhoods continue to justify their $500,000 mortgages after that one.

By bailing out those who can least afford their mortgages, we essentially reduce home prices to their lowest common denominator — that is, to whatever price a troubled subprime borrower can bear. And that price will by its very definition be much lower than the price that the rest of the market — that is, the majority of borrowers who can afford their mortgages — would otherwise settle on.

That’s assuming of course, that the housing bill will make enough of a dent with troubled borrowers to impact the overall housing market — we’re now staring at 3 million or so foreclosures this year, and many more troubled borrowers beyond that total. The Senate housing bill is estimated by the Congressional Budget Office to aid just 400,000 at-risk borrowers. I’d submit that’s going to end up creating a perceived shortfall in much the same way that expanding conforming lending limits has.

Which is to say that even if the current controversial housing bill passes and becomes law, it’s highly likely that Congressional Democrats will be going back to the well to hammer out yet another housing aid package — and that next bill will be even larger than the one currently under consideration, if past experience with Congressional response is any indication.

Homes Less Affordable as Prices Fall, Rates Rise, Zillow Says By Sharon L. Lynch Enlarge Image/Details June 27

(Bloomberg) -- Rising mortgage rates are driving up the cost of buying a house even as prices fall, making property more expensive across the U.S., according to a new study by Zillow.com, an online provider of home valuations.

Monthly payments on 30-year fixed mortgages are 6 percent to 10 percent higher in 41 of the top U.S. housing markets than they were two months ago. First-quarter prices have declined from a year earlier in 88 percent of those areas, Zillow said.

``We're going to need about a 30 percent decline in house prices if you are going to keep payments stable,'' said Morris Davis, a former senior economist with the Federal Reserve and now a real estate professor at the University of Wisconsin-Madison's School of Business.

Seven Federal Reserve benchmark cuts since September have failed to lower mortgage rates as banks have curtailed lending after taking writedowns or credit losses of more than $400 billion from investments in mortgages. Rates for 30-year fixed-rate home loans were about 6.3 percent when the Fed first reduced its target federal funds rate nine months ago. They're now just under 6.45 percent, data from Bankrate.com show.

Zillow based its calculations on almost 25,000 mortgage offers to potential homebuyers with credit ratings of at least 680 out of a possible 850. The would-be buyers sought bids through Zillow's Mortgage Marketplace, a new service that helps consumers shop for home loans. Zillow's main business provides U.S. home valuation estimates based partly on sales data.

`Unfortunate Pickle'

The average monthly mortgage payment rose $131, or $1,572 a year, since the beginning of April in the 41 areas surveyed, Zillow said. The figure is controlled for population.

``The story here is not so much how much more it will cost you over the life of the loan, but how much less house you can buy,'' said Greg Rand, managing partner of Prudential Rand Realty in Westchester County, New York. ``It's an unfortunate pickle that we're in.''

Prudential Rand has more than 700 sales associates and a mortgage brokerage that arranges financing.

Home prices in 20 U.S. metropolitan areas fell in April by the most on record, according to the S&P/Case-Shiller home price index, and new home sales declined 40 percent in May from a year ago, according to the U.S. Census Bureau. Sales of previously owned homes in the U.S. rose in May from the lowest level in at least nine years as a slide in prices lured some buyers into the market, the National Association of Realtors said yesterday.

Fed Actions

U.S. housing was less affordable in April than the previous month even as sales increased in some markets, the Realtors data show. The composite homebuyer index fell to 129.8 in April from 130.6 in March. A value of 100 means that a family with the national median income has exactly enough income to qualify for a mortgage on a median-priced home.

Fed rate reductions have historically lowered mortgage rates. From Jan. 3, 2001, to June 25, 2003, the Fed cut rates 13 times. Mortgage costs fell eight times and rose five times, according to North Palm Beach, Florida-based Bankrate.com.

Changes in mortgage rates have the biggest impact when those rates are near the historic lows they are now, Davis said. If interest rates were at 1 percent and rose to 2 percent, house prices would have to drop 50 percent to keep a buyer's house payment the same.

Mortgage payments rose the most in the California metropolitan areas of Ventura and Santa Rosa, gaining 10 percent, according to Zillow. That added $220 a month to loan payments in Ventura and $189 in Santa Rosa. Home prices in those areas fell about 20 percent in the first quarter from a year earlier, the company said.

Higher Payments

The annual cost for a 30-year fixed-rate mortgage to buyers with good credit in the Ventura area is now $2,640 more now than 60 days ago. That amounts to $79,200 more over the life of the loan, without adjusting for inflation, Zillow said.

The trend holds true in California metro areas including Sacramento, San Francisco, Los Angeles, San Jose and San Diego, where mortgage payments on median priced homes range from 7 percent to 10 percent more now than in April.

California is among the states hardest hit by the biggest drop in U.S. home sales in 26 years. One in every 183 households in the state was in some stage of foreclosure in May, more than double the national average, according to Irvine, California-based RealtyTrac Inc.

Sales Gain

Foreclosures drive down prices by contributing to the higher inventory of unsold homes, forcing prices lower and reducing home equity, said Ryan Ratcliff, an economist with the UCLA Anderson Forecast in Los Angeles.

Home sales in California rose 18 percent and exceeded an annualized, seasonally adjusted rate of 400,000 last month for the first time since early 2007, the state Realtors Association said in a news release on June 25. The increase in sales volume came because of more ``distressed sales,'' the Los Angeles-based group said.

In New York, New Jersey, Long Island and parts of Pennsylvania, where the median estimated home value is $418,500 and APRs have risen from 5.9 percent to 6.5 percent, today's buyers can expect to pay $1,656 more a year while home values for the region have dropped about 1.4 percent.

The price of condominiums and co-operative apartments in Manhattan are an exception, with the median increasing 13.2 percent to a record $945,000 in the first quarter, according to an April 2 report by New York-based real estate appraiser Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate.

Jumbo Pain

Buyers in markets including New York and coastal California, where more than half of all homes cost more than $417,000, are feeling the most pain. Jumbo loan rates have risen from about 7 percent to about 7.4 percent over the nine months the Fed has cut rates, according to Bankrate.com.

The cost for 30-year fixed-rate jumbo mortgages has increased more than 2 percentage points since June 2003, according to data from Bankrate.com. Over the past year, the average spread between jumbo and so-called conforming mortgages has been about 93 basis points, or 0.93 percentage point. That gap is now about 111 basis points.

``While it's a buyers market in terms of home prices, that is definitely being mitigated by the cost of financing,'' said Stan Humphries, Zillow's vice president for data and analytics.

Vital Part of Housing Bill Is Brainchild of Banks

(Washington Post) A key provision of the housing bill now awaiting action in the Senate -- and widely touted as offering a lifeline to distressed homeowners -- was initially suggested to Congress by lobbyists for major banks facing their own huge losses from the subprime mortgage crisis, according to congressional staff members and bank officials.

Credit Suisse, a large investment bank heavily invested in mortgage-backed securities, proposed allowing hundreds of thousands of homeowners to refinance their mortgages with lower-cost government-insured loans, relieving financial institutions of the troubled debt.

After the bank proposed this to Congress in January, it became known as the "Credit Suisse plan" among congressional staffers and lobbyists. It later formed the basis of housing provisions in both the House and Senate.

Bank of America, which is acquiring Countrywide Financial, the country's largest mortgage lender, followed with a similar and more detailed proposal, principal negotiators on the legislation said.

In approaching congressional aides, the lobbyists suggested that banks take less than full payment for the distressed loans on their books. But the measures would allow financial institutions to get cash out of foreclosed properties that would otherwise sit on their books as dead weight.

Since the new loans would be guaranteed by the Federal Housing Administration (FHA), taxpayers would ultimately pay for defaults. The Congressional Budget Office projected that this could cost $1.7 billon over five years.

During the first week of January, three officials from Credit Suisse -- two from Washington and one from the mortgage-trading desk in New York -- spent a day on Capitol Hill briefing the staffs of the committees that oversee housing. They gave a brief PowerPoint presentation to the House Financial Services Committee in the morning and to the Senate Banking Committee in the afternoon.

They remained in close touch afterward, especially with House Democratic aides. They also met with officials from the FHA. The bank lobbyists provided the FHA with statistics, run through their company's computers, about the potential impact of new rules.

Bank of America executives presented a 28-page "discussion document" on March 11 to the same congressional staffs, which was marked "confidential and proprietary." It was filled with detailed explanations of how a system similar to Credit Suisse's plan might work, complete with flow charts and graphs.

Afterward, congressional aides checked with Credit Suisse officials to hear what they thought about Bank of America's suggestions. They generally agreed with Bank of America's direction but thought such elaborate legislation was not needed, people familiar with the talks said.

"The first bank that I remember recommending something like this was Credit Suisse," said House Financial Services Committee Chairman Barney Frank (D-Mass.).

But Frank said the legislation was the result of many conversations with interested parties, including fair-housing advocates. Lawmakers and bank officials defend the provision as a balanced compromise, tempered by extensive input by government regulators, that gives homeowners a chance to stay in their homes while preventing the government from having to appropriate billions of dollars to buy nonperforming mortgages.

"The alternative to having the banks as participants was a massive federal bailout," Frank said. "They [the banks] benefit, but they benefit by losing less."

Still, critics expressed disappointment that banks were given such a large hand in writing legislation designed to ease a foreclosure problem they helped create.

"It is ironic that Congress, responding to a crisis that was created in large part by irresponsible lending, would produce a bill, the main beneficiaries of which are likely to be those lenders," said Dean Baker, co-director of the Center for Economic and Policy Research, a liberal research group. "There are aspects that work hugely to the banks' advantage."

Credit Suisse reported a $2.1 billion loss in the first quarter, one of its worst in years, because of a $5.3 billion write-down in mortgage-related assets and other loans. Bank of America reduced the value of its mortgage-related assets by $2 billion in the first quarter, on top of a $5.7 billion write-down in the last three months of 2007. Bank of America is also putting the finishing touches on its acquisition of Countrywide. Countrywide had $3 billion in losses in the first quarter alone and set aside $1.5 billion for bad loans and wrote down another $1.5 billion on souring loans.

The pursuit of legislation to help strapped homeowners began last year. Several scholars, from both the political left and right, recommended plans based on the Depression-era Home Owners' Loan Corp., which put the federal government in the business of providing mortgages. But that was eventually seen by lawmakers, including Frank and Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.), as too expensive a program to win congressional approval.

Then in December, Credit Suisse officials proposed a different approach to the White House's economic advisers, according to people familiar with the plan who spoke on condition of anonymity because their employers did not allow them to speak publicly. The bank recommended to the White House -- and soon after to congressional staffers -- the broad outlines of the provision now headed for passage in Congress.

The banks would have to accept a reduction in the value of the troubled loans while qualified borrowers could then get federally insured loans to replace their private ones. The homeowners would avoid foreclosure and pay less each month. The banks would get a payment rather than a potentially nonperforming asset. Mortgage holders typically lose about 40 percent of the value of their loans on foreclosed homes.

Congressional aides said they did not simply accept the banks' proposals. Rather, they said, they worked with others, especially financial regulators, to refine the package. The Federal Deposit Insurance Corp., for instance, urged that financial institutions accept a larger cut in the borrowers' principal than first proposed, and the House measure reflects this recommendation.

Congressional staffers said they also consulted with other banks, such as Citigroup, and industry groups such as the Securities Industry and Financial Markets Association. It also hashed out concepts with La Raza, the NAACP and low-income housing groups.

But Credit Suisse and Bank of America were instrumental throughout the process. "They helped us understand the notion of how many loans were going to default based on the coming waves of foreclosure," a House aide said. "They helped us dimension up the scope of the program."

Credit Suisse said it made its suggestions to improve the mortgage market. "We've participated in a series of conversations with government entities and offered a discreet regulatory solution to improve existing affordable mortgage programs," said Duncan King, spokesman for Credit Suisse. "We hope to improve existing affordable mortgage programs."

