Monday, November 30, 2009

Obama administration kicks off HAMP conversion drive

The U.S. Department of the Treasury and Department of Housing and Urban Development (HUD) today kick off a nationwide campaign to help borrowers who are currently in the trial phase of their modified mortgages under the Obama Administration’s Home Affordable Modification Program (HAMP) convert to permanent modifications. The modification program, which has helped over 650,000 borrowers, is part of the Administration’s broader commitment to stabilize housing markets and to provide relief to struggling homeowners and is a primary focus of financial stability efforts moving forward. Roughly 375,000 of the borrowers who have begun trial modifications since the start of the program are scheduled to convert to permanent modifications by the end of the year. Through the efforts being announced today, Treasury and HUD will implement new outreach tools and borrower resources to help convert as many trial modifications as possible to permanent ones.

“We are encouraged by the pace at which trial modifications are now being made to provide immediate savings to struggling homeowners," said the new Chief of Treasury’s Homeownership Preservation Office (HPO), Phyllis Caldwell. “We now must refocus our efforts on the conversion phase to ensure that borrowers and servicers know what their responsibilities are in converting trial modifications to permanent ones." In her new role, Caldwell will lead HPO’s conversion drive efforts.

“Encouraging borrowers to move through the process of converting trial modifications to permanent modifications remains a top priority for HUD," said HUD Assistant Secretary for Housing and FHA Commissioner David Stevens. “As a part of our continuing efforts to improve the execution of the HAMP program, HUD is committed to working with servicers, borrowers, housing counselors and others dedicated to homeownership preservation to improve the transition of distressed homeowners into affordable and sustainable mortgages."

With tens of thousands of trial modifications being made each week, the Administration is now working to ensure that eligible borrowers have the information and the assistance needed to move from the trial to the permanent modification phase. (All mortgage modifications begin with a trial phase to allow borrowers to submit the necessary documentation and determine whether the modified monthly payment is sustainable for them.) As the first round of modifications convert from the trial to permanent phase, the Administration has identified several strategies for addressing the challenges that borrowers confront in receiving permanent modifications.

In addition to the conversion drive that kicks off today, the Obama Administration has already taken several steps to make the transition from trial to permanent modification easier and more transparent by:

  • Extending the period for trial modifications started on or before September 1st to give homeowners more time to submit required information;
  • Streamlining the application process to minimize paperwork and simplify the submission process; meeting regularly with servicers to identify necessary improvement to borrower outreach and responsiveness;
  • Developing operational metrics to hold servicers accountable for their performance, which will soon be reported publicly;
  • Enhancing borrower resources on the website and the Homeowner’s HOPETM Hotline (888-995-HOPE) to provide direct access to tools and housing counselors.

The Mortgage Modification Conversion Drive will include the following:

  • Servicer Accountability. As part of the Administration’s ongoing efforts to hold servicers accountable for their commitment to the program and responsibility to borrowers, the following measures will be added:
    • Top servicers will be required to submit a schedule demonstrating their plans to reach a decision on each loan for which they have documentation and to communicate either a modification agreement or denial letter to those borrowers. Treasury/Fannie Mae “account liaisons" are being assigned to these servicers and will follow up daily as necessary to monitor progress against the servicer’s plan. Daily progress will be aggregated by the end of each business day and reported to the Administration.

    • Servicers failing to meet performance obligations under the Servicer Participation Agreement will be subject to consequences which could include monetary penalties and sanctions.

    • The December MHA Servicer Performance Report will include the data on permanent modifications as well as the number of active trial period modifications that may convert by the end of the year if all borrower documents are successfully submitted, sorted by servicer and date.

    • Servicers will be required to report to the Administration the status of each modification to provide additional transparency about situations where borrowers face obstacles to moving to the permanent phase.

  • Web tools for borrowers. Because the document submission process can be a challenge for many borrowers, the Administration has created new resources on to simplify and streamline this step. New resources include:
    • Links to all of the required documents and an income verification checklist to help borrowers request a modification in four easy steps;

    • Comprehensive information about how the trial phase works, what borrower responsibilities are to convert to a permanent modification, and a new instructional video which provides step by step instruction for borrowers;

    • A toolkit for partner organizations to directly assist their constituents;

    • New web banners and tools for outreach partners to drive more borrowers to the site and Homeowner’s HOPETM Hotline (888-995-HOPE).

  • Engagement of state, local and community stakeholders. Through the conversion drive, the Administration is engaging all levels of government - state, local and county - to both increase awareness of the program and expand the resources available to borrowers as they navigate the modification process.
    • HUD will engage staff in its 81 field offices to distribute outreach tools. HUD will also encourage its 2700 HUD-Approved Counseling Organizations to distribute outreach information to participating borrowers.

    • By engaging the National Governors Association (NGA), National League of Cities (NLC) and National Association of Counties (NACo) the Administration is connecting with the thousands of state, local, and county offices on the frontlines in large and small communities across the country who are hardest hit by the foreclosure crisis. These offices will now have the tools to increase awareness of the program, connect with and educate borrowers and grassroots organizations on how to request a modification and take the additional steps to ensure they are converted to permanent status; and serve as an additional trusted resource for borrowers who are facing challenges with the program.

    • In partnering with the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators, state regulators will now have enhanced tools to assist borrowers who are facing challenges in converting to a permanent modification and to report to the Administration on the progress and challenges borrowers and servicers are facing on the ground. Regulators will also be empowered to work directly with escalation and compliance teams to ensure that HAMP guidelines are consistently applied.

More information about the Obama Administration’s mortgage modification program can be found at

For subprime, is it deja vu all over again?

Posted on the Housing Wire by Paul Jackson:

I know, I know. Subprime is so, like, 2007. And most of the financial press has moved onto sexier mortgage words like “option ARMs,” or “FHA loss reserves.”

That said, I thought it would be interesting to dive back into subprime waters, taking a granular look at individual deal performance using November remittance data from that old standby, the ABX. (For those that don’t recall, the ABX index was launched by Markit in 2006 to track the private-party subprime RMBS market — and it allowed some hedge funds an easy mechanism to short the market for subprime mortgages.)

We decided to take a look all 81 different deals across the 2006 and 2007 vintages within the ABX, comparing month-to-month percentage changes in both 60+ day delinquencies (not yet in foreclosure) and properties in foreclosure status.

What we found is a telling picture of a subprime market on hold, but far from reaching a bottom. Blue bars represent month-over-month trending in 60+ day delinquencies for each of the 81 deals, while red bars represent month-over-month trending in foreclosures.

Click the image to see full-size version

Because this sort of chart technique might be foreign to some readers, the zero axis point represents no change between October 2009 and November 2009 data. Any data points in positive territory reflect a percentage increase month-over-month, while data points in negative territory reflect a percentage decrease month-over-month.

Surprised? Only if you thought the subprime mess was over with.

What’s beyond clear here is that the volume of 60+ day delinquencies is almost universally on the rise, while foreclosure volume is far more erratic and more likely to be on the downswing — the effect of various government programs designed to prevent foreclosure at all costs, while unemployment continues to take its toll on borrowers’ ability to pay their mortgage. That effect can be seen even more clearly in declining REO inventories tied to these 81 subprime deals, below.

Click the image to see full-size version

Right now, securities holders have benefited somewhat from a modest rebound in prices, and banks have booked some market gains on the increased valuations assigned by trading activity in their Q3 earnings. But this data seems to suggest pretty plainly that any such gains might best be interpreted as transient — unless you believe that the Federal balance sheet has ample room to absorb an increasing number of troubled borrowers.

In either case, I don’t see a backup in 60+ day delinquents (subprime and elsewhere) as a sign of clear market recovery for housing or mortgages. And it’s precisely this growing backlog of newly-troubled borrowers that has me scratching my head when the NAR blindly projects a 4 percent gain for home prices next year. I’m very positive on the ability of our housing and mortgage markets to emerge stronger, but that’s a long-term sort of outlook. Don’t be fooled in the short-term by what John Mauldin has taken to calling The Statistical Recovery.

For subprime mortgages, it appears Yogi Berra was right: this really is like deja vu, all over again.

Sunday, November 29, 2009

Tranche Warfare: MBS Investor Sues American Home Over REO Sales

Posted on March 6, 2009 on the Housing Wire by Teri Buhl:

A Greenwich-based hedge fund manager is in a desperate fight to keep his subprime MBS investment strategy alive. HousingWire peeled back the layers to uncover what’s really going on behind the scenes in what has become a vicious battle between the hedge fund and legendary investor Wilbur Ross’ mortgage servicing company, Irving, Tex.-based American Home Mortgage Servicing, Inc.

