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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Conforming Borrower & Current Rate Example

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

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

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

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

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

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

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

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

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

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

Jumbo Borrower & Current Rate Example

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

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

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

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

A Win-Win Bankruptcy Reform

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

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

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

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

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

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

How far we have come.

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

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

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

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

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

Non-Profits Urge Reinstatement of DAPs After Home Sales Decline

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Key terms of the guarantee:

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

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

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

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

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

Modifications Rise Despite Subprime, Prime Disparity

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

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

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

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

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

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

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

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

From the American Banker:

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

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

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

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

NAR: Re-default Rate 50% of Modifications

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

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

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

ING DIRECT Suspends Foreclosures

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

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

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

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

Connecticut Gov. Calls for Six Month Foreclosure Moratorium

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

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

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

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

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

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

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

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

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

Bernanke Admits Misjudging Mortgage Crisis

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

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

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

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

Read the full New Yorker feature.

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

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

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

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

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

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

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

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

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

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

BusinessWeek: FHA-Backed Loans: The New Subprime

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

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

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

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

More Bad Debt

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

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

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

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

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

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

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

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

Back to Life

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

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

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

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

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

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

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

A Swelling "Tsunami"

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

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

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

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

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

Like Flies to Honey

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

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

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

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

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

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

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

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

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

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

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

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

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

Low Income? No Problem

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

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

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

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

Defaults and Denials

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

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

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

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

Business Exchange: Read, save, and add content on BW's new Web 2.0 topic network

A Warning to Homeowners

A personal finance column in The Washington Post in October noted that while the Federal Housing Administration's expanded $300 billion mortgage insurance program may help some struggling families keep their homes, the assistance could come at a steep price. For example, the government gets to keep half of any appreciation in the value of the house once it is sold, even after the mortgage is paid off, the Post pointed out.

For more of the Post's analysis, go to http://bx.businessweek.com/housing-market/reference.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

HUD Relaxes Hope for Homeowners Requirements

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Predicted House Price Changes, August 2008 vs. Nov. 2012
City	Price Change
Boston	-10.29%
Chicago	0.00%
Denver	-12.55%
Las Vegas	-12.97%
Los Angeles	-17.22%
Miami	-11.93%
New York	-13.40%
San Diego	-13.21%
San Francisco	-12.57%
Washington, D.C.	-15.32%
Composite	-10.38%
Based on CME House Price Futures, as of Nov. 19, 2008.

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

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

No wonder homes aren't selling.

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

Real And Predicated House Price Changes Peak-to-Trough, Nov. 2008 and Nov. 2012
City	Actual % Change From High Through 11/08	Predicted % Change From High Through 11/12
Boston	-9.10%	-18.45%
Chicago	-11.31%	-11.31%
Denver	-5.44%	-17.31%
Las Vegas	-35.89%	-44.20%
Los Angeles	-30.94%	-42.83%
Miami	-34.67%	-42.46%
New York	-10.65%	-22.62%
San Diego	-32.60%	-41.51%
San Francisco	-30.67%	-39.64%
Washington, D.C.	-22.39%	-34.28%
Composite	-21.96%	-29.29%
Based on CME House Price Futures, as of Nov. 19, 2008.

Those numbers are scary.

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

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

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

Those are simply incredible figures.

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

Any takers?

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

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

Amendments to Hope for Homeowners

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

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

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

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

Modifications to HOPE for Homeowners include:

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

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

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

Background

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

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

Immediate Payments to Subordinate Lienholders

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

Extending Loan Terms from 30 to 40 years

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

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

• Their mortgage must have originated on or before January 1, 2008.
  
  
• They cannot afford their current loan.
  
  
• They must have made a minimum of six full payments on their existing first mortgage and did not intentionally miss mortgage payments.
  
  
• The loan amount may not exceed a maximum of $550,440.
  
  
• The Upfront Mortgage Insurance Premium is 3 percent and the Annual Mortgage Insurance Premium is 1.5 percent.
  
  
• The holders of existing mortgage liens must waive all prepayment penalties and late payment fees.
  
  
• They do not own a second home.
  
  
• They did not knowingly or willfully provide false information to obtain the existing mortgage, and they have not been convicted of fraud in the last 10 years.
  
  
• They must follow FHA's long-standing and strict policy of fully documented income and employment.

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

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

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

Wachovia, Golden West Loans Probed by U.S. Prosecutors, SEC

(Bloomberg) U.S. prosecutors and the Securities and Exchange Commission opened an investigation into whether Wachovia Corp. misled borrowers or investors, San Francisco U.S. Attorney Joseph Russoniello said.

Prosecutors are examining whether Golden West Financial, which Wachovia acquired in 2006, fraudulently lured borrowers into mortgages, such as by switching them into more expensive loans or falsifying financial information so they could qualify, Russoniello said. His office and SEC investigators in San Francisco are also scrutinizing whether the banks misled investors about the quality of Golden West's loans, he said.

``We are looking down, in terms of what borrowers were told, and we're looking up at what investors were led to believe,'' Russoniello said in an interview today. He characterized the inquiry as preliminary.

Christy Phillips-Brown, a spokeswoman for Charlotte, North Carolina-based Wachovia and SEC spokesman John Nester declined to comment.

Wachovia, which agreed last month to be acquired by San Francisco-based Wells Fargo & Co. for $14 billion, came within hours of collapse in September after regulators told the bank to find a buyer. Some of the losses stemmed from payment-option adjustable-rate mortgages made by Golden West, the California lender it had purchased for $24 billion near the peak of the housing market.

The Great Mortgage Modification Pump - GOD SAVE US ALL!

(Mr. Mortgage) As you all know, this is a hot topic of mine. All of these proactive loan modification efforts now coming out of the woodwork by every bank, regulator and government agency is destined to keep the housing market completely depressed and home owners trapped, unable to sell or refinance, for decades.

They are rushing out with modification plans because higher paper grades are now defaulting at a staggering rate due to negative equity and home owners finding it better to walk away from all that debt and rent. What’s worse is that over the past five years there was a fundamental shift of how people viewed their home - from a place to live to their single largest investment.

Higher grade loans allowed a 50% debt-to-income ratio and higher due to no income documentation, meaning most of their after-tax income is going out each month to pay bills with the house payment being the largest. This is a tough nut to swallow when your house is down 50% in value and you are 30% upside down in your mortgage…yes, these are 20% down prime borrowers I am talking about. This makes the decision to walk all the easier. The easiest and quickest way for the underwater, over-leveraged home owner to stop the pain is to walk. The new plans are designed to make that less attractive by playing the low monthly payment game.

I have been telling all of you for a long time that they will have to modify every loan in America in order to fix this problem, but I never dreamed they would do it this way. Reworking loans to make ‘payments affordable’ without permanently reducing principal balances is the worst possible thing that can be done because it ensures the housing and foreclosure crisis will be with us for a long time. If these programs are widely accepted, housing is a dead asset class indefinitely.

However, they are accomplishing one thing by keeping borrowers leveraged-up, paying low monthly payments and adding all of that deferred interest and payments to the back of the loan - that’s bailing out the banks.

This style of modification does not sit well with owners of mortgage securities either, which make up the bulk of distressed mortgages. This is because deferred interest, 40-year terms and interest only teaser periods greatly reduces the cash flows and lengthens the duration of the security. For many securities owners, its better to have the home sold in foreclosure so they can recoup at least part of their investment. Again, the new plans only help the banks and the whole loans they own. These plans allow the bank to avoid a write down - the banks get their money cheap enough to offer 1.5% and still make money.

Homeowners - SMARTEN UP! The FDIC program keeps you fully in debt, renting your home for the rest of your life. This is a terrible solution. This is no different than other programs being offered by banks such as Chase, BofA and Wachovia. Why in the world would a sensible person accept such a program?

WITHOUT A PERMANENT PRINCIPAL BALANCE REDUCTION, NO MORTGAGE MODIFICATION PROGRAM WILL EVER WORK. Period…end of story.

If you walk away now your credit will be ruined for 5-10 years. So what. It will take much longer than that for home prices to ‘come back’. It will take even longer for borrowers to pay off the original mortgage loan amount, which could be 100% higher than the present value of the property. And if borrowers accept this they will have to pay down the loan because you are upside down and can’t sell!

Think about it folks! If your home value is down or you are underwater by 50%, which is not too bad especially is many areas in the bubble states, YOUR VALUE HAS TO GO UP 100% for you to break even- or for your home price to ‘come back’. Quit dreaming. It ain’t gonna happen.

If house prices stopped going down this very minute and started rising at a historical 5%-7% per year based upon a good overall economy, low interest rates, strong sentiment and rental rates it would take years for prices to get back to where they were. And we don’t have a good economy, low mortgage rates, strong sentiment or rising rental rates.

These mortgage modification efforts only lower monthly payments. They are no better than the toxic loans that caused all of this mess in the first place. They only kick the can down the road. They rely upon ‘extend terms to 40-years, deferred interest and low introductory rates’. THIS IS HOW WE GOT HERE IN THE FIRST PLACE - they were called ‘2/28s’, ‘interest only’ and ‘Pay Option ARMs’.

What they are trying to do is simple - play with monthly payments so borrowers find it easier to stay than walk away and rent. IT IS A TRICK, just like when the car salesman asks ‘how much can you afford to pay each month?‘…then the payment comes in low but your term is 84 months. You never end up getting right side up. As a society we need to break the ‘monthly payment’ habit and get back to reality which is saving money and spending less.

The fact is when you accept this type of modification YOU ARE RENTING. It is WORSE THAN RENTING because when you walk away and rent you don’t have the debt any longer. With these new mortgage modification programs, all of the debt stays with you forever.

AMERICA DESERVES PRINCIPAL BALANCE REDUCTIONS - YOU WERE DECEIVED. GET IT?!?

It is time for the banks to write down principal.

Home prices only got as high as they did from 2003 through 2007 due to extraordinary leverage created through exotic loan programs and easy credit that never existed before and never will again. From 2003 through 2007 everyone made $150k a year for the purposes of buying a home. Home prices responded by surging higher to meet the new found nationally high affordability level.

Everyone was suckered. Folks who really earned $150k a year went out and bought over priced homes not knowing they were suckered - they are now upside down by 50% in their home and have seen their life savings go up in smoke. They overpaid because the janitor was bidding against them for the $650k home using a stated income 100% interest only combo. Hey, the loan officer at the bank and the Realtor told him that ‘based upon this loan program he qualifies’. Why should he argue with his bank? They know best. They are the experts.

But now everyone knows it was all a fraud and none of those easy credit, high-leverage programs exist any longer. Prices are coming down to the real affordability levels using 15 and 30-year fixed rate loans and a down payment, which has rendered the nations financial institutions and millions of home owners instantly insolvent. The same household that earns $75k per year that two years ago could buy a $650k home with no money down can now buy a $275k home with 10% down. It now takes $150k a year and a large down payment to buy a $650k home.