Bank of America said its participation came at the request of congressional aides. "They were reaching out to all sorts of people who have been thoughtful about this crisis," said Peter McKillop, a spokesman for Bank of America. "They were talking to us and talking to every bank that had a sophisticated mortgage business. We wanted to come up with a bipartisan solution that stabilizes the housing market."

"The benefit to the bank," he added, "would be having a more stable housing market."

Move to bring in greater ABS transparency

(FT) An initiative designed to provide more transparency in the opaque world of asset-backed securities - one of the markets most severely hit by the credit crunch - is to be launched in response to demands from regulators.

Markit, the data provider, and nine leading banks have joined forces in developing plans to give investors more information on how these highly complex products are priced and structured in the European market.

The European Commission warned bankers last month that these products faced a regulatory clampdown unless they provided greater clarity on the market, which froze in the wake of the credit squeeze last summer as investors shunned all types of complex security, regardless of the quality of the underlying collateral.

Only $36bn of ABS products - bonds backed by cash flows from assets such as mortgages, credit cards or car loans - have been issued this year compared with $315bn during the same period in 2007, according to Dealogic.

Ben Logan, managing director of structured finance at Markit, said: "We will provide investors with documentation on how the deals are structured, what collateral is backing the bonds and how they are performing.

"Knowing which assets are backing a deal is key for investors. The whole market has been tarred with the same brush, yet many bonds have good quality collateral backing them."

Markit is working with the banks to create a website, which will be up and running by September, that will consolidate prospectuses and investor reports for European asset-backed securities.

Markit said it hoped other banks will join BNP Paribas, Citigroup, Deutsche Bank, Goldman Sachs, JPMorgan, Lehman Brothers, Morgan Stanley, Royal Bank of Scotland and UBS in developing the website.

The move follows a similar initiative launched this month by Lewtan Technologies, another data provider. Lewtan's web portal also covers mortgage-backed bonds and other ABS, giving access to original offering memoranda and the latest investor monitoring reports.

Median house price versus median income

(Calculated Risk) A research analyst at Harvard Joint Center for Housing Studies (JCHS) has been kind enough to send me (Thanks!) an update to the median house price to median income ratio I discussed yesterday (see: Ratio: Median Home Price to Median Income)

JCHS didn't post this data because they changed both the data source they use, and their methodology to calculated the ratio - and JCHS analysts felt this would be confusing because the ratios are different from previous releases. However the trends are the same - and therefore useful for us.

Here is some price-to-income data from the 2008 report (data through 2007). Once again I picked a few key cities and plotted the national average (dashed). Note: the new data only goes back to 1989.

Click on graph for larger image in new window.

Different areas have different price to income ratios. There are several reasons for this (land restrictions, demographics), but on a national basis, the median price to median income ratio rose from around 3.5 in the 1990s, to 4.7 in 2005, and has started to decline since then. This would suggest that a combination of falling prices and rising incomes would need to adjust this ratio by about 25% from peak to trough.

For Los Angeles, it is reasonable to expect the price to income ratio to fall to below 5. This suggests prices at the peak were about twice as high as normal.

Hold on, you say ... the above graph shows the price-to-income ratio for Los Angeles only declined about 3% from 2006 to 2007, but Case-Shiller showed prices in Los Angeles declined 14% in 2007 ... what gives?

Although I don't know the exact methodology used by JCHS, the likely reason for the difference is the JCHS data is based on the annual average, whereas the Case-Shiller data is from the end of 2006 to the end of 2007.


The second graph illustrates this point for Los Angeles. The red line is the JCHS median price to median income ratio for LA.

UPDATE: For Case-Shiller Index, Jan 2000 = 100.

The blue line is the annual average of the mid tier Case-Shiller index (mid tier was used to approximate the median price). The difference between the red and blue lines is that nominal median incomes are increasing. This is exactly what we would expect.

The dashed line is the monthly Case-Shiller mid tier price index. This has fallen off a cliff. It is very likely that the median price to median income ratio (on a monthly basis if it was available) would now be around 7 or lower - well on the way to the historical norm of around 4.7.

Questions Over FHA Down Payment Assistance Programs Hit Mainstream

(Housing Wire) Industry participants that have been around for some time are likely familiar with the ongoing debate over seller-funded down payment assistance programs, a Federal Housing Administration program that allows borrowers to get into a home for little — if any — money down. The program has become nearly the last bastion of zero-down, only-$500-puts-you-into-a-home! lending for borrowers with damaged credit in the wake of the subprime mortgage meltdown, and it’s one that has some government officials very worried.

FHA Commissioner Brian Montgomery came out firing against DAP, as it’s commonly called, in a June 9 speech in which he said that a failure to eliminate seller-funded down payment assistance would likely push the Depression-era housing agency into insolvency.

“No insurance company can sustain that amount of additional costs year after year and still survive,” he argued. “Unless we take action to mitigate these losses, FHA will soon either have to shut down or rely on appropriations to operate.”

More than a third of FHA’s current loan volume is of the DAP variety.

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

Tuesday’s Wall Street Journal ran a front page story bringing the DAP issue front-and-center for the financial markets, replete with copies of numerous fliers from builders touting the no-money-down mortgages. Some of the builders that spoke with the Journal for the story said that the programs are the only way they’re able to attract buyers.

“The bottom line…is these promotions work,” John F. Eilermann Jr., chief executive of McBride & Son Enterprises Inc., the parent company of Vantage Homes, said in an email to the Journal. Eilermann also is reported to have said in the email that “creative marketing” around DAP programs is what helped boost 2007 sales volume despite a quickly-deteriorating housing market.

That sort of logic is troubling to some industry participants that see remnants of the spark that set off the subprime explosion, according to one senior bank executive that spoke with HW.

“If the only buyers the builders can bring in right now are those that require down payment assistance, and they have to get ‘creative’ with marketing to make it happen, you have to wonder if those are the borrowers we should be putting into homes in this sort of market,” he said, under condition of anonymity.

“It’s an odd world where the FHA is the riskiest lender, but the truth is that we’d never lend under that sort of criteria.”

Fueling the problem is the clear fact that DAP-funded mortgages are defaulting at three times the rate of mortgages in which the borrower put up their own funds as a downpayment, stats that many say proves just how risky the program really is.

“[T]he DAP programs simply keep contract sales prices inflated, channel fees into the pockets of ‘nonprofits’ who provide no other service than laundering money, and result in lower insurance premiums than FHA should be getting for loans with riskier profiles,” said well-known blogger Tanta on the Calculated Risk blog, herself a long-time industry participant.

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

That’s not to say that seller-funded down payment assistance is wholly reviled; those who have borrowed under the program (and not defaulted), as well as the nonprofits that provide the funds, have argued strongly for years that the programs are needed to help minorities gain access to homeownership.

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

She argued that denying key groups the ability to purchase a home would further destabilize an already-wobbling housing market.

The housing bill currently being considered in the Senate would eliminate the long-controversial programs; a House version would not. That difference is sure to be a hot area of negotiation on Capitol Hill if the Senate passes its version of the bill, as expected, next Tuesday.

No-Money-Down Mortgages: Still Not Dead

(Felix Salmon) Nick Timiraos has an important front-page WSJ article today on the reappearance of no-money-down mortgages. At 1,500 words, it's far too long - Robert Thomson clearly has a ways yet to go before he achieves the Murdoch dream of short and punchy articles. But if I were a mortgage lender operating in the current market, I'd be hanging on every word.

The problem is that even if lenders aren't offering 100% mortgages any more, on the grounds that they tend to default at very high rates, their borrowers might still not in reality have any skin in the game. In which case their default probability is likely to be much higher than their models are telling them.

For sellers, by contrast, these things are great. Don't drop your price by 10% or 20%: if you do, many potential buyers still won't be able to come up with a down payment. Instead, keep the headline price unchanged, and funnel the price-drop through a non-profit "down-payment-assistance program". Presto, you're effectively making the buyers' downpayment for them, allowing them to buy with no money down, which allows you to sell your house.

Who loses? The lender, for starters: it isn't modelling no-money-down default rates. And also the taxpayer: a lot of these mortgages are being backed by the Federal Housing Administration.

These schemes also have the effect of artificially inflating nominal house prices, since the sale price is not the same as the amount netted, at the end of the day, by the seller. I'm sure that a lot of politicians and realtors reckon that house prices need all the artificial inflation they can get at the moment, but my feeling is that over the medium to long term, no good can come of this.

Down-payment assistance programs (DAPs) will not die!

(Calculated Risk) When I first heard of Down-payment Assistance Programs (DAPs), I knew we would see higher default rates on FHA loans. Heck, the IRS has called DAPs a "scam". The FHA has vowed to eliminate DAPs ... and yet, amazingly, the percent of FHA loans using DAPs is still increasing.

DAPs simply will not die.

To understand DAPs in nerdy detail, see Tanta's DAP for UberNerds.

From the WSJ: Government Mortgage Program Fuels Risks

The offers -- including "100% financing" -- are made possible due to down-payment assistance programs run by nonprofit organizations. These programs are funded largely by home builders and also by private homeowners desperate to sell. The seller-funded groups provide enough down-payment money to buyers that they can qualify for a mortgage backed by the Federal Housing Administration, which requires at least a 3% down payment.

There are not real down-payments from disinterested third parties. These programs are designed to have the seller (including home builders) funnel money to the buyer through a "nonprofit" to get around the FHA down-payment requirements. The buyer still has no skin in the game.

The FHA estimates that down payments provided by nonprofit groups account for 34% of all 200,000 loans backed by the FHA so far this year, up from 18% in all of 2003 and less than 2% in 2000. And the agency says that borrowers are two to three times as likely to default on their payments when they receive a down payment from a nonprofit.

D.R. Horton Inc., the nation's largest home builder by volume, is touting "100% financing" for its two- and three-bedroom condominiums near the beach in Maui, Hawaii, which start at $498,000. In the Seattle area, local builder Quadrant Corp. is advertising townhouses that can be purchased with as little as $500 down. "Use your coffee budget to move into a new home," says an online promotion.

Here are some previous posts by Tanta and I about DAPs:

FHA Going After DAP Again? Tanta, June 10, 2008

DAP for UberNerds, Tanta, Oct 19, 2007 **** READ this one for nerdy details! ****

FHA to Ban DAPs, CR, Sept 29, 2007

Housing: IRS Raps DAPs, June 2, 2006

More on Housing, CR, Feb 24, 2005

In Distressed Mortgages, MBS Investors Stuck in a Holding Pattern

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(Housing Wire) There’s an old adage in the commercial property development business: it’s never the first investor, but usually the third or fourth, that ends up making money on a project. It’s an adage that seems apropos to the mortgage-backed securities business these days, as well, given that the market remains largely frozen amid the perception that many of the bonds in question yet have further to fall in value.

Monday’s Wall Street Journal picks up the trail of a story we’ve been covering here at HW pretty extensively for the past six months, and notes that while money is piling up on the sidelines of the RMBS wreckage, there aren’t too many funds yet jumping in to buy paper that many still fear may ultimately be on what one market participant characterized as “a race to zero.”

“We think that there are limited opportunities currently,” Alistair Lumsden, a senior portfolio manager at London hedge fund CQS LLP, is quoted as saying in the WSJ story.

There are two sides to the distressed mortgage market, of course, something the Journal story misses: the bond side, which is still a smoldering and smoking heap of mess, and the whole loan side. While subprime MBS may not yet be attracting strong investor interest, whole loans most certainly are, and by most accounts are trading relatively briskly.

“Portfolioed mortgage loans are a growth opportunity right now in distressed debt,” said one fund manager, who asked not to be identified in this story. “We’re seeing sellers like GMAC and Citi looking to clean up their balance sheets and reduce risk exposure, among a few others.”

Some very large funds have already jumped into the whole loan acquisition side. One such example is San Diego-based National Asset Direct, backed by a syndicate of unnamed institutional investors; BlackRock Inc. (BLK: 199.56, +1.30%), 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 focus on whole loan acquisition and restructuring. 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 from other lenders’ portfolios.