The lawsuit underscores just how complicated servicing non-agency securitized loans can really be, amid a push by legislators and regulators to put a common set of standards into place to help manage a housing crisis that as of yet shows little signs of slowing down.

Bruce Rose, who runs hedge fund Carrington Investment Partners LP – and who purchased a mortgage servicing platform of his own last year when former subprime high-flier New Century Mortgage went bankrupt – filed a lawsuit last month claiming that American Home Mortgage Servicing, the nation’s largest independent mortgage servicer, had been selling the REO homes it manages at ‘fire sale prices,’ because it needed cash to pay off its warehouse credit facility.

The REO sales push was hurting Rose’s hedge fund, because the loans on the homes are tied to mortgage-backed securities Rose had invested in. According to Carrington investors and sources familiar with Rose’s investment strategy, the hedge fund owns the junior tranches of the deals in question.

Carrington, which leaked a copy of the lawsuit to the Wall Street Journal before the suit had been served to American Home Mortgage and filed in court, alleges in its complaint that AHMSI saw its core credit facilities shrunk, forcing the REO sales. But sources familiar with Irving-based servicer say they’ve never worried about being able to tap the credit market – and say that selling the REOs had nothing to do with paying down an existing credit facility.

Instead, AHMSI’s decision to sell the homes was driven out of a desire to serve the best interests of the trust that represents all investors, sources say – to get the most money they could for the trust, because holding on to properties while home prices remain in a negative freefall costs most bondholders more money than simply getting the properties off the books. Most servicers have a fiduciary duty to a trust to maximize net present value of cash flows to investors, per most traditional pooling and servicing agreements that bind servicer’s activities.

David Friedman, CEO of American Home Mortgage, told HousingWire today, “The financial health of our company is strong. We paid off the original credit facility and replaced it with an AAA-rated facility. In fact, if needed, we can expand our credit limit and others can now invest in our high quality debt.”

So-called ‘tranche warfare’ is something that most investors and servicers have become accustomed to, but the Carrington/AMHSI dispute is unique because of the structure of the specific deals Carrington invested in. According to the complaint, Carrington acquired a 100 percent interest in a unique class of subordinate certificates in various MBS deals during 2005 and 2006, totaling $128.1 million in principal amount.

These subordinate certificates allegedly give Carrington the right to direct the servicer over the management and sale of all REO properties tied to the trust, a right that Carrington asserts in the pleading it had bargained specifically for in structuring the deals – three of the four MBS deals in question were issued directly by Carrington. All four deals were serviced by Option One Mortgage Company until Ross’ AHMSI unit acquired the Option One platform last year from tax giant H&R Block (HRB: 20.39 -0.49%).

Carrington argues in the complaint that its interests as a junior bondholder are in line with those of the senior bondholders, as well as trustees including Deutsche Bank (DB: 71.24 -5.29%) and Wells Fargo & Co. (WFC: 27.14 -2.48%) – allegations that are being hotly contested by sources that spoke with HousingWire.

Holding REO hostage?

Rose is currently battling an investor-led lawsuit, filed early last year, for alleged securities fraud and breach of his duties as the manager of the hedge fund; his fund booked a negative 9.75 percent return for 2008, according to an investor letter reviewed by HousingWire. That return is actually amazingly good given the upheaval among most funds investing in private-party MBS – but according to the investors in the lawsuit, Rose is improperly marking the assets in the fund to his own model.

Carrington was also one of the first hedge funds to get investors to vote on an amendment halting redemptions in late 2007; according to the securities lawsuit against the fund, Rose said if he had to sell the subprime-backed mortgage securities he would only get 10 cents on the dollar and would have to shut down the fund. The attorney representing Carrington investors told HousingWire that they anticipate moving for summary judgment shortly after Rose finally answers the original complaint, which is due later this month; such a judgment could invalidate the redemption amendment, and leave Carrington’s fund open to significant redemptions.

Sean O’Shea, an attorney representing Carrington, said that Rose was acting to protect investors by preventing redemptions. “By putting up the gate, Rose acted in the interest of all his investors and upheld his duty to all,” he told HousingWire. O’Shea also stressed that the investors’ claims are baseless. Nonetheless, a Connecticut federal judge ruled last month that the Carrington investors’ complaint had strong enough evidence to move forward with the securities fraud claim.

Rose allegedly told a fellow top hedge fund manager in 2007 that his strategy was to “isolate and hold the credit risk on subprime deals,” a strategy borne out by the unique class of securities Carrington now holds on the AMHSI-serviced loans. A hedge fund manager who knows Rose and spoke on the condition of anonymity told HousingWire, “I’d be amazed if there was actually any money left in the fund.”

How much money is left remains to be seen; but the special rights allegedly given to Carrington as a junior bondholder in the disputed loans have apparently led to some strange behavior, including allegedly attempting to direct AHMSI not to sell its REO properties, or to list them above market value to ensure they do not sell. When a loan in the pool does default, as long as the servicer still holds on to the property as a bank owned asset and marks it at the level of the original loan investment, the junior bond continues to pay out, sources told HousingWire.

In contrast, if the REO property is sold and actual market prices are recognized, the junior tranche would effectively be wiped out while the senior tranches divide up the recovered principal. So by dictating how a servicer can manage the loan, Carrington could control the value of its investment while setting up senior bondholders for a fall they may or may not have expected. Sources familiar with the situation told HousingWire that Rose has been asking AHMSI to book the REO in its deals at a mark-to-model method he prefers, rather than using independent appraisals or other common methods of property valuation.

Sources familiar with the situation also suggested that Rose originally attempted to get the trustees on the deals – Deutsche and Wells Fargo – to fire AHMSI as servicer of record, a move that led the trustees to suggest they poll all other investor classes first. When it became clear that other investors were unwilling to support the move, Rose attempted to purchase the relevant servicing rights himself to have the servicing moved over to his own shop; allegedly, Rose could not secure enough financing to manage such a purchase, and filed suit shortly thereafter.

O’Shea, Carrington’s attorney, says financing wasn’t the issue, and contends that AHMSI didn’t offer terms that were acceptable to Carrington to purchase the servicing. He also says that the hedge fund has ample room in its own credit facility to buy the servicing rights, if it wanted to.

Carrington’s complaint did not peg an alleged monetary damage suffered by the hedge fund, nor did the fund attempt to file an injunction to stop AHMSI from selling further REO properties tied to the contested securities. O’Shea told HousingWire his client has lost $128 million thus far on forced REO sales – all of the original principal amount invested. Of course, whether Carrington would have such broad rights as a junior bondholder to direct both the pricing and disposition methods of REO properties is a matter yet to be sorted out by the courts.

Both sides say they expect a long fight.

O’Shea told HousingWire that he believes according to the pooling and servicing agreement, AHMSI was required to uphold Carrington’s ‘special rights,’ as a responsibility to all investors. “They did it for the first few months, why aren’t they doing it now?” he said.

AHMSI’s Friedman told HousingWire that the servicer plans a fight of its own. “We plan to vigorously defend Carrington’s baseless claims in a court of law,” he said. “The servicer stands by the fact their real responsibility is to not violate its contractual obligations of the trust, and do right by all investors, not just the ones conveniently holding the ‘special rights.’”

Wilbur Ross's Mortgage Modification Plan

Posted on February 19, 2009 on the Housing Wire by Paul Jackson:

Distressed asset investor Wilbur Ross, of WL Ross & Co., has plenty of skin in the mortgage servicing game, as he owns Irving, Tex.-based American Home Mortgage Servicing, Inc.. Back in February, Ross told HousingWire in an interview that he thinks the best way to motivate lenders, servicers, and homeowners work together on modifications requires far more than what’s been proposed so far.

In particular, he believes that what’s needed is aggressive principal modifications for borrowers most in need. He has said that his American Home servicing shop has seen six-month recidivism rates below 20 percent — compared to the 50 or 60 percent standard in the industry — because the servicer has been aggressively looking to cut principal balances.

“The price of housing needs to be cleaned out. The Obama administration could right-size every underwater home and reduce principal to fit the current market value of the home. If they are going to deal with it they have to deal with it in a severe way,” Ross told HousingWire. “They also really need to consider all borrowers who are underwater, and not just the ones that have gone into default.”

The Homeowner Affordability and Stability Plan does some of that, but doesn’t go far enough, Ross suggested. “The have to reduce the principal amount of loan, not just nonperforming loans, but also performing ones,” he told CNBC. “Why should a guy who’s not paying benefit, while some poor citizen who’s struggling to make the payments gets stuck with the mortgage?”

