Friday, October 30, 2009

Fannie Mae: Delinquencies Increase Sharply in August

Posted on Calculated Risk:

Here is the monthly Fannie Mae hockey stick graph ...

Fannie Mae Seriously Delinquent Rate Click on graph for larger image in new window.

Fannie Mae reported today that the rate of serious delinquencies - at least 90 days behind - for conventional loans in its single-family guarantee business increased to 4.45% in August, up from 4.17% in July - and up from 1.57% in August 2008.

"Includes seriously delinquent conventional single-family loans as a percent of the total number of conventional single-family loans. These rates are based on conventional single-family mortgage loans and exclude reverse mortgages and non-Fannie Mae mortgage securities held in our portfolio."

Just more evidence of the growing delinquency problem, although these stats do include Home Affordable Modification Program (HAMP) loans in trial modifications.

Wednesday, October 28, 2009

In re Olga: of Bankruptcy and Foreclosure

Posted on Calculated Risk:

An article by a person named Morgenson appeared in the New York Times last weekend, calling to our collective attention a New York bankruptcy case that adds to our collective knowledge of our collective foreclosure problem. Driven by a suspicion that the article would have helped us understand more if it had been written by someone other than the aforesaid Morgenson, your intrepid foreclosure correspondent dug into the record and filed the following report.

Picking on Poor Gretchen

First, for recent arrivals, there is a long and honored history at this site of Picking on Poor Gretchen. In this case I want to congratulate Morgenson, as it appears she did break this story herself rather than picking it up, unattributed, from bloggers. Let me also say I am not necessarily the best person to carry on the tradition of Picking on Poor Gretchen. I experimented with journalism in my youth, and I know how difficult it can be to get enough actual facts in a short time to fill up the number of column inches your editor is expecting from you.

But the more I thought about the Times article, the harder it was to escape the conclusion that Brad Delong is right – the print dinosaurs are doomed, and they have done it to themselves. The first few paragraphs of Morgenson’s purported article are appallingly fact-free and hyperbolic, or as Tanta put it, “Morgenson’s valid points are drowning in a sea of sensational swill.

The article begins:
FOR decades, when troubled homeowners and banks battled over delinquent mortgages, it wasn’t a contest. Homes went into foreclosure, and lenders took control of the property.

On top of that, courts rubber-stamped the array of foreclosure charges that lenders heaped onto borrowers and took banks at their word when the lenders said they owned the mortgage notes underlying troubled properties.

* * *
But some judges are starting to scrutinize the rules-don’t-matter methods used by lenders and their lawyers in the recent foreclosure wave.
Morgenson deserves credit for finding this story, but it is hardly the first foreclosure-gone-wrong story of the decade, or even of the “recent foreclosure wave.” Morgenson has apparently forgotten the redoubtable Judge Boyko, who dismissed some Ohio foreclosure complaints in 2007 based on somewhat similar facts. We know Morgenson covered that story, so it is not clear to me whether the “decades” of judicial neglect and rubber stamping occurred before 2007 or after. But, well, whatever.

So What Happened In This Case?

Most of the sensational swill is in the first few paragraphs of this Times story. Once you get past the first third, Morgenson’s facts are basically correct. Unfortunately, much of the context is missing. For example, one of the things you would never guess from reading the Times article is that it matters whether you’re talking about a bankruptcy case or a foreclosure case. That is Takeaway Lesson Number One from this case: Bankruptcy is different from foreclosure.

The purpose of a foreclosure case is usually to allow a lender to take back collateral after the borrower stops paying on a loan. It should not be a surprise that lenders often win such cases, frequently by default. By contrast, the purpose of a bankruptcy case is to allow the debtor to restructure debt, distribute the available assets fairly among creditors, and extinguish debt that can’t realistically be paid. It should not be surprising that debtors “win” bankruptcy cases more often than foreclosure cases, especially if the debtor can show the lender has not followed the rules.

I will call the debtor in this case “Olga.” Her last name is redacted because she doesn’t seem to be seeking publicity. Olga filed bankruptcy under Chapter 13, which is a section of the bankruptcy code allowing individuals with regular income to develop a three or five year plan to pay their debts under supervision of a trustee. The debtor is protected from bill collectors, and most debts that can’t reasonably be paid are discharged. Chapter 13 theoretically allows the debtor to keep a mortgaged home if the debtor can catch up on payments within the plan period. The bankruptcy judge does not have the power to change the loan contract much, though, so many people can’t keep their homes using Chapter 13 unless the lender can somehow be “persuaded” to modify the loan.

But Olga was willing to try. She gave notice to creditors and filed a plan, among other things, and her mortgage servicer (PHH Mortgage Corp.) filed a proof of claim with a schedule stating how much was allegedly owed on Olga’s house. Olga’s lawyer noticed that PHH’s paperwork was not very complete, so he sent some information requests. He was not satisfied with the response, so he filed a motion to have PHH’s proof of claim expunged.

Olga’s Motion to Expunge

Mortgage servicers have important rights under the various contracts associated with the loan, but the servicer frequently is not, and PHH in this case was not, the actual owner of the note or the mortgage. In addition, the paperwork provided by PHH was woefully incomplete. Woefully incomplete paperwork can mean something different in bankruptcy than it does in foreclosure.

When your paperwork is woefully incomplete in a foreclosure case, you can ask for a delay or you can drop the case or have it dismissed, and you usually get another chance. Bankruptcy, by contrast, is kind of a one-shot deal by nature. The judge will add up all the debts, add up all the money available, approve a plan, and that’s it. Very limited do-overs.

Olga’s motion listed a number of problems:

  • PHH didn’t own the note.
  • The owner of the note was not joined in the proceeding.
  • PHH did not file all the documents necessary to show that it was authorized to bring the claim by the holder of the note.
  • PHH therefore is not the real party in interest and had no standing.
  • The documentation for the securitization trust that probably owns the note probably severely limits the way notes and mortgages can be handled, but
  • The mortgage documentation was not provided, so there is no way to know if it was assigned properly.
  • The note was provided, but it had an endorsement dated after the bankruptcy filing.

    These items are explained a little bit more in Olga’s Response to the lender’s objection to her motion to expunge the proof of claim, which is a pretty good summary of things borrowers might want to think about when they are considering whether to contest foreclosures. MERS was a nominee at some point, but was not directly involved in the case.

    My impression is that Olga’s lawyer did not expect the proof of claim to be expunged, and was primarily interested in getting more information and forcing the lender to negotiate. Bankruptcy Judge Robert Drain had other ideas – he expunged the claim.

    The Aftermath

    This is probably not the end of the story because, as Olga’s lawyer explained, a title company probably will not insure the title if Olga tries to sell the house without taking any further action. Judge Drain did not explain much in his order, but what seems to have gotten his attention is the likelihood that the note and mortgage really never were properly assigned to the securitization trust.

    Takeaway Lesson Number Two from this case is that, if Judge Drain is right, this is not a nothingburger. This could apply to a large number of securitized mortgages based on the language of the securitization documents themselves, not on the quirks of local law. The decision has been appealed to the district court, so we will likely find out more unless the case settles.

    Morgenson also noted that this decision was by a “federal judge.” It is probably worth noting that bankruptcy judges are not quite the same as U.S. District Court judges. Bankruptcy judges are not appointed for life, they only have jurisdiction over matters that are related to bankruptcy, and their decisions are appealable to a District Court judge, as happened in this case. But bankruptcy judges have a lot of power over core bankruptcy matters. This particular judge was the one who slashed executive compensation in the Delphi case.

    In my opinion, Takeaway Lesson Number Three is this: lenders would probably have been better off with a reasonable cramdown provision in the bankruptcy laws. As Tanta explained in her cramdown post, home mortgages were often modified in bankruptcy proceedings before 1993. Morgenson’s claim that all types of court proceedings have uniformly favored lenders “for decades” is wrong, but the bankruptcy laws got a lot worse for consumers in 1993 and again in 2005. In the absence of reasonable solutions imposed by a bankruptcy judge, lawyers for debtors and home mortgage lenders sometimes act like Reagan and Brezhnev, threatening each other with nuclear options and hoping none of the tactical warheads go off prematurely. Which is what seems to have happened in this case.
  • More than you probably ever wanted to know about the Hamp

    Posted on FT's Alphaville by Tracy Alloway:

    The Federal Reserve Board had just released a working paper on the Home Affordable Modification Plan — the Hamp.