100% stated interest only and Pay option ARMs will not return. Nor will 100% HELOCs. They were doomed to fail from their creation. The banks had modeling systems that they never stress tested. You mean to tell me that it never occurred to the smartest guys in the room to plug into the model that home prices could actually fall? That was a fatal error that the world is paying for. But the banks will never pay if everyone gets an FDIC or bank designed mortgage modification because they make the borrower take 100% of the hit.

THE SOLUTION

If not for the unregulated institutions providing unlimited credit and leverage to every household in America this never would have happened. It is time for the very same financial institutions that created all of this to do what’s right and re-underwrite every loan originated between 2003 - 2007 using prudent underwriting guidelines. Then, reduce the principal balance to what the borrower really earns using a 28% housing and 36% total debt-to-income ratio at a market rate 30-year fixed loan. When home owners are levered at 28/36 they are able to save money and live a decent lifestyle. If they go upside down in their property who cares - they are still able to save money.

If reducing the principal balance to 28/36 on a market rate 30-year fixed loan is $100k lower than the present value of the home, the bank can take can take the differential through a second mortgage or equity warrant. if the borrower sells or walks away then, the banks gets paid. But the home owner gets all of the upside. If the borrowers can’t prove income, then they need to leave the house and rent. They should have been renters all along. Anything less and the program will fail.

If they don’t do this right, then what one of my readers CR Harrington wrote me as his solution may happen over time. There are already many firms out there performing these types of audits with great success. - Best, Mr Mortgage

AN ALTERNATIVE PLAN by CR Harrington

Here is my solution to our problem… Give homeowners who are in default on their mortgages, $1000 from the treasury to be payable directly to an attorney who understands predatory lending. If the mortgage closing paperwork audit reveals any violation of Respa, TILA, etc, and further identifies any potential lending violations, especially on exotic mortgages (option ARM, Alt A, Interest only, Neg am, etc.) then allow an additional $9000 flat fee to the attorney to SUE the bank for fraudulent business practices, deceptive loan practices, concealment, theft by deception, whatever…. What if 70% of all loans between 2003-2007 were illegal? What if the banks don’t even own the loans beyond servicing, and the true holder of the note has imploded? Give the homeowners a year in the house during the lawsuit (to save up some money and keep one less house on the market) and then give the homeowners who win their homes in successful lawsuits, a free house - free and clear. Then they can sell their home for 50 - 60 (market value?) cents on the dollar to pay off their credit card bills and whatever is left over can be a sizable down payment on an owner financed home. Also, keep $10,000 at closing to pay back the Treasury to recycle back into the DISTRESSED HOMEOWNER LEGAL BAILOUT FUND!!! Home values will stabilize - (its a start….,) more money from home sales gets put back into the economy, everybody wins (except the criminals on Wall Street and defrauded investors who are going to sue anyways - they then can win and get the leftover homes that weren’t contested.) This is “trickle-up” and makes for a common sense solution that does not burden the tax-payer - very much.

European Securitization Update

The European Securitization Forum (ESF) is pleased to announce the publication of a new and much expanded Securitisation Data Report. This publication is the first publicly-available report that consolidates relevant aggregated European and US data for the securitisation markets. The report data is also available for download in Excel format, accessible via the 'downloadable data' button on the report's cover page.

Download the report in pdf format:

• Securitisation Data Report 2008:Q3
• Securitisation Data Report 2008:Q2
• Securitisation Data Report 2008:Q1

The report contains data on:

Term securitisation (ABS, CMBS, RMBS, CDOs):
Issuance activity (by country of collateral, type of collateral and rating); Securitisation issuance by deal size; Balances outstanding (as above for issuance); Rating changes by country of collateral and collateral type;	Credit spread changes; Changes in credit prices; Indices data;
Asset-backed commercial paper:	In addition:
Historical Issuance; Issuance by issuer nationality and by programme type; Volumes outstanding by issuer nationality and by programme type; Spread changes; Primary distribution pattern by investor type and investor location.	Global comparative issuance data; Securitisation market highlights and commentary; Methodological summary for the statistical data presented.

Recent Securitisation Data Reports

Winter 2008: European Securitisation Issuance Lower in Fourth Quarter and Second Half on Diminished Liquidity and Global Credit Market Turbulence; Issuance Rises by 9.6 Percent to €496.7 Billion for Full-Year 2007 on Strong First Half...
Download full report pdf
Extract report data xls

Autumn 2007: European Securitisation Issuance1 Drops in the Third Quarter to €89.5 Billion on Weakened Global Credit Market Conditions; Market Outstanding Volume Remains Flat at €1.32 Trillion as of 30 September, 2007...
Download full report pdf
Extract report data xls

Archived Data Reports

2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007

Mortgage Cram-Down Legislation Resurfaces

(Housing Wire) The cram-down debate is back: Sen. Richard Durbin (D-IL) re-introduced hotly-contested legislation Monday that would allow judges to modify the terms of distressed mortgages on primary residences in bankruptcy cases — and this time, sources suggest the legislation faces good odds of passing.

Durbin’s bill was introduced in what is expected to be a brief lame-duck session of Congress, convened to address the auto industry bailout and economic stimulus measures, according to a Reuters report. But it likely won’t be made into law until sometime in 2009, sources say.

Democrats, including Durbin in particular, have long advocated allowing judges to modify principal amounts of mortgages on primary residences in Chapter 13 bankruptcy cases filed by debtors; currently, such modifications are precluded by law. In contrast, Republicans and most industry groups have strongly opposed so-called ‘debt cram-down’ proposals for mortgages, saying that allowing cram-downs would add to the costs of a mortgage for most consumers and swell the ranks of borrowers filing for bankruptcy protection.

Senate Democrats tried and failed to get cram-down provisions included in the Housing and Economic Recovery Act of 2008 during July; and they tried again in the recent negotiations surrounding the creation of the Troubled Asset Relief Program. President-elect Barack Obama, however, has said repeatedly that his administration will make passing cram-down legislation a priority when he takes office in January.

In a statement released by Durbin’s office late Monday, the Senator signaled that his proposed bill wasn’t likely to be passed in the current Congress. “In many ways, today’s legislation is a marker for future action,” Durbin said. “The debate on how to help stabilize the financial sector will continue into the 111th Congress, and I intend to continue to fight for homeowners and taxpayers.”

But a lobbyist on Capitol Hill said that the bill faces very good odds of becoming law sometime in 2009. “This is a priority for the Barack Obama administration,” said the source, who asked not to be named.

Durbin’s bill also would force servicers to restructure any loan that qualifies under the criteria established for HUD’s Hope for Homeowners mortgage program. The current law merely makes H4H an option in loss mitigation, and earlier reports from HW have highlighted a slow start from the program. It would also require modifications to any loan managed by the government, as is the case at IndyMac Federal Bank, which is currently managed by the Federal Deposit Insurance Corp.

“Virtually every economist agrees that the financial crisis will not diminish, and the economy will not begin to recover, until we address the root cause of the problem: the failed mortgage market,” Durbin said. “We also have an obligation to make sure that taxpayer money is spent responsibly and that the American people see a return on this investment.”

Beyond his proposed legislation, Durbin also said he would chair a Senate Judiciary Committee hearing Wednesday on the role bankruptcy courts can play in easing the ongoing and worsening housing crisis.

FDIC’s Bair Pushes Loan Modification Program

(Housing Wire) The U.S. can prevent 1.5 million foreclosures at a taxpayer cost of $24 billion, Federal Deposit Insurance Corp. chairman Sheila Bair said Tuesday in remarks before Congressional leaders, as she continued to push the FDIC’s recent proposal for mass loan modifications for troubled borrowers. At a hearing of the House Financial Services Committee called to discuss oversight and implementation of the Emergency Economic Stabilization Act of 2008, Bair was clearly more focused than either of her counterparts at the Treasury or Federal Reserve on the need to manage down a growing number of foreclosures in the ailing U.S. housing market.

Bair said that “the failure to deal effectively with unaffordable loans and unnecessary foreclosures” was “the root cause of the current economic crisis,” taking clear issue with U.S. Treasury secretary Henry Paulson’s defense during the same hearing of the direction taken thus far with the $700 billion Troubled Assets Relief Program.

The FDIC late last week unveiled an updated loan modification program it has been lobbying Treasury and Bush administration officials to implement, despite the recent rollout of a systematic loan modification program at both Fannie Mae (FNM: 0.5007 +11.27%) and Freddie Mac (FRE: 0.645 +21.70%). The program rolled out by administration officials “falls short of what is needed to achieve widescale modifications of distressed mortgages,” Bair said last week. She wants to see a prgoram put into place that would see the government assume redefault risk on certain modified mortgages.

Tuesday morning, she detailed the mechanics of the sort of workout plan she said had been used successfully at IndyMac Federal Bank in the past few months — although it’s wholly unclear if the program’s results represent success or failure. The IndyMac modification plan was unveiled by the agency in August, targeting 40,000 of the 60,000 or so severely delinquent loans at the bank; Bair said in her testimony Tuesday that thus far, more than 5,000 borrowers’ loans have been modified under the program.

It’s not clear, however, if that implied modification rate — 12.5 percent of eligible severe delinquencies, and 8.7 percent of total delinquencies — is significantly better or worse than what the former Alt-A lender was seeing before its servicing platform was assumed by the FDIC. Under the program, eligible borrowers are offered “affordable and sustainable payments” using interest rate reductions, extended amortization and deferrment of principal.

Some policy experts that have spoken with HousingWire privately have suggested that if the FDIC’s modification approach at IndyMac is truly and honestly successful, and widely implemented, it will clearly incent performing borrowers to default in an effort to secure below-market interest rates on their own mortgage debt. “Bair and the FDIC are walking a fine line here,” said one economist, who asked not to be named because his view were his own and not those of his employer. “Her program needs to succeed, but not so much so that everyone decides they too ought to get a 3 percent mortgage.”

Such misgivings are likely behind the current Bush administrations hesitance to the new FDIC proposal, the source said. Nonetheless, Bair has been at the forefront of fighting for troubled homeowners, something that has won her praise from various sectors, including key Democrats. Whether she will continue her role at the FDIC under an Obama administration is yet unknown.
“Today, the stakes are too high to rely exclusively on industry commitments to apply more streamlined loan modification protocols,” Bair argued in her testimony. “The damage to borrowers, our communities, our public finances, and our financial institutions is already too severe. An effective remedy requires targeted, prudent incentives to servicers that will achieve sustainable modifications by controlling the key risk from the prior, less sustainable modifications — the losses on redefault.”

Bair’s proposal assumed a redefault, or recidivism rate, of 33 percent in coming up with her $24 billion cost figure. It’s at least worth considering that estimate is likely a little too sunny — redefault rates have averaged roughly 40 percent on modified loans, during even the best housing markets. And it’s unclear yet how many of the 5,000 modified loans at IndyMac under its new program will fall victim to recidivism, our sources suggested.