His own plan looks something like this:

1. The lender takes a write-down in principal, and the servicer takes a similar hit on any servicing strip on the newly-reduced UPB.
2. After principal reduction, the government guarantees half of the remaining principal the lender now holds.
3. This guarantee of half the principal can now be sold into the securitization market, which will give the lender an income stream on the home again and offset some of the losses the owner of the loan has to take when they write down the principal.
4. When the house is sold, if the value of the home has gone up at the point of sale, the homeowner and the lender share in the profits earned on the gain.

Ross isn’t the first to suggest an home equity sharing plan, and there are clearly strong complexities in how any such plan would be put together, particularly as it relates to second lien holders and/or investors in junior bond classes. But the fact that a large investor with such a strong hand in the servicing business is suggesting it’s possible at all to accomplish is something that perhaps bears more attention than the idea has been getting as of late.

Quelle Surprise! Treasury Mortgage Mod Program Produces Zero Permanent Mods

Posted on Naked Capitalism:

For the record, zero is a very impressive achievement, so we have to give the Treasury department credit where credit is due. From Bloomberg:

More than 650,994 loan revisions had been started through the Obama administration’s Home Affordable Modification Program as of last month, from about 487,081 as of September, according to the Treasury. None of the trial modifications through October had been converted to permanent repayment plans, the Treasury data showed. That failure is getting the administration’s attention.

Treasury was clearly trying to blunt criticism of this program by having some new measures ready to go, as discussed in the New York Times yesterday. But the goose egg results, per Bloomberg today, are, even by the low expectations for this effort, a remarkably poor showing. And give the complete failure of the Bush, then Obama Administration efforts to get more mortgage mods within the considerable confines of current practice, why should we expect a different outcome?

The mortgage mod program is yet another ill-conceived effort to solve the problems borne of faulty technology, namely securitization. The FASB came out with a memo in 2004 that warned that warned about subprime loans and the current head of the FASB has questioned the entire premise of securitizing risky mortgages. In a 2008 roundtable, FASB chairman Robert Herz remarked:

In securitization accounting, there’s been in place, as part of the rules, a device called a qualified special-purpose entity (QSPE). It basically was a notion that if assets were placed into a trust, a vehicle, and then interests were issued out of that vehicle to various forms of security holders, what are called beneficial interest holders; basically the form of that vehicle, that trust, was to collect the proceeds on the assets and then remit them to various security holders. They were fairly passive, and the rules talked about how the powers would be very limited-entirely specified up front–and I think that worked for a fair amount of time.

But 1 think what we’ve learned in the last three to five years is in residential mortgages (also to a certain extent in commercial mortgage space and some other assets) that these assets are not passive in nature. Certainly, the subprime assets that were put into these vehicles called “Q’s,” with a lot of hindsight, because they took a lot of management when they went bad in terms of the servicing or having to restructure the loans, modify them, do all sorts of workouts. That clearly was not intended. I think the lesson learned here is that they were not actually “Q-able.”

Yves here. Now there may be remedies to prevent this sort of problem from occurring in the future, but that does nothing to solve the wee mess we have now. Residential real estate prices are sufficiently under water in a most markets that for a viable borrower (meaning one who still has a steady source of income), a deep mod can be a win/win. And before readers get moralistic, this isn’t charity, it’s practicality. In real estate downturns in the stone ages when banks held mortgages on their balance sheets, banks routinely did mods. And even in our current environment of more highly levered consumers, this practice has some empirical support. Wilbur Ross, vulture investor (ie, not predisposed to be a friend of the little guy) is an advocate of deep principal reductions based on his success with them as the owner of the biggest third-party mortgage servicer.

Now it was pretty obvious that the Obama mortgage mod effort would not produce much in the way of results. First, it provided subsidies to servicers, but much less than they would make from foreclosing. That means the banks have every reason to use the Treasury initiative to amass a track record that mods do not succeed (independent of whether they might succeed, as Wilbur Ross has shown they can).

Second, the program offered only a five year payment reduction program, with the lender then able to step up the interest payments to the fixed rates in effect at the time the sorta-mod was entered into. That does not do enough for the borrower. the redefault rate on mortgage mods that do not have significant principal reduction in the first six months now is high. When the initiative was announced, he New York Times reports that payment reductions are expected to be “hundreds of dollars” a month. Is that really going to make a difference with most borrowers, particularly since the interest portion is tax deductible and these mortgages are recent (ie, the interest component is a high proportion of the total payment).

Moreover, if a homeowner has negative equity, he still faces a big bill when he sells the house. What incentive does he have to work to keep current on the mortgage, or to invest in the house?

Now most people have focused on lack of servicer incentives, infrastructure, and experience to do mods, but we have another impediment, which the Treasury interest-only modification program clearly tried to work around. Losses are distributed differently in a mod than in a foreclosure. For a foreclosure, the losses go against the lowest tranches first, and then proceed to higher tranches. However, with a principal reduction, all tranches, including the AAA (or more accurately, what was once AAA) layer.

The interesting bit here, however, is the complete goose egg in the way of results. Most banks do own some mortgages they originated, and they should be able to renegotiate those freely. The failure to do so suggests either that they are concerned that modifying delinquent mortgages might require them to write down similar paper and/or they simply aren’t set up to do mods and are not really interested in creating the infrastructure to do so (and again note that what Treasury tried to create was a “mass mods” template, to reduce the work required by the lender).

The Administration did not throw its weight behind the only idea so far that could have cut this Gordian knot, which was to allow for the modification of mortgages in bankruptcy (the concept, which is well established in commercial bankruptcies, is to write the mortgage down to the current value of the collateral, and treat any remaining mortgage balance as unsecured credit). So now that this voluntary program is turning out to be an embarrassment, what will Team Obama do next? Back to Bloomberg:

“We are taking additional steps to enhance servicer transparency and accountability as part of a broader focus on maximizing conversion rates to permanent modifications,” Treasury spokeswoman Meg Reilly said in an e-mail yesterday. The Obama administration plans to announce additional steps tomorrow, including new private-public partnerships and resources for borrowers.

Given that “public private partnerships” has meant “large subsidies to banks that produce perilous little in the way of results,” I would not hold my breath. And the measures suggested in the Times verged on laughable:

“The banks are not doing a good enough job,” Michael S. Barr, Treasury’s assistant secretary for financial institutions, said in an interview Friday. “Some of the firms ought to be embarrassed, and they will be.”

Even as lenders have in recent months accelerated the pace at which they are reducing mortgage payments for borrowers, a vast majority of loans modified through the program remain in a trial stage lasting up to five months, and only a tiny fraction have been made permanent…

“They’re not getting a penny from the federal government until they move forward,” Mr. Barr said

Shaming bankers? What planet is Barr from? The industry is systematically predatory. If they had any concern about public opinion, they’d have used the Bush and Obama efforts as cover to try pushing back against investors in securitization vehicles. Before some of you go on about sanctity of contract, the father of mortgage backed securities, Lew Ranieri, seemed genuinely shocked in the Milken conference in 2008 when other participants said mods were restricted or prohibited in many securitization contracts. Ranieri said they did them routinely. Not only has the industry done anything more than go through the motions, one has to wonder whether they influenced Treasury in the design of the program so as to assure it would not be effective.

Friday, November 27, 2009

Cracking down on destructive lenders

Posted on Reuters by Felix Salmon:

It’s almost quaint that there are still people out there who believe that all market participants are always rational actors making decisions in their own economic best interest. Take Daniel Indiviglio, who even stands up for IndyMac and its “inequitable, unconscionable, vexatious and opprobrious” regional manager, Karen Dickinson:

I’m a little confused about how Salmon proposes that the bank here wasn’t acting in its own best interest. If he means that its actions led to a judge awarding the home to the borrower, and that screws the bank, well that’s true. But I seriously doubt that the bank believed that its actions would lead to that outcome…

Had the mortgage contract been upheld, then Indymac would have repossessed the home, as planned. Clearly, that’s the outcome it expected its actions to bring. If Salmon means to speculate that the bank would have been better off if it had accepted one of Ms. Yaho-Horoski’s modification alternatives than force her to foreclose, then I’m not sure I can agree…

For whatever reason, it didn’t like the modification options Ms. Yaho-Horoski presented. Maybe it believed that they all had far more risk than just foreclosing and settling for whatever price it could obtain in the battered housing market. So the bank deemed foreclosure its best option.