It’s not currently known just how much mortgage volume has been put into portfolio on a whole loan basis by private party market participants — a number sure to reach well into the hundreds of billions — but as the secondary markets began seizing up early in 2007, lenders ended up carrying plenty of whole loans on their books.

“Enough subprime and Alt-A junk was put into portfolio in the past 12 months to get us started,” said one fund manager, who asked not to be identified. “We’ll move into RBMS when the first-loss opportunity is there, but that’s not right now.”

Buying troubled whole loans usually involves more control over potential losses, sources told HW; many of the funds now competing to buy assets in this space have their own captive servicing shops to board the loans they purchase. In comparison, dealing with distressed mortgages on the securitized side of the market usually entails buying equity positions in securitized deals, as well as any associated servicing rights on the loans involved; it’s a model that sources say is more constrained by existing pooling & servicing agreements, as well as competing investor interests.

“If you buy into a AAA position right now, you have to wonder what security you’re really buying,” said one source. “And if you go scratch-and-dent, trying to service your way out of first loss in the equity position, you’re pretty much stuck as well, with mushrooming losses and comparatively less flexibility to service the mortgages the way you’d really want to.

“There just so much more risk [in mortgage bonds] right now, rather than whole loan acquisition.”

Did Bank of America write the Dodd bailout bill?

(Los Angeles Times) Those following the progress of the Dodd-Shelby mortgage rescue plan in the Senate might want to check out two solid pieces of enterprising reporting on the bill this weekend.

First, The Examiner's Tim Carney reports the bailout section of the Dodd-Shelby bill is, in the words a lobbyist, "exactly what Bank of America and Countrywide wanted."

Is there a connection between Bank of America and U.S. Sen. Christopher Dodd (D-Conn.)? There is. Carney: "Bank of America's political action committee (PAC) has donated $20,000 to Dodd since he became chairman of the banking panel 17 months ago. From January 2007 to March 2008, Bank of America employees have donated at least $50,400 to Dodd's campaigns, according to the Center for Responsive Politics."

National Review's The Corner follows up, citing an internal Bank of America document that "would appear to support the contention that BofA essentially wrote the bailout section of the bill."

The Corner: "National Review Online (see below) has obtained an internal Bank of America "discussion document" (pdf here) on the subject of the FHA Housing Stabilization and Homeownership Retention Act of 2008, a.k.a. the Dodd-Shelby mortgage-lender bailout bill ... This discussion document (dated March 11, 2008) would appear to support the contention that BofA essentially wrote the bailout section of the bill.

Faithful readers of the blog will remember that Bank of America has been pushing hard for a big federal intervention for months. This was from a New York Times story on BofA's lobbying efforts back in February: "Bank of America suggested creating a Federal Homeowner Preservation Corporation that would buy up billions of dollars in troubled mortgages at a deep discount, forgive debt above the current market value of the homes and use federal loan guarantees to refinance the borrowers at lower rates. 'We believe that any intervention by the federal government will be acceptable only if it is not perceived as a bailout of the bond market,' the financial institution noted. In practice, taxpayers would almost certainly view such a move as a bailout."

BofA-Scripted Bank Bailout Looks Awfully Similar to Dodd-Drafted Housing Bill

National Review Online has obtained an internal Bank of America "discussion document" (pdf here) on the subject of the FHA Housing Stabilization and Homeownership Retention Act of 2008, a.k.a. the Dodd-Shelby mortgage-lender bailout bill.

Yesterday, Tim Carney reported that the prevailing sentiment on Capitol Hill is that the Dodd-Shelby bill "is exactly what Bank of America and Countrywide wanted." BofA is in the process of acquiring Countrywide. Countrywide is currently embroiled in a scandal over its V.I.P. program, under which several powerful politicians, including Sen. Chris Dodd, got preferential loan rates.

This discussion document (dated March 11, 2008) would appear to support the contention that BofA essentially wrote the bailout section of the bill. Almost all of BofA's preferences are mirrored in the Dodd-Shelby legislation. The BofA document even offers PR tips, such as "We believe that any intervention by the federal government will be acceptable only if it is not perceived as a bail-out of the bond market."

The president has threatened to veto Dodd-Shelby because it would "unfairly benefit lenders who made bad loans." The Senate will resume debating the bill on Monday.

The BofA doc is worth posting here for a couple of reasons: First, the similarities between BofA's ideal bill and the bill before the Senate are obvious even to the layperson — read the document, then read David C. John's analysis of the bailout and see for yourself.

Second, we'd invite our readers with some expertise in this area to look over the document for things we might have missed. Opponents of the bailout are lucky that a few tenacious Republicans (Kit Bond, DeMint et al) were able to hold up the bill and keep it from passing as quickly as expected. The fight resumes next week, so take a look at this document and keep digging.

Fitch Assessing Effect of Ocwen Interest Shortfalls on U.S. RMBS

(Fitch Ratings) Last month's interest shortfalls on certain Subprime transactions serviced by Ocwen Financial Corp. (Ocwen) are a subject that Fitch Ratings has been carefully tracking for the last several days. Fitch has been involved in ongoing discussions with senior management for Ocwen and Wells Fargo's trustee operations in order to determine the immediate cause and probability of continuation of the conditions which lead to the interest payment shortfalls.

In these deals, Ocwen reported interest payments to senior note holders that were in an amount less than would have been expected under the structure of the deals.

'In these discussions, it was determined that Ocwen had materially increased its modification program activity and many modifications involved principal reductions in addition to interest rate reduction and/or forgiveness of other payment and cost amounts,' said Managing Director Diane Pendley. April was the first month in which a sizable number of mods were reported through to the trustee for the May distribution. Ocwen indicated that it continued to report monthly activities on these transactions as in prior months.

In discussions with Wells Fargo the trustee indicated, due to the material increase in mods being performed throughout many RMBS transactions, the company had recently developed an enhanced reporting format, based on the trustee's participation on an industry task force on the issue. The trustee further indicated that it had circulated this new form to the servicers and when the servicer properly used this format, Wells Fargo would have sufficient information to determine the proper allocation of funds and/or losses. It is believed that Ocwen will be reporting in the new format for the upcoming cycle.

Unless otherwise specifically addressed in the controlling legal documents, Fitch believes that amounts considered as principal forgiveness would be treated as a mortgage principal loss and allocated to bonds according to the terms of the documents. In most instances, these losses are applied to the principal balance of the most junior bonds outstanding in the transaction.

Generally most RMBS transactions do not consider an interest shortfall as an event of default and a mechanism exists to have shortfalls potentially recovered from available funds over time. Shortfalls may be temporary, perhaps driven by a non-recurring circumstance and recovered quickly in subsequent months from excess interest, or essentially unrecoverable, likely resulting from poor portfolio performance.

'The likelihood and expected timing of recoveries will determine whether a bond's current rating will be affected by the occurrence of an interest shortfall,' said Managing Director Vincent Barberio.

Fitch continues to monitor the situation and will issue additional market commentary upon further developments.

Ocwen Steps Up Loan Mods, Confounds MBS Investors

(Housing Wire) It looks like the rubber is finally beginning to meet the road when it comes to massive loan modification activity and its effect on RMBS and derivative investors. Case in point: Ocwen Financial Corp. (OCN: 5.25, -12.50%), a large subprime servicer, has left MBS investors both angry and nervous after several deals serviced by the company experienced significant interest shortfalls on senior ABS securities in the month of May.

An interest shortfall occurs when bondholders do not receive the full interest they are due for reasons that include delinquencies, defaults and prepayments. In this case, driving the shortfalls were both a dramatic increase in loan modification activity at the West Palm Beach, Florida-based servicer, as well as the judgment of the trustee involved in accounting for the surge in modifications.

By “dramatic increase,” we’re talking about monthly loan modification activity that rose more than six fold between the end of last year and April of this year — in fact, Ocwen modified nearly 900 loans in April, after modifiying less than 200 in January and well below 25 loans in December 2007, according to a review of available data by Housing Wire. The company has modified more loans in the first four months of this year than it modified during all of 2007; in fact, Ocwen modified more loans in April alone than it modified during all of last year.

Analysts at Credit Suisse (CS: 45.83, -2.49%) this week noted the interest shortfall in a research report, and said that Ocwen had significantly stepped up both interest reductions as well as principal reductions in modifying troubled loans. The company also reduced its so-called required trial mod period to three months from a prior six month trial, as part of a strategy to reduce its advance cost, Credit Suisse said.

“Ocwen had materially increased its modification program activity and many modifications involved principal reductions in addition to interest rate reduction and/or forgiveness of other payment and cost amounts,” said Diane Pendley, a managing director at Fitch Ratings.

Trustees “blindfolded”
At least part of the shock investors felt this month on Ocwen-serviced deals was because the trustee, Wells Fargo & Co. (WFC: 24.50, -4.41%), was forced to determine how to account for the flood of modifications. Fitch Ratings, in a press statement Friday, noted that Wells didn’t have sufficient information to determine the proper allocation of funds and/or losses, due to limitations in the reporting format used to obtain data from servicers.

In plain English, HW’s sources said this means that Wells didn’t really know what was principal reduction, what was interest forgiveness, and what funds (or lack thereof) needed to be allocated where. So it had to guess, and allocated losses to interest rather than principal — the result is that senior bondholders took a hit rather than junior holders. That sort of has a way of ticking off senior bondholders rather inordinately.

Trustee confusion over loan modification activity underscores the pains the securitization market is undergoing as it develops policies and procedures for handling a flood of bad loans; it also underscores how a lack of data standardization across servicers in reporting loan data can lead to problems upstream. The OCC’s John Dugan underscored the severity of this problem in remarks earlier this month, noting that wide variations in reporting standards across servicers made it difficult for the agency to get a read on actual loss mitigation efforts.

April was the first month in which a sizable number of mods were reported through to the trustee for the May distribution, Fitch’s Pendley noted.

Fitch also noted that Wells “had recently developed an enhanced reporting format, based on the trustee’s participation on an industry task force on the issue.” For its part, Wells Fargo said it has since circulated the new format among servicers; the new format is designed to give it enough information to determine the proper allocation of funds and/or losses.

But the fact that the bank wasn’t initially receiving enough information to properly allocate funds to investors underscores just how fragile certain aspects of the massive secondary mortgage market really can be, a source told HW.

“There are plenty of risks we try to price in,” said one trader involved in some of the Ocwen deals, who asked not to be identified. “The trustee operating blindfolded isn’t something that I’ve ever had to consider. Nor should I.”

Despite investor unease, it’s not clear if the interest shortfall will ultimately help or hurt investors.

“It is too soon to determine the impact of the recent Ocwen mod increases on investors,” wrote Credit Suisse analysts, in a report dated June 17. “Should the newly modified loans successfully re-perform, ABS investors would be better off.”

Substantial amounts of re-performing loans would eventually make up the shortfall, Fitch Ratings said — the only question is whether Ocwen’s recent modifications will ultimately be able to stick, and the servicer has not disclosed its re-underwriting criteria to investors.

“The likelihood and expected timing of recoveries will determine whether a bond’s current rating will be affected by the occurrence of an interest shortfall,” said Fitch managing director Vincent Barberio.

Related stories:

• Fitch Alters RMBS Criteria to Account for Increased Use of Loan Mods
• Commentary: “Subprime Freeze” Generates More Questions than Answers
• Much Ado About Nothing: Wall Street Weighs In on Subprime Loan Mods
• Moody’s: Low Loan Mod Levels Among Subprime Servicers ‘A Cause for Concern’
• SEC: Fast-Tracking Loan Mods Won’t Jeopardize Trust Status

Ocwen Steps Up Loan Mods, Confounds MBS Investors

(Housing Wire) It looks like the rubber is finally beginning to meet the road when it comes to massive loan modification activity and its effect on RMBS and derivative investors. Case in point: Ocwen Financial Corp. (OCN: 5.25, -12.50%), a large subprime servicer, has left MBS investors both angry and nervous after several deals serviced by the company experienced significant interest shortfalls on senior ABS securities in the month of May.