    The paper is fantastic for details on just how the programme — which is aimed at making mortgages more affordable by reducing interest payments — came about and feeds into the wider financial system. When it comes to the programme’s potential success, authors Larry Cordell, Karen Dynan, Andreas Lehnert, Nellie Liang and Eileen Mauskopf think the Hamp will help a lot of homeowners — but they do see limitations.

    Of particular note is the idea that the Hamp might not be helping those who need it most:

    Nonetheless, millions of foreclosures are likely to occur over the next couple of years. House price declines have led to a sharp deterioration in the financial situation of many homeowners, leaving them less willing or able to afford even reduced mortgage payments. Further, HAMP modifications are not well-suited to address many cases where homeowners have suffered a large temporary decline in income, as might be the result of job loss. In particular, because the modification calls for a reduction in the ratio of payments to income based on the current level of income, a reduction that would not be reversed if income were to return to its previous level, the required modification in such cases will often be too costly to qualify the program.

    Which means that because the size of the reduction in payments permanently depends on current income (virtually none in the case of the unemployed) — the loan modification could turn out to be overly generous. Once the jobless homeowner resumes work he will still be making Hamp payments based on his unemployed income — and those bearing the cost of the Hamp exercise will be left to pick up the tab. Furthermore:

    In addition, the program may not be very effective when the value of the mortgage greatly exceeds the value of the home. Some borrowers who believe that there is little prospect for house prices to recover enough to put the mortgage “above water” within some reasonable period of time will not participate in the program and instead walk away from their mortgages. Worse yet, other borrowers may shift beliefs only after entering the program; these borrowers are likely to default after many of the costs associated with the modification have already been borne.

    Which is a problem that’s been mentioned before. If you are say, a homeowner offered a Hamp trial modification plan where your monthly payments are reduced, you could easily walk away after making a few cheap payments. We’ve noted one instance where a Hamp modification plan entailed monthly payment of $1170 a month, when comparable houses were renting for close to $1,500 a month. That’s a bargain for the (underwater) homeowner.

    But it’s not so great for the people and institutions assuming the cost of the modifications:

    The HAMP protocol requires servicers to lower monthly mortgage payments, which include principal, interest, taxes and insurance (PITI), to 38 percent of the borrower’s gross income, through any method they choose, with investors bearing the losses implied by the reduced payments. Servicers are then required to reduce the DTI [payment to current income ratio] from 38 percent to 31 percent by using the waterfall provided by the plan; the losses associated with the additional reductions in the DTI are shared equally by the government and the investors

    Now a typical mortgage investor is someone like Greenwich Financial Services. But they also include Fannie and Freddie — the government-sponsored enterprises. Banks tend to be on the mortgage lending and servicing side of things — which presumably is why you sometimes see them lobbying for more aggressive Hamp action. Servicers and lenders get payments for Hamp participation — the trade-off is they have to commit a lot of time and resources to the actual modification process.

    Anyway, back to the GSEs:

    For loans owned or guaranteed by the government-sponsored entities, the modification may proceed even if the present value of the modified revenue stream is less than that expected to be obtained under foreclosure. In all cases, the GSE buys the loan out of the pool, the investor is made whole with respect to the remaining balance on the loan. Under the Treasury’s commitment to maintain a positive net worth for the GSEs, the cost of the modification may ultimately be borne by the taxpayer. (23)

    23 These modification costs are over and above the Treasury incentive payments under HAMP. Given the Treasury’s commitment to the GSEs, a modification that lowers the borrower’s payments means that the taxpayer receives a lower return than he would under the terms of the original loan when the loan is owned or guaranteed by the GSEs.

    Got it? Mortgage investors get lower payments. Mortgage lenders and servicers get Hamp bonus incentives and Fannie and Freddie get Treasurized.

    The argument of course, is that a loan modification will ultimately be cheaper than foreclosure — though some of that loses weight if you consider that a Hamp homeowner dragging out proceedings in an environment of declining houseprices, will mean losses from delaying foreclosure could be larger than losses if foreclosure had been initiated immediately. The authors say incentive payments — linked to the rate of recent home price decline — should mitigate this.

    But the historic evidence presented from the paper is not encouraging.

    The authors, for instance, looked at 5.5m active loans in the First American CoreLogic Loan Performance ABS database as at March 2009. Of note:

    . . . the performance of loans modified as of March 2009 was poor, as only 40 percent of modified loans were current at 6 months after modification, and 29 percent were seriously delinquent. Given that loans are marked as seriously delinquent if they have missed three or more payments or are in foreclosure, such borrowers likely made only one or two payments on their modified loan.

    Appropriations Resolution Extends Jumbo Conforming Limit

    Posted on the Housing Wire by Austin Kilgore:

    Appropriations committees in the House and Senate are proposing to extend the temporary limits for conforming jumbo loans either insured by the Federal Housing Administration (FHA) or purchased by the government-sponsored enterprises (GSE) Freddie Mac (FRE: 1.16 -5.69%) and Fannie Mae (FNM: 1.02 -4.67%).

    The proposed extension of the conforming minimum of $729,750 for mortgages in higher-priced markets would run through the end of 2010.

    “While those loan limits aren’t scheduled to go down to $625,500 until January 1, if not maintained at the higher level now, the mortgage industry will begin to plan for loans at the lower amount,” according to a joint press release by the chairs of the appropriations committees in both houses of Congress, Sen. Daniel Inouye (D-HI) and Rep. David Obey (D-WI).

    Inouye and Obey added: “This could result in major disruptions in the mortgage origination market for large loan sizes as early as November.”

    The proposal is included in a continuing resolution that will keep the federal government operating through Dec. 18, 2009. The resolution is attached to an appropriations bill to fund the federal government’s interior and environment initiatives.

    The appropriations bill, including the resolution, still face votes in both the House and Senate. Currently, the temporarily extended conforming limits for loans Fannie and Freddie are allowed to purchase are set to expire at the end of the year. The extension would also apply to conforming loans and reverse mortgages — or home equity conversion mortgages (HECM) — insured by the FHA.

    In anticipation of the expiration, HousingWire sources have indicated that some lenders are setting deadlines as early as next week for rate locks on jumbo conforming loans.

    Designing Loan Modifications to Address the Mortgage Crisis and the Making Home Affordable Program (Federal Reserve)

    Abstract: Delinquencies on residential mortgages and home foreclosures have risen dramatically in the past couple of years. The mortgage losses triggered a broad-based financial crisis and severe recession, which, in turn, exacerbated the initial financial distress faced by homeowners. Although servicers increased their loss mitigation efforts as defaults began to mount, foreclosures continued to occur in cases where both the borrower and investor would be better off if such an outcome were avoided. The U.S. government has engaged in a number of initiatives to reduce such foreclosures.

    This paper examines the economic underpinnings of the Administration’s loan modification program, the Home Affordable Modification Program (HAMP). We argue that HAMP should help many borrowers avoid foreclosure, as its key features—a standardized protocol, incentive fees for servicers, and a requirement that the first lien mortgage payment be reduced to 31 percent of gross income—alleviate some of the previous obstacles to successful modifications.

    That said, HAMP is not well-suited to address payment problems associated with job loss because the required modification in such cases would often be too costly to qualify for the program. In addition, the focus of the program on reducing the payments associated with the mortgage rather than the principal of the mortgage may limit its effectiveness when the homeowner’s equity is sufficiently negative. In this case, recent government efforts to establish a protocol for short sales should be a useful tool in avoiding costly foreclosure."

    The paper can be downloaded at

    Monday, October 26, 2009

    As Reverse Mortgages Grow, so Will Related Securitization

    Posted on the Housing Wire by Jacob Gaffney:

    Reverse mortgage securitizations may not be new to the structured finance industry but panelists at the Information Management Network’s 15th annual ABS East gathering in Miami Beach conference said that in the last two years the structure has moved beyond the needs-based senior and now see a significant mix of borrowers tapping into the market.

    Further, a Sunday session on reverse mortgages and securitization said the market is set to grow dramatically, with predictions that the next leg of growth in structured finance will come by way of reverse mortgage resecuritizations, despite warnings that the product is particularly vulnerable to misuse and even fraud.