On the one hand, this is trivially false, since IndyMac rejected a bid at full market price from Yaho-Horoski’s daughter: it’s inconceivable that after going through the expense of foreclosing on and selling the house, IndyMac would net more money than that. After reading judge Jeffrey Spinner’s decision, it’s pretty clear that Dickinson was a malicious liar who was acting not in the best interests of IndyMac but much more simply in the worst interests of the Yaho-Horoskis. If they suggested anything at all — even a desperate offer of simply giving IndyMac the deed to the house, in lieu of foreclosure — Dickinson was predisposed to reject it.

It’s also inconceivable that IndyMac thought it could get a significant amount of money out of Yaho-Horoski over and above the proceeds from a foreclosure sale. Yes, New York is a recourse state. But we’re not talking here about the only kind of situation in which lenders ever go after borrowers after they’ve foreclosed — a case where the borrower is wealthy, clearly has the money to repay the debt, and is simply refusing to do so because the value of the house has fallen. The borrower in this case was Diana Yano-Horoski individually, and all of the proposals she made involved using the combined income of herself, her husband, and her daughter. But Dickinson evinced no interest in maximizing the amount of money being put towards repaying the mortgage: she even “summarily rejected” the offer from Yano-Horoski’s husband and daughter to be added to the loan as obligors.

More generally, it seems that Indiviglio’s fundamentalist beliefs about what banks do are utterly unfalsifiable. This case isn’t a cut-and-dried example of a bank acting against its own best interest, yet he still refuses to accept that’s what was happening. It’s almost as if he doesn’t understand that banks are run by humans, and that humans are fallible, especially in emotionally-fraught circumstances: they get caught up in an us-versus-them mindset which confuses the best outcome for themselves with the worst outcome for their opponents, or they just panic and do something stupid, like lying to a judge or pulling an emergency brake cord on a subway train.

I’m not saying that “Indymac is just pure evil” — the straw man that Indiviglio sets up as the only possible alternative to his sunny world where everybody always acts in their own best interest. I’m saying that certain corporate officers, in certain situations, make mistakes — and often make very large mistakes. In the case of the housing market in general, and foreclosure proceedings in particular, those mistakes happen quite often, if not always as egregiously as in this case. Loan servicers are simply overwhelmed by the sheer quantity of mortgages in default, and frequently rush to foreclosure even when there are much better options available.

It’s both in the national interest and in the best interest of the loan servicers collectively to put a brake on such actions: if everybody’s rushing to foreclose at the same time, that just creates a glut of distressed property sales which in turn drives down property prices further and perpetuates the vicious cycle. On the other hand, if everybody else is slowing down, then immoral banks like IndyMac can try to act as free riders and grab all the collateral they can, free-riding on rest of the banking community. Such actions should be opposed by all three branches of government, including the judicial branch. Which is one reason why Jeffrey Spinner is such a hero.

Few mortgages have been permanently modified

Posted in the New York Times by E. Scott Reckard:

Lenders have temporarily restructured hundreds of thousands of loans, but long-term changes have proved elusive, raising the specter of a new wave of foreclosures.

In October 2008, JPMorgan Chase & Co. shaved 25% off Rick Mullen's mortgage payment by lowering his interest rate, helping him to stay in his Valencia home despite a downturn in his small business refurbishing large shipments of damaged shoes.

More than a year later, Mullen is grateful but frustrated, he says, because Chase has repeatedly lost his paperwork and never finalized what was supposed to be a three-month trial loan modification.

"I've talked to them at least 50 times, and it's always the same: . . . 'Oh, we're missing some documents, your modification is at risk,' " Mullen said. "How long are they going to keep me hanging?"

Loan-modification limbo is of high concern these days, not only to borrowers like Mullen but also to economists, consumer advocates and government officials pondering the fact that 1 in 7 U.S. mortgages is in foreclosure or past due.

Responding to an Obama administration initiative, lenders have temporarily restructured hundreds of thousands of mortgages, with hundreds of thousands more modified under the banks' own programs.

But achieving longer-term changes in the terms of mortgages has proved elusive, raising the prospect of a bigger wave of home repossessions that could cause a fresh decline in home prices only months after they appeared to hit bottom.

The Treasury Department announced in October that, after a slow start last spring, its Making Home Affordable loan-modification initiative had resulted in about 500,000 trial modifications. The department said the $75-billion centerpiece of its anti-foreclosure efforts was "on track" to meet its goal of offering at least five years of lower payments to as many as 4 million stressed-out borrowers.

But even after reporting this month that trial modifications had topped 650,000, the government still hasn't said how many of those loans have been permanently restructured. The Treasury Department says such numbers will be in next month's report on the program, which has been allocated $75 billion from the government's $700-billion Troubled Asset Relief Program bailout fund.

"You can't claim victory at 500,000 trial modifications and then have half of them drop out," said Paul Leonard, California director for the Center for Responsible Lending, a Durham, N.C.-based advocacy group.

At this point, converting 50% of the trial modifications into long-term restructurings might be considered an accomplishment. As of Sept. 1, with more than 350,000 trial modifications begun, the program had achieved just 1,711 permanent modifications, the oversight panel created by the TARP legislation reported, citing nonpublic Treasury data.

Laurie Anne Maggiano, director of policy at the Treasury's Office of Homeownership Preservation, said last month that the government had addressed the slow conversions by giving mortgage customer-service operations five months to make trial modifications permanent, up from three months originally.

Speaking to a Mortgage Bankers Assn. conference in San Diego, Maggiano said the government also had simplified paperwork for borrowers, who must make their reduced payments on time during the trial modification, submit an account of their financial hardship and document their income with pay stubs or tax returns.

Exactly what is holding up the conversions depends on whom you talk to.

"Getting these loans to the finish line is tough" for loan servicers, Chase Home Lending Senior Vice President Douglas Potolsky said at the San Diego conference. The main obstacle, he and other bankers said, is borrowers who don't properly complete their paperwork.

The story is different on the other side of the transactions.

"What you hear from loan counselors and a lot of borrowers," Leonard said, "is complaints about servicers who make multiple requests for the same thing, lose documents again and again, and change their requests for information in midstream."

Loan-servicing employees may know all about collecting payments but be clueless about the process of requalifying borrowers for modified loans, said Sam Khater, an economist with mortgage data firm First American CoreLogic. Getting income documentation is a major problem now that the era of "low doc" and "no doc" loans is long gone, he said in an interview.

The government program, mandatory for banks that accepted federal bailout funds, was announced Feb. 17, with its details unveiled the following month. It emerged amid widespread complaints that loan servicers were slow and inconsistent in modifying loans to keep borrowers in their homes, even though the lenders acknowledged that a foreclosure can give the mortgage holder a six-figure loss.

The initiative seeks to hold servicers accountable by providing a standardized format for restructuring loans and reporting progress on the efforts. It targets borrowers who are struggling to make mortgage payments that exceed 38% of their gross income.

The program pays subsidies to lenders who lock in "permanent" loan modifications that cut payments for at least five years. Lenders are supposed to reduce interest rates to as little as 2%, stretch out the time for repayment to as long as 40 years and suspend interest payments on some of the principal. The aim is to bring down the loan payment on a first mortgage, including taxes and insurance on the property, to 31% of the borrower's income.

The lender also has the option of reducing the loan balance. But in every case the lender must compare how much it expects to make on a modified loan with what it expects to recover if it doesn't alter the loan's terms, perhaps triggering a foreclosure or forcing a borrower to sell the home. If this "net present value" calculation shows a modified loan is more valuable, the lender is required to make the changes.

Ambitious as the attempt sounds, the TARP oversight panel says the Obama program appears too limited in scope and scale.

Meanwhile, the number of homes at risk of being seized in foreclosure continues to rise. In announcing the latest mortgage delinquency figures last week, Mortgage Bankers Assn. economist Jay Brinkmann said 4 million households were in foreclosure or were more than 90 days past due on their loans -- more than all the homes currently for sale.

If most of those loans prove beyond salvage, a new wave of foreclosure sales will further pressure the economy, Brinkmann said -- particularly in the hardest-hit sections of the country, like California.

Major servicers say their loan modifications, including proprietary programs supplementing the government-sponsored plan, are taking hold. Citigroup Inc. said this week that it helped about 130,000 distressed homeowners during the third quarter. Bank of America Corp. said it eased loan terms for about 100,000 former customers of Countrywide Financial Corp. under a settlement of state regulators' accusations of predatory lending by the giant Calabasas mortgage lender, which BofA acquired last year.

Neither Citigroup nor Bank of America would disclose how many trial modifications offered under the Obama plan had been made permanent. They and other lenders said the government had requested that such information be kept private until next month's official announcement.