An interest shortfall occurs when bondholders do not receive the full interest they are due for reasons that include delinquencies, defaults and prepayments. In this case, driving the shortfalls were both a dramatic increase in loan modification activity at the West Palm Beach, Florida-based servicer, as well as the judgment of the trustee involved in accounting for the surge in modifications.

By “dramatic increase,” we’re talking about monthly loan modification activity that rose more than six fold between the end of last year and April of this year — in fact, Ocwen modified nearly 900 loans in April, after modifiying less than 200 in January and well below 25 loans in December 2007, according to a review of available data by Housing Wire. The company has modified more loans in the first four months of this year than it modified during all of 2007; in fact, Ocwen modified more loans in April alone than it modified during all of last year.

Analysts at Credit Suisse (CS: 45.83, -2.49%) this week noted the interest shortfall in a research report, and said that Ocwen had significantly stepped up both interest reductions as well as principal reductions in modifying troubled loans. The company also reduced its so-called required trial mod period to three months from a prior six month trial, as part of a strategy to reduce its advance cost, Credit Suisse said.

“Ocwen had materially increased its modification program activity and many modifications involved principal reductions in addition to interest rate reduction and/or forgiveness of other payment and cost amounts,” said Diane Pendley, a managing director at Fitch Ratings.

Trustees “blindfolded”
At least part of the shock investors felt this month on Ocwen-serviced deals was because the trustee, Wells Fargo & Co. (WFC: 24.50, -4.41%), was forced to determine how to account for the flood of modifications. Fitch Ratings, in a press statement Friday, noted that Wells didn’t have sufficient information to determine the proper allocation of funds and/or losses, due to limitations in the reporting format used to obtain data from servicers.

In plain English, HW’s sources said this means that Wells didn’t really know what was principal reduction, what was interest forgiveness, and what funds (or lack thereof) needed to be allocated where. So it had to guess, and allocated losses to interest rather than principal — the result is that senior bondholders took a hit rather than junior holders. That sort of has a way of ticking off senior bondholders rather inordinately.

Trustee confusion over loan modification activity underscores the pains the securitization market is undergoing as it develops policies and procedures for handling a flood of bad loans; it also underscores how a lack of data standardization across servicers in reporting loan data can lead to problems upstream. The OCC’s John Dugan underscored the severity of this problem in remarks earlier this month, noting that wide variations in reporting standards across servicers made it difficult for the agency to get a read on actual loss mitigation efforts.

April was the first month in which a sizable number of mods were reported through to the trustee for the May distribution, Fitch’s Pendley noted.

Fitch also noted that Wells “had recently developed an enhanced reporting format, based on the trustee’s participation on an industry task force on the issue.” For its part, Wells Fargo said it has since circulated the new format among servicers; the new format is designed to give it enough information to determine the proper allocation of funds and/or losses.

But the fact that the bank wasn’t initially receiving enough information to properly allocate funds to investors underscores just how fragile certain aspects of the massive secondary mortgage market really can be, a source told HW.

“There are plenty of risks we try to price in,” said one trader involved in some of the Ocwen deals, who asked not to be identified. “The trustee operating blindfolded isn’t something that I’ve ever had to consider. Nor should I.”

Despite investor unease, it’s not clear if the interest shortfall will ultimately help or hurt investors.

“It is too soon to determine the impact of the recent Ocwen mod increases on investors,” wrote Credit Suisse analysts, in a report dated June 17. “Should the newly modified loans successfully re-perform, ABS investors would be better off.”

Substantial amounts of re-performing loans would eventually make up the shortfall, Fitch Ratings said — the only question is whether Ocwen’s recent modifications will ultimately be able to stick, and the servicer has not disclosed its re-underwriting criteria to investors.

“The likelihood and expected timing of recoveries will determine whether a bond’s current rating will be affected by the occurrence of an interest shortfall,” said Fitch managing director Vincent Barberio.

Related stories:

• Fitch Alters RMBS Criteria to Account for Increased Use of Loan Mods
• Commentary: “Subprime Freeze” Generates More Questions than Answers
• Much Ado About Nothing: Wall Street Weighs In on Subprime Loan Mods
• Moody’s: Low Loan Mod Levels Among Subprime Servicers ‘A Cause for Concern’
• SEC: Fast-Tracking Loan Mods Won’t Jeopardize Trust Status

Prepayment modelers can’t keep up

(Housing Wire) A secondary mortgage market expert I think extremely highly of emailed me last night with the following terse take on the state of the financial markets:

I think we’re on the cusp of another sewer break on the news front … get your waders on …

No kidding. While March may have represented the worst of the credit crunch thus far, May and June are looking to shape up as particularly troublesome for a side of the mortgage market that, so far, has seen relatively benign activity. Reuters’ Al Yoon knocks yet another story out the park Thurday morning:

Investors who thought they were safe owning guaranteed mortgage-backed securities in the wake of steep credit losses from other MBS are now grappling with a different kind of risk.

Models that predict payments on bonds issued and protected by Fannie Mae, Freddie Mac and Ginnie Mae have been far off the mark in recent months, resulting in increased risk to investors in the $4.5 trillion “agency” MBS market.

Errors are happening for the same reason credit loss forecasters failed to prepare investors for the subprime mortgage meltdown: it has never happened before.

As HW grows (hint: subscribe to our coming magazine!), we’ll be tracking this more closely ourselves; we’ve been hearing about just how bloody May was for agency MBS for a few weeks now. In particular, prepayments didn’t just slow. They came to near standstill by Wall Street prepayment research standards.

When HW first started in late 2006, I spent alot of time writing about how prepayment modelers had failed to account for credit and collateral risk effectively in most of their models; what we’re seeing now is the flip side of that same coin. In pure prepayment terms, triggers are blowing up faster than most models have been set up to handle — and that’s hurting even the most staid of agency MBS investors.

More from Reuters and Yoon on the matter at hand:

Wall Street banks that spend countless hours trying to measure that risk for clients have seen data stray from their forecasts by unusually large amounts. A 20 percent drop in May prepayments sharply exceeded expectations, leading to a collective groan among analysts.

May data “was a shock to everybody,” said Arthur Frank, head of MBS research at Deutsche Bank in New York. Vagaries of falling prices and tight credit have “wreaked havoc” on models that were created during the heydey of refinancing, analysts at Merrill Lynch & Co. said in a recent research note …

“An unprecedented housing market will produce unprecedented prepayments and defaults,” said Dale Westhoff, a managing director at JPMorgan Chase & Co. in New York, who has been refining models for 18 years. “We’ve already seen that on the default side. On the prepayment side, the May numbers are starting to reflect this new environment.”

With due deference to Deutsche and JPMorgan, not everyone has been surprised by the prepayment shift. UBS immediately comes to mind, for one, having read their weekly MBS research for some time now.

There’s also Stamford, Conn.-based Structured Portfolio Management, which in mid-April said it was shifting its asset allocation strategy in the belief that prepayments would slow dramatically in subsequent months. (No word on how they’ve done with that approach, but I can safely bet the answer is “not badly.”)

And, of course, we should note that HW’s well-known contributor Linda Lowell noted in early May that prepayment-based strategies needed to move to the forefront for MBS traders — “the data underlying prepayment models reflects relaxation of credit standards and risk-based pricing, not the current tightening trend,” she wrote then.

Dodd, Shelby Roll Out Senate Housing Bill

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(Housing Wire) After working behind the scenes to negotiate on differences with House Financial Services Committee chairman Barney Frank (D-MA), Senators Chris Dodd (D-CT) and Richard Shelby (R-AL) on Wednesday rolled out a housing proposal that could be put to the Senate floor for a final vote as early as this week.

“Americans are looking to Congress to deliver solutions to the housing crisis, which has forced millions of homeowners to file for foreclosure, reduced home values for millions more, crippled the mortgage markets, and significantly weakened the American economy,” said Dodd.

The comprehensive housing legislation contains provisions from a Dodd-Shelby bill that was approved by the Senate Committee on Banking, Housing and Urban Affairs on May 20, as well as measures from the Foreclosure Prevention Act, which passed the Senate in April.

The Senate proposal would create a $300 billion initiative within the Federal Housing Administration (FHA) to prevent foreclosures for hundreds of thousands of families, known as the HOPE for Homeowners Act; the cost of the program would be covered by contributions to an affordable housing fund by both Fannie Mae (FNM: 24.93, +1.05%) and Freddie Mac (FRE: 23.44, 0.00%).

The Congressional Budget Office has estimated that the program will cost the GSEs as much as $9 billion; using affordable housing funds to pay for the $300 billion expansion of FHA lending for troubled homeowners represents a compromise from a similar bill that has already passed in the House of Representatives. Earlier, Shelby and other key Republicans had refused to support the Democrats’ housing proposals — especially the proposed $300 billion FHA expansion initiative — on the grounds that the costs would be borne directly by taxpayers.

“I am pleased that we included significant protections for the American taxpayer through meaningful GSE reform, and by ensuring that taxpayer dollars will not be used to fund the HOPE for Homeowners program,” said Shelby.

Approval from key Senators notwithstanding, a large number of conservative organizations came out firing Wednesday against the use of GSE-funded dollars to fund the FHA expansion program.

“The Dodd plan creates a new housing trust fund that will collect more than $530 million a year through a new levy on Fannie Mae and Freddie Mac,” groups including the American Conservative Union, Americans for Tax Reform, Citizens Against Government Waste, Club for Growth, Competitive Enterprise Institute, and FreedomWorks wrote in an open letter to Congressional representatives this week.

“The trust fund in turn makes these funds available to politically active community groups like ACORN outside the normal appropriations oversight.”

Beyond the FHA expansion provisions, the bill also contains provisions that would establish a new regulator for the GSEs, and allocate nearly $4 billion in supplemental Community Development Block Grant Funds to be used to buy vacant and foreclosed properties in hard-hit neighborhoods. It also contains provisions for FHA modernization that the industry has long pushed for, as well as $150 million in additional funding for housing counseling.

Where the details are, the sticking points are
There are, of course, key sticking points in the legislation. According to various published reports, Barney Frank has said that while the Senate proposal is a step in the right direction, he doesn’t expect the House will approve the Senate’s version as it stands right now.

Which, of course, means that getting bill on the President’s desk before Congress breaks on July 4 could yet be a very large challenge.

“This thing could collapse and if it does, you may be talking about … waiting until next year,” Dodd said in a press conference Wednesday.

Chief among the sticking points between legislators are provisions in GSE reform that would set conforming limits permanently higher in certain high-cost areas. Current provisions for so-called “jumbo conforming” loans underwritten by Fannie Mae and Freddie Mac set the maximum limit at $729,500 temporarily through the end of this year.

Both the House and Senate proposals seek to make loan limit increases permanent, but diverge on the amount of the loan limit ceiling and what each GSE can do with the jumbo conforming loans it acquires; Frank has pushed to make permanent the current $729,500 ceiling, while also allowing the GSEs to hold jumbo conforming loans in portfolio (both are currently required to securitize and sell off any such loans acquired).

In contrast, the Senate proposal sets the maximum limit at $625,000; in a concession to Frank, the Dodd-Shelby proposal was modified from its earlier form to allow the GSEs to portfolio such higher-balance loans, as well.

There is also some discussion of delaying the process of naming a new GSE regulator by six months, allowing the next administration to name the new regulator and associated staff (given that House Speaker Nancy Pelosi (D-CA) is the one pushing for the delayed effective date, according to an outline, it’s clear that Democrats expect to capture the White House in November).

What’s Old is New Again: HOPE NOW Touts Loss Mit Guidelines

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(Housing Wire) If anything, HOPE NOW — the industry coalition of lenders, servicers, investors and counselors — faces the sort of challenges that tend to come whenever a large group of people with conflicting interests get together and work on finding some sort of non-binding, unforced middle ground. In particular: arriving at a groundbreaking accord is pretty much not an option from the outset, and pushing individual members to make real changes becomes difficult.

On Tuesday, the group released a set of mortgage servicing guidelines that it touted to the press as the first set of uniform, even if unbinding, procedures for loss mitigation; the guidelines included what the group claimed were “the lending industry’s first-ever published guidance for dealing with second mortgages and short sales.”