Paulson: Housing Correction Depends on Flow of Mortgage Lending

(Housing Wire) “There is no playbook for responding to turmoil we have never faced,” wrote U.S. Treasury Department secretary Henry Paulson in an opinion piece featured Monday in The New York Times. The rules for the implementation of funds under the Treasury’s Troubled Asset Relief Program, therefore, have had to adjust along the way, he said. It’s an approach that, thus far, has drawn some strong criticism for Paulson; but the Treasury secretary has also pulled in equal amounts of praise from some peers, as well.

Paulson has most recently come under fire for the announced abandonment of TARP funds from their original intent: purchasing troubled mortgage-backed assets from financial institutions’ clogged balance sheets. But in a press conference where the new strategy was unveiled, the former Goldman Sachs chief said he “will not apologize” for altering the Treasury’s strategy as market conditions evolve.

In an op-ed that acknowledged some of the rising criticism, Paulson wrote that the Treasury’s initial intent was to strengthen the banking system by purchasing troubled mortgage-related assets and securities, but “the severity and magnitude of the situation had worsened to such an extent that an asset-purchase program would not be effective enough, quickly enough.” Instead, he wrote, the Treasury exercised its authority by deploying a $250 billion capital injection program that — Paulson anticipated — would be followed by a troubled asset-purchasing program. But, by then, it was a too-little-too-late scenario.

“In mid-September, before economic conditions worsened, $700 billion in troubled asset purchases would have had a significant impact,” Paulson’s opinion piece read, in part. “But half of that sum, in a worse economy, simply isn’t enough firepower.” Read the op-ed.

A changing strategyPaulson echoed the same sentiments in testimony Tuesday morning before the House Committee on Financial Services, and suggested that further allocation of TARP funds wasn’t likely to be seen during the remaining few weeks of his tenure at the Treasury.

In his testimony, Paulson addressed several questions that have been asked of him in recent days: Why has the economy worsened under his new Congress-granted authority, why won’t he use his authority for other suffering industries, and why isn’t he addressing housing and mortgages in his execution of TARP, since these lie at the root of the economic turmoil?
“The purpose of the financial rescue legislation was to stabilize our financial system and to strengthen it,” he said. “It is not a panacea for all our economic difficulties.” Paulson acknowledged that the financial crisis has already spilled over into our economy and other industries, but said it will take time to get credit flowing and repair the financial system and, in effect, repair the economy. As for housing and forecosure, Paulson said Treasury had already taken key steps to strengthen housing. Read his testimony.

“The most important thing we can do to mitigate the housing correction and reduce the number of foreclosures is to increase access to lower cost mortgage lending,” he said. “The actions we have taken to stabilize and strengthen Fannie Mae and Freddie Mac, and through them to increase the flow of mortgage credit, together with our bank capital program, are powerful actions to promote mortgage lending.”

His remarks contrasted sharply with assertions from Federal Deposit Insurance Corp. chairman Sheila Bair, who told the committee that enough wasn’t being done to help troubled homeowners.

Stability now?Like Paulson, Federal Reserve chief Ben Barnanke stressed that the TARP program was needed and defended the government’s decisions thus far in the area to critical lawmakers. “The value of the TARP in promoting financial stability has already been demonstrated,” he told legislators in the same hearing. “Failure to prevent an international financial collapse would almost certainly have had dire implications for both the U.S. and world economies.”

Bernanke also suggested that the nation’s credit crisis had begun to ease. “There are some signs that credit markets, while still quite strained, are improving,” he said, although he cautioned that the economic system was far from out of the woods.

“Overall, credit conditions are still far from normal, with risk spreads remaining very elevated and banks reporting that they continued to tighten lending standards through October,” Bernanke said. “There has been little or no bond issuance by lower-rated corporations or securitization of consumer loans in recent weeks.”

The Fed has recently told financial institutions to begin lending, although the joint policy statement on the issue is more a suggestion to banks, than a directive. “It is imperative that all banking organizations and their regulators work together to ensure that the needs of creditworthy borrowers are met in a manner consistent with safety and soundness,” he told lawmakers.

Of course, banks in the meantime have continued to focus on deleveraging — witness Citigroup Inc. (C: 8.39 -5.62%), which said it would lay off 20 percent of its employees, and touted its efforts to delever thus far as a positive point. Such a stance suggests more deleveraging has yet to be done.

Zillow: US home values declined 9.7% y-o-y in 2008Q3

(Zillow.com) U.S. home values continued to slide for the seventh consecutive quarter, declining 9.7 percent from a year ago, and falling 12.8 percent since the market peak in 2006. This is also the first quarter a significant number of markets show flat or negative five-year annualized change. Additionally, one-third of homes sold in the past 12 months sold for a loss, and 14.3 percent of all homeowners have negative equity.

Zillow Q3 Real Estate Market Reports track 163 metropolitan statistical areas (MSAs) throughout the U.S., identifying market trends including, but not limited to: five and 10-year annualized change, homes selling for a loss, negative equity and foreclosure transactions.

Click here to view this data for the nation and 163 MSAs. For more information about Zillow Q3 Real Estate Market Reports, including the press release, additional graphics, or to access the Zillow Q3 Homeowner Confidence Survey, visit the special Real Estate Market Reports section in the Zillow press room.

The Economics and Ethics of Mortgage Default

(Felix Salmon) Noel Sheppard is mad at Kathleen Pender for educating consumers about their financial options. Pender's article is headlined "Are you an idiot to keep paying your mortgage?", and, yes, Joe, it does lay out a pretty strong argument in favor of going into arrears on your mortgage, in the hope and expectation that the loan will be restructured once you're 90 days delinquent.

It's similar to the argument that was put forward by Mark Gimein earlier this month:

Lenders and developers have through the years shown a great deal of ability to maneuver unsophisticated buyers into crummy real estate deals. The reason that the one act rule exists is to put the risk of these deals on the lender, not the buyer. The purpose is to discourage bad underwriting, dishonest marketing, and unjustified price inflation by making it very, very hard for a lender to get back the money if they lent more on a mortgage than a house was worth. The system is designed to let people walk away. California has a system that puts a higher premium on keeping people out of debt slavery than avoiding bank losses. I see nothing wrong with that legislative choice.

Except now, homeowners get to have their cake and eat it: rather than walk away from their house, they can stay in it, become delinquent on a mortgage, and then have their lender restructure their loan into something easier to repay.

A few caveats are, of course, in order. For one thing, your loan has to be owned or guaranteed by Fannie Mae or Freddie Mac, and it has to be worth at least 90% of your home's present value. For another thing, you have to be paying more than 38% of your income in mortgage payments right now. And then of course there's the ding to your credit, the importance of which is easy to overstate -- even the official FICO spokesman says that "one isolated delinquency will do less damage to your score than it has in the past," and that "if it was me and I was certain that I could keep my home even after missing a couple payments by working out a deal with the lender", that's what he'd do.

If the government passed a bill giving $1,000 to anybody who asked, then it would be entirely responsible for every personal finance columnist in the land to give advice on exactly how to get that money. And the situation here is similar: the government is passing a bill which essentially gives money, in the form of greatly reduced liabilities, to people who default on their upside-down mortgages. Incentives matter: if you reward default in this manner, then people will be more likely to default, and quite rightly too.

Peter Schiff notes that the scheme rewards more than just default: it rewards seemingly crazy behavior like quitting one's job.

Peter Schiff, president of Euro Pacific Capital, predicts that many homeowners who have little or no equity will stop paying their mortgage and then reduce their income to get the biggest payment cut possible. They could stop working overtime or, if two spouses work, one could quit. After the modification, they could try to boost their income again.
"This is a once-in-a-lifetime opportunity," Schiff says. "People are going to feel like complete morons if they don't participate. The people getting punished are the ones who never made an irresponsible decision to buy a house they couldn't afford."

He's right: if you can get your principal reduced by hundreds of thousands of dollars just by quitting your job for a few months, that's a deal which makes a certain amount of sense. It's a pretty perverse incentive for the government to give you, but that's the hand that millions of Americans are now being dealt. And it's entirely the fault of the people who dreamed this scheme up.

Remember that it's not a crime to default on your mortgage. The banks are perfectly happy scraping around in the fine print of credit-card agreements to screw their customers; the customers should be perfectly happy similarly to optimize their own situation with respect to the banks. It's an unfortunate situation all round, but it's not something you can blame the financial press for.

ASF: Buy Loans Out of Securitization Trusts

(Housing Wire) While interim assistant Treasury secretary for financial stability Neel Kashkari was busy being dressed down by lawmakers in a hearing Friday — and stole most of the financial press’ headlines, as a result — mortgage market participants should probably pay much more attention to the ideas emanating from the American Securitization Forum.

The reason: the group is suggesting that Treasury purchase individual loans out of securitization trusts as part of the Troubled Asset Relief Program, or TARP.

The surprising suggestion, which comes after Treasury secretary Henry Paulson said Thursday that TARP funds would not be used to purchase troubled assets off the balance sheets of banks and financial institutions, is telling — precisely because the Treasury seems to have signaled earlier in the week that asset purchases are off the table. So why keep pushing now?

“Historically, whole loans have not been sold out of securitization trusts by servicers for a variety of legal, tax, and accounting constraints,” said Tom Deutsch, deputy executive director of the American Securitization Forum, in testimony Friday to a subcommittee hearing within the Committee on Government Oversight and Reform.

“The ASF supports, where feasible, facilitating such purchases as part of a broader range of loss mitigation alternatives, and has recently undertaken a review of the various opportunities and obstacles for servicers to sell below par individual distressed loans out of MBS to the TARP.”

Parsing Treasury’s stance
Understanding why Deutsch would continue to push this option after the Treasury signaled other priorities for TARP funds requires a close reading of Paulson’s actual words from earlier this week: he said Treasury would not be looking to buy mortgage-related assets, for one thing, rather than specifying mortgages outright. Which means nearly everyone has realized the troubles involved in trying to sell securities, but may have also realized that selling loans out of a trust might be feasible (at least from a preserve-the-balance-sheet sort of standpoint).

Most securitization trusts are (for now, at least) off-balance sheet entities, and selling loans out of the securitized pool, rather than the securities backed by them, could possibly avoid the mark-to-market headaches that would come with outright RMBS and CDO sales.

Note also that the Treasury secretary also suggested that focus going forward will be placed directly on stimulating growth in the securitization markets; and while the focus here is on consumer ABS, Paulson did note that Treasury would consider a program for residential mortgages, as well. That program is likely to involve some form of financing for repo operations, as Paulson suggested, but is it possible that it might also involve clearing bad loans out of securitization trusts?

Right now, that’s anyone’s guess. But the fact that ASF’s Deutche continues to push the subject after the fact — not to mention various memorandums HW has been been privy to, under an agreement not to circulate — suggest that Treasury officials may at least be considering the idea. And the goal, of course, is to coax buyers back into securitization markets, restoring lending activity.