In a news release last month announcing that it had offered 125,000 modifications using the government plan, Bank of America said it began achieving "significant gains" in trial modification starts in August. "On that basis," the company said, "the company expects its conversion of customers into permanent modifications under the program will begin showing substantial progress in December."

Barbara DeSoer, Bank of America's president for home loans, said in an interview last month that the bank "was pulling loan officers out of sales and putting them into servicing" to help get borrowers into permanent modifications. The loan officers, who are used to talking over complex personal financial issues with customers, have "a better pull-through rate," DeSoer said.

One lender that has achieved a high rate of trial modifications is Saxon Mortgage Services Inc., a Morgan Stanley subprime unit. Robert W. Meachum, executive vice president at Saxon, said its employees were more used to dealing with struggling borrowers than loan servicers at prime lenders were, and had been authorized to make quick decisions. But he acknowledged last month that of Saxon's 35,000 trial modifications, the number made permanent was in the hundreds.

Taking another tack, Fannie Mae has hired four outside firms to send people to knock on the doors of customers who didn't respond to modification proposals or needed help with their paperwork.

The giant mortgage purchaser has had "favorable results" with this labor-intensive effort at "borrower engagement," Fannie Mae spokeswoman Amy Bonitatibus said Wednesday.

Tuesday, November 24, 2009

One in Four Borrowers Is Under Water

Posted in the Wall Street Journal by Ruth Simon and James Hagerty:

The proportion of U.S. homeowners who owe more on their mortgages than the properties are worth has swelled to about 23%, threatening prospects for a sustained housing recovery.

Nearly 10.7 million households had negative equity in their homes in the third quarter, according to First American CoreLogic, a real-estate information company based in Santa Ana, Calif.

These so-called underwater mortgages pose a roadblock to a housing recovery because the properties are more likely to fall into bank foreclosure and get dumped into an already saturated market. Economists from J.P. Morgan Chase & Co. said Monday they didn't expect U.S. home prices to hit bottom until early 2011, citing the prospect of oversupply.

Home prices have fallen so far that 5.3 million U.S. households are tied to mortgages that are at least 20% higher than their home's value, the First American report said. More than 520,000 of these borrowers have received a notice of default, according to First American.

Most U.S. homeowners still have some equity, and nearly 24 million owner-occupied homes don't have any mortgage, according to the Census Bureau.

But negative equity "is an outstanding risk hanging over the mortgage market," said Mark Fleming, chief economist of First American Core Logic. "It lowers homeowners' mobility because they can't sell, even if they want to move to get a new job." Borrowers who owe more than 120% of their home's value, he said, were more likely to default.

Mortgage troubles are not limited to the unemployed. About 588,000 borrowers defaulted on mortgages last year even though they could afford to pay -- more than double the number in 2007, according to a study by Experian and consulting firm Oliver Wyman. "The American consumer has had a long-held taboo against walking away from the home, and this crisis seems to be eroding that," the study said.

Just months after showing signs of leveling off, the housing market has thrown off conflicting signals in recent weeks. Jittery home builders and bad weather led to a 10.6% drop in new home starts in October, and applications for home-purchase mortgages have dropped sharply in recent weeks.

These same falling prices have boosted home sales from the depressed levels of last year. The National Association of Realtors reported Monday that sales of previously occupied homes in October jumped 10.1% from September to a seasonally adjusted annual rate of 6.1 million, the highest since February 2007.

The bump in sales was ahead of forecasts, spurred by falling prices, low mortgage rates and a federal tax credits for buyers. Congress recently expanded and extended the tax credits.

The latest First American data aren't comparable to previous estimates because the company revised its methodology. First American now accounts for payments made by homeowners that reduce principal, and it no longer assumes that home-equity lines of credit have been completely drawn down.

The changes reduced the total number of borrowers under water -- although both old and new methodology show increases from the previous quarter. Using the old methodology, the portion of underwater borrowers would have increased to 33.8% in the third quarter.

Homeowners in Nevada, Arizona, Florida and California are more likely to be deeply under water, according to the analysis. In Nevada, for example, nearly 30% of borrowers owe 50% or more on their mortgage than their home is worth, said First American.

More than 40% of borrowers who took out a mortgage in 2006 -- when home prices peaked -- are under water. Prices have dropped so much in some parts of the U.S. that some borrowers who took out loans more than five years ago owe more than their home's value.

Even recent bargain hunters have been hit: 11% of borrowers who took out mortgages in 2009 already owe more than their home's value.

Andrew Lunsford put 20% down when he bought his home in Las Vegas for $530,000 in 2004. Now, he said, his home was worth less than $300,000.

"I'm to the point where I feel I will never get my head above water," said Mr. Lunsford, a retired state trooper who works for an insurance company. He said his bank won't modify his loan because he can afford his payments, and he's unwilling to walk away, he said: "We're too honest."

Borrowers with negative equity are more likely to default if they live in a state where the bank can't pursue their assets in court, according to a study by the Federal Reserve Bank of Richmond.

But borrowers who are less than 20% under water are likely to maintain their mortgage if their loan is modified and the payments reduced, said Sanjiv Das, head of Citigroup's mortgage unit. "Beyond 120%, the most effective modification is a complete loan restructuring, including a principal reduction."

Mortgage companies have been reluctant to reduce mortgage principal over worries about "moral contagion, with people not paying their mortgage or redefaulting because they believed the bank would reduce their principal," Mr. Das said.

Many borrowers are so deeply under water that they can't take advantage of lower rates and refinance their mortgage. "We're declining hundreds of loans each month," said Steve Walsh, a mortgage broker in Scottsdale, Ariz. "The only way we will make headway is if we allow for a streamlined refinance where the appraisal is irrelevant."

Realtors reported that home sales in October were up 24% from a year earlier. The number of homes listed for sale nationwide was 3.57 million at the end of October, down 3.7% from a month earlier, the trade group said. But that inventory could rebound next year as banks acquire more homes through foreclosure.

About 7.5 million households were 30 days or more behind on their mortgage payments or in foreclosure at the end of September, according to the Mortgage Bankers Association. Many of those homes will be lost to foreclosure, adding to the supply of homes for sale.

A recovery could pay off for the roughly 30% of underwater borrowers who owe 110% or less of their home's value and are able to endure the slump. "Most people prefer to stay in their home" even if the value of their property has declined, said John Burns, a real-estate consultant based in Irvine, Calif.

Sunday, November 22, 2009

Maybe more need to walk away, prof says

Posted in the Arizona Daily Star by Josh Brodesky:

Why aren't more "underwater" homeowners just walking away? That's a question University of Arizona law professor Brent T. White has been wondering for a while now as he's watched countless homeowners continue to chip away at their loans even though it could be years until they get back their equity.

White recently set the Internet abuzz after he put out a discussion paper on this point, saying it's in the best interest of many homeowners to turn in the keys, but fear and shame often keep people in check. By not walking away, these homeowners are throwing away their money and propping up housing values.

Most of the Internet chatter distilled the paper to something like this: "Prof says it's OK to walk away from home."

But really, White is arguing something much deeper — something much more in line with the question of why banks are bailed out for making bad loans, but homeowners are expected to hold up their own obligations on crummy loans.

"The government was encouraging people to buy, telling people that it was a good investment to buy. Real estate agents pushing people to buy, banks pushing people to buy," White said in an interview. "And then when the market collapses, the homeowner alone is left holding the bag and forced to bear the burden. And so I think we need to talk about the disproportionate burden that is falling on homeowners."

As of this summer about 15.2 million mortgages in the U.S. were "upside down" — meaning a borrower owes more than the property is worth — show numbers from First American CoreLogic, which tracks housing data.

But despite this huge number of underwater borrowers, lenders have done very little to bring things into balance. Instead, the loan modification process is whiplash-inducing. You know, like UA football.

If homeowners are current on their loans, they can't get a modification because they've shown they can make the payments. If they intentionally go into default (often at the suggestion of their lender) to get a modification, they risk taking a hit on their credit or losing their home.

"I think that we have seen rather clearly that lenders are not going to voluntarily modify their loans," White said.

The idea of countless Americans shirking their responsibilities conjures end-of-the-world scenarios. Just think of all the unkempt lawns on those bank-owned properties. But White said it wouldn't be that bad.

"Everyone is concerned about what happens if people actually do walk. The market is going to crash, and maybe that's the case," White said. "And maybe not. Maybe if people start to walk, lenders would start to modify their loans, and we might have decreased foreclosure rates."

Of course, it would be nice if we never got to that point.

To that end, White, who is slightly upside down on his own home, said he is a supporter of principal reductions for homeowners who are more than 20 percent underwater. He also thinks the government should issue hyper-low-interest mortgages to help keep housing costs down.