“These new guidelines will greatly expedite the process of preventing foreclosures,” said Faith Schwartz, executive director of HOPE NOW. “The industry is committed to helping distressed borrowers stay in their homes whenever possible and these guidelines will help in that effort.”

All hyperbole aside, HOPE NOW faces a tough challenge: convince an increasingly untrusting public that, in the face of historic and yet-growing foreclosure activity, those invested in the mortgage banking value chain are doing all they can to help troubled borrowers keep their homes.

Truth be told, the HOPE NOW servicing guidelines don’t exactly chart new territory in loss mitigation at all, sources that spoke with Housing Wire said. A review of the formal guidelines by HW show that, in fact, the outlined procedures tend to merely provide a taxonomy of the loss mitigation process already in place at most sizeable servicing options — for example, outlining when to use a forebearance or repayment plan, as is done in the guideline document, isn’t exactly the stuff of servicing legend.

Wells Fargo & Co. (WFC: 25.43, +0.12%) executives even essentially admitted as much in a separate statement on Tuesday, that ran with the headline “New HOPE NOW Mortgage Servicer Guidelines Mirror Wells Fargo Long-Standing Real Estate Lending and Servicing Practices.”

In other words: we’re already doing this, and have been for some time. Which means that the HOPE NOW pronouncement is likely more a chance for the industry to remind legislators and the public at large that loss mitigation departments at key servicers are already doing all they can to help those borrowers that want to and can stay in their homes.

“It’s critical to remember that nobody benefits when a homeowner faces foreclosure,” said Jonathan L. Kempner, president and CEO of the Mortgage Bankers Association.

While the group touted its guidelines on second lien subordination as ground-breaking — and received some breathless press coverage from non-trade financial press in this area, as a result — more than a few industry participants told HW on Wednesday morning that the guidelines don’t say anything that market participants didn’t already know.

“Essentially, [HOPE NOW is] saying that second lien holders should resubordinate if it fits within the terms of the pooling and servicing agreement, and whenever the loan modification doesn’t hurt the equity position,” said one source, a bank servicing manager that asked not to be identified. “I’m not exactly sure what’s new there.”

That’s not to say, however, that HOPE NOW’s efforts to crystallize a basic set of servicing guidelines that everyone can agree upon is for naught. If anything, the industry needs to be able to explain the range of its loss mitigation efforts clearly and succinctly — and the servicer guidelines do just that, even if they’re being touted as more than they might really be.

Treasury Under Secretary for Domestic Finance Robert K. Steel alluded to that very premise in remarks Tuesday on the HOPE NOW guidelines.

“There is no one silver bullet to address every housing challenge, but if we continue pursuing a series of measures and initiatives, we can have a maximum impact,” he said.

Which means that the truth behind the HOPE NOW guidelines is less blaring than the headlines used to sell them — but it should also be clear at this point that the “maximum impact” that Steel refers to is clearly as much about the battle for the public’s minds and hearts, as it is about the very real battle for people’s homes.

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

Will the housing bust impact geographic mobility?

(Calculated Risk) The WaPo had a story this morning, Held Back by the House, about a couple who moved from Florida to Washington because of a job change. They have been unable to sell their Florida home, and remarked:

"If we knew then what we know now, we would have stayed where we were."

Of course many homeowners now know they are trapped:

[D]epressed sales and sinking home prices in many parts of the country are complicating relocations and transfers for thousands of workers ... A survey last year by Worldwide ERC, a nonprofit association that represents relocation specialists, found that depressed home values emerged as the No. 1 reason for resisting job transfers for the first time in more than 10 years.

Of the member organizations that reported employee reluctance to move, 71 percent cited the sluggish real estate market as an impediment to a job-related move, up from 16 percent last year.

"This is a dramatic shift," said Cris Collie, the group's chief executive. "The top issue has consistently been family concerns, such as dual-career couples, children at a critical school age or caring for elderly parents who live nearby.

There are probably close to 10 million households currently with zero or negative equity in the U.S. For these homeowners, it will be very difficult to accept a job transfer to a different county or state.

Definition: Negative Equity: a homeowner owes more than their home is worth.

To size the problem: According to the Census Bureau, from 2005 to 2006 (the most recent data), approximately 1.7 million owner-occupied households, moved to a different county or state. If approximately 1 in 8 households (the same proportion as with negative equity) will not accept a transfer now because of depressed home values that would be about 200,000 households per year that will be reluctant to accept job transfers.

This will not only impact the earning potential of these households, but this could also impact the performance of various companies. A significant majority of households that migrate have incomes above the median - and negative equity situations will limit the ability of companies to transfer these senior employees.

OCC versus Hope(less) Now

(Tanta @ Calculated Risk) The Washington Post picks up the brewing controversy over the rather significant mis-match between the foreclosure and loss mitigation statistics reported in the new OCC Mortgage Metrics Report and the Hope Now reports we've been seeing since January. Of course they got seriously scooped on this by Housing Wire, who had this story on Wednesday, but I guess now that it's in the newspapers it's got legs:

John C. Dugan, comptroller of the currency, which oversees national banks, said his agency found "significant limitations with the mortgage performance data reported by other organizations and trade associations."

"Virtually none of the data had been subjected to a rigorous process to check for consistency and completeness -- they were typically responses to surveys that produced aggregate, unverified results from individual firms," Dugan said in a speech in New York on Wednesday. "That lack of loan-level validation raised real questions about the precision of the data, at least for our supervisory purposes."

Dugan said in an interview that he was referring to information provided by groups such as the Mortgage Bankers Association, which reports a foreclosure rate widely cited by regulators and the media. A report by the Office of the Comptroller of the Currency calculated that the rate was higher based on raw data it collected from nine of the country's largest banks.

Dugan's comments also raised questions about the accuracy of the reporting from Hope Now, an alliance of mortgage firms and banks that was formed to help financially troubled holders of subprime mortgages. Leaders of the coalition, which was put together by the Bush administration, contend they have aided more than 1 million homeowners. Those figures were self-reported by lenders in response to the kind of surveys Dugan has faulted. . . .

In an interview yesterday, Dugan tempered the strong language he used in his speech. "It was not intended to be a criticism of what they are doing," he said of MBA and other industry associations. Their figures, he added, "get you in the ballpark . . . but we wanted to have a much more specific level of detail."

Banks and mortgage firms have widely varying definitions for what constitutes a loan modification for a struggling borrower and even define subprime mortgages differently. The lack of standards leave the data open for interpretation or manipulation.

I have already gone on record accusing Hope Now of using "weird numbers," and I hope the OCC eventually comes up with a clean enough database (the OCC database currently has 20% of loans classified for credit quality as "other" because they're missing FICO scores) and better definition of credit quality (currently they're using FICO only, not such things as documentation type or LTV/CLTV) that its numbers can provide a better baseline for measuring loss mit activities. I am also willing to observe that if the OCC is only noticing here in Q2 2008 that big bank databases are sloppy and inconsistent, the OCC certainly should "temper the strong language" a touch.

Ultimately, this is going to come down to new regulatory rules on data reporting and management for supervised institutions, as it should. The industry will whine about regulatory burdens, as it always does, but it will be hard to avoid the conclusion that "voluntary" reporting via the MBA or Hope Now is not producing reliable numbers. It will of course also occur to some of us that the OCC's supervision of these banks over the last several years has apparently been based in part on data that it never until now seemed to realize needed some cleaning up.

Negative equity and foreclosure (Calculated Risk on Boston Fed paper)

(Calculated Risk) Here is a new research paper with some important conclusions about the percentage of foreclosures among homeowners with negative equity. From Christopher L. Foote, Kristopher Gerardi, and Paul S. Willen at the Boston Fed: Negative Equity and Foreclosure: Theory and Evidence

As a consequence of the recent nationwide fall in house prices, many American families owe more on their home mortgages than their houses are worth—a situation known as “negative equity.” The effect of negative equity on the national foreclosure rate is of obvious interest to policymakers, but this effect is difficult to study with datasets that are commonly used in housing research. In this paper, we exploit unique data from the Massachusetts housing market to make three points. First, during a specific historical episode involving a downturn in housing prices—Massachusetts during the early 1990s—less than 10 percent of a group of homeowners likely to have had negative equity eventually defaulted on their mortgages. Thus, current fears that a large majority of today’s homeowners in negative equity positions will soon “walk away” from their mortgages are probably exaggerated. Second, we show that this failure to default en masse is entirely consistent with economic theory.
...
A foreclosure requires both negative equity and a household-level cash-flow problem that makes the monthly mortgage payment unaffordable to the borrower. Cash-flow problems without widespread negative equity do not cause foreclosure waves. Even if borrowers are having trouble making payments, they will always prefer to sell their homes rather than default, as long as equity in their homes is positive so they can pay off their outstanding mortgage balances with the proceeds of the sales. Similarly, widespread negative equity will not result in a foreclosure boom in the absence of cash-flow problems. Borrowers with negative equity and a stable stream of income will, in most cases, prefer to continue making mortgage payments. Thus, we argue that negative equity does play a key role in the prevalence of foreclosures, but not because (as is commonly assumed) it is optimal for borrowers with negative equity to walk away from affordable mortgages.
emphasis added

The authors present a model to explain why homeowners with negative equity, but sufficient cash flow, will not walk away. See section 3: The basic economics of default from the borrower’s perspective

I think this model is helpful for understanding the behavior of homeowners with minimal negative equity, but may be flawed for a simple reason: the probabilities in the two state model are what the homeowner believes will happen, and homeowners deep in negative equity will assign probabilities of zero to the good outcome and one to the bad outcome.

Here are the equations as presented by the authors (see paper for description):
V₁^H = rent₁ + 1 / (1+r) * [3/4 P₂^G + 1/4 P₂^B]
V₁^M = mpay₁ + 1 / (1+r) * [3/4 M₂ + 1/4 P₂^B]
But notice what happens when we make the good outcome zero for deep underwater homeowners (instead of 3/4) and the bad outcome 1 instead of 1/4 (and adding stigma term). The choice simplifies to the obvious:

Value = (rent₁ - mpay₁) + Stigma_i
Where Stigma includes "moving costs, default penalties that take the form of limited future access to credit markets, sentimental attachment to the home, or even the presence of moral qualms associated with defaulting on one’s debts".

This is really the problem: deep underwater homeowners who perceive the probabilities of a negative outcome as 1 (and are probably mostly correct), will walk away from their homes unless Stigma is greater than (mpay - rent). And Stigma for many of these homeowners really depends on if it becomes socially acceptable for middle class Americans to walk away (ruthless default).

Finally, there may be problems when comparing to the Boston housing bust of the early '90s - although prices did decline about 30% from the peak in real terms (according to Case-Shiller), lending standards were tighter in the late '80s compared to the recent bubble, and few homeowners bought at the peak with no or negative equity (like during the current boom). Also, the current bubble was much larger than the late '80s bubble in Boston, and some areas in the U.S. will probably see real price declines in excess of 40% (maybe even 50% or more), and these homeowners will be deeply underwater.

This is an interesting paper. I believe it is like that a majority of homeowners with negative equity will not walk away from their homes. But I believe we need to know the number of homeowners deeply underwater, and try to understand their probable behavior.

OCC’s Dugan Takes Aim at HOPE NOW’s Workout Claims

(Housing Wire) After first requiring servicers to report loan level data to his agency in early March, Comptroller of the Currency John Dugan said Wednesday that the OCC had released a new, comprehensive report on mortgage performance during the fourth quarter of 2007 and first quarter of 2008.

What the report found is telling, to say the least. The OCC study seems sure to create the latest firestorm among industry participants, coming at stark odds with the workout claims made recently by the HOPE NOW coalition, which has been reporting on the voluntary industry groups’ loss mitigation efforts since the early part of this year — disparities that clearly underscore just how difficult obtaining data can be in an industry where one firm’s Alt-A mortgage is another’s subprime loan.