    In the last couple of years, the reverse mortgage market shifted into into a more fluid product, said panelists at the conference, with the share of assets being collateralized growing from modest to more affluent. This year alone, the percentage of owners with homes valued at above $400,000 is increasing to up to 39% of the reverse mortgage claims in some markets.

    Annual reverse mortgage volume has topped 110,000 units and $17bn, with top banks like Wells Fargo and Bank of America and large insurance companies like Genworth and MetLife leading the way. Despite a slowdown in originations due to the recession, reverse mortgage originations are continuing at a record pace.

    And panelists said that given the economic environment it is likely that over the next two to three years more seniors will seek out to release equity via this route. But a report issued by the National Consumer Law Center (NCLC) earlier this month warned that the practice of reverse mortgage could lead to market abuse in the face of its growing allure.

    “In the reverse mortgage market, seniors face some of the same aggressive lending practices that were common in the subprime lending boom,” said Tara Twomey, an NCLC attorney and author of the report. “Well-funded marketing campaigns and perverse incentives to brokers are targeting seniors’ home equity and using reverse mortgages as their tools.”

    The NCLC report highlighted a need for regulatory improvements in this industry in order to protect America’s seniors as well as our tax dollars. The report describes the growth of an aggressive and dangerous reverse mortgage sales culture that has outstripped the limited resources and uncertain funding for the counseling agencies that current laws rely on to prevent reverse mortgage abuses. Panelists speaking at the IMN event said that the products are evolving in design to include high end, more sophisticated customers.

    Nonetheless, “reverse mortgages are complicated and expensive financial products that must be used wisely and regulated carefully, or profit and volume driven sales efforts can open the door to abuses and fraud,” said Odette Williamson, an NCLC attorney.

    Nixon said he agreed with comments that reverse mortgages are a little protected asset class and said that the FHA is working toward implementing good practice codes for this product. He adds that investors must also likewise be experienced and understand that the product function quite differently that forward mortgage products. For example, forward mortgage deals can close in two months. Reverse mortgage product scan take upward of six months to structure because it’s more of an educational process and Nixon said that the senior mortgage holder should not be pressured into a quick decision.

    Also, investors face higher fees to pay out initially. The largest fee they can expect is the 2% FHA insurance fee and lenders on average can charge around 1.5%. “ These are not insignificant costs, “ said Nixon. “Investors have to hold the bonds for a longer period of time in order to offset these costs.”

    Ryan LaRose, executive vice president of Celink said that from a servicing perspective one of the critical functions the industry performs is customer service. LaRose explained that for reverse product the servicer experience a higher incident of inbound calls as opposed to forward products.

    Reverse mortgages also require the servicer to send money out, unlike forward mortgages where servicers take in cash flow. “It poses a much higher cost to service these mortgages,” said LaRose.

    Sunday, October 25, 2009

    More on Banks Engaging in Mortgage Fraud

    Posted on Naked Capitalism:

    I am a lawyer who has been involved in corporate finance for over 25 years. First, if you beleive that securitization offers benefits (cost reductions) to consumers then MERS is not per se a bad thing in that it reduces overall transation costs which should in part be passed on to the homeowner borrower. As you note, the problem is more a change in standards (perhaps ethics and morality) in the last ten years in the industry.

    The problem is not MERs by itself but how the securitization industry has changed in recent years to the detriment of cosumers and investors in the banks and other companies that have blown up as a result of an important industry being turned into basically a circus. I can share my own expereince as a homeowner to demonstrate how crazy things have become.

    I had a mortgage on my home that was originated over 15 years ago at a local bank. The mortgage had been sold (through five intervening transactions)over the years to Washington Mutual. Two years ago I decided to pay the loan off. At the end of a month, I sent in a check for the full balance of principal and interest on the loanand requested a deed release be filed. This was all in accordance with the terms of my promissory note and mortgage the legal agreement governing all parties.

    Two weeks later I received my check back in the mail from WMU with a letter stating that the payoff was not in accordance with Washington Mutual policy. No one at Washington Mutual had bothered to read the mortgage agreement (the legal agreement binding the parties). Instead the letter stated that payoffs had to be preceeded by paying $75 for a “payoff quotation” and must be made by wire transfer and other terms which were obviously made to increase the profitablity to WMU which had no basis in the legal agreements.

    Since WMU had no legal basis for its demands, I stopped paying my mortgage. Within three months my credit score had been lowered 300 points, all of my credit cards were canceled (I never kept a balance on any card) and I was receiving daily harrassing collection calls. Eventually, I sent a couple of letters to the WMU General Counsel’s office and began to work towards a class action lawsuit. Despite this, it took another three months to get someone’s attention at WMU who could put two and two together and I finally received a call and letter from a senior attorney who agreed to forgive thousands of dollars in interest, put a person full time on reestoring my FICO score etc etc. and fix the problems that never should have occured.

    The point is that the securitization industry 5-10 years ago made a collective choice to ignore the terms of contracts, state and local laws and legal convesntions developed over hundreds of years. Why? Because they could. Our legal system and conventions were built on the assumption that most businesses would choose to follow them. Instead, the securitization industry simply developed a cost/benefit approach to following the law and adhering to contracts. It worked quite well becaseu most individuals just aren’t equipped to read and enforce their mortgage agreements or fully understand the law.

    This is why the banks are fighting so hard against the Consumer Financil Protection Agency. The CFPA will have the ability to level the playig field and thus change the economics of banks simply ignoring laws, contracts and convention.

    Note this mess got resolved only because the consumer in question was an attorney, and he still had to threaten a class action suit to get the servicer’s attention. And even then, it took months to clear matters up, and completely trashed his credit score in the meantime, resulting in the loss of ALL his credit cards.

    How many people can afford that? Seriously. For instance, if you need to rent cars or stay in hotels in your line of work, and either your company does not provide you a corporate credit card, or you are self employed (business credit is based on your personal FICO), you’d be stuck. And if you were looking for a job, many employers pull a credit report and will not consider a candidate with a low FICO.

    In other words, very few people are able to contest abusive behavior and overbilling by servicers due to the hard costs (attorney’s fees) and soft ones (damage to credit score).

    Update 5:20 PM: Another sighting courtesy reader i on the ball patriot:

    Bank of America and Countrywide Home Loans destroyed mortgage documents, and “recreate” them by “insert(ing) data as they see fit,” to cover up their own failure to keep records – or their fraud – according to a federal RICO class action.

    Article continues here.

    Hoisted from comments:

    Edward Pinto: The Government's Loan Modification Numbers Are A Total Sham

    Posted on the Business Insider by Joe Weisenthal:

    Mortgage expert and one-time Fannie Mae Chief Credit Officer Edward Pinto blasts the claim that 500,000 homeowners have entered into HAMP (Home Affordable Modification Program).

    Based on comments being made by industry participants and program results to date, HAMP is rapidly becoming: I will pretend to modify your loan if you pretend that you will make the payments.

    On October 9 Treasury Secretary Geithner announced that the Obama administration’s HAMP had enrolled its 500,000 participant.

    However, only about 1200 borrowers have entered the permanent modification phase; with the balance being in the 3-5 month trial period. This is in spite of the fact that there were 200,000 trials in progress back in July.

    The reason for this snail like progress is, in an effort to reach its previously announced target of 500,000 modifications by November 1, program documentation guidelines were loosened. According to Michael Young, vice chairman of the Mortgage Bankers Association, 99% of the loan modification packages are incomplete. This has led to speculation that many of the 500,000 will never submit the necessary documentation or will not qualify.

    Also of concern is the expected dropout of a sizable number of qualified borrowers who fail to make all the payments required during the trial period.

    This fear has been heightened by the concern of some servicers that borrowers will use the trial period to game the foreclosure process and delay their own foreclosures by another 5 or 6 months.

    Finally, in an effort to get more modifications approved, unemployment compensation will be counted (see attachment).

    The number of permanent modifications resulting from these 500,000 trial modifications could be low as 100,000-200,000. Finally, at a 50% ultimate redefault failure rate, only 50,000-100,000 performing loans will result. At this success rate, it is mathematically impossible for the administration to meet its announced goal of keeping 3 to 4 million Americans in their homes by preventing avoidable foreclosures with loan modifications . To do so would require putting 15 -30 million loans into trial modifications to reach the stated goal.