It's not so much about making a moral argument for people to walk away, he said, but fixing a burden that middle-class owners are being forced to carry.

"We are propping up the market on the backs of the middle class," he said. "If we are going to prop up the market on the backs of the middle class there needs to be some kind of bailout for homeowners."

Saturday, November 21, 2009

Wall St. Finds Profits Again, Now by Reducing Mortgages

Posted in the New York Times by Louise Story:

As millions of Americans struggle to hold on to their homes, Wall Street has found a way to make money from the mortgage mess.

Investment funds are buying billions of dollars’ worth of home loans, discounted from the loans’ original value. Then, in what might seem an act of charity, the funds are helping homeowners by reducing the size of the loans.

But as part of these deals, the mortgages are being refinanced through lenders that work with government agencies like the Federal Housing Administration. This enables the funds to pocket sizable profits by reselling new, government-insured loans to other federal agencies, which then bundle the mortgages into securities for sale to investors.

While homeowners save money, the arrangement shifts nearly all the risk for the loans to the federal government — and, ultimately, taxpayers — at a time when Americans are falling behind on their mortgage payments in record numbers.

For instance, a fund might offer to pay $40 million for a $100 million block of mortgages from a bank in distress. Then the fund could arrange to have some of those loans refinanced into mortgages backed by an agency like the F.H.A and then sold to an agency like Ginnie Mae. The trick is to persuade the homeowners to refinance those mortgages, by offering to reduce the amounts the homeowners owe.

The profit comes when the refinancings reach more than the $40 million that the fund paid for the block of loans.

The strategy has created an unusual alliance between Wall Street funds that specialize in troubled investments — the industry calls them “vulture” funds — and American homeowners.

But the transactions also add to the potential burden on government agencies, particularly the F.H.A., which has lately taken on an outsize role in the housing market and, some fear, may eventually need to be bailed out at taxpayer expense.

These new mortgage investors thrive in the shadows. Typically, the funds employ intermediaries to contact homeowners and arrange for mortgages to be refinanced.

Homeowners often have no idea who their Wall Street benefactors are. Federal housing officials, too, are in the dark.

Policymakers have encouraged investors and banks to put more consumers into government-backed loans. The total value of these transactions from hedge funds is small compared with the overall housing market.

Housing experts warn that the financial players involved — the investment funds, their intermediaries and certain F.H.A. approved lenders — have a financial incentive to put as many loans as possible into the government’s hands.

“From the borrower’s point of view, landing in a hedge fund or private equity fund that’s willing to write down principal is a gift,” said Howard Glaser, a financial industry consultant and former official at the Department of Housing and Urban Development.

He went on: “From the systemic point of view, there is something disturbing about investors that had substantial short-term profit in backing toxic loans now swooping down to make another profit on cleaning up that mess.”

Steven and Marisela Alva say they do not know who helped them with their mortgage. All they know is that they feel blessed.

Last December, the couple got a letter saying that a firm had purchased the mortgage on their home in Pico Rivera, Calif., from Chase Home Finance for less than its original value. “We want to share this discount with you,” the letter said.

“I couldn’t believe it,” said Mr. Alva, a 62-year-old janitor and father of three. “I kept thinking to myself, ‘Something is wrong, something is wrong. This sounds too good.’ ”

But it was true. The balance on the Alvas’ mortgage was ultimately reduced to $314,000 from $440,000.

The firm behind the reduction remains a mystery. The Alvas’ new loan, backed by the F.H.A., was made by Primary Residential Mortgage, a lender based in Utah. But the letter came from a company called MCM Capital Partners.

In the letter, MCM said the couple’s loan was owned by something called MCMCap Homeowners’ Advantage Trust III. But MCM’s co-founders said in an interview that MCM does not own any mortgages. They would not reveal the investor that owned the Alvas’ loan because they had agreed to keep that client’s identity confidential.

Michael Niccolini, an MCM founder, said, “We are changing people’s lives.”

In Washington, mortgage funds are lobbying for policies that favor their investments, particularly mortgages held in securitized bundles. They want more mortgage balances to be lowered, which might help mortgage bonds perform better. Big banks generally oppose such reductions, which lock in banks’ losses on the loans.

In April, about a dozen investment firms formed a group called the Mortgage Investors Coalition to press their case. One investor who is speaking out is Wilbur L. Ross, who runs a fund that buys mortgages and owns a large mortgage servicing company.

Mr. Ross said modifications that simply lower interest rates or lengthen the duration of a loan, as is typical in the government modification program, do not work well.

“They make a payment or two, but then one night the husband and wife will sit down at the table and say, ‘Do we really want to make 140 monthly payments into a rat hole?’ ” Mr. Ross said.

The Fortress Investment Group, a hedge fund in New York, is one of the firms at the forefront of picking through mortgages. Fortress created a $3 billion credit fund in 2008 partly to buy loans from banks like Citigroup, which were under pressure to purge loans to raise cash.

“They’re going ahead and they are refinancing them and getting their money out right away,” said Roger Smith, an analyst at Fox-Pitt Kelton. “What Fortress is doing is actually good for the borrower.” Congress, however, may not be happy that hedge funds are making money this way, Mr. Smith said.

Fortress, which declined to comment, typically buys batches of loans and works with other companies to evaluate which ones might qualify for F.H.A., Fannie Mae or Freddie Mac refinancing.

Sometimes Fortress works with Nationstar, a mortgage servicer and originator that it owns. Other times, Fortress uses an outside partner like Meridias Capital, a lender in Henderson, Nev., that once originated Alt-A loans, which are just above subprime.

After the mortgage market imploded, Meridias began dissecting portfolios of troubled loans for investment funds.

Because firms like Fortress purchase blocks of mortgages at distressed prices, they are able to reduce the principal amount of the loans. Nick Florez, president of Meridias, calls such transactions an “incentive refinance.” He said he would not agree to take a loan unless he could help the homeowner. He said he was able to reduce the loan amount by 11 percent on average.

“I’m giving money away,” said Mr. Florez, who is a 35-year-old Las Vegas native. “It’s really a feel-good business.”

It is too early to know how the new loans will work.

David H. Stevens, the new commissioner of the F.H.A., said he was monitoring F.H.A. lenders but did not have thorough information about which ones work with distressed investors. So far he has not seen a problem from loans coming from hedge funds.

“They’re helping to protect people in their homes and they’re refinancing people from a distressed situation,” he said.

But he acknowledged that funds have an incentive to aggressively push homeowners into federally guaranteed loans, since the investors get their money back as soon as they complete the refinancing.

Seth Wheeler, a senior adviser in the Treasury Department who specializes in housing policy, declined to say whether the investment firms that are lowering principal for homeowners are altruistic or not.

“Investors are doing it where it both benefits the investor and the borrower,” he said.

Part of the risk may be determined by how the funds compensate the F.H.A. lenders and whether the lenders are beholden to the funds for business.

David Zitting, the chief executive of Primary Residential Mortgage, the company that refinanced the Alva family’s loan, said his company did not receive fees from the hedge funds.

“They have all sorts of motivations that, frankly, we don’t understand,” he said. “We don’t do anything special for them because that’s not fair lending.”

The Alvas had to dip into their savings to qualify for their new federally insured loan, since the biggest F.H.A. mortgage they could get was for $285,000, they said. They paid off $21,000 in credit-card and car loans, and put up an additional $29,000 for their new mortgage, depleting their already meager savings.

Brian Chappelle, a mortgage consultant, said loans to people like the Alvas, with modest incomes and scant savings, could turn out to be risky.

“It does raise risk concerns for F.H.A.,” he said.

The Alvas are grateful for the help. Their home is, Marisela said, a dream come true. “I’m very happy,” she said. “We never thought this was possible.”

The Fed and Mortgage Rates

Posted on Calculated Risk:

Meredith Whitney expressed concern about what will happen when the Fed stops buying GSE MBS by the end of the first quarter 2010. From Bloomberg: Meredith Whitney Says Bank Stocks Are ‘Grossly’ Overvalued

The Federal Reserve has begun slowing purchases in the $5 trillion market for so-called agency mortgage-backed securities after announcing in September that it would extend the timeline for its $1.25 trillion program to March 31 from year-end. Whitney said that banks are only originating home loans that they can sell to Fannie Mae and Freddie Mac.