HOPE NOW officials have claimed in recent weeks that lenders have helped more than one million borrowers between October of last year and this March — numbers that have been pushed by Bush administration officials as proof that numerous assistance programs are helping troubled borrowers — but the OCC said that its analysis found that only 167,000 borrowers had been helped in the same time frame.

Related links:

• see the OCC Mortgage Metrics Report

Dugan said that as the OCC began to collect data from servicers, a “lack of loan-level validation raised real questions about the precision of the data, at least for our supervisory purposes.” In statistical terms, what Dugan’s referring to is the whole enchilada: both reliability and validity of the underlying data.

“We … came to realize that there were some significant limitations with the mortgage performance data reported by other organizations and trade associations,” Dugan said, including varying definitions of credit class and shifting definitions for delinquencies as well.

In particular, Dugan singled out loss mitigation reporting as particularly problematic, saying that “some [were] counting any contact with a borrower about payment reduction or relief as a mitigation in process, while others did not count mitigation efforts until a particular mitigation plan had been formally implemented.”

“Virtually none of the data had been subjected to a rigorous process to check for consistency and completeness,” he said.

The OCC report is the first of what will become a quarterly analysis; the OTS is working on a similar report, but has yet to release its findings.

HOPE NOW has come under fire in recent months by consumer advocates and some industry analysts for allegedly inflating its statistics, or failing to properly report its data — and Dugan’s remarks seem likely to fan the flames of that debate further. Like immediately.

American Banker reported Wednesday evening that HOPE NOW executive director Faith Schwartz was already on the defensive.

“OCC data is reflective of the results of the nine banks it governs that offer mortgage loans,” she said in a statement. “Hope Now statistics reflect member data and provide a larger view of the number of solutions delivered by a larger number of mortgage servicers. Because of these differences, the data will not match exactly.”

Of course, not exactly matching is one thing. Not matching at all is entirely another, and something tells me that Schwartz will be forced to say much more before this brou-haha dies down.

That sort of massive disparity led Jaret Seiberg, an analyst at Stanford Washington Research Group, to suggest that Dugan’s remarks were tantamount to a warning.

“Regulators hold a lot of sway, and if the industry resists their call for better data reporting, then these servicers run the risk they are going to have a system imposed on them that’s going to be much more onerous,” he said in remarks reported by American Banker.

Behind closed doors, industry participants have long known that data is problematic — ask anyone that’s every worked at Clayton Holdings, Inc. (CLAY: 5.77, 0.00%), First American CoreLogic LoanPerformance, any credit rating agency, or as an erstwhile MBS analyst for any number of i-banking operations. It’s long been impossible to get “clean” data, and the firms that have even come close to doing it have had a very profitable niche in the secondary markets for quite some time.

Other disparities exit in the OCC data as well, relative to HOPE NOW — the OCC found, for example, that repayment plans outnumbered loan modifications by more than four to one during March. HOPE NOW has said in previous reports that loan modifications represented 49 percent of all subprime workouts in March.

Sources that spoke with HW said the differences appearing the data don’t lend themselves to explanatory reconciliation.

“There isn’t a way to explain one difference versus the other, given how amazingly wide the gulf is between each,” said one source, an MBS analyst that asked not to be identified by name. “Either HOPE NOW is wrong, or the OCC is. Take your pick.”

Meet the New Sheriff, Same as the Old: MI Bounces Back As Seconds Fade

(Housing Wire) The second mortgage market hasn’t shut down, but it’s shrinking fast. Which means that, on the other end of the see-saw, mortgage insurers are back and dictating the credit terms for primary financing on about 80 percent of a house’s value.

This is a sea change for housing finance that, so far, has gone mostly unnoticed. It also explains why, in May, both Fannie Mae (FNM: 23.33, -2.02%) and Freddie Mac (FRE: 21.62, -3.87%) could abruptly reverse the maximum financing “haircuts” that they had earlier adopted for transactions in declining housing markets last December.

It’s this simple: when a mortgage exceeds 80 percent of a home’s value, the GSEs are required by charter to have credit support on the portion of the loan above 80 percent in the form of mortgage insurance, resource to the seller or seller participation greater than 10 percent. The most common form of credit support on higher LTV loans securitized or held in portfolio by the GSEs is — what else? — mortgage insurance.

Likewise, in the traditional lending markets of yore, lenders also commonly required MI on primary non-GSE conventional loans with LTVs over 80 percent.

As most of us now know, the traditional conventional mortgage lending paradigm of 20 percent down or MI (and full documentation, too) was eroded by growing acceptance starting in the mid-1990s of so-called purchase money seconds — or “piggy-backs,” as they’ve come to be called. Borrowers — or their brokers — could finance up to 100% (or more) of the traditional down payment with secondary financing in the form of a closed-end loan or a HELOC. Brokers and lenders aggressively marketed the so-called 80-20 (80 percent first, 20% second lien for 100 percent financing) and 80-10-10 (80 percent first, 10 percent second lien, 10 percent down) and other loan combinations as more affordable than MI.

The result? Piggy-backs became extremely popular.

Although GSE pool data doesn’t tell us the extent of secondary financing in their loan universe, we do know from analysis of loan level data off private securitizations that piggy-back lending was a feature of much non-agency lending. For example, in first half 2006, data provided by UBS analysts in January of this year found that the percentage of piggy-backing recorded for prime ARMs was 31 percent, Alt-A ARMs 54 percent, subprime ARMs 35 percent, Option ARMs 30 percent, Prime Fixed 24 percent, and Alt-A fixed 26 percent. That’s a lot. Only fixed rate subprime deals disclosed a relatively low 8 percent rate of piggy-back financing.

As lenders reached for more business, and borrowers reached for more house, leading lenders to reach for more business, subsequent vintages tended to have yet ever-higher percentages of piggy-backs. As piggy-backing expanded, MI volumes shrank. By one estimate, piggy-back lending ate over 40 percent of MI providers’ previous market share before the loan market imploded.

Now lenders aren’t eager to make seconds, for obvious reasons. The current rate of price depreciation is great enough in many housing markets to wipe out a second in a year or two; worse yet, there is no securitization market for them, and they’re turning into deadly sludge on bank and thrift balance sheets to boot.

Detached seconds (a term used when the second is held by a different lender relative to the first) are also a problem for borrowers attempting to refinance — if the second isn’t refinanced, the lender will very likely decline to retain second lien position.

There is little quantitative evidence that secondary financing of home purchases and refinancings is down. But anecdotally we know it is. One second lien lender we know says 100 percent CLTV is still possible, but the underwriting is very tough and the documentation is scrutinized.

Freddie Mac’s new loan and pool level disclosures do indicate a steep decline in piggy-backing (and leverage) in their universe (alas, Fannie does not disclose as richly). Based on the weighted average of original LTV and CLTV data across all Freddie Mac pass-throughs (ARM, Fixed, etc.) by origination month, borrowers’ leverage peaked in 3rd quarter 2007 at 76.9 percent LTV and 80.2 percent CLTV, according to data provided by eMBS, Inc. Tighter credit conditions have shaved both measures sharply since that time, to 70.1 percent LTV and 72.9 percent CLTV as of May 2008 originations.

Making our point — that piggy-backs are fading — the spread between CLTV/LTV was cut in half, from a peak of 3.8 percent in late spring 2007 to 1.8 percent as of May originations!

There are more hard numbers available to support MI’s recent surge. MICA, the trade association representing the private mortgage insurance industry, began reporting rising volume monthly after February 2007. For example, mortgage insurers wrote 190 percent more business this year, through April, than in the comparable period of 2006, when subprime/Alt-A were in their heyday.

To put that sort of gain into proper context, consider that even GSE production is only up 160 percent — and they are doing an estimated 80 percent of all new mortgage lending. By inference, MI providers have made huge gains in market share.

The return of mortgage insurers doesn’t mean a return to traditional lending standards, but it does make insurers the final arbiters of credit requirements for over 80 percent LTV.

This is important, so I’ll restate: the responsibility for tightening credit standards for home financings levered more than 4x has now been taken out of the hands of the GSEs, who are subject to terrific political scrutiny and pressure. That responsibility now sits squarely with private mortgage insurers, whose various state regulators are charged with ensuring the MI companies can pay claims — and not with putting a safety net under housing markets and household wealth.

And mortgage insurers have been steadily lowering their risk, cutting programs, raising rates and adopting “declining” (aka restricted, distress, and soft) market criteria that obviate the need for the GSEs to persist with their own — and make it possible for the GSEs to avoid any political heat for so-called red lining (from consumer groups) or increasing risk to taxpayers (from GSE bears/hawks). Nor do the GSEs have to look like they are “pro-cyclically” restraining credit in the current crisis, when the Bush administration/Treasury/OFHEO have made it clear that “good” housing GSEs should behave in a “counter-cyclical” fashion, tightening credit and building reserves in boom times, while private lenders rake in the profits, and salvaging the market when private capital withdraws.

So, Freddie on May 2 issued a Seller Servicer Bulletin announcing that maximum LTV requirements need not be reduced for purchases or no-cash-out refis in declining markets on single-unit primary residences when the mortgage recieves an “Accept Risk Class” from its automated underwriting system, Loan Prospector.

On May 15, Fannie made a headline splash with its announcement of a Single National Down Payment Policy, rescinding its declining markets maximum financing rules, effective June 1. The announcement included an assertion that the new D.U. Version 7.0 — which went into effect on June 1 as well — “will limit risk layering and assess each loan more precisely.” (DU 7.0 still can’t handle jumbo loans, BTW; they must still be underwritten manually. Freddie Mac’s LP platform was jumbo-ready when the programs first went into effect.)

To market insiders, this stuff about DU and risk laying really seems like posturing. Risk layering is about piggy-backs and stated-income, no-income documentation, especially when combined with loans MI won’t insure — things like 2/28 ARMs, short term IO, Option ARMs, and so forth. In other words, with MI now running the tables on low-equity loans, risk layering isn’t happening anyway.

OCC mortgage metrics

(Calculated Risk) The OCC has inaugurated a new report, which will be issued quarterly, on mortgage delinquency, loss mitigation, and foreclosure activity drawn from the servicing databases of nine large banks:

The report analyzes data submitted on each of the more than 23 million loans held or serviced by these nine banks from October 2007 through March 2008. The $3.8 trillion portfolio represents 90 percent of mortgages held by national banks and about 40 percent of mortgages overall. The participating national banks are Bank of America, Citibank, First Horizon, HSBC, JPMorgan Chase, National City, USBank, Wachovia, and Wells Fargo.

Of this aggregated servicing portfolio, about 90% of loans are securitized either through the GSEs or private label issuers. The mix is 62% prime, 9% Alt-A, and 9% subprime, with the remaining 20% "other" being largely loans with insufficient or missing data that does not allow assignment into one of the three categories. The OCC indicates that data scrubbing will continue, and hopefully future reports will have a smaller "other" bucket.

It's a big database, and the OCC has made a real effort to standardize its own definitions, based on reported data elements rather than servicer descriptions, so that the credit and loss mitigation categories are consistent across all nine servicers.

The full report is available here. From the summary:

• The proportion of mortgages in the total portfolio that was current and performing remained relatively constant during the reporting period at approximately 94 percent.
• Serious delinquencies, defined as bankrupt borrowers who are 30 days delinquent and all delinquencies greater than 60 days, increased just one-tenth of a percentage point during the period, from 2.1 percent to about 2.2 percent.
• As in other studies, the report confirms that foreclosures in process are plainly on the rise, with the total number increasing steadily and significantly through the reporting period from 0.9 percent of the portfolio to 1.23 percent. Interestingly, the number of new foreclosures has been quite variable. While one month does not make a trend, new foreclosures in March declined to 45,696, down 21 percent from January’s high and down about 4.5 percent from the start of the reporting period last October.
• The majority of serious delinquencies was concentrated in the highest risk segment – subprime mortgages. Though these mortgages constituted less than 9 percent of the total portfolio, they sustained twice as many delinquencies as either prime or Alt-A
mortgages.
• Consistent with other reports, payment plans predominated, outnumbering loan modifications in March by more than four to one. But loan modifications increased at a much faster rate during the period.
• Although subprime mortgages constituted less than 9 percent of the total portfolio, subprime loss mitigation actions constituted 43 percent of all loss mitigation actions in March.
• The emphasis on loss mitigation for subprime mortgages corresponds to the nationwide focus on this higher risk sector. Total loss mitigation actions exceeded newly initiated foreclosure proceedings by a margin of nearly 2 to 1.