The sale of distressed loans to third parties has not typically been a loss mitigation option that servicers had available to them when dealing with private-party securitizations. But unless the securitization servicing agreement prohibits the sale of these types of loans, and as long as appropriate relief from the accounting and tax consequences is obtained, the ASF said it would consider reinforcing a market practice that the servicer be permitted to consider such a sale as one option among the loss mitigation techniques it may consider when deciding which course of action to pursue with a defaulting loan.

“Adding the sale option, of course, does not change the servicer’s responsibility to analyze what loss mitigation strategy is optimal to pursue,” Deutsch said in his testimony. “Ultimately, the servicer’s decision must still be based on its analysis of which approach would result in the maximum net proceeds, or net present value basis, to the securitization trust.”

Deutsch also backed Federal Deposit Insurance Corp. chairman Sheila Bair’s proposal to see the government guarantee loan modification redefault risk (see story), and suggested that TARP funds be used to provide lender or guaranty facilities for servicer advances. Servicers are being squeezed by capital needs as defaults rise and the need to advance funds to investors eats away at available cash, something we’ve covered in the past.

All three ideas — loan purchases, assumption of recidivism risk, and funding servicer advances — would support the Treasury’s stated objective of mitigating foreclosures, Deutsche argued.

“High Touch” Servicer Expands to 24 States

(Housing Wire) National Asset Direct, Inc., an advisor and portfolio manager focused on the distressed mortgage market, said late Thursday that the Nebraska Department of Banking and Finance had granted a license to service first and subordinate lien mortgage loans to iServe Servicing, Inc., a wholly owned subsidiary of NAD.

With the latest authorization, iServe is now authorized to service residential mortgages in a total of 47 states — including California, Florida and Texas. iServe is among the new entrants into the “high touch” servicing space that targets the needs of distressed mortgage investors; HousingWire has covered the emergence of this space at length in the past few months. “High-touch” servicing has grown in demand from regional and national investors looking for aggressive loss mitigation strategies on loan portfolios they acquire — and with the number of sub- and non-performing notes continuing to grow, the demand for custom servicing platforms has grown, as well.

“Improving the way that distressed mortgages are serviced is a critical but overlooked aspect of the current plan to fix the housing market,” said Louis Amaya, chief investment officer and chief operating officer at National Asset Direct.

“In order for this plan to succeed, we believe that servicers must re-evaluate each mortgage on a case-by-case basis with an eye to mitigating risk and preventing foreclosures, if possible. If the borrower does not have the ability or willingness to stay in the home, opportunities should be created to allow the borrower to exit the property with dignity by allowing them to share in proceeds if they assist in creating a preferred liquidation strategy, thereby helping them to make a transition.”

HW has heard from more than a few investors in the past few months lamenting what they call a “one size fits all” servicing approach among many of the larger servicing shops; that’s not to say, however, that some of the larger shops are refusing to cater to the custom needs of distressed mortgage investors. GMAC’s Residential Capital LLC recently rolled out its own custom servicing division this past August, and hired former EMC Mortgage CEO John Vella to lead the effort.

It remains to be seen, however, if the larger servicing shops can compete with the customized platforms being put into play by firms such as iServe, among others. Amaya said his firm limits loss mitigation specialists to roughly 150 cases each, a number far lower than the industry average.

“While the vast majority of this industry continues to work on a volume basis … toward sub-performing and non-performing mortgage assets,” NAD’s Amaya said, “iServe is uniquely positioned to provide tailored, private-sector solutions to home owners.”

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

FDIC Loss Sharing Proposal to Promote Affordable Loan Modifications

(FDIC Press release) Although foreclosures are costly to lenders, borrowers and communities, the pace of loan modifications continues to be extremely slow (around 4 percent of seriously delinquent loans each month). It is imperative to provide incentives to achieve a sufficient scale in loan modifications to stem the reductions in housing prices and rising foreclosures.

Modifications should be provided using a systematic and sustainable process. The FDIC has initiated a systematic loan modification program at IndyMac Federal Bank to reduce first lien mortgage payments to as low as 31% of monthly income. Modifications are based on interest rate reductions, extension of term, and principal forbearance. A loss share guarantee on redefaults of modified mortgages can provide the necessary incentive to modify mortgages on a sufficient scale, while leveraging available government funds to affect more mortgages than outright purchases or specific incentives for every modification. The FDIC would be prepared to serve as contractor for Treasury and already has extensive experience in the IndyMac modification process.

Basic Structure and Scope of Proposal

This proposal is designed to promote wider adoption of such a systematic loan modification program:

by paying servicers $1,000 to cover expenses for each loan modified according to the required standards; and

sharing up to 50% of losses incurred if a modified loan should subsequently re-default

We envision that the program can be applied to the estimated 1.4 million non-GSE mortgage loans that were 60 days or more past due as of June 2008, plus an additional 3 million non-GSE loans that are projected to become delinquent by year-end 2009. Of this total of approximately 4.4 million problem loans, we expect that about half can be modified, resulting in some 2.2 million loan modifications under the plan.

Eligible Borrowers: The program will be limited to loans secured by owner-occupied properties.

Exclusion for Early Payment Default: To promote sustainable mortgages, government loss sharing would be available only after the borrower has made six payments on the modified mortgage.

Standard NPV Test: In order to promote consistency and simplicity in implementation and audit, a standard test comparing the expected net present value (NPV) of modifying past due loans compared to the strategy of foreclosing on them will be applied. Under this NPV test, standard assumptions will be used to ensure that a consistent standard for affordability is provided based on a 31% borrower mortgage debt-to-income ratio.

• Systematic Loan Review by Participating Servicers: Participating servicers would be required to undertake a systematic review of all of the loans under their management, to subject each loan to a standard NPV test to determine whether it is a suitable candidate for modification, and to modify all loans that pass this test. The penalty for failing to undertake such a systematic review and to carry out modifications where they are justified would be disqualification from further participation in the program until such a systematic program was introduced.

• Reduced Loss Share Percentage for "Underwater Loans": For LTVs above 100%, the government loss share will be progressively reduced from 50% to 20% as the current LTV rises.¹ If the LTV for the first lien exceeds 150%, no loss sharing would be provided.

• Simplified Loss Share Calculation: In order to ensure the administrative efficiency of this program, the calculation of loss share basis would be as simple as possible. In general terms, the calculation would be based on the difference between the net present value of the modified loan and the amount of recoveries obtained in a disposition by refinancing, short sale or REO sale, net of disposal costs as estimated according to industry standards. Interim modifications would be allowed.

• De minimis Test: To lower administrative costs, a de minimis test excludes from loss sharing any modification that did not lower the monthly payment at least 10 percent.

• Eight-year Limit on Loss Sharing Payments: The loss sharing guarantee ends eight years of the modification.

Impact of the Program
The table below outlines some of the basic assumptions behind the scale of the plan and its expected costs.² To summarize, we expect that about half of the projected 4.4 million problem loans between now and year-end 2009 can be modified. Assuming a redefault rate of 33 percent, this plan could reduce the number of foreclosures during this period by some 1.5 million at a projected program cost of $24.4 billion.

---

¹ Current LTV can be demonstrated by a Broker Price opinion, or BPO.

² Note: These figures have been updated from previous summaries to reflect a narrower application of the program to non-GSE loans that become delinquent through year-end 2009.

Help-for-Struggling-Homeowners Central

(Joe Nocera in the NYT Executive Suite) In my column this week, I mention, at least in passing, six plans that I’ve read that offer ideas for helping struggling homeowners, and in so doing stem the rising tide of foreclosures and stabilize housing prices, two things that are badly needed if the financial crisis is ever going to ease. (This of course doesn’t include the plan that has been put together by the Federal Deposit Insurance Corporation, which, pathetically, the Treasury Department and the White House still haven’t approved.) I’ve also seen a handful of other plans that deserve consideration that didn’t make it into this week’s column. So without further ado, here they are, in no particular order:

The Columbia Business School Plan. That’s my name for it because its authors are R. Glenn Hubbard, the dean of the business school (and the former chairman of the Council on Economic Advisers under President Bush), and Christopher Mayer, a professor at the business school. Their idea is simplicity itself: allow all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25 percent. Here’s how they describe it in The Wall Street Journal.

The Peter Wallison Plan. Mr. Wallison, of the American Enterprise Institute, who may be the world’s greatest critic of Fannie Mae and Freddie Mac, thinks that now that the government has taken them over, it should use them to help homeowners. With a colleague, Ed Pinto, he explains his reasoning on the A.E.I. Web site.

The American Homeowner Preservation Plan. This is the plan where this nonprofit organization uses tax-exempt bonds to buy up mortgages and lease the homes back to the former homeowners. Here is a description of it.

The James Grosfeld Plan. It is complicated but worth paying attention to. Mr. Grosfeld spend much of his career in homebuilding–he was the long-time chief executive of Pulte Homes–and besides, his is the only plan that would make money for the federal government. Here is his description.

The Thomas Peterffy Plan. It doesn’t get any simpler than this. Mr. Peterffy argues that the only way we can move quickly enough — and help enough people — is to simply give every homeowner $250 a month for five years to help pay the mortgage on a primary residence. He describes it here.

The William Browning Plan. This may be my favorite, for its sheer brevity and pithiness. Bill, an artist and former investment banker, has been a correspondent of mine for several years, and recently sent along this plan.

And of course, there is Daniel Alpert’s Freedom Recovery Plan, and the William Hambrecht Plan, which I have talked about here, here, here and here.

I would like to post the details of the William Frey Plan, but he hasn’t yet given me permission. (It is contained in a letter he wrote to Treasury Secretary Henry Paulson and the Federal Reserve chairman, Ben Bernanke.) If and when he does, I’ll add it to this list.

Can Anyone Solve the Securitization Problem?

Can Anyone Solve the Securitization Problem?

By Joe Nocera

(Joe Nocera in the NYT Executive Suite) So now the mortgage finance giants Fannie Mae and Freddie Mac say they are going to institute a mortgage modification program. Well, good for them. Announced this afternoon, the plan calls for struggling homeowners with mortgages held by Fannie and Freddie to have their payments reduced to 38 percent of their gross income through a combination of interest rate reductions, principle reductions and longer repayment terms. This comes on the heels of Citigroup’s announcement on Monday that it would undertake a mortgage modification program, which came on the heels of a similar announcement last week from JPMorgan Chase, which came on the heels of Countrywide’s announcement, and so on.

In other words, just about everyone in the mortgage business has come to see the wisdom of mortgage modification — except one important player: Wall Street.

You see, all of these programs deal only with “whole loans” — that is loans on the books of the institutions, unencumbered by securitizations. So far, the attitude of all involved when it comes to securitized mortgages is to throw up their hands and say — “it’s too hard to deal with!” And it may well be: mortgages that were sold to Wall Street and wound up in mortgage-backed securities have been sliced and diced and sold and resold to investors with varying risk tolerances. They are serviced by people who owe a fiduciary duty to all these investors, no matter what their place on the risk continuum.