“If Fannie and Freddie can’t sell to an end buyer, i.e. the U.S. government steps back, the mortgage market at minimum contracts, rates go higher, and banks are poised with more writedowns,” said Whitney, founder of Meredith Whitney Advisory Group. “This is probably the issue that scares me most across the board.”
This raises an interesting question: What is the impact from Fed MBS buying on mortgage rates? I looked at this a couple of months ago: The Impact on Mortgage Rates of the Fed buying MBS and here is an update:

Earlier this year, Political Calculations introduced a tool to estimate mortgage rates based on the Ten Year Treasury yield (based on an earlier post of mine): Predicting Mortgage Rates and Treasury Yields. Using their tool, with the Ten Year yield at 3.356%, this suggests a 30 year mortgage rates of 5.33% based on the historical relationship between the Ten Year yield and mortgage rates.

Freddie Mac released their weekly survey Thursday:
Freddie Mac (NYSE:FRE) today released the results of its Primary Mortgage Market Survey® (PMMS®) in which the 30-year fixed-rate mortgage (FRM) averaged 4.83 percent with an average 0.7 point for the week ending November 19, 2009, down from last week when it averaged 4.91 percent. Last year at this time, the 30-year FRM averaged 6.04 percent.
This suggests morgage rates are about 50 bps below the expect level ...

Mortgage Rates and Ten Year Treasury Here is an update to the previous graph. Sure enough mortgage rates have been below expectations for about seven months (recent months in yellow with blue outline at lower left).

Although this is a limited amount of data - and the yellow triangles are within the normal spread - this suggests the Fed's buying of MBS is reducing mortgage rates by about 35 to 50 bps relative to the Ten Year treasury.

It isn't that Fannie and Freddie "can’t sell to an end buyer", it is that the GSEs will be selling for a lower price (higher yield) when the Fed completes the MBS purchase program. At that time mortgage rates will probably rise by about 35 bps to 50 bps (relative to the Ten Year) in order to attract other buyers. Alone that isn't all that "scary".

But combined with the growing problems at the FHA, the distortions in the housing market caused by the first-time home buyer tax credit, rising delinquencies, the uncertainty of the modification programs, and likely further house price declines in many bubble states - there are serious problems ahead for the housing market.

Friday, November 20, 2009

Combined Loan to Values Swell to 107% in July 2009: Equifax

Posted on the Housing Wire by Jon Prior:

The combined loan to values (CLTVs) on current loans are worse than many realize, according to a study by Equifax Capital Markets.

Equifax provides borrower and property value information to lenders and investors.

The average CLTV, a ratio used to determine the risk of default when more than one loan is used, for current Alt-A loans ballooned from 75% in July 2005 to 107% in July 2009, according to the study. Home price declines and an increase in the popularity and size of second liens caused the rise, analysts reported.

The percentage of borrowers holding a second lien with a current Alt-A loan increased to 25% in July 2009 from 10% in July 2005, according to the study.

While home prices have gained the spotlight, the increased prevalence of second liens has quietly grown. As a result, mortgage market investors are still concerned about the impact of borrower equity as home price depreciation eases, according to the report.

Researches also found that Alt-A and prime borrowers have caught up to subprime borrowers in the utilization of their revolving credit lines. In July 2009, 22% of Alt-A borrowers with a current mortgage loan put to use 80% or more of their total credit, up from 10% in July 2005.

HELOCs, or a home equity line of credit, represented a significant portion of the borrowers’ revolving debt, according to the data. Specifically, 45% of prime borrowers and 33% of Alt-A borrowers with current and securitized mortgage loans had a HELOC in July.

Equifax analyzed the health of borrowers with non-agency securitized mortgages from Q305 to Q309 by studying borrower credit information, home price data from the Federal Housing Finance Agency (FHFA) and loan-level data. After isolating the population of non-agency securitized mortgages, Equifax statisticians studied the performance of the loans across vital default risk trends.

“As home prices moderate, comprehensive and up-to-date information on second liens, including whether they exist as well as their balance and payment status, will become more critical for investors to know in order to accurately value non-agency mortgage-backed securities and whole loans,” said Steve Albert, vice president of Equifax Capital Markets.

Wednesday, November 18, 2009

Hiring Boom in Mortgage Restructuring

Posted in the Wall Street Journal by Kyle Stock:

Mortgage restructuring for strapped homeowners has emerged as a rare growth area in the economy as companies in the field keep hiring.

Four of the largest mortgages servicers -- Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co. and Wells Fargo & Co. -- have collectively hired almost 17,000 people this year, mostly to work with financially ailing homeowners. With the number of defaults rising, many are planning to keep adding staff.

"We've hired folks, we've transferred folks within the company and everyone is working overtime. All hands on deck is really the right analogy," said J.P. Morgan Chase spokesman Thomas Kelly.

In October, about 12.4% of the 56 million U.S. households with mortgages -- or about 6.9 million households -- were 30 days or more overdue, or in the foreclosure process, according to LPS Applied Analytics, a research firm in Denver.

Wells Fargo, which services one in six U.S. mortgages, has almost doubled its staff working on restructurings, adding close to 7,000 employees this year. Citigroup has boosted its staff by about 54%, adding 1,400 positions. In Arizona, one of the states hit hardest by the subprime disaster, Citigroup opened a new service center staffed by 800 mortgage negotiators.

Loan-servicing companies report that people with a wide variety of backgrounds are applying for the jobs, from rental-car service representatives to former chief executives of small mortgage brokerages that went under.

One of J.P. Morgan Chase's best loan modifiers is a former police officer from Jacksonville, Fla., said Mr. Kelly, the spokesman. "She's terrific on the phone with customers because she knows how to calm people down," Mr. Kelly said.

New companies formed in response to the home-mortgage crisis also have been hiring. For example, Private National Mortgage Acceptance Co., dubbed PennyMac, was founded in 2008 by former executives of Countrywide Financial Corp. and now employs about 120 people.

Nate Cadena, who used to sell loans for AmeriCash Mortgage Bankers, is one of PennyMac's loan modifiers. He said his job today isn't all that different: He gets on the phone with customers and tries to figure out how much they can afford to pay each month.

Mr. Cadena, 32 years old, said he used to earn "very lucrative pay" as a loan salesman. But he said that since the economy tanked, he was forced to take a job as a door-to-door salesman, an experience that readjusted his goals and perspective. "It used to be that I wanted to make as much money as I could," he said. "Now it's about a career path and stability."

Executives at mortgage servicers say most workers dealing with borrowers earn between $30,000 and $60,000 a year plus bonuses, and spend their days talking to delinquent or financially strapped mortgage borrowers. The modifiers present a number of options, with the aim of lowering the monthly payment to roughly one-third of household income.

Monday, November 16, 2009

Capital in the Hamp-er

Posted on FT Alphaville by Tracy Alloway:

For some reason we find the Home Affordable Modification Plan — the US government’s programme to encourage lenders and mortgage servicers to reduce interest payments for certain homeowners — and its impact on banks fascinating.

And so, we read with interest the following press release from last Friday:

Agencies Issue Final Rule for Mortgage Loans Modified Under the Home Affordable Mortgage Program

The federal bank and thrift regulatory agencies today issued a final rule providing that mortgage loans modified under the U.S. Department of the Treasury’s Home Affordable Mortgage Program (HAMP) will generally retain the risk weight appropriate to the mortgage loan prior to modification.

The agencies adopted as final their interim final rule issued on June 30, 2009, with one modification. The final rule clarifies that mortgage loans whose HAMP modifications are in the trial period, and not yet permanent, qualify for the risk-based capital treatment contained in the rule.

The final rule, issued by the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of Thrift Supervision, will take effect 30 days after publication in the Federal Register, which is expected shortly.

Bear with us here, because this is a bit confusing.

Under the agencies’ current rules, it looks like mortgage loans are generally given either a 50 per cent or a 100 per cent capital risk weighting depending on things like whether they’re fully secured by first liens or meet “certain prudential critieria”. Under OCC rules, to receive the 50 per cent ranking a mortgage loan must “not [be] on nonaccrual or restructured” status. And under the Board’s general risk-based capital rules for bank holding companies and state member banks, mortgage loans must be “performing in accordance with their original terms” and not carried in nonaccrual status, in order to receive a 50 per cent risk weight.

All of which means, that mortgage loans modified under the Hamp programme might have generally been considered to have been restructured (OCC) or not considered to be performing in accordance with their original terms (Board). Thus they would have had to be risk-weighted at 100 per cent. That would have been bad news for banks — and bad news for the Hamp, since it could have disincentivised financial institutions from holding onto the mortgages.

What the above rule does then, is make sure banks aren’t discouraged from modifying or holding onto modified Hamp loans. There was already a hint of this coming since a similar interim rule was published in June, 2009. This is the final version of the rule.