Filing Made For Exchange-traded Securities For Housing

(Housing Derivatives) MacroMarkets has filed with the SEC to list exchange-traded housing price securities. These securities will allow retail and institutional investors to access changes in the S&P/Case-Shiller Home Price Index with 2x leverage.

Here is the SEC filing.

Fitch: Problems in Housing Greater than Originally Estimated

(Housing Wire) In a wide-ranging report on U.S. housing released Tuesday evening, Fitch Ratings said that its “forecast for the housing sector in 2008 has become more bearish,” pointing to a soft economy, very depressed consumer sentiment, and an unaccommodating mortgage market as key factors behind the latest bearish turn at the credit rating agency.

“The spring selling season was a ‘bust’,” Fitch analysts wrote in the report. “Although it does not appear likely that the year-over-year declines in major metrics such as starts, new home sales, and existing home sales will continue at the current pronounced pace throughout this year, the decreases are likely to be greater than Fitch’s prior projections.”

Fitch dropped its forecast for existing home sales to 4.835 million for 2008, 14.5 percent below year-ago recorded volume; the agency had previously forecast existing-home sales of 4.975 million. Projected housing starts also fell, with the agency saying it now expects just 0.96 million in 2008, after previously predicting starts of 1.06 million.

Saying that “operational and financial pressures will persist and, possibly, intensify for the public homebuilders during 2008 and into next year,” Fitch took a hack-saw to the ratings of more than a few major builders on Tuesday as a result of its updated expectations for housing. Centex Corp. (CTX: 15.91, 0.00%), Pulte Homes Inc. (PHM: 11.00, 0.00%), Lennar Corp. [[LEN], and D.R. Horton Inc. (DHI: 12.17, 0.00%) were among those that saw their core issuer default ratings cut, while some — notably, Toll Brothers Inc. (TOL: 20.22, 0.00%) — saw ratings affirmed with a negative outlook.

Inventory particularly problematic
While Fitch pointed to a myriad of factors as reasons for a more dour outlook on housing, the agency singled out a massive inventory overhang as “perhaps the most challenging issue.”

The seasonally-adjusted inventory estimate for new homes in April was 456,000, representing a supply of 10.6 months at the current sales rate, the Commerce Dept. said on May 27. Existing homes inventory stood at 4.522 million in the most recent report, representing 11.2 months’ supply.

“These new and existing home inventory statistics remain quite high by historical standards,” Fitch analysts noted. “It is generally believed that 5.5-6.0 months of supply would represent a rough equilibrium of supply relative to demand for new and existing home inventories.”

If so, we’ve got a ways to fall yet - and Fitch warned that cancellation rates and rising foreclosures only complicate the inventory burden now weighing down much of the nation’s housing.

“To the degree that cancellation rates remain high or again increase, inventories will be sustained and the high level of home foreclosures … is expected to persist throughout 2008 and into 2009, and add to the home inventory burden,” the report said.

Calling current market data “unfortunate,” Fitch conceded in its report that its more bearish scenario — that housing won’t reach a bottom until mid- to late-2009 — has become far more likely than a less severe housing contraction scenario.

Looking ahead to 2009, Fitch said it had assigned a 60 percent probability to its bearish case, which estimates total starts to be down 8.3 percent in 2009, as single-family starts fall 10.3 percent. New home sales are projected to decrease 7 percent next year, Fitch said, while existing home sales are forecast to decline 6 percent.

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

Housing: Buy and bail

(Calculated Risk) From the WSJ: Some Buy a New Home to Bail on the Old

Next month, Michelle Augustine plans to walk away from her four-bedroom house in a Sacramento, Calif., subdivision and let the property fall into foreclosure. But before doing so, she hopes to lock in the purchase of another home nearby.

"I can find the same exact house as what I live in right now for half the price," says Ms. Augustine ...

In markets hit hardest by falling home prices and rising foreclosures, lenders and brokers are discovering a new phenomenon: the "buy and bail," in which borrowers with good credit buy a new home -- often at a much lower price -- then bail out of the "upside down" mortgage on their first home.
...
The mortgage industry is starting to wise up to the practice and is scrambling to fight back. Buy-and-bail is "certainly fraudulent and unfortunately on an uptick," says Gwen Muse-Evans, vice president for credit policy and controls at Fannie Mae.
...
Under revised Fannie Mae guidelines, which could take effect next week, loan applicants who claim they will rent out their first home will have to produce supporting evidence, including an executed lease agreement. Borrowers also will have to prove that they can pay the mortgage, property taxes and insurance for both residences.

So far there are only a few anecdotal reports of "buy and bail", so this might be much ado about nothing. This is certainly fraud (if they sign a false loan document). But just like fraud for housing (when people lie about their income to buy a home), this type of fraud is almost never prosecuted - and extremely difficult to prove, unless someone tells a reporter what they're going to do.

FHA going after DAP again?

(Tanta @ Calculated Risk) Well Glory Be. FHA Commissioner Brian Montgomery, that well-known Ownership Society Koolaid drinker, went before the National Press Club yesterday and made noises to the effect that FHA will resurrect its efforts to rid the world of the DAP scourge:

The Federal Housing Administration expects to lose $4.6 billion because of unexpectedly high default rates on home loans, officials said Monday.

Brian D. Montgomery, the F.H.A. commissioner, attributed the unanticipated losses primarily to the agency’s seller-financed down payment mortgage program, which has suffered from high delinquency and foreclosure rates in recent years. . . .

But Mr. Montgomery warned that the F.H.A. would have to renew its efforts to end the seller-financed down payment program, which accounted for 35 percent of its loans in 2007.

He said the mortgages had foreclosure rates three times those of traditional loans and would push the F.H.A. to the brink of insolvency.

“Let me repeat: F.H.A. is solvent,” Mr. Montgomery said on Monday in a speech at the National Press Club. “However, no insurance company can sustain that amount of additional costs year after year and still survive. Unless we take action to mitigate these losses, F.H.A. will soon either have to shut down or rely on appropriations to operate.”

The Times writer notes that FHA has tried for years on end to get rid of this practice without success. However, the explanation of what these programs really do isn't very helpful. I call them "DAP" (Downpayment Assistance Program) because that's the term HUD uses, and the term you will find in the HUD-sponsored research on the performance of these loans. The term "seller financed" isn't exactly helpful; if we are to use our own term for these deals, I'd suggest "seller money laundered" instead.

I have written about DAP loans and the effort to get rid of them before. Here's an UberNerdly post explaining how the loans work. Here's a post from a year ago summarizing the long tedious and ultimately unsuccessful efforts of the HUD Inspector General to get rid of the program. Let us all devoutly hope that it will work this time.

FHA Chief: Hits From Down-Payment Assistance Threaten Agency’s Future

(Housing Wire) It doesn’t get much more stark than the barb lobbied by Federal Housing Administration

commissioner Brian Montgomery on Monday afternoon — stop allowing down-payment assistance, or send the FHA into insolvency.

“Data clearly demonstrates that FHA loans made to borrowers relying on seller-funded downpayment assistance go to foreclosure at three times the rate of loans made to borrowers who make their own downpayments,” Montgomery said at a National Press Club event.

Such loans are currently one-third of the government agency’s portfolio, he added, and led the agency to book an additional $4.6 billion in unanticipated long-term losses in an annual re-estimate.

“No insurance company can sustain that amount of additional costs year after year and still survive,” he argued. “Unless we take action to mitigate these losses, FHA will soon either have to shut down or rely on appropriations to operate.”

The admonishment by Bush adminstration officials over down-payment assistance programs comes as lawmakers are increasingly looking to the Depression-era agency to backstop a flailing housing market; Mongtomery said that HUD would reopen to public comment a hotly-contested proposed rule that would look to ban the down-payment assistance program.

“We are concerned about this business because the substantial losses affect FHA’s bottom line and FHA’s ability to serve American citizens who need access to prime-rate home loans,” he said.

“Given these concerns, we cannot just stand by – we must make our case again.”

It’s a case that met with stiff resistance the first time around, particularly from the nonprofit organizations that provide the so-called DPA programs.

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

She argued that denying key groups the ability to purchase a home would further destabilize an already-wobbling housing market.

Political currency
It’s becoming clear that attempts by lawmakers to push troublesome loans into HUD’s arms may have their financial — and perhaps their political — limits. In his remarks Monday, Montgomery alluded to a mortgage relief proposal backed by House Financial Services Committee chairman Barney Frank (D-MA), characterizing the proposal as “well intentioned” but also “worrisome,” suggesting that it would “endanger the housing market” by asking the FHA to assume the risk on an increasing number of bad loans.

“FHA is designed to help stabilize the economy, operating within manageable, low-risk loans,” Montgomery said. “It is not designed to become the federal lender of last resort, a mega-agency to subsidize bad loans.

“We don’t want to dramatically enlarge FHA’s portfolio, with a substantial portion of the portfolio problematic, high risk loans that cost homeowners who were careful and bought homes within their means.”

The Bush administration has strongly opposed Frank’s version of the housing/foreclosure relief package, with the President vowing a veto, while implicitly backing a compromise bill currently awaiting Senate consideration that would ban down-payment assistance for FHA-endorsed loans.

While the Senate has yet to formally consider the bill — a product of compromise between Senator Chris Dodd (D-CT), chairman of the Senate Committee on Banking, Housing and Urban Affairs, and Senator Richard Shelby (R-AL), the ranking Republican on the committee — various media reports suggested Monday that Congressional Democrats are already hard at work behind closed doors to fast-track a joint housing proposal that integrates both the House and Senate proposals (read earlier coverage).

Is securitization coming back?

(Naked Capitalism) In a Financial Times article. Gillian Tett files a somewhat dumbfounded report from the European Securitization Forum in Cannes. While the event has gone wildly downscale from last year's bash, the participants were hopeful that the return of good times was just around the corner. As we'll see posthaste, Tett doesn't buy it. She sees regulators primed to attack the loopholes and oversights that allowed the high profit products, particularly CDOs, to flourish. Yes, securitization will come back, but it seems certain to be only the plain vanilla, low margin sort.

There's another constraint that Tett omits, Securitization depends on credit enhancement. That can be accomplished three ways: overcollateralization, credit default swaps, and insurance. The latter two were the most common methods for more complicated deals. Yet as the credit crisis has progressed, CDS protection writing capacity is scarce and costly, and measures to move CDS to exchanges and force standardization of terms would make them less suitable for new issues. Paul Jackson wrote about the problem shortly after the annual meeting of the American securitization industry's big confab:

While the monoline business may or may not be less important in the municipal bond markets due to the unbelievably low incidence of defaults, the guaranty business is actually far more important to the MBS business than most have given attention to thus far — precisely because defaults can and do happen.

For secondary mortgage market participants, resolving this crisis isn’t just a piece of the puzzle; it might be the puzzle. At the American Securitization Conference in Las Vegas last week, many investment bankers suggested on panels and in hallways that the bond insurer mess is the single largest issue keeping the private-party market from having a chance at establishing any modicum of recovery going forward.

As we know, the monolines have gone down for the count.

From the Financial Times:

[W]hat was more noteworthy about this week’s {European Securitisation Forum] gathering in Cannes was just how many bankers still seem to think – or hope – that this champagne drought will prove short-lived.

For while nobody is brave enough right now to predict that subprime mortgages are about to return, there was plenty of excitement in Cannes about opportunities in other asset classes. Auto loans, for example, are currently considered hot; so is Islamic finance. Meanwhile, one banker chirpily predicted that we will soon see the launch of some CDOs based on Russian consumer debt. “This stuff always comes back. Just give it a few months,” he said.