James Grosfeld, the former chief executive of Pulte Homes, summed up the problem in a recent e-mail message:

There are well over $1,000,000,000,000-$1,500,000,000,000 of mortgages trapped within mortgage-backed securities. These are the most risky mortgages ever issued — mortgages poorly underwritten and often with unaffordable payment shock at the end of teaser rate periods. Pool losses will be unprecedented.

However, there has been no successful effort on a broad scale to reform these mortgages because of contractual obligations of trustees and servicers to bondholders. Simply put these fiduciaries are scared of being sued by bondholders if they modify loans into affordable new mortgages. Every effort to jawbone trustees/servicers to reform these mortgages quickly and on a mass basis has failed and will fail. These fiduciaries fear financial liability, and servicers are overworked and have no meaningful financial incentive to provide this desperately needed refinancing.

Recently, certain hedge funds have threatened to sue fiduciaries of these securitizations if they refinance loans. Congressional hearings are taking place with respect to these threats. Nothing to prevent mass foreclosures of these loans will be effective unless Congress acts affirmatively to remove liability and provide financial incentives for refinancing. Jawboning bondholders and fiduciaries has not and will not work.

The situations borders on the absurd. Investors will not allow mortgage modifications that would hurt them more than some other investors — thereby insuring that everyone gets hurt even more as foreclosures continue. And as foreclosures continue, the financial crisis continues to deepen because foreclosures on Main Street mean billion-dollar write-offs on Wall Street. And struggling homeowners can only pray that their mortgage is still held by the bank and not sold to Wall Street — in which case they are out of luck. It is like flipping a coin to see if you can hold onto your home.

Wednesday, the House Financial Services Committee will hold a hearing on the issue of what, if anything can be done about the securitization problem. The hearing came about because the committee chairman, Representative Barney Frank of Massachusetts, read in The New York Times about two hedge funds that were telling mortgage servicers they would sue if the servicers tried to modify any mortgages. Inexplicably, the two hedge fund managers whose heads Mr. Frank seemed to demanding on a platter are not being called to testify. But maybe that is a good thing. Maybe it means the committee genuinely wants to see if this is a solvable problem (which would almost surely require legislation), rather than turn the hearing into an exercise in hedge-fund bashing. The problem is real, and it deserves serious consideration. I’ll be writing about Mr. Frank’s hearing in my column on Saturday.

Bubble-States Awash in Negative-Equity

(Mr. Mortgage) One of my primary arguments that the foreclosure crisis has a long way to go has to do with to the massive amount of negative equity in the hardest hit, most populated ‘bubble states’. The very states that added so much to the great wealth effect.

Negative-equity is FICO-score and loan type blind. In the new era of ‘my house is my largest investment’, most everyone feels the same way about paying into a massively depreciated asset. This is even more the case when the payment increases on an exotic-type loan such as a 2/28, Pay Option ARM or even a Prime 5/1 Interest Only.

In the hardest hit states, those not in a negative equity position have very little equity remaining given the current data. This is why the all-important move-up buyers are non-existent and over half of the homes sold are from the foreclosure stock.

With lending tightened to such a large degree, sizable down payments are now required to attain the best financing. Ideally, a buyer wants to extract this and all other purchase expenses through the sale of the property. However, with the median Loan-to-Value’s in the bubble states being so high there is not enough left over from the proceeds to pay a real estate agent, put a down payment on the new property and cover all of the other costs associated with moving. People are stuck in their properties unable to move or refinance.

This recent data from Loan Performance below corroborates my research. The first chart shows the amount of negative equity in each state. In addition, I added the top 10 foreclosure states per Realty Trac in the third column. With the exception of Illinois and Indiana, the top 10 negative equity states are the same as the top 10 foreclosures states. Nevada and Michigan top the list…a solution there may be bulldozers and gasoline.

This second chart shows the median Loan-to-Value in each state. The top negative-equity states have the highest median Loan-to-Value ratio (littlest amount of equity). These housing markets within these states are frozen, as the majority home owners are unable to freely transact. Note, that this estimate of equity is based upon Loan Performance’s proprietary House Price Index, which may or may not be accurate - home price indexing has been an impossible task for everyone to date.

The charts above scream loudly about what WILL happen, as loans now considered ‘high-grade’ or ‘Prime’ begin to adjust or even borrowers in 30-year fixed rate loans who put 20% down but bought at the wrong time find it a financially prudent move to de-leverage and walk away. We are seeing this happen today in ever increasing numbers.

Source: Inman News: Nearly 10 million homes upside down

The Underwhelming Frannie Loan-Mod Plan

(Felix Salmon) The Frannie loan-mod plan has arrived, and it's not particularly exciting. Among the more obvious problems:

• It applies only to mortgages owned by Frannie, which means, by definition, that it doesn't include subprime mortgages. FHFA is trying to apply moral suasion -- but no cash -- to persuade other mortgage holders to adopt the same plan. Good luck with that.
• It doesn't even begin to address the problem of mortgages which have been securitized, rather than being held by a single bank.
• It's based on the idea that servicers "have dedicated personnel who are experienced in working with borrowers
  who are struggling with finances, but who are eager to keep their homes". Not nearly enough of them they don't.
• It requires borrowers to be 90 days delinquent -- and therefore gives many borrowers with mortgages over 38% of their gross monthly income a massive incentive to cease making any mortgage payments now.
• The onus is on the borrower to initiate proceedings, providing a package including "monthly gross household income, association dues and fees, and a hardship statement". For $800 per mod, servicers aren't going to be proactive about helping get this kind of thing done, especially given how overworked they are already.

In a quite extraordinary turn of events, FHFA director James Lockhart said in his statement that "we have drawn on the FDIC's experience and assistance, and have greatly benefited from the FDIC's input", yet the FDIC's Sheila Bair then turned around and released her own statement, saying that the plan "falls short of what is needed to achieve widescale modifications of distressed mortgages".

Clearly this is not going to be the last word when it comes to government attempts to help stabilize the housing market. It's probably going to be the last word until January 20, though; after that, Bair might find Treasury and the White House more amenable to her ideas.

FanFred’s NEW PLAN Keeps Borrowers Underwater in Neg-Am’s & Teasers

(Mr. Mortgage) The great new and improved big plan to save the housing sector involves giving 40-year terms, adding balances to the end of the loan and offering teaser rates. IT WAS THESE EXACT PRACTICES THAT GOT US HERE IN THE FIRST PLACE! They were called ‘interest only’ and ‘Pay Option ARMs’.

This ‘new’ program is nothing new at all. It is simply an aggregation of a bunch of stuff brought forth previously that just makes everyone renters. The government’s new plan of reducing rates, extending terms and allowing negative amortization is being done primarily to keep borrowers from walking and renting by competing with rentals.

Why walk from your home when you can essentially rent your own home for the same? That is what the government is banking on. But in doing this the borrower stays underwater and highly leveraged. Its sad when it takes reducing rates to 1-2% to get the borrowers to be able to afford their mortgage. It highlights just how over-leveraged the housing system is. If this new program is widely adopted and successful, it ensures lost future DECADES for housing.

This new plan certainly does not instill any confidence in new buyers because it makes everything much more opaque. It makes true valuations much more difficult to derive.

This plan does not solve the problem - that home owners are hopelessly underwater and over-leveraged to their home. They can’t sell or refi. In turn, they are making a wise financial decision and walking away. Negative equity cuts across all loan types and borrower demographics.

Another main problem is that the borrowers have to produce income documentation. Remember, in the Alt-A universe 83% of all loans were limited documentation (stated income). In the Subprime universe 55% were stated income and in the Prime world, some 35% were limited documentation. How many that lied on their original loan application will be willing to give the real information now?

Additionally, by the time borrowers have missed so many payments they have been beat up by the lender for months. Many just give up and don’t care anymore. You would be surprised how hard it is to get borrowers to help themselves even with massive principal balance reductions, which are not being offered through the program to the best of my knowledge.

It is impossible to quantify, but I still maintain that programs that do not address the root problem will promote bad behavior by good borrowers looking to benefit. There are millions underwater in their property perfectly able to make their payments that may chose to default as a means to better their balance-sheet.

Today’s hype was just that…a non-starter ’solution’ that ultimately turns home owners into leveraged renters because banks refuse to reduce the principal balance. Until principal is waived for good, no solution will work.

I highly urge you to read the two posts below regarding the terrible solutions being brought forth by the government. - Best, Mr Mortgage

• Banks Giving 1-2% Teaser Rates as Modifications (6) Posted on November 4, 2008 5:20 PM
  Posted on November 11, 2008 12:26 PM
• NO MORE MORTGAGE PAYMENTS SOON - Get Ready to Default! (62)
  Posted on November 4, 2008 5:20 PM
• Bubble-States Awash in Negative-Equity (10)
  Posted on November 10, 2008 6:44 PM

JP Morgan’s Loan Mod Program Prevents 250,000 Foreclosures

(Housing Wire) A look at JP Morgan Chase & Co.'s prime mortgage delinquency rate. (Source: JPM investor presentation)

JP Morgan Chase & Co. announced Thursday it has prevented 250,000 foreclosures since beginning its active loan modification process in early 2007, according to a MarketWatch report. The figure is part of a presentation scheduled to be given at an upcoming conference, in which JP Morgan is set to reiterate its prime mortgage losses could total $300 million in early 2009.

JP Morgan Chase began in 2007 to actively pursue modification options with customers who held adjustable-rate mortgages that were scheduled to reset. Despite the efforts, delinquencies continued to rise, according to MarketWatch.

JP Morgan in late October became the latest large lender to launch an aggressive loan modification plan, saying it would look to implement a “mass mod” program while voluntarily enacting a foreclosure moratorium on loans it owns in an effort to qualify existing troubled borrowers for the new, expanded program. The expansion of its existing modification efforts came after JP Morgan acquired failed thrift Washington Mutual Inc. - and all of its struggling borrowers.

“It doesn’t make sense for us to wait” to tackle the problem, said Charles Scharf, an executive at the firm, according to the Wall Street Journal on Nov. 1.

JP Morgan told HousingWire earlier this week that, in addition to its expanded modification plan, the bank is eager to offer Hope for Homeowners refinancing to its current customers, although it expects a slow start on that end.

2009 Conforming Loan Limits Unchanged, FHFA Says

(Housing Wire) The conforming loan limit — the maximum size of loans that can be purchased by Fannie Mae (FNM: 0.7647 +7.70%) and Freddie Mac (FRE: 0.8896 +4.66%) — will remain at $417,000 during 2009, the Federal Housing Finance Agency announced Friday. The only areas where loan limits will change are considered “high-cost” areas; the new limits there are equal to 115 percent of the local median house prices and cannot exceed 150 percent of the standard limit of $625,000 for single-unit homes.