What’s interesting then are the differences between the interim rule and this final rule, and how the banks tried (as they are wont) to game the regulatory capital system. Here’s a bit of detail from the full rule document:

The agencies received six comments on the interim rule, one from a banking organization, four from trade groups representing the financial industry, and one from an individual. The commenters that addressed the interim final rule unanimously supported it, asserting that it is consistent with the important policy objectives of the Program and does not compromise the goals of safety and soundness. Commenters requested that the agencies clarify whether the rule’s capital treatment is available for a mortgage loan that has been modified on a preliminary basis under the Program, but which still is within the trial period (and, thus, has not been permanently modified). Commenters also requested clarification regarding the circumstances under which a mortgage loan that was risk-weighted at 100 percent immediately prior to modification under the Program could receive a 50 percent risk weight. Some commenters suggested that such a loan should receive a 50 percent risk weight following completion of the trial period or following receipt of the first pay-for-performance incentive payments. Other commenters requested that the agencies clarify that a sustained period of repayment performance could include payments made after a loan had been modified under the Program.

Remember that one of the big controversies related to the Hamp programme is that while about 650,000 three-month trial modifications have been initiated, very few permanent mods have been made. Whether the rule would apply to trial mods would thus have had a very big impact on the banks.

This is what’s been decided (or clarified) on the trial/permanent point:

Based on the analysis of the comments, the agencies have modified the rule to specify that a mortgage modified on a permanent or trial basis pursuant to the Program and that was risk-weighted at 50 percent may continue to receive a 50 percent risk weighted provided it meets its other prudential criteria.19

[Footnote] 19 The agencies intended the interim rule to apply to loans modified on both a trial and permanent basis under the Program. Accordingly, the modifications to the final rule are clarifying in nature.

And on the “sustained” payment bit:

As noted in the preamble to the interim rule, under the agencies’ existing practice, past due and nonaccrual loans that receive a 100 percent risk weight may return to a 50 percent risk weight under certain circumstances, including after demonstration of a sustained period of repayment performance. Because borrower characteristics, such as debt service capacity, impact a borrower’s creditworthiness, the degree of appropriate reliance on a fixed period of payment performance may vary for different borrowers. For these reasons, the agencies have not established a specific period of repayments that would constitute a “sustained period of performance” for a particular loan. The agencies confirm that a borrower’s payments on a mortgage loan modified under the Program, including during the trial period, may be considered in assessing whether the borrower has demonstrated a sustained period of repayment performance.

Which seems to mean that past due and nonaccrual loans with a 100 per cent risk weight can return to 50 per cent, if the borrower demonstrates they can make the new payment over a “sustained period of time” — but there’s no specific timeframe for that period.

If you’re falling asleep at this point (as you probably should be) just remember the above as another example of how the whole of the US financial regulatory system now looks geared towards making these sort of loan modifications palatable for the parties involved.

Saturday, November 14, 2009

Seller-Funded Down Payments Still Plague FHA

Posted in the Wall Street Journal by Nick Timiraos:

Seller-funded down payment “gifts” appear to be of the sort that keep on giving.

It was a little over a year ago that FHA finally prevailed in a years-long effort to rid itself of gift programs that allowed home sellers to fund 3% down payments for borrowers who took out FHA-backed home loans. But the recently released independent audit for the FHA, which shows that the agency’s reserves for unexpected losses have fallen to razor thin levels, shows that seller-funded down payments continue to account for an outsized share of losses.

From 2002-2008, these gift programs essentially allowed folks to buy homes with no money down. Nonprofit agencies provided the required down payments to home buyers, and the sellers typically made a donation to the nonprofits. (See any one of three Page One stories that the Journal did over the years: U.S. Backed Mortgage Program Fuels Risks, Scrutiny of Down-Payment Gifts Threatens Charitable Movement, and Home Buyers’ Down Payments Are Now Paid by Some Builders.)

The problem with the loans, of course, is that buyers who have no skin-in-the-game are more likely to default on their mortgage. “Those facilities created too many homeowners in the FHA portfolio that were not equipped for the financial responsibilities of homeownership,” the agency said in its report to Congress.

The FHA said on Thursday that it’s now badly depleted reserves would be more than $10 billion higher without them—enough to put the agency’s capital reserve ratio at the minimum 2% required by law.

There’s been a lot of criticism of the FHA coming from Congress in recent weeks, as it appears taxpayers may now have to foot the bill. But some folks have short memories: Seller-funded down payment assistance programs existed because they had big support from both parties, including from Rep. Maxine Waters (D., Calif.), Rep. Gary Miller (R., Calif.) and Texas Democrat Al Green, who earlier this year introduced a bill to bring back seller-funded down payments.

Recall that in 2004, the Republican Party platform called the down payment “the most significant barrier to homeownership” and supported various “efforts to reduce that barrier.” As recently as early 2008, Congress was prepared to lower the minimum down payments for FHA-backed loans to 1.5%, down from 3%, and some were pushing to eliminate down payments from the FHA altogether.

Rep. Scott Garrett (R., N.J.) introduced a bill last month to raise minimum down payments to 5%. That may sound like a small step, but consider: the FHA’s annual report showed that nearly seven in eight loans made for home purchases in 2009 had loan to value ratios of 96% or higher, meaning buyers had 4% or less equity in the house. That makes housing officials—and the real-estate industry—leery of taking any such measures that might limit too many home sales.

Friday, November 13, 2009

Google and Mortech Soft Launch Mortgage Pricing Tool

Posted on the Housing Wire by Austin Kilgore:

Mortgage pricing software developer Mortech is moving forward with its plans to provide technology to a new mortgage-pricing feature on Google.

The “Adwords Comparison Ads” device is a test product Google is developing. The targeted ad product can be adapted for a variety of search terms, but currently is in limited release to certain users and is only available to a limited number of advertisers in the mortgage/refinance space.

In a post on Google’s official blog, the search giant explains how the ad device works when a user enters the term mortgage in its search engine.

“Comparison Ads improves the ad experience on by letting users specify exactly what they are looking for and helping them quickly compare relevant offers side by side,” Google wrote on its blog. “Users searching for ‘mortgage’ on may see a promotion from Comparison Ads prompting them to select the type of loan they are looking for and to compare various rates.”

A user who clicks the ad is sent to a second page. The user can then enter the principal of the mortgage, borrower credit rating, down payment and information on the location of a prospective property and the search provides additional real-time price quotes for a number of mortgage products provided by different lenders.

HousingWire has learned this search device was developed through a partnership with Mortech — the same partnership that resulted in a lawsuit (which was later settled) from earlier this year.

Mortech officials declined to comment on its relationship with Google, but the partnership is only one of a number of partnerships Mortech is developing to implement its real-time mortgage pricing software into other online services.

One such arrangement will implement Mortech searches with the real estate Web pages of a major newspaper corporation that has as many as 70 newspapers.

Mortech president Don Kracl told HousingWire the newspaper company is one of a dozen firms with a real estate-oriented Internet presence that are implementing the company’s pricing services.

“Prices change so rapidly in the mortgage industry, so we’re working on some applications that take the instant pricing ability that we already have and tying that together with real estate listings, multiple listings, for sale by owner and MLS Web sites,” Kracl said.

The landscape for real estate Internet is changing, Kracl said. With more consumers using Internet tools to search for anything from camcorders to homes or mortgages, Kracl said, consumers are savvier and want more from their home buying Internet experience.

“Somewhere around 80% of all real estate transactions begin on the Internet. But consumers go there and there’s so much bad information on the Web and it’s a bait and switch mentality, so they get frustrated and end up going to the brick and mortar across the street,” Kracl said.

“Consumers are pretty smart characters and they’re starting to figure out that the low rate on a lot of these displays is not who’s getting most of the traffic,” he added. “People realize if it’s too good to be true, it probably is, they get it. If somebody’s rates are a half percentage point lower than everybody else, people know something’s up.”

The newspaper relationship is appealing to Mortech because many newspapers already have an extensive real estate Web presence, but don’t offer Internet-based avenues for initiating the mortgage origination process. Kracl believes Mortech’s technology can fill that gap.

“The tie-in with newspapers that’s so appealing to us, if you go look at their realty classified ads, most of them do a nice job with them. They’re viewed by a lot of people, they’re dynamic, they’re well presented. We think we can tie into that with the real-time responses to their audience,” he said.

While Mortech is expanding its presence with other companies, it’s also still providing technology for the online loan aggregator’s mortgage search engines. Now that the lawsuit’s been resolved, Kracl described his company’s relationship with LendingTree as “business as usual,” and one that will continue to grow.