    More Judges Taking on Foreclosures Without Document Trails

    Posted on Naked Capitalism:

    As most people know (and many by first hand experience) mortgages often pass through a lot of hands, and the securitization industry has played plenty fast and loose in making sure the transfers are handled properly. The system by which these sales are executed is coming under increasing scrutiny. From Pam Martens:

    The problems grew out of the steps required to structure a mortgage securitization. In order to meet the test of an arm’s length transaction, pass muster with regulators, conform to accounting rules and to qualify as an actual sale of the securities in order to be removed from the bank’s balance sheet, the mortgages get transferred a number of times before being sold to investors. Typically, the original lender (or a sponsor who has purchased the mortgages in the secondary market) will transfer the mortgages to a limited purpose entity called a depositor. The depositor will then transfer the mortgages to a trust…

    Because of the expense, time and paperwork it would take to record each of the assignments of the thousands of mortgages in each securitization, Wall Street firms decided to just issue blank mortgage assignments all along the channel of transfers, skipping the actual physical recording of the mortgage at the county registry of deeds.

    Yves here. I know I have said this before, but I am gobsmacked every time I read this stuff. When I was briefly in the securities business (early 1980s), even a teeny weeny error in a securities offering was completely unacceptable, a career limiting event for lawyers and bankers involved. And even though due diligence wasn’t what it should have been, there were certain steps that were absolutely necessary to avoid liability (having the deal counsel read the issuer’s board minutes and having someone from the lead manager visit the major facilities of a first-time issuer, for instance).

    The finesse in mortgage securitizations was a company called MERS. Fore those not familiar with their procedures, Marten gives a good overview:

    on August 28, 2009, Judge Eric S. Rosen of the Kansas Supreme Court took an intensive look at a “straw man” some Wall Street firms had set up to handle the dirty work of foreclosure and serve as the “nominee” as the mortgages flipped between the various entities. Called MERS (Mortgage Electronic Registration Systems, Inc.) it’s a bankruptcy-remote subsidiary of MERSCORP, which in turn is owned by units of Citigroup, JPMorgan Chase, Bank of America, the Mortgage Bankers Association and assorted mortgage and title companies…

    In recent years, MERS has become less of an electronic registration system and more of a serial defendant in courts across the land…

    MERS doesn’t have a big roster of employees or lawyers running around the country foreclosing and defending itself in lawsuits. It simply deputizes employees of the banks and mortgage companies that use it as a nominee. It calls these deputies a “certifying officer.” Here’s how they explain this on their web site: “A certifying officer is an officer of the Member [mortgage company or bank] who is appointed a MERS officer by the Corporate Secretary of MERS by the issuance of a MERS Corporate Resolution. The Resolution authorizes the certifying officer to execute documents as a MERS officer.”

    Kansas Supreme Court Judge Rosen wasn’t buying MERS’ story… Judge Rosen wrote:

    “The relationship that MERS has to Sovereign [Bank] is more akin to that of a straw man than to a party possessing all the rights given a buyer… What meaning is this court to attach to MERS’s designation as nominee for Millennia [Mortgage Corp.]? The parties appear to have defined the word in much the same way that the blind men of Indian legend described an elephant — their description depended on which part they were touching at any given time. Counsel for Sovereign stated to the trial court that MERS holds the mortgage ‘in street name, if you will, and our client the bank and other banks transfer these mortgages and rely on MERS to provide them with notice of foreclosures and what not.’ ” (Landmark National Bank v. Boyd A. Kesler)

    Yves here. So you see what happened? The securitization industry decided to impose the convenience of “street name” holdings of securities to mortgages, simply ignoring hundreds of years of precedent and a thicket of local laws (no joke here, the US precedent on the primacy of title documents goes back to at least 1818 in the US. No deed is like “no tickie, no laundry.”) Back to Marten:

    Lawyers for homeowners see a darker agenda to MERS. Timothy McCandless, a California lawyer, wrote on his blog as follows:

    “…all across the country, MERS now brings foreclosure proceedings in its own name — even though it is not the financial party in interest. This is problematic because MERS is not prepared for or equipped to provide responses to consumers’ discovery requests with respect to predatory lending claims and defenses. In effect, the securitization conduit attempts to use a faceless and seemingly innocent proxy with no knowledge of predatory origination or servicing behavior to do the dirty work of seizing the consumer’s home. While up against the wall of foreclosure, consumers that try to assert predatory lending defenses are often forced to join the party — usually an investment trust — that actually will benefit from the foreclosure. As a simple matter of logistics this can be difficult, since the investment trust is even more faceless and seemingly innocent than MERS itself. The investment trust has no customer service personnel and has probably not even retained counsel. Inquiries to the trustee — if it can be identified — are typically referred to the servicer, who will then direct counsel back to MERS. This pattern of non-response gives the securitization conduit significant leverage in forcing consumers out of their homes. The prospect of waging a protracted discovery battle with all of these well funded parties in hopes of uncovering evidence of predatory lending can be too daunting even for those victims who know such evidence exists. So imposing is this opaque corporate wall, that in a ‘vast’ number of foreclosures, MERS actually succeeds in foreclosing without producing the original note — the legal sine qua non of foreclosure — much less documentation that could support predatory lending defenses.”

    Yves again. Again, I know this has been rumbling around in the news for months, but it is hard for me to believe this has gone on as long as it has. I have heard (from my attorney first hand on situations she has been involved in, not urban legend) of a corporate lawsuit being thrown out of court because the contract between the parties had the name of the entities wrong….by a comma! Now real estate law is a different area, but title is one of its fundamental principles. Selling securities in a trust when the trust does not have clear title to assets in the trust is fraud. If judges keep nixing foreclosures based on the servicer (acting on behalf of the trust) not being able to demonstrate ownership, we could see a very interesting knock-on, of investor litigation against the trusts. But it’s too early to tell.

    But it isn’t surprising that judges are plenty unsympathetic, and in cases, outraged. The law is all about sanctity of process, both the underlying law and court proceedings. Cases typically revolve around disputes of fact or grey areas of the law. This isn’t grey (whether a party has standing to file a suit is fundamental) and the law in this area is well established. Basically, the securitization industry tried creating rules outside any established legal framework and judges are having none of it.

    Morgenson offers an interesting new sighting, involving a Federal judge in the Southern District of New York. This is significant because the Federal bench is generally pretty high caliber, and the Southern District of NY is particularly well respected. Moreover the ruling can’t be dismissed as a judge favoring the locals over the big bad out of town servicer:

    …..on Oct. 9 in federal bankruptcy court in the Southern District of New York. Ruling that a lender, PHH Mortgage, hadn’t proved its claim to a delinquent borrower’s home in White Plains, Judge Robert D. Drain wiped out a $461,263 mortgage debt on the property. That’s right: the mortgage debt disappeared, via a court order.

    Yves here. Translation: the judge was pissed. He could have dismissed the case without prejudice, meaning PHH could get its ducks in a row and try again, but he sent a much stronger message. Back to the story:

    ….the case is an alert to lenders that dubious proof-of-ownership tactics may no longer be accepted practice. They may even be viewed as a fraud on the court…..

    Yves here. Lawyers can correct me, but I believe “fraud on the court” would mean that lawyers that bringing that sort of action could be sanctioned. Back to Morgenson:

    According to court documents, the borrower bought the house in 2001 with a mortgage from Wells Fargo; four and a half years later she refinanced with Mortgage World Bankers Inc.

    She fell behind in her payments, and David B. Shaev, a consumer bankruptcy lawyer in Manhattan, filed a Chapter 13 bankruptcy plan…

    Mr. Shaev said that when he filed the case, he had simply hoped to persuade PHH to modify his client’s loan. But after months of what he described as foot-dragging by PHH and its lawyers, he asked for proof of PHH’s standing in the case…..

    Mr. Shaev received a letter stating that PHH was the servicer of the loan but that the holder of the note was U.S. Bank, as trustee of a securitization pool. But U.S. Bank was not a party to the action.

    Mr. Shaev then asked for proof that U.S. Bank was indeed the holder of the note. All that was provided, however, was an affidavit from Tracy Johnson, a vice president at PHH Mortgage, saying that PHH was the servicer and U.S. Bank the holder.

    Among the filings supplied to support Ms. Johnson’s assertion was a copy of the assignment of the mortgage. But this, too, was signed by Ms. Johnson, only this time she was identified as an assistant vice president of MERS, the Mortgage Electronic Registration System. This bank-owned registry eliminates the need to record changes in property ownership in local land records.