The national loan limit, as defined by provisions with in the Housing and Economic Recovery Act of 2008, is based on changes in average home prices over the previous year. It cannot decline from year to year, as provided by the act. The decision to lave the national limit unchanged - not increased - was influenced by declines in monthly and quarterly house price indexes over the past year, according to FHFA. Home prices have fallen in “virtually every” measure, with many showing larger declines than the 5.9 percent purchase-only index decline and the 1.7 percent all-transactions index decline seen over roughly the past 12-month period, FHFA said.

A report released by Altos Research LLC confirmed the most recent month in a long trend of home price declines. Altos announced on Friday home asking prices continued to fall in October - down 1.5 percent from the previous month. Although asking prices demonstrate the continued in a downward slump in the housing market, the FHFA is not authorized to lower the national loans limit. The only direction the Recovery Act allows it to take is a limit increase. FHFA has said it has not considered that move for 2009.

“FHFA has not yet determined whether it will continue to use a currently existing FHFA price index to gauge price movements in future years,” officials said in a media statement. “For this year, however, all reliable metrics point to lower prices, and a price decline of any size is sufficient to determine that the national limit will not change.”

The new limits for “high-cost” areas go into effect for loans purchased by the GSEs in 2009, except for loans made eligible for purchase under the Economic Stimulus Act, which sets generally higher limits on these exceptions. Under the Stimulus Act, loans originated from mid-2007 through 2008 are limited to 125 percent of local price medians - up to a $729,750 maximum. Despite the discrepancy between the limits under the act and the new “high-cost” area limits, FHFA said in a statement that the higher limits will be favored for loans originated in the timeframe defined by the Stimulus Act.

Loan limits for two-, three-, and four-unit properties will remain at 2008 levels, as well, FHFA announced: $533,850 for two-unit, $645,300 for three-unit and $801,950 for four-unit properties.

FHFA used median house price estimates calculated by the Federal Housing Administration of the Department of Housing and Urban Development, as well as aggregated Radar Logic Inc. data and other information, to calculate loan limits. For anyone wishing to contest its median price estimates, HUD plans to allow a 30-day appeals period, details of which FHFA said FHA would announced later Friday in a mortgagee letter.

For more information, visit the Office of Federal Housing Enterprise Oversight Web site.

Ginnie Mae Makes Mortgage Market History

(Housing Wire) Mark October 2008 down in the annals of mortgage history: it represents the first time that fixed issuance volume from Ginnie Mae formally surpassed similar issuance volumes from either Fannie Mae (FNM: 0.769 +8.31%) or Freddie Mac (FRE: 0.89 +4.71%). According to data provided to HousingWire by eMBS, Inc., fixed issuance in October at Ginnie Mae rose to $27.8 billion, while Fannie saw fixed issuance fall to $27.7 billion; Ginnie had already been outpacing Freddie Mac’s fixed issuance volume since July, and Freddie posted just $14.4 billion in fixed issuance volume last month.

Fixed issuance refers to MBS deals backed by fixed-rate mortgage products, and represent the lion’s share of total issuance in the agency and government-backed MBS markets. Adding in ARM and hybrid ARM issuance totals, eMBS’ data shows that Fannie maintained a very slight overall lead in total issuance volume during October, booking $29.6 billion in total volume to Ginnie’s $29.5 billion.

The growth of Ginnie Mae says as much about the resurgence of FHA loan products in the nation’s ailing mortgage market as it does about the shrinking violets that have become the GSEs in the wake of their conservatorship with the Federal Housing Finance Agency. Fannie Mae saw its total issuance fall a sharp 27.6 percent between September and October, while Fannie Mae saw total issuance fall even further, at 33.5 percent; Ginnie, however, increased its issuance totals by nearly 10 percent in the same timeframe.

For Freddie Mac, its $14.4 billion in fixed issuance in October is its worst monthly showing since January 2001, according to eMBS data; for Fannie, October’s woeful total is the GSE’s lowest since March 2005. While fixed issuance fell at each GSE, much of the drop-off at both Fannie and Freddie has more to do with stunning declines in both ARM and hybrid ARM issuances: consider, for example that Freddie Mac issued a little over $3 billion in hybrid ARM transactions during Sept., and just $718.4 million in October.

All of which underscores just how prominent a role FHA-endorsed loans have come to play in this market, although many expect both GSEs to ramp up issuance volumes in the last two months of the year.

Firms Suggest TARP Purchases of REO

(Housing Wire) Uncertainty reins when it comes to the Treasury’s Troubled Asset Relief Program, or TARP, according to a survey released Friday morning by the Securities Industry and Financial Markets Association. SIFMA, along with four other trade associations that conducted the survey, found that large firms are more likely to participate in selling illiquid assets to the Treasury under the program. Not surprisingly, as well, a current lack of clarity surrounding implementation and terms of asset purchases — if those purchases indeed ever materialize — are significantly affecting firms’ willingness to participate.

“Given the breadth of the markets, this survey provides some meaningful direction on where regulators’ tools might be targeted to be most effective, particularly as it relates to providing price transparency,” said Tim Ryan, president and CEO at SIFMA.

Among that direction: smaller financial institutions, those with total assets under $5 billion, expressed a strong desire to see the Treasury purchase REO properties via TARP. Forty-nine percent of firms with assets less than $1 billion, and 54 percent of firms with assets between $1 billion to $5 billion, said REO would be among their top three assets to target for sale to the Treasury under the program.

Larger firms — those with total assets over $5 billion — were far less focused on REO, however, with just 10 percent of firms ranking it as a priority for TARP. For larger financial firms, much of the focus was on offloading corporate loans to the government via TARP purchases.

The survey, which included 445 firms, also found that most firms would look to give priority to the purchase of subprime and Alt-A mortgage assets, split evenly among whole loans and securities. And — shock of all shocks — firms said that they would only really be willing to participate if they could sell their assets at cost, or at the very least at current book value. Firms suggested they’d only sell 9 percent of assets targeted for TARP at current market price,while they’d sell 67 percent of assets if Treasury would pay cost.

Smaller financial institutions were even more stark in suggesting they’d only participate if they could sell at cost — only 23 percent said they’d sell at a value based on current book value. Which means that the financial firms surveyed want to sell assets, but only at levels that are well above current market prices.

Which brings us back to the simple problem most fund managers that work with potential sellers have: the bid-ask spread is too wide. “It’s almost turning gravity onto its head to say, yeah, we’ll buy [these assets] at cost from you,” said one hedge fund manager, who declined to be named in this story. “Of course anyone in this market would sell at cost if they could, because they know [their assets] are worth far less than that.

“There is a market for this stuff, it’s just that none of the sellers want the market price.”

The survey, of course, represents what firms want; what terms they’ll actually be offered by the Treasury is, at this point, anyone’s guess. SIFMA is hosting a summit covering TARP on Monday in New York City, and Treasury’s Neel Kashkari, who is the interim manager of the program, is scheduled to speak.

Click here to read full survey results.

[Servicer] Ocwen Posts $15.6 Million Q3 Profit

(Housing Wire) Despite the pressures pushing and pulling on any servicer these days, Ocwen Financial Corp. (OCN: 6.77 +3.68%) said Thursday that it made $15.6 million, or $.23/share, during the third quarter, more than 160 percent above year-ago’s $6.0 million, or $.09/share, in reported net income. The West Palm Beach, Fla.-based company maintains a large non-prime servicing platform and a substantial mortgage and finance technology solutions business.

The company’s servicing portfolio continued to contract during the quarter, however, falling 33 percent to $41.8 billion; one year ago, Ocwen’s servicing portfolio stood at $55.7 billion. Ocwen ranked as the nation’s 24th largest servicer in 2007, according to statistics provided by Inside Mortgage Finance, an industry trade publication.

CEO William Erby stressed Ocwen’s recent strong focus on loan workouts, saying that the company completed 22,257 workouts during the third quarter and 54,868 for the year.

“Every successful workout makes the loan cash flow again and avoids substantial losses that the investor would otherwise incur in a foreclosure — loss severity is at an all time high now at 50 percent,” he said, suggesting the loan workouts were a “win-win” for investors and borrowers. They also were clearly a win for Ocwen’s own cash flow: by limiting delinquencies, Ocwen has been able to reduce its advance balances by $147.2 million since the end of June.

The company did not specify how many of its workouts were repayment plans versus executed loan modifications.

Despite stronger financial performance, collateral in the company’s servicing portfolio continues to deteriorate, reflecting the national state of housing. Ocwen said that non-performing assets reached 22.7 percent of the servicing portfolio — or $9.5 billion — during the third quarter; that’s up substantially from 14.6 percent one year ago, and a slight increase from the prior quarter, despite all of the servicer’s loan workouts.

Erbey also said that Ocwen is actively considering a spin-off of its technology solutions company into a separate, publicly-traded entity. Revenues in the technology business line rose 30 percent to $11.7 million during the third quarter. Operating income rose to $2.1 million for Q3, compared to a $0.3 million loss from operations in the third quarter of 2007.

Shares in Ocwen were up 5.21 percent to $6.87 in afternoon trading Thursday, bucking a trend of broader stock declines in the Dow Jones Industrials.

Servicers Stretched on Capacity, Advances, Say Analysts

(Housing Wire) Residential mortgage servicers are dealing with a steep rise in delinquent loans, while servicers on thecommercial side are witnessing an uptick in transfers of nonperforming assets to special servicing, according to a recent summary published by Standard & Poor’s Ratings Services.

“With the dramatic increase in loan delinquencies come staffing and capacity issues, portfolio risk related to adjustable-rate mortgage resets, and the accompanying pressure to find effective loss mitigation strategies, including loan modifications,” said residential servicer analyst Richard Koch, a director in Standard & Poor’s servicer evaluations group.

“In addition, the spike in foreclosures and real estate owned assets, in our opinion, has stretched the limited number of vendors that service the industry to capacity — and as more loans move through foreclosure into the REO category, the need to make loan advances has placed yet another financial strain on servicers.”

The proliferation of risky mortgage products such as option ARMs has done more than fuel the rise in delinquencies — it has also exposed servicers to greater portfolio risk. “For both the subprime and Alternative-A loan segments, ARM resets will peak this year and drop off significantly in 2009and 2010,” he contended.

Data, however, suggests that the option ARM problem is likely to rise to prominence in mid 2009 and run through 2010; and, of course, subprime ARM borrowers that can’t refinance into a fixed-rate product remain exposed to further re-adjustments of their loans going forward.

Regardless, one of the most pressing tasks for residential servicers has been the need to quickly increase staffing and capacity, especially in the default administration area. “Although the need to add new collection representatives has abated somewhat, servicers are still significantly expanding staff in areas such as loss mitigation and REO asset disposition,” Koch said.