Well, perhaps. But I suspect that some of this optimism is pretty delusional. For the events of the last year have not just hurt investor confidence in the securitisation process, they have also left regulators horrified by the degree to which bankers have abused banking loopholes in recent years.

In normal times, bankers tend to be pretty cynical – even scathing – about what these regulators might think. (Indeed, one top representative from PWC had the temerity to declare in Cannes this week that the industry already had the regulators “under control”, although he noted the European parliament was less malleable.)

I suspect, however, that bankers would be foolish to discount the regulators this time. For some of the ideas currently floating around the supervisory community could potentially have a big impact on the securitisation world for years to come.

Take the matter of the capital treatment of trading books. In recent weeks, some Western supervisors have conducted intensive analysis on banks’ trading books and discovered, to their horror, that some banks have been exploiting so many regulatory loopholes in recent years that they have got away with posting virtually no capital reserves against assets, such as the senior tranches of CDOs.

This situation reflects badly on the regulators who devised these rules – and even worse on supervisors who were supposed to police them. However, now they have woken up to the problem, many regulators want to act, probably by imposing much higher capital charges for assets in the trading book.

This has big implications for parts of the CDO world. Most notably, the banks will have far less economic incentive to create instruments such as mortgage-bond CDOs, or so-called single-tranche CDOs, if they can no longer park the senior CDO debt on their trading books for free.

In other words, one upshot of the regulatory rules is that when securitisation does return, it is likely to be in a dramatically simpler form, centred around more traditional lines of business, such as creating mortgage-backed bonds. And the key point about this is that these “simple” business lines tend to be far less profitable than the complex stuff or, more accurately, wacky stuff that uses free money in spades.

So the upshot is this: securitisation is certainly not dead; but it is unlikely to produce endless champagne again anytime soon. And anybody setting out for the ESF events in the coming years had better develop a taste for cheap beer.

Primed for Trouble: Pace of Mortgage Distress Shifts to Prime Borrowers

(Housing Wire) While foreclosure activity hit an all-time record in the first quarter, according to statistics released Thursday morning by the Mortgage Bankers Association, an alarming shift of the mortgage mess towards prime borrowers appears to be taking place as well — signaling that the credit crunch that began among those with less-than-perfect credit is now marching onward towards borrowers usually deemed better credit risks.

It shouldn’t surprise anyone at this point to learn that first quarter foreclosure activity was the highest since 1979, the first year MBA’s data on foreclosure activity is available. The percentage of loans in the foreclosure process was 2.47 percent at the end of the first quarter, the MBA said, an increase of 43 basis points from the fourth quarter of 2007 and 119 basis points from one year ago.

The percent of loans on which foreclosure actions were started during the quarter was 0.99 percent on a seasonally-adjusted basis, 16 basis points higher than the previous quarter and up 41 basis points from one year ago, the MBA said.

And while the overall numbers for the first quarter show that the majority of troubled borrowers are in the subprime credit category, the pace at which prime borrowers are running into a wall now strongly outstrips anything being seen in the subprime arena.

Velocity shifts away from subprime
Among subprime borrowers, severe delinquencies — a measure that includes 90+ day delinquencies and foreclosures — increased from 14.44 percent of loans in the fourth quarter to 16.42 percent in Q1. In contrast, just 1.99 percent of all prime borrowers were severely delinquent at the end of Q1, compared to 1.67 percent at the end of last year, numbers that illustrate the relatively greater distress felt by subprime borrowers.

But it’s the velocity of these changes that’s most worth noting from an investor’s perspective — the Q4 to Q1 change in severe delinquencies strongly favors prime borrowers, for example, with severe DQs increasing by 19.2 percent for prime and 13.7 percent for subprime borrowers.

By splitting out fixed-rate and adjustable-rate DQs, the increasing distress now being felt by prime borrowers becomes even more evident: prime ARMs showed the highest velocity of change of any major loan category in nearly every measure of distress published by the MBA. Severe delinquences increased a whopping 28.71 percent among prime ARMs during Q1, while in comparison, subprime ARMs saw severe DQs jump 18 percent.

It’s a pattern repeated outside of ARMs, too. The velocity of severe delinquencies among prime, fixed-rate borrowers actually came close to doubling that recorded by subprime FRMs during the first quarter. Prime FRMs saw severe DQs increase 12.1 percent in the first quarter, while subprime FRMs posted a 6.7 percent increase in severe delinquencies over the same time frame.

It’s a difference Jay Brinkmann, MBA’s vice president for research and economics, took notice of.

“Prime ARMs represent 15 percent of the loans outstanding, but 23 percent of the foreclosures started,” he said. “Out of the approximately 516,000 foreclosures started during the first quarter, subprime ARM loans accounted for about 195,000 and prime ARM loans 117,000, but the increase in prime ARM foreclosures exceeded subprime ARM foreclosures with increases of 29,000 and 20,000 respectively over the previous quarter.”

Location, location, location
The old real estate mantra that location matters is proving true as the mortgage and housing mess rolls on, as well. The MBA said that a continued increase in the overall delinquency rate was driven by increases in the number of loans 60 and 90 or more days past due, primarily in California and Florida.

“The problems in California and Florida are extraordinary and they are the main drivers of the national trend,” Brinkmann said. “The quarterly rate of foreclosure starts on subprime ARM loans in California was 9.24 percent.

“This rate, combined with Florida’s rate of 8.25 percent, drove up the national average foreclosure start rate to the point where 43 states were below the national average of 6.32 percent.”

California saw a total of approximately 109,000 foreclosure starts and Florida 77,000, the MBA reported; in contrast, the next highest states were Texas, Michigan and Ohio with between 24,000 and 20,000 each. Taking California, Florida, Arizona and Nevada together, the four states represented 62 percent of all foreclosures started on prime ARM loans, and 84 percent of the increase in prime ARM foreclosure, Brinkmann noted.

“About 20 states had drops in their number of foreclosures started, including Michigan, Ohio and Indiana where problems have been the most severe for the last several years,” he said.

A Tale of Two Housing Markets: There’s REO, and Then There’s Everything Else

(Housing Wire) Proving that even within a single local housing market, sales trends can be more complex than they might otherwise seem, new data is suggesting that distressed assets can move housing markets — when prevalent enough.

A monthly housing report from real estate analytics firm Radar Logic Inc., released Monday morning, found that in March of this year, so-called motivated sales — defined as liquidity-driven sales of real-estate owned and similar transactions — had managed to split apart more than a few local markets.

In other words, there’s REO, and then there’s everything else.

Los Angeles, for example, saw motivated/distressed sales made up a whopping 29.2 percent of the market in March 2008, up from 2.9 percent one year ago. And these motivated sellers are just that: the price per square foot of motivated sales transactions has declined 11 percent since the start of 2008, according to Radar Logic, while non-motivated sellers have seen prices drop far less drastically, just 1.8 percent.

With the percentage of motivated sales in Los Angeles increasing nearly 20 percent since the beginning of this year alone, the overall price-per-square foot for the MSA has fallen 6.7 percent in the same time period, Radar Logic said.

Pricing trends in local areas such as Phoenix are affected strongly by REO and foreclosures. Click for larger view. (Source: Radar Logic)

In Phoenix, the area MSA has plunged by 22.7 percent year-over-year. But, as with Los Angeles, the trends differ once you tease out the “motivation effect.” Motivated sales were 24.5 percent of transactions in March 2008, up from just 2.8 percent one year earlier, Radar Logic reported. Price-per-square-foot for distressed sales have fallen 9.1 percent this year, while non-distressed sales have seen prices fall a more muted 3.3 percent.

Like other MSAs where distressed assets are prevalent, motivated sellers are focused in lower-priced neighborhoods. In Phoenix, for example, a quartile analysis found that distressed sales account for 27 percent of sales in the lowest-price quartile; that percentage falls to 14 percent in the top-priced tier.

But the fact that REO and foreclosure activity is prevalent at all in the upper quartiles is an emerging trend, suggesting that the downward pressure on prices may actually increase in the months ahead (see an earlier HW exclusive on jumbo REOs).

While Radar Logic CEO Michael Feder said that his firm does not provide forecasts, he did say in an email to Housing Wire that it seemed “clear that the impact of mortgages is having a powerful effect on home equity values, both in terms of troubled borrowers offering discounts and the difficulty buyers may have getting credit constraining purchases.”

Most key markets in California saw motivated sales comprise a growing portion of transaction volume, as well. In Oakland, distressed sales were 35 percent of the housing market in March, RadarLogic said; in Sacramento, that number soared to nearly 50 percent. Nineteen percent of San Jose sales were distressed during the month, while San Franscisco held up the best — only 8.7 percent of the market in the city was considered a motivated sale by RadarLogic.

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

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

HSBC on mortgage workouts

(Tanta @ Calculated Risk) The Chicago Tribune has a lengthy article out on HSBC's loan workout efforts. This is all rather confusing because HSBC uses the term "modification" the way everyone else I know uses the term "repayment plan," and then uses the term "restructuring" for what everybody else calls a "modification." With that in mind:

HSBC quickly stopped offering some of the riskiest loans, including stated-income mortgages, which require little documentation, and those generated by brokers, a channel where it had less control.

But trying to help homeowners stave off foreclosures through loan modifications or restructurings is taking longer than expected, McDonagh said.

A modification is generally temporary; after the end of a certain period, the loan resets to its original terms. A restructuring is a permanent redoing of the contract, including new terms and conditions.

"We typically would do six- to nine-month modifications" for troubled homeowners, he said. "Now we're looking out two to three years because, with the severity of the issues they've got, they need longer than six months to work things out."

The number of modifications and restructurings have been rising and represent 22 percent of its mortgage book, or about $18 billion.

Of that, $1.9 billion in modifications, in 11,900 loans, has occurred since late 2006 as part of a program to address the interest rate resets of adjustable-rate mortgages. . . .

HSBC Finance, which typically holds its mortgages on its books, ended 2007 with 9,627 foreclosed properties, up from 8,809 at the end of the third quarter, company records show. While the average number of days to sell a foreclosed property has dipped from 186 to 183 in the same time period, HSBC's losses on the sale of foreclosed real estate have climbed, losing 14 percent of their value in the fourth quarter, up from a 9 percent loss in the third quarter.

Every modification or restructuring is a full re-underwriting, with customers' latest financial situations reviewed.

"To make it work, they have to be upfront about their debts and sources of income," he said.

To a degree, HSBC relies on computerized analysis to decide whether a customer is suited to a mortgage modification.

But "at the end of the day, it's a personal negotiation because every customer's situation is different," he said. "It requires skilled" employees.

I periodically hear people wondering if servicers of securities are doing modifications they wouldn't do on their own mortgage portfolio. I have believed all along that in fact portfolio lenders are much more aggressive about working out loans. They are also, I suspect, much faster at offloading REO quickly and taking the loss.

The question becomes whether the securitization rules or trustees themselves are hindering servicer efforts to work out loans, or whether servicers prioritize their workload with their portfolio loans first, then the securitized loans. I would guess it's a combination in a lot of cases.

REO market picking up

(Calculated Risk) From the LA Times: Sales of foreclosures are on the rise

THE MARKET may be down, but sales of bank-owned properties are picking up, with multiple offers being made in many cases as lenders drop their prices to move foreclosed homes off the books.
...
"A $650,000 to $700,000 appraisal a year ago in some areas is now worth about $350,000. It took a while for the banks to adjust their mentality to that." [said Earl Bonawitz, general manager for Century 21 Wright in Temecula]
...
John Karevoll, an analyst with DataQuick Information Systems, also is seeing that REO prices have come down and more homes are closing escrow than a few months ago.

"The big question is whether we're in a recession," he said. "If we are, we're in for some more downturn. If we're not in a recession, it's likely that prices have found their bottom and that most of the declines are behind us. That's true for REOs and the market as a whole."

Yes, some REO lenders are finally getting realistic with their pricing, and in areas with significant REO activity (and aggressive lenders) prices may be close to the eventual nominal bottom. This is one of the key points I made in House Price Mosaic.

But this article misses a far more important point: house price changes vary widely by area, not just by state, but even within cities. 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.