    Another problem was that the document showed the note was assigned on March 26, 2009, well after the bankruptcy had been filed….

    According to a transcript of the Sept. 29 hearing, Mr. DiCaro [representing PHH] said: “In the secondary market, there are many cases where assignment of mortgages, assignment of notes, don’t happen at the time they should. It was standard operating procedure for many years.”

    Judge Drain rejected that argument, concluding that what had been presented to the court just did not add up. “I think that I have a more than 50 percent doubt that if the debtor paid this claim, it would be paying the wrong person,” he said. “That’s the problem. And that’s because the claimant has not shown an assignment of a mortgage.”….

    Late last week, PHH appealed the judge’s ruling. But Mr. DiCaro and PHH are in something of a bind. Either they will return to court with a clear claim on the property — including all the transfers and sales that are necessary in the securitization process — or they won’t be able to produce that documentation. If they do produce it, they will then have to explain why they didn’t produce it before.

    Yves again. And given that they presented that little assignment with a date after the bankruptcy was filed….that would seem to say that any cleaned up paper trail was fraudulent.

    Of course, presumably everyone in foreclosure land will get smarter and at least post date their documents more carefully. But maybe not.

    And we have an even more interesting set of possibilities. Say servicers and MERS fail to clean up their act, and more judges start throwing out foreclosures. Kansas Supreme Court Judge Rosen didn’t just say he didn’t see an acceptable paper trail; elements of his ruling were a much more fundamental attack on MERS. If more judges start challenging MERS’s legitimacy, that could strike at the heart of foreclosures in securitizations. In other words, a few more of these rulings may accomplish what the folks in DC have been unwilling and unable to do: force banks to negotiate. The problem, of course, is the impact will be very inconsistent. Some jurisdictions and judges will no doubt be more sympathetic to this line of argument than others.

    Stay tuned, this looks certain to get even more interesting.

    Gretchen Morgenson of the New York Times reports on the latest instance of judges taking issue with the rather haphazard procedures of lenders and servicers in handling mortgage assignments.

    Saturday, October 24, 2009

    Old credit disputes can scuttle loan

    Posted in the Washington Post by Kenneth Harney:

    Could a little-known and potentially controversial practice by mortgage giants Fannie Mae and Freddie Mac kill or stall your next loan application? Absolutely.

    Picture this scenario: You've got outstanding credit scores close to 800 and solid equity in your home. All you want is to refinance your current mortgage to take advantage of today's rock-bottom interest rates.

    By any measure, your application should rocket through your lender's system and get you a great rate. But your bank says: Sorry. We can't do your loan.

    Fannie Mae's automated underwriting system won't accept any application in which there is a notation in the credit report that a consumer has disputed an account or "tradeline."

    You explain that the dispute -- over a medical bill or a credit card charge -- was valid. The account was closed. The creditor promised to remove the dispute notation but apparently never did. Your loan officer won't budge. Policy is policy, he says. Your refi application is dead.

    What's going on here? Under the Fair Credit Reporting Act, consumers are guaranteed the right to dispute erroneous information on any account in their credit files. Once a consumer challenges that information, a notation to this effect must be made on the file. As long as it remains, most credit scoring systems generally will not factor the disputed account into the computation of the consumer's score.

    Does Fannie Mae, currently operating under federal conservatorship, deny loans to consumers simply because they exercised their legal rights? In an e-mail response, communications director Amy Bonitatibus confirmed that the company's automated underwriting system -- used by virtually all lenders doing business with Fannie Mae -- sends applications with "consumer disputed" items on credit reports back to the lender for what is known as "manual underwriting."

    Bonitatibus emphasized that the company does "not prohibit delivery of a loan . . . where the borrower has disputed information" on his or her credit report. Through manual underwriting, she said, "our policy requires the lender to determine and document whether or not the disputed information is accurate and underwrite the borrower's credit accordingly."

    What's the practical effect of bucking back applications to lenders for potentially lengthy and contentious discussions with applicants and their creditors? According to consumer postings on, a financial education Web site, the net result often is that the bank kisses you off and blames it on Fannie.

    One poster who had sought to buy a condominium was turned down by a national lender despite an acknowledgment by the bank that "all of the accounts have a zero balance, are in good standing, and show no other derogatory information." After spending "hours on the phone with the creditors and credit bureaus trying to resolve this issue," nothing was resolved, said the poster.

    Christopher Cruise, a Maryland-based mortgage originator and a founding member of the National Association of Responsible Loan Officers, said, "There's no question -- when there are lots of other applications and business is good," applications requiring extra time and hands-on research "just aren't going to move."

    Evan Hendricks, author of the book "Credit Scores and Credit Reports" and publisher of Privacy Times, a newsletter that outlined Fannie Mae's policy in a recent report, calls it "extremely unfair to honest consumers who are simply doing what they should -- challenging misinformation." Instead, he said, "they get ambushed" when they apply for a mortgage.

    Freddie Mac's policy on disputed tradelines is broadly similar to Fannie Mae's, according to spokesman Brad German. Though the specific requirements of its automated system are "proprietary," he said in an e-mail, "the presence of disputed tradelines will affect (the system's) determination of a borrower's credit reputation and its decision to accept the application or refer it to the lender for manual underwriting."

    Why are both Fannie and Freddie so uptight about applications with disputed accounts? Mainly because during the past several years, credit repair companies have been gaming automated systems tied to credit scores by disputing accurate but negative items. When tradelines in a consumer's file contain a "disputed" notation, most scoring software ignores them for the purposes of computing the score.

    A seriously delinquent account that could legitimately depress a FICO score might be taken out of the equation -- at least temporarily -- if a "consumer-disputed" notation is in the file. Fannie and Freddie are trying to protect themselves from gamesters and frauds.

    But what about the impact on disputed items when the consumer is right -- or files in which creditors failed to remove the disputed-account designation? For the time being, it's tough luck for all applicants with disputes in their credit files.

    Fannie Mae, however, says it is "reviewing" its policy, so maybe there's a chance for a change.

    Uncle Sam Adds 5% to Prices of Homes, Goldman Says

    Posted in the Wall Street Journal by James R. Haggerty:

    Uncle Sam’s interventions in the housing market have pushed home prices 5% higher on a national average than they would have been otherwise, Goldman Sachs estimates in a report released late Friday.

    The government over the past year has slowed the pace of foreclosures through moratoria and the drive to modify mortgage terms to keep more borrowers in their homes. It also has pumped up demand for housing by giving tax credits to many first-time home buyers and by driving down mortgage interest rates. As a result, home prices in some areas have risen in recent months, particularly for homes that appeal to investors and first-time buyers. Bidding wars for the more attractive bank-owned homes have become common.

    But these artificial props won’t last forever and may have created a false bottom in the market. “The risk of renewed home-price declines remains significant,” Goldman economist Alec Phillips writes in the report, “and our working assumption is a further 5% to 10% decline by mid-2010.”

    Federal government policies encouraging loan mods have reduced the supply of homes on the market temporarily because it takes months for loan servicers (the firms that collect mortgage payments) to figure out which borrowers qualify. Some states have added their own restrictions on foreclosures that drag out the process further. In many cases, borrowers who get loan mods will default again within a year or so, meaning the problem has been delayed rather than solved. That means there is a large but impossible-to-measure “shadow” inventory of homes that eventually will hit the market.

    Goldman estimates the tax credit has boosted sales by 200,000 units. Congress is debating whether to extend that credit beyond Nov. 30. Goldman says it “appears likely to be extended for at least a few months but probably no longer than through the first half of 2010.”

    Mammoth purchases of mortgage securities by the Federal Reserve appear to have held home mortgage rates about 0.30 percentage point lower than they would have been, Goldman says. Those purchases are due to be phased out in next year’s first quarter.

    The outlook for further government policy is “cloudy,” Goldman notes. But it is safe to assume that many politicians will remain loath to let the market run free and wild. Goldman points to legislation introduced by Sen. Jack Reed (D, R.I.) that would require mediation between borrowers and lenders before any foreclosures and mandate loan mods in some cases.

    “At a minimum, the Reed proposal would slow the foreclosure process considerably,” helping to prevent price declines in the near term, Goldman says. It adds: “The tradeoff would come later, when many of the properties eventually make their way back onto the market through foreclosure.”