HousingWire can attest for growth in the REO space; a recent REO-centric conference in Dallas, the Five Star, drew more than 4,000 attendees this year.

CRE may be next upMeanwhile, delinquencies are also on the rise among commercial servicers, although they still remain low from a historical perspective, S&P said. Commercial special servicers rated by S&P reported substantially more asset transfers to special servicing, however, and higher volumes of REO assets during the first half of 2008 than in the prior six months.

“Based on what some special servicers are saying about third-quarter volumes, the number of loans entering special servicing appears to be on pace to increase substantially, and perhaps even double, in the second half of 2008 compared with the first,” said commercial servicer analyst Michael Merriam, adirector in Standard & Poor’s servicer valuations group.

Some special servicers are reporting that loan maturities are becoming a more common–if not yet overwhelming–reason for transfers to special servicing. In other words, it’s getting pretty difficult to roll over some CRE debt.

“In the tighter credit environment, we expect to see special servicers’ total inventories of unresolved loans increase and their timeframes for resolving nonperforming assets to lengthen as we move through the fourth quarter and into 2009,” Merriam said.

There is a connection between what many expect to be a bust in commercial real estate and woes in residential housing; S&P said that some special servicers have noted concerns that the extremely high volume of residential foreclosures already in, or about to enter, the court system.

The concern is that the high volume may impede their own efforts to complete legal actions involving commercial real estate.

Foreclosure crisis burdens schools

(From CyberHomes) Our nation's foreclosure mess is a formidable one, affecting homeowners and families across the U.S. The current issue of Education Week shows just how far-reaching this crisis is, with a story that depicts one way in which the foreclosure problem is affecting children and weighing heavily on our nation's schools. The article helps to bring home the personal toll of the foreclosure problem.

In "Districts See Rising Numbers of Homeless Students," Catherine Gewertz writes that public school districts are seeing a dramatic rise in the number of homeless students, as parents lose their jobs and homes as more and more people struggle to keep up with their mortgages and their leases, or as more landlords default on their loans.

Among the hard-hit areas Gewertz highlights is Clark County, Nev. (which includes Las Vegas), where the local school district has noted 1,500 homeless students, twice the number that was reported a year ago. Districts are struggling to cope with this problem -- before today's current financial crisis, student homelessness in many school districts was less frequent, and was often spurred by traumatic events like family abuse or home fires, not by foreclosure, Gewertz says.
She notes that according to First Focus, an advocacy group for children and families based in Washington, D.C., an expected 2.2 million foreclosures over the next two years will impact 2 million U.S. children.

The foreclosure crisis is a heavy burden for schools to carry, as they already struggle with higher fuel and other costs. Gewertz writes that student homelessness can strain a school's transportation budget as schools have to bus homeless students -- who may now be living beyond the boundaries of the school district -- to school. Schools are also seeing a higher demand for psychological and social-work services as a result of the foreclosure crisis, she says.

Yesterday, we blogged about how there's conjecture that president-elect Barack Obama will make improving the housing market a priority. Let's hope so -- before more children are affected.

Idea of the Day: Provide Incentives for Mortgage Restructuring

(Center for American Progress) Congress added provisions to the October financial rescue bill to require Treasury to use its new authority under the legislation to exhort servicers toward more loan restructurings, but we need to free servicers from conflicting requirements and give them an incentive to sell mortgages to Treasury for refinancing and foreclosure avoidance.

Servicers managing pools of loans for investors are generally barred by contract from selling the underlying mortgage loans, but the trust agreements also generally provide that servicers must amend the agreements if doing so would be helpful or necessary to stay in compliance with tax rules under the Real Estate Mortgage Investment Conduit statute and related laws. REMIC provides important benefits for these securitization trusts and their investors. We propose to modify the REMIC rules to ensure that servicers have the authority and incentive to sell the mortgages to Treasury.

Legislation would provide that REMIC benefits would be denied going forward if the securitization’s contract provisions have the effect of barring servicers from selling or restructuring loans under Treasury’s programs. Servicers would have a legal obligation to their investors to modify the agreements to stay in compliance. Servicers could then sell loans to Treasury for restructuring. Participation in the Treasury program would remain voluntary, but the key legal impediments to participation would be removed.

Credit Suisse Housing Crisis Solutions: Meet the New NEIGHBOR

This proposal is taken from an April 15, 2008 Credit Suisse report out of their “structured products” group.

The proposed solution would involve a new public-private partnership. This new entity would buy out delinquent loans and REO properties at close to market prices from securitization trusts and portfolio lenders. The new entity would then work with other entities (GSEs, servicers, etc.) to craft an optimal solution. This new entity would have much greater flexibility, incentives, scale and resources and would result in far lower losses at no expected cost to the government. [We are proposing] a new RTC-like entity. The RTC itself was modeled after a Great Depression vehicle called the Home Owners Loan Corporation, or HOLC. We are calling our vehicle the NEIGHBOR Fund. While many object to any solution that smacks of a government bailout, we point out the following:

• First, our plan proposes buying out delinquent mortgages at close to market prices (a deep discount) and at a level that would actually return profits to the government. Likewise, the HOLC, a similar government entity created in the Great Depression era, returned a small profit when it was liquidated.

• Second, and perhaps more important, in an extreme scenario (which is becoming more likely by the day), the federal government has already explicitly or implicitly agreed to bail out the housing market. Through FDIC insurance, home loan bank lending, and GSE guarantees, the government has sold a massive amount of put options on the housing market. Therefore, attempts to avoid completely anything that smacks of a government bailout run the risk of forcing a far larger government housing bailout, i.e., if the housing market continues to slip out of control, the government may find itself the proud owner of over 50% of the U.S. mortgage market. Or put another way, the government-guaranteed portion of the U.S. housing market cannot be ringfenced from the non-agency portion. The continued meltdown in the one would inevitably infect the other. While this is a low probability risk, the severity would be very high should it materialize.

We hereby provide some additional details of our proposal, including the following:

• A new entity, similar to the RTC or HOLC (we’re calling it the NEIGHBOR Fund) buying out delinquent loans and foreclosed real estate (REO) from lenders and securitization trusts. The NEIGHBOR Fund could contract out some of the tasks to the GSEs (Fannie Mae and Freddie Mac) and several large servicers. Further, the fund could employ significant additional resources, such as underwriters, due diligence folks, appraisers, landscapers, etc.

• The cost to the government could be manageable, as the fund would buy loans at a substantial discount. ABS investors would earn a higher recovery than in a liquidation scenario as the fund’s demand for mortgage loans would help to improve the market price for mortgage loans and stabilize house prices. . Furthermore, to the extent this program would limit a housing meltdown, all investors and homeowners would benefit. There are many innocent victims of the housing crisis and they stand to suffer more should we continue down the current path.

• The fund could engage in more successful and aggressive servicing. Currently, servicers’ limited flexibility in securitization deals is inhibiting optimal solutions. With the fund controlling the servicers, there would be far greater flexibility than with any other owner.Aggressive forgiveness/write-downs of second liens. This contributes to solving two problems – lack of equity that inhibits borrower willingness to pay and additional second lien payment, which impairs their ability to pay. We commented on this type of piggyback second lien modification in our December 7 Market TABS. Earlier this week, Federal Reserve Chairman Bernanke also suggested principal forgiveness to avoid preventable foreclosures. However, so far, this type of principal forgiveness and more creative second lien workouts are still very rare and difficult logistically given various securitization restrictions and different servicing standards. If the NEIGHBOR Fund owned both loans, they have far more flexibility.

• Creating more refinancing opportunities with new mortgage structures. By forgiving the second lien and creating borrower’s equity in the home, the new entity could create more refinancing opportunities. More borrowers would become eligible for FHA or other GSE mortgage loans. It could also create new mortgage structures; for example, shared appreciation mortgages, in which the lender and borrower would share in any future appreciation. This provides upside to the lender and also allows borrowers to enjoy the potential for real estate appreciation.

• Acting as a benevolent landlord for homes where the government isn't successful in working out with the borrower. Maintaining the property and renting at subsidized or market rates would prevent the sizeable increase in forced liquidations that will likely result if we continue on the current REO liquidation trajectory. Given the discounts paid for the loan, even a subsidized rental may provide positive returns. Currently, securitizations require servicers to liquidate REO. In many instances, these properties are sold to investors who don’t have a vested interest in maintaining neighborhood quality.

• Aggressively pursuing fraud. This new entity would have far more flexibility in going after those who committed fraud. It is currently logistically complex and expensive to go after a borrower’s assets and to evaluate whether fraud was committed. In egregious cases, this entity could have the scale to pursue deficiency judgments. This could also minimize potential moral hazard, whereby borrowers intentionally become delinquent in the hope of substantial principal forgiveness.

• Existing servicers would have incentives to sell the loans to the government. Servicing delinquent loans is very costly, and the current environment offers servicers limited opportunities to cure delinquencies. Based on our recent roll rate analysis published on February 1 (also in the January 18 Market TABS), the cumulative default rate on a 30-day delinquent loan originated in 2006 or 2007 is already around or even above 90%. Selling these delinquent loans to the government, even at a deep discount, would still be better than an REO liquidation, which means a lower severity on the ABS bonds. Thus, opting to sell would be considered as effective loss mitigation and is consistent with existing ABS documents. If the fund’s bid price provided higher proceeds to ABS investors and they rallied around this execution, servicers would likely be pressured into selling at what would be a best bid.

• The fund could outsource servicing to several largest/best servicers using unified servicing standards. Given that there are nearly 20 subprime servicers, who in turn have to operate under hundreds of different servicing agreements, this new entity would simplify the process by having one unified set of servicing standards. These unified servicing standards could be easily achieved by enhancing the GSE servicing criteria already in place. Additionally, this government entity can also measure ongoing servicing performance via a few key metrics, such as those we published in our Subprime HEAT report.

• Servicing fees could be structured with incentives. We believe many servicers are reluctant to ramp up servicing staffing as we reach peak delinquencies. This fund would have no such constraints and would ultimately profit through greater recoveries. Currently, most servicers earn a fixed fee and aren't incented to spend lots of money on servicing. This new entity could reward servicers who meet pre-defined performance targets.

• Positive externalities. In order to maximize value, the government could hire a team of underwriters, brokers, carpenters, painters, landscapers, etc. (there may be a few housing folks looking for jobs). This temporary government employment program would target precisely the part of the economy that is losing jobs fastest – housing related employment. Further positive externalities would include preservation of neighborhoods.

• Housing soft landing. While there is little doubt that housing prices need to adjust significantly lower, a government-engineered RTC-type program could help to provide a soft landing and limit the damage to neighborhoods that would probably occur if the market were left to work out these delinquencies on its own.

• Where would the money come from? While much of the money could be provided by the government, it’s likely that GSEs could participate, as well as private investors and even municipal pension funds. The latter would particularly benefit, as they would be investing for returns while at the same time helping to support their neighborhoods and limiting the neighborhood degradation that comes from large foreclosure-related liquidations. Additional sources could be the large pool of social responsible funds. According to a recent Wall Street Journal report, socially responsible funds have increased to $2.4 trillion in the past year. Finally, garden variety private investors might also participate.