    Friday, October 23, 2009

    Shrewd Mortgage Borrowers Know Their PNPs

    Posted on Yahoo Finance by Jack Guttentag:

    In the mortgage market, PNP stands for "pricing notch point," which is a value of one of the factors used in pricing at which the price changes. In most lines of business, the factor used to price is the quantity purchased. For example, at the farm stand where I buy corn, the price is $.70 an ear for the first three ears, $.65 for the next three, and $.60 for any ears beyond six. This merchant’s PNPs are three ears and six ears. These PNPs are pretty easy for consumers to understand, but the stakes are small.

    PNPs are more complicated, but the stakes are high. On a mortgage, the "price" includes the interest rate, mortgage insurance premium, and points, any or all of which can change in response to changes in loan size, loan-to-value ratio (LTV), and credit score. Each of these has its own PNPs.

    As an example, on September 18, 2009, the interest rate on a 30-year prime FRM at zero points was 4.75 percent for a loan amount of $417,000, and 5.375 percent on a loan of $417,001. $417,000 was a loan-size PNP. On a prime 30-year FRM, the monthly mortgage insurance premium was .69 percent at an LTV of 85 percent, and .88 percent at an LTV of 85.1 percent. 85 percent was an LTV PNP. The same mortgage with a rate of 4.875 percent had points of .3 percent with a FICO score of 720, and points of .8 percent with a FICO of 719. 720 was a FICO-score PNP.

    Since the increase in price that results from crossing a PNP applies to the entire loan, not just to the increment, the increment can be extremely costly. While no one would borrow $417,001, as in the above example, they might borrow $500,000. In that case, the cost of the $83,000 increment would be 5.375 percent on the increment, plus an additional .625 percent on the $417,000. The moral is that you don’t pass a PNP in the wrong direction if you can possibly avoid it.

    Conventional Loans

    On conventional loans, there are now two loan amount PNPs. One is $417,000, called the "conforming loan limit," which is the largest loan that can be purchased by Fannie Mae and Freddie Mac in any part of the country. The second PNP, called the “conforming jumbo limit,” varies by county up to $729,750 and is scheduled to expire at the end of 2009.

    PNPs in the ratio of loan amount to property value are generally 80 percent, 85 percent, 90 percent, 95 percent, and 97 percent. In the crisis market that developed after the housing bubble burst in 2007, 75 percent also became a PNP.

    PNPs often become relevant in connection with the issue of whether or not to finance closing costs, since doing so increases the loan amount and could breach a PNP. As an example, if closing costs on a $400,000 loan are $8,000 and the initial LTV is 80 percent to 83 percent of value, financing the closing costs won’t affect the price because the ratio will remain below 85 percent.

    But if the initial LTV was 84 percent, adding the $8,000 would bring the ratio above 85 percent, raising the price on the $400,000. That would make the cost of the $8,000 astronomical.

    Another Important Point

    Another situation where PNPs are important to borrowers is where they have the capacity to make a larger down payment, or to pay down the balance preparatory to a refinance. If the larger down payment or prepayment penetrates a PNP, the return on investment will be very high. The financial crisis increased these returns by widening the price spreads between PNPs, and by eroding borrower equity.

    As an example, a borrower who wrote me recently was paying 6.125 percent on her current mortgage and qualified for a no-cost refinance at 5.125 percent, which was highly advantageous. Because of the decline in the value of her home, however, her LTV had risen to 86 percent, which would require purchasing mortgage insurance on the refinance.

    To avoid that, she would have to pay down the loan balance by enough to reduce the LTV to 80 percent. Relative to remaining with her current mortgage, I calculated the annual rate of return on the required investment at 18 percent over five years and 16.6 percent over 30 years, with no risk. Equally high returns are available on modest-size investments in partial prepayments that convert jumbo into conforming loans.

    FICO-score PNPs may differ some from lender to lender, but they are equally important. A typical set would be 800, 780, 720, 700, 680, 660, 640, and 620. Mortgage applicants are much more likely to be on the wrong side of a FICO-score PNP than an LTV or loan amount PNP. They are less likely to know the FICO-score PNPs, and in many cases they don’t know their own score going in. Further, their loan provider may or may not be willing to put a deal on hold in order to work on an applicant's credit score. I will be discussing this issue in a future column.

    Thursday, October 22, 2009

    HOPE NOW Pushes HAMP for Unemployed Homeowners

    Posted on the Housing Wire by Jon Prior:

    The HOPE NOW Unemployment Committee collaborated with the Obama Administration to develop a new tool to help identify the eligibility of unemployed homeowners to for the Home Affordable Modification Program (HAMP).

    The US Treasury Department allocates capped incentives to servicers participating in HAMP to modify loans on the verge of foreclosure. Servicers lower the debt-to-income ratio of a qualified borrower to 31% with a HAMP modification.

    With the new tool, homeowners with nine months of unemployment benefits may use their unemployment income in determining HAMP qualification, according to a statement from Faith Schwartz, executive director of HOPE NOW, the private sector alliance of mortgage servicers, investors, insurers and non-profit counselors..

    The web-based unemployment verification tool informs mortgage companies, housing counselors and homeowners of the correct amount of unemployment income and the duration of the payments.

    “This is a highly useful tool for all parties as it really streamlines the process for unemployed borrowers to a faster resolution,” Schwartz said.

    Treasury’s Allison Confirms ‘Foreclosure Alternative’ Plans

    Posted on the Housing Wire by Jon Prior:

    In a testimony before the Congressional Oversight Panel (COP), Herb Allison, the assistant secretary for Financial Stability, confirmed the US Treasury Department’s plans to develop a foreclosure alternatives program with funds from the Troubled Asset Relief Program (TARP).

    An existing homeownership preservation program under TARP, the Making Home Affordable (MHA) Program, encourages the modification or refinancing of troubled mortgages. Under the Home Affordable Modification Program (HAMP), the Treasury allocates capped incentives to servicers that modify qualifying loans on the verge of foreclosure.

    The new program will provide incentives for short sales and deeds-in lieu of foreclosure when borrowers are unable or unwilling to complete the HAMP process, Allison said.

    “We are aware that there are many borrowers whose modifications under HAMP will not be sufficient to keep them out of foreclosure,” Allison said.

    The Foreclosure Alternatives Program can help prevent foreclosures and minimize the damage on borrowers, financial institutions and communities, Allison said.

    HousingWire first reported on the development of the program when Laurie Maggiano, the chief of the Homeowner Preservation Office at the Treasury, released information on the forthcoming initiative, which she called the Home Affordable Foreclosure Alternatives (HAFA) program.

    Sources close to HousingWire indicate a lack of transparency over the percentage of trial HAMP modifications that become permanent is creating a fair amount of uncertainty in evaluating the cash flow of securitizations affected by modified loans. HAMP requires borrowers to remain current during a three-month trial before the modification is considered permanent.

    COP, which reviews actions taken by the Treasury, reported that servicers participating in HAMP permanently modified 1,711 loans since the program’s launch in March 2009.

    Anatomy of a Hamp modification

    Posted on FT Alphaville by Tracy Alloway:

    Did you ever want to see what a mortgage modification from the US government’s Home Affordable Modification Plan (Hamp) looks like?

    Here’s your chance. Calculated Risk has got hold of some loan modification documents from Wells Fargo.

    The whole document can be found here, with names and addresses removed, but here are a few key points from Calculated Risk:

    • The borrower is delinquent and hasn’t made a payment in about one year.
    • The trial modification plan (three months) calls for three payments of $1170.82 per month (includes an escrow account for taxes and insurance). This is about $1000.00 less than the borrower’s previous monthly payment
    • The borrower owes approximately $330,000 (including missed payments). Wells Fargo is waiving the late fees if the borrower completes the trial modification plan.
    • A similar house has recently sold for $150,000 (distressed sale), so the borrower is probably $150,000 to $180,000 underwater.
    • Comparable houses rent for close to $1,500 per month. So the borrower is paying less than the going rent on the modified loan.
    Now, if the third quarter has shown us anything it’s that Hamp modifications have had an impact on bank results — the question is how much.

    Under the program, the US Treasury pays borrowers and loan servicers, including the banks, to agree to the loan mods.In exchange, the lender agrees to reduce monthly payments in a “trial” modification period (three months), which is then — hopefully — made into a permanent payment reduction plan. In the above example the borrower has agreed to pay about 46 per cent less in interest than he would otherwise have owed.

    So are the banks taking losses on Hamp modifications?

    Not from what we understand.

    Crucially a Hamp modification does not have to include principal forgiveness or reduction, so there’s not usually a loss there.

    Instead, the loss comes from the reduction in interest income — and that, it seems, is borne mostly by the US Treasury and the GSEs, Fannie and Freddie.

    What you tend to see in bank results then, is an increase in the delinquency rate since Hamp loans in trial modification are included in that rate.

    What you cannot really see is Hamp’s impact on the banks’ charge-off rates.

    This, for instance, is from Citi’s third-quarter conference call:

    Turning to first mortgages on slide 18, we take a closer look at the delinquency data. Last quarter, we discussed a trend that showed a decline in the 90 to 179 day bucket and an increase in the 180 day plus bucket. The trend in the 90 to 179 day bucket has reversed this quarter, but can be largely explained by the loan modification program known as Home Affordable Modification or HAMP. We have approximately $6 billion of on-balance sheet mortgages in this program. Under HAMP, borrowers make reduced mortgage payments for a trial period, during which they continue to age through our delinquency buckets even if they are current under the new payment terms. This serves to increase our delinquencies. Virtually all of the increase in the 90 to 179 bucket and half of the increase in the 180 plus day bucket are loans in HAMP trial modifications. The rest of the increase in the 180 plus day bucket is attributable to a backlog of foreclosure inventory driven by a slowdown in the foreclosure process in many states. HAMP also reduces net credit losses as loans in the trial period do not get charged off at 180 days past-due as long as they have made at least one payment. Nearly half the sequential decline in net credit losses on first mortgages this quarter was attributable to HAMP. We have provided additional loan loss provisions to offset this impact.

    All of which is fine as long as the trial modifications work out and become permanent, at which point all those Hamp loans will jump out of the delinquent bracket and into current status.

    However, if house prices continue to fall, home-owners like the one in the Wells Fargo Hamp documentation above — already $150,000 underwater — may well decide to simply decide to walk away. At which point the loan would be in default and the bank would simply foreclose on the property.

    In fact there’s a huge question mark over default rates for modified loans. From a Federal Reserve publication:

    For example, the Fitch ratings service released a report earlier this year showing the re-default rate for modified subprime, securitized loans was between 65 percent and 75 percent. But a recent Mortgage Metrics Report from the Office of the Comptroller of the Currency and the Office of Thrift Supervision, which analyzed the loan performance at nine national banks and four thrifts with the largest mortgage portfolios, found that “modifications that decreased monthly payments had consistently lower re-default rates, with greater percentage decreases [in monthly payments] resulting in lower subsequent re-default rates.” The report also found the re-default rate for modified mortgages was generally lower if the borrower’s payment was reduced by more than 10 percent.

    In light of banks’ third-quarter results, FT Alphaville will be taking a closer look into the Hamp.

    There’s a selection of links below if you want to as well.

    Related links:
    Fitch projects more RMBS re-defaults as Hamp disappoints - HousingWire
    An overview of the Home Affordable Modification Program - Philadelphia Fed
    Mortgage modification datapoint of the day - Felix Salmon
    Chances are, most Hamp mods won’t work: Amherst - HousingWire
    Has mortgage modification failed? - The Baseline Scenario

    Waiting for the Next McMansion to Drop

    Posted in the Wall Street Journal by James R. Hagerty:

    Despite some tentative signs of recovery, the U.S. housing market remains vulnerable to further price drops—especially in areas where large numbers of mortgages are headed toward foreclosure over the next few years.

    The Wall Street Journal's quarterly survey of housing-market data in 28 major metro areas shows sharp drops in the number of homes listed for sale across the country (see chart on page D2). But the potential supply of homes is far larger because banks are likely to acquire significant numbers of foreclosed homes in some areas, notably Las Vegas, Atlanta, Detroit, Phoenix, Miami and other parts of Florida, and Sacramento, Calif., over the next few years.

    Sales of those homes may depress prices further. By contrast, metro areas with relatively low foreclosure and mortgage-delinquency rates include Boston, Denver, Minneapolis, San Francisco, Seattle, Raleigh, N.C., and Portland, Ore., making them less vulnerable.

    Homeowners and potential buyers have been whipsawed by conflicting signals about the state of the market in recent months. Ulani and Mike Thiessen found the market surprisingly hot when they went shopping for their first home in Las Vegas during the summer. With the help of Kim Kelly-Reed, an agent from One Source Realty & Management, the Thiessens finally bought a foreclosed house in September for about $136,000—but only after being outbid on three other houses.

    "It's a crazy market out there," says Ms. Thiessen, who works for an electrical contractor.

    Despite a continuing surge in defaults, there is a shortage of well-preserved foreclosed homes on the market in Las Vegas, Sacramento and some other metro areas where first-time home buyers have been competing with investors for newly affordable properties. "Anything under $300,000 that is decent within hours has dozens of offers," says Michael Lyon, CEO of Lyon Real Estate in Sacramento.

    The supply of foreclosed homes listed for sale has dwindled largely because of government-mandated efforts to save as many borrowers as possible from losing their homes. That campaign has gummed up the foreclosure process, slowing the flow of houses into bank ownership—but only temporarily.

    Over the next few years, housing analysts believe, millions of other homes are heading for bank ownership, but no one can say how long that will take or when a sudden torrent of bank-owned properties may swamp certain local markets.

    Nearly 27% of first-lien home mortgages are at least 30 days overdue or in foreclosure in the Miami-Fort Lauderdale area, according to research firm LPS Applied Analytics in Denver. The rate is 23% in Las Vegas, but about 8% in Denver and Seattle. The national average is 12.4%, up from 5.2% at the end of 2006.

    Among the millions of homeowners whose fate remains undecided are Jill and Robert Loy, who live in Scottsdale, Ariz. They bought their home in 2004 for $630,000 but figure it is now worth only about $350,000, well below the $470,000 owed on their mortgage.

    Falling Behind

    The couple fell behind on their loan payments last spring when Ms. Loy was temporarily jobless, and they have been trying to work out a modification of their loan terms with the company that collects payments on their mortgage, Colonial Savings FA of Fort Worth, Texas. A Colonial spokeswoman says the bank is trying to help the Loys.

    The housing market is heading into the winter doldrums—when fewer people shop for real estate—after a summer marked by strong demand for low-end to midrange homes, spurred by a temporary federal tax credit for first-time buyers. How the market fares in the spring will depend largely on the state of the economy and the pace of foreclosures.

    "The number of people receiving paychecks will drive the demand for houses and apartments," Jay Brinkmann, chief economist for the Mortgage Bankers Association, said Tuesday in testimony to the Senate Banking Committee, "and the recovery will begin when unemployment stops rising."

    For now, the market seems to be stabilizing, says Jeffrey Otteau, president of Otteau Valuation Group, an East Brunswick, N.J., appraisal firm. But if the job market gets much worse and mortgage rates rise sharply, "that could be the tipping point" for another drop in prices.

    Mark Zandi, chief economist at Moody's, predicts that average national home prices will bottom out in next year's third quarter, assuming that employment begins growing again in mid-2010. But prices in some metro areas still have a long way to fall, he believes. Prices in the second quarter of 2010 will be down about 30% from a year earlier in Miami, 27% in Orlando, Fla., 24% in Las Vegas and 23% in Phoenix, Moody's forecasts.

    Foreclosures and short sales (in which a home is offered for less than the mortgage balance) dominate the markets in some metro areas. Satish M. Mansukhani, a market strategist in New York, estimates that such "distressed" homes account for 79% of home listings in the Detroit area and 75% in Las Vegas, but just 16% in Houston and 7% in Boston.

    One big question is how much more the federal government will do to prop up housing. Congress is debating whether to extend the tax credit for home buyers beyond Nov. 30. Meanwhile, the Federal Reserve is phasing out its massive purchases of mortgage-backed securities and plans to conclude the program by the end of March. Those purchases have helped keep interest rates on 30-year fixed-rate mortgages around 5%. Mr. Zandi says mortgage rates are likely to rise as much as one percentage point after the Fed ends that support. Analysts at Barclays Capital in New York forecast mortgage rates will be slightly over 6% by the end of March.