• Measures of success. This new entity could measure returns along two dimensions – income-based returns and social returns. This dual focus is often referred to as having a double bottom line in the social investing world.

Or...perhaps it's the ideal program.

Workouts Work Out

(From the July 21, 2008 Forbes) Michael Moore and his wife, Rebecca, began careening toward foreclosure in 2005. That year the couple refinanced their $300,000 home in Livonia, Mich., going from a $149,000 30-year fixed-rate mortgage at a 7% interest rate to a $300,000 adjustable-rate loan with a teaser interest rate of 8%. They used a chunk of the cash to cover Rebecca's mother's medical bills. Some of the rest evaporated last year when the rate on their loan jumped to 11.35% and the monthly payment rose to $3,100. The couple started falling behind on payments, prompting foreclosure warnings from their lender. "You pray it will all work out," says Rebecca, 54.

Enter Moose M. Scheib. His 27-person loan modification processing firm in Dearborn, Mich., called Mizna, works as a mediator between lenders and overextended homeowners. Scheib collected the Moores' W-2 forms, tax returns, bank statements--and ordered an appraisal and best-price offer from a Realtor on the Moores' three-bedroom house. After 45 days of negotiations with Litton Loan Servicing, Mizna helped the Moores keep their home by lowering their monthly mortgage payment to $2,500 with an 8% fixed-rate mortgage last October. "Most homeowners are too scared to speak with their mortgage company; that's where we come in," says Scheib, 28.

Mizna, which means "desert cloud" in Arabic, claims to have saved 3,900 harried loan customers of Litton (a Goldman Sachs subsidiary), HSBC, Washington Mutual and Countrywide since January 2007. That work helped Mizna net $875,000 pretax on revenue of $3.9 million over the past four quarters on 4,015 loan modifications. Scheib and equal partner Sonny Mandouh hope their company will modify 20,000 more loans by the end of 2009. Mizna's fee, which has risen fivefold since early last year, is now typically $1,500. It is paid by lenders, who are under pressure by state and federal policymakers to modify loans and repayment plans for troubled borrowers. Mizna clears $500 per loan after salaries for 20 loan processors.

A tenth of Mizna's clients have come in via loanmod.com, the Web site Scheib bought for $50,000 in 2007. Most come through mortgage companies that would rather pay Mizna than spend $50,000 in a typical foreclosure process. Mizna has completed modifications for an impressive 42% of the Litton customers it contacted last year. Only 1% of customers Litton contacted directly the year before did loan workouts.

Scheib, a former associate at Proskauer Rose law firm in Manhattan, is not alone in this game. Well-connected nonprofit groups are getting grants and free software to help them negotiate cheap workouts for big lenders. Scheib says there is plenty of business to go around, especially as more well-to-do folks have trouble: "Borrowers with high-end homes are reaching out to us for help."

New Model Is Forged In Bank's Wreckage

(WP) Inside the stone-and-glass headquarters of IndyMac Federal Bank, regulators are carrying out an experiment that could change the course of the financial crisis by tackling the home foreclosures that are at its root.

With the Federal Deposit Insurance Corp. at the helm of IndyMac, which was seized in July after it became one of the country's largest bank failures, regulators are attempting to create a model for reworking mortgages and rescuing homeowners.

A few major banks are also trying to tackle the home foreclosure problem, a major impediment to the nation's economic recovery. J.P. Morgan Chase yesterday said it will begin modifying mortgages under a program that could keep 400,000 families in their homes. Bank of America plans to soon start modifying an estimated 400,000 loans held by its newly acquired Countrywide Financial.

But so far, private efforts have moved slowly. So attention is focused on the work of the FDIC. Its chairman, Sheila C. Bair, has been a fierce advocate of directing more assistance to homeowners instead of just to financial firms. Members of Congress have also pushed the Bush administration to help homeowners. The FDIC and Treasury Department are negotiating a plan to have the government guarantee mortgages of millions of distressed homeowners if lenders agree to significant loan modifications.

The IndyMac initiative is seen as a way to test some aggressive methods for breaking through traditional barriers to loan modification. For instance, regulators are using a formula -- rather than individually scrutinizing each borrower -- to try to decide who should and should not be saved from foreclosure. In addition, regulators have won the cooperation of a major Wall Street firm in their mortgage modification effort, something critical to their success.

But the initiative is also uncovering unexpectedly tough challenges, among them the frustration of having a complicated mix of loans in the bank's portfolio, borrowers who are difficult to reach and a number of homeowners whom regulators cannot legally help.

Jeff Lehman is one of the FDIC's success stories. Lehman, a fur retailer, fell behind in his payments earlier this year after 20 years in his West Hollywood condominium. His initial attempts to modify his loan through IndyMac were rebuffed.

But after the FDIC took over the bank, Lehman said, he received a letter proposing a more-than-$300 drop in his monthly payments. "This was definitely better than losing the place," he said.

About a dozen FDIC employees and a group of contractors have set up operations on four floors of IndyMac's headquarters, working next to the remaining IndyMac employees. With more than 7,000 employees laid off in the past year, many offices and desks are empty.

IndyMac's massive portfolio contains more than 700,000 loans, most of which are for homes in the hardest-hit parts of the country, including Southern California and Florida. More than 50 percent are adjustable-rate mortgages, with many homeowners facing an increase in monthly payments that could push them into delinquency.

The FDIC is skipping the traditional but time-consuming approach of making customized modifications to individual mortgages. Instead, regulators are plugging homeowners' incomes into a formula to determine how much they can afford to pay -- usually 38 percent of their gross monthly income. Regulators first try to reach that payment level by lowering the interest rate. If that is insufficient, they then extend the term of the loan to 40 years. If that also is insufficient, homeowners might pay interest on only a portion of the principal.

"Is it perfect? No. Is it effective? Yes," said Mike Krimminger, special policy adviser to the FDIC, who was dispatched to California to head the program he helped design. "Streamlining makes a big difference in being able to apply this to a lot of mortgages."

IndyMac has three main types of loans in its portfolio. Some are mortgages it owns. Others are loans it has managed for other lenders, such as Lehman Brothers. Still others are loans that had been bundled into pools, known as mortgage-backed securities, governed by agreements or rules that dictate what if any changes can be made to their terms.

The FDIC can easily rework the loans IndyMac owns.

Regulators achieved a breakthrough with the second type after persuading Lehman Brothers, the investment bank under bankruptcy proceedings, earlier this month to allow its 38,000 loans in IndyMac's portfolio to be included in the modification program. FDIC officials are now hoping to use Lehman's example to persuade others to sign on. The key, agency officials said, will be convincing lenders that a modified loan, even with a reduced interest rate, will be more profitable than a foreclosure.

The third category, securitized pools, can be even more complicated because, often, dozens of investors own portions of the pool. Revisions to the contracts that establish what kinds of changes can be made to mortgages must be approved by all the investors. Sometimes those contracts can forbid modification of more than a small portion of the loans in the pool.

Lenders that want to modify loans in mortgage pools have said they have been hamstrung because they fear that investors would sue them for damaging their investment.

The FDIC said IndyMac's portfolio allows modifications. So regulators have bypassed the time-consuming process of asking each investor for permission or changing the contracts.

But the contracts did have one restriction that challenged the FDIC and that it could not get around legally. They required that a homeowner be seriously delinquent before a loan could be modified. When the FDIC's Krimminger saw that, he said, he was "disturbed and bothered."

The agreements meant that hundreds of thousands of homeowners in IndyMac's portfolio facing interest rate increases on risky loans could not be covered by the program. "I wish I could say that we could do something to help people who are current but have a problem coming up, but it's difficult to do under our agreements," Krimminger said. "There is nothing worse than having somebody call and say, 'I'm current, but I think I'm going to have a problem here soon,' but unfortunately we can't do anything."

In addition, about 25 percent of the delinquent homeowners vetted by the FDIC's formula did not qualify. In many of those cases, even after the FDIC's adjustments to interest rate and principal, the homeowners could not afford the monthly payments.

Another problem is getting homeowners to respond to offers of help. The FDIC mailed 35,000 unsolicited modification invitations. About half of those included a detailed estimate of how much the program could save the homeowner. These offers, which are based on financial information about the borrowers, had a response rate above 70 percent.

But the FDIC is struggling to reach about 18,000 other homeowners for whom the agency does not have salary information. The FDIC sent those homeowners a letter asking that they call a customer-service line to discuss a modification. But only about 15 percent of those homeowners have responded.

Last week, the FDIC began hiring nonprofit groups to help it reach this population. The agency will pay the housing counseling agencies $150 if the homeowner gets in contact with IndyMac and $350 more if the modification is successful. And the FDIC is preparing another outreach program, including new solicitations that note that the average modification includes a savings of about $380 a month.

Even after homeowners receive loan modifications, there is still a considerable risk they will default. In the past, about 40 percent of homeowners were delinquent again within a year of receiving a traditional loan modification, according to a recent Credit Suisse report. And some industry officials warn that the proportion could jump if the economic downturn deepens, throwing more people out of work.

Lenders say that the FDIC effort has pointed out some possible solutions but also has highlighted problems. "The FDIC has good intentions, and they are probably demonstrating things that can be done better," said Bob Davis, an executive vice president with the American Bankers Association. "But they are also demonstrating there is no silver bullet."

The industry has pointed to its Hope Now effort, an alliance of lenders established by the Treasury Department last year. The group says it has helped about 2.5 million homeowners, but nonprofit advocacy groups say the assistance won't necessarily keep participants out of foreclosure over the long term.

Indeed, the FDIC effort also does not go as far as some housing advocacy groups would like. The program defers but does not forgive principal for homeowners who owe more than their house is worth. Regulators have in many cases made the modifications temporary rather than permanent. For instance, a loan reduced to a 3 percent interest rate will begin to creep back up after five years to the survey rate set by Freddie Mac -- currently about 6 percent.

In some cases, the FDIC effort is less aggressive than Bair advocated earlier. For example, a year ago, she said lenders should freeze the interest rate for certain subprime loans with adjustable rates. But faced with such a wide variety of loans at IndyMac, regulators determined that doing so would be impractical.

The American Securitization Forum, which represents many lenders and investors, is studying the IndyMac experiment. "As the housing market continues to experience severe stress, we are discussing with our members the approach taken by the FDIC and others as we consider additional industry initiatives to enhance the loss-mitigation process," Tom Deutsch, the group's deputy executive director, said in a statement.

Saving Distressed Homeowners

The Federal Deposit Insurance Corp. and IndyMac Bank are experimenting with a mortgage modification program that attempts to quickly determine those who can be saved from foreclosure and who cannot. The program may serve as a model for other banks facing waves of foreclosures.