    High-Priced Home Glut

    While supplies of moderately priced homes have shrunk, there is still a glut of high-priced houses in many areas, suggesting that prices on those properties may fall sharply as more owners default. In Sacramento, there are enough homes on the market at $600,000 and above to last more than 15 months at the recent rate of sales, compared with just 1.5 months for homes priced at $300,000 and below, according to Lyon Real Estate.

    Home sellers will also face tougher competition from landlords, who generally have been cutting rents in the past year. The national apartment-vacancy rate in the third quarter was 7.8%, the highest in 23 years, according to Reis Inc., a New York research firm. It predicts "a few more quarters of distress, lower rents and higher vacancies."

    Apartment rents may face further downward pressure as investors buy foreclosed single-family homes and turn them into rental units, says Ryan Severino, an economist at Reis, who notes that there is little data on the number of houses being converted into rental properties.

    Wednesday, October 21, 2009

    Healthiest housing markets

    Posted on Cyberhomes by Lauren Baier Kim:

    The fall update on the 20 healthiest housing markets from BUILDER and Hanley Wood Market Intelligence is out. Cruising through the list is a very interesting exercise. Nearly all the markets on the list have at least one of three factors shoring up demand – a major university, a military base or a position as a capital city.

    Five of the 20 – and three of the top five – are in Texas, including the top spot, which goes to Austin, Texas. That’s not surprising. I’ve always heard very good things about this town. It winds up on a lot of top 10 lists, touted for its culture (it is home of the South by Southwest Festivals), its commitment to green building, the University of Texas, and its general cool factor. It’s not surprising, either, that Washington, D.C., is number three on the list, given all the job growth in the nation’s capital.

    The bulk of the rest are smack in the middle of the country’s heartland, cities such as Oklahoma City, Okla.; Tulsa, Okla.; Des Moines, Iowa; Little Rock, Ark.; Omaha, Neb; and Madison, Wis. There also are two markets in Utah, one in Colorado, and one in Washington State.

    Only three of the top 20 – Baton Rouge, La.; Charleston, S.C.; and Raleigh, N.C. -- are in traditionally Southern markets. Markets that drove the housing boom – such as Southern California, Arizona's Phoenix and Tucson, Nevada's Las Vegas, Georgia's Atlanta and Florida markets Orlando, Miami, Tampa, and Ft. Myers – are nowhere to be found.

    The other interesting thing is how dramatically the list has changed since it originally debuted in February. The first list included Indianapolis, Ind; Myrtle Beach, S.C.; Nashville, Tenn; Wilmington, N.C.; Seattle; and Charlotte, N.C. They’re gone now.

    If you look at the list and are scratching your head about a particular city’s inclusion, here is some context. You’ll notice it says the "healthiest" markets, not "healthy" markets. There’s a big difference. The scoring system incorporates home price appreciation, job growth, household growth, unemployment and median income growth. A score of 50 or more is considered healthy. Only one city of the 20, Austin, actually scored above 50.

    Tuesday, October 20, 2009

    Servicers Prefer Foreclosure, Says NCLC

    Posted on the Housing Wire by Jon Prior:

    Mortgage servicers have found it cheaper to foreclose on homeowners than offer loan modifications, according to a new report from the National Consumer Law Center.

    The report points out servicers in charge of modifying distressed loans are separate from the lenders, who have packaged the loans and sold them in pieces or pools to other banks and investors.

    “In the majority of cases, servicers have nothing to do with what’s in the best interest of those investors,” said Diane Thompson, the author of the report and attorney at the NCLC. “We figured this out by following the money, by following who plays what role in all of these business transactions and who gets paid what for doing what.”

    Financial incentives encourage servicers to pursue a foreclosure in lieu of a modification, which costs the servicer upfront money in fixed overhead costs, and out-of-pocket expenses such as property valuations and credit reports, according to the report.

    “A servicer deciding between a foreclosure and a loan modification faces the prospect of near certain loss if the loan is modified, and no penalty, but potential profit, if the home is foreclosed,” according to the report.

    The report details servicing fees, such as markups in broker-priced opinions (BPOs), that provide incentives to delay a foreclosure and even partly explain a servicer’s reluctance to enter into a short sale, according to the report.

    A servicer would profit from a short sale only if the servicer’s financing costs outweigh the foreclosure fees charged and if the short sale processes faster than foreclosure, according the report.

    “If you read these servicing agreements and prospectuses, you can see that there are a bunch of different people who own the loans, and you can see that the servicer doesn’t hold much if any interest in what happens to the loan as a whole,” Thompson said. “And the way that a servicer gets paid entirely pushes the servicer to proceed with a foreclosure and not to do a loan modification.”

    Download report here.

    MBA's plan for rebuilding the secondary market for mortgages

    The most immediate challenge is what will happen to interest rates when the Federal Reserve terminates its program for purchasing Fannie Mae and Freddie Mac mortgage-backed securities in March. The Federal Reserve has purchased the vast majority of MBS issued by these two companies this year and in September purchased more than 100% of the Fannie and Freddie MBS issued that month. The benefit has been that mortgage rates have been held lower than what they otherwise would have been without the purchase program, but there is growing concern over where rates may go once the Federal Reserve stops buying and what this will mean for borrowers. While the most benign estimates are for increases in the range of 20 to 30 basis points, some estimates of the potential increase in rates are several times those amounts. The extension of the Fed’s MBS purchase program to March gives the Obama administration time to announce its interim and, perhaps, long-term recommendations for Fannie and Freddie in February’s budget release.

    All of this, however, points to the need to begin replacing Fannie Mae and Freddie Mac with a long-term solution. MBA has been working on this problem for over a year now and recently released its plan for rebuilding the secondary market for mortgages.

    MBA’s plan envisions a system composed of private, non-government credit guarantor entities that would insure mortgage loans against default and securitize those mortgages for sale to investors. These entities would be well-capitalized and regulated, and would be restricted to insuring only a core set of the safest types of mortgages, and would only be allowed to hold de minimus portfolios. The resulting securities would, in turn, have a federal guarantee that would allow them to trade similar to the way Ginnie Mae securities trade today. The guarantee would not be free. The entities would pay a risk-based fee for the guarantee, with the fees building up an insurance fund that would operate similar to the bank deposit insurance fund. Any credit losses would be borne first by private equity in the entities and any risk-sharing arrangements put in place with lenders and private mortgage insurance companies. In the event one of these entities failed, the insurance fund would cover the losses. Only if the insurance fund were exhausted, would the government need to intervene.

    For the whole speech click here.

    More RMBS Re-Defaults as HAMP Disappoints

    Posted on the Housing Wire by Jon Prior:

    Servicers of residential mortgage-backed securities (RMBS) continue to increase loss mitigation resolutions, including a significant push in the number of loan modifications, according to a report from Fitch Ratings.

    As of September 2009, roughly 10% of all RMBS loans and 25% of all subprime loans received at least one modification. A year ago, servicers modified only 3% of all loans, and 7% of subprime loans, according to the report.

    Fitch estimated a “conservative” projection of 65% to 75% of subprime delinquencies of 60 days or more that will re-default after 12 months post-modification.

    “As in prior statements, market pressures to allow more aggressive [modifications], continued home price declines, and the economy’s effect on job losses factor into this projection,” according to Fitch analysts.

    The projection includes re-defaults on loans that received a second and third modification after the first one failed. Roughly 11% of all modified RMBS loans received a second modification, and of the modifications done in Q308, 17% were re-modified, according to the report.

    The monthly modification volume dropped from the peak in the middle of 2009, because loan modifications under the Home Affordable Modification Program (HAMP) are not considered complete until a three-month trial finishes.

    Through HAMP, the US Treasury Department allocates capped incentives to servicers for the modification of loans on the verge of foreclosure.

    HAMP’s first modifications did not begin to complete the trial period until early July and are not included in the January through June 2009 results, according to the report. But cumulative modifications increased during the first half of 2009 as servicers continued non-HAMP modifications.

    “Initial indications suggest the conversion from trial mod under HAMP to actual finalized
    modification status has been disappointing,” according to Fitch analysts.

    Through September 2009, there has been no “pick-up” in modification activity stemming from the completion of HAMP trial modifications.

    According to a report from the Congressional Oversight Panel (COP), which reviews actions taken by the Treasury, only 1,711 of the 360,000 trial modifications started passed out of the HAMP trial period and into permanence as of September 1.