Tuesday, March 30, 2010

Answers to Questions About New Mortgage Modification Program

The federal government announced new initiatives on Friday to help people who are having trouble paying their mortgages. Here are some questions and answers about the efforts posted in the New York Times Ron Lieber and Jennifer Saranow Schultz.

Q. I am currently unemployed. What sort of mortgage payment reduction can I qualify for?

A. The company servicing your mortgage will be required to offer at least three, and up to six, months of reduced payments. During that time, you won’t have to pay more than 31 percent of your monthly income toward the mortgage.

You have to live in the home to qualify, and the mortgage balance has to be less than $729,750, with a monthly payment that represents more than 31 percent of the gross monthly income of all borrowers who signed your mortgage, before you subtract anything for taxes or deductions. If one person in the household works and one is unemployed, you will not be eligible if the loan payment is under 31 percent of your current total household income.

Also, you need to prove that you are receiving unemployment benefits and ask for help within 90 days of any late payments.

The lowered payments would revert to the regular amounts once you got a job, if you became employed before the three- to six-month period ended.

Q. I’m underwater, since my mortgage is for more than my home is worth. What sort of help might I get from my mortgage company?

A. The company that controls your mortgage might reduce your principal, something that wasn’t happening much before. The government is offering additional incentives for companies to do so.

Your property will need to be worth at least 15 percent less than the value of your first mortgage for you to qualify. If your mortgage has already been modified to lower your interest and monthly payments, you may still be eligible.

To qualify, you need to live in your home, have a mortgage under $729,750 and have a mortgage payment more than 31 percent of your gross monthly income.

Any principal forgiveness will take place in three equal amounts over the course of three years but only if you make your mortgage payments on time.

But banks are not required to participate.

Q. What about the new refinancing option with another lender for people who are underwater?

A. If you’re current on your payments with your existing mortgage provider, you may be able to refinance into a loan through the federal government’s Federal Housing Administration program and have some of your principal forgiven. Here, too, you will need to be occupying your home to qualify; you can’t be an investor or landlord. You will have to document your income to apply.

Your current mortgage holder is not required to write down any principal, but if it does decide to participate, it will have to agree to write down at least 10 percent of the value of your first mortgage. And your current loan cannot itself be an F.H.A. mortgage.

Also, your payment under any new F.H.A. loan must be less than 31 percent of your gross monthly income, and your total household debt can’t be more than about 50 percent of your income unless you have an excellent credit history.

Q. Who decides how much my home is worth and how?

A. There will be a reappraisal, which raises an odd scenario. Normally, when selling your home, you want the appraisal to be at a high value. Here, however, the lower the value of your home the more likely you are to be underwater enough to qualify for help.

Q. What if there is a second mortgage on my home?

A. There are now additional incentives in place to write down amounts on second mortgages to help people become eligible for the F.H.A. refinancings. You may be eligible for help with a second mortgage even if you’ve already qualified for help with a first mortgage.

Q. Is there someplace I can go to get more details?

A. More information is available on the Treasury Department’s Web site.

Q. How will a loan modification affect my credit score?

A. A loan modification may not affect your credit score — at least in the near future.

If your mortgage holder writes down some of your principal, there’s a chance that won’t be a black mark on your credit report, but the exact impact is still unclear.

As of November, the credit reports of borrowers who had been participating in earlier mortgage modification program weren’t necessarily affected just by virtue of their participation. That’s because the Treasury Department and the Consumer Data Industry Association, which represents credit reporting agencies, created a new code for loans modified under a federal government plan. They recommended that lenders use the code but did not require it. In the near term, FICO is ignoring that code in its credit scoring formula.

It’s possible, however, that banks will treat some or all of the new principal forgiveness programs in a different way that could harm participants’ credit reports. A spokesman for the Consumer Data Industry Association said he was still working out what code or codes ought to apply. The federal agencies involved do not tell lenders how to report participation in the programs.

Meanwhile, if you participate in the temporary payment reduction program for unemployed people, you will probably see some damage to your credit report.

Q. When should I call my mortgage servicer?

A. For unemployed borrowers, this should all start in the next couple of months. Some servicers may already have a program in place. The other programs may not begin until the fall.

Your lender is supposed to contact people who are eligible for help, but it’s probably best to call in periodically yourself for updates if you think you may be eligible.

Q. Are lenders and servicers really going to be prepared to handle the volume of inquiries?

A. Many people attempting to modify their mortgages so far have been frustrated by long hold times, conflicting information and lost paperwork. These new programs won’t make it any easier for the companies involved. Make sure to write down the names of everyone you speak to about your mortgage and save copies of all paperwork.

Q. I don’t need any help. Am I paying for all of this through my taxes?

A. The money is coming out of existing TARP funds, so there is no new money going toward these initiatives. So far, at least.

Walking away from mortgages harder to do in Maryland

Original posted in the Baltimore Sun by Eileen Ambrose:

very day more homeowners are underwater - meaning they owe more on their house than it's worth - and a growing number of them across the country are simply walking away.

They pack up, throw the house keys in the mail to the bank and start over. Sounds like an easy solution to a difficult problem.

"Anything that sounds really easy or guaranteed is not," says Anne Balcer Norton, director of the foreclosure prevention division at St. Ambrose Housing Aid Center in Baltimore.

Indeed, in Maryland and the majority of states, walking away is no guarantee that mortgage debt won't come back to haunt you. These are so-called recourse states, where a lender can pursue you for any shortfall after it sells the house. So if you walk away from a $350,000 mortgage and the lender turns around and sells the house for $250,000, you can still be on the hook for $100,000.

In Maryland, lenders generally can come after you for up to three years after the sale to collect. And that time limit could be as long as 12 years under certain contracts, says Phillip Robinson, executive director of Civil Justice Inc., a nonprofit legal services agency in Baltimore that assists residents statewide.

Housing experts here say they don't see a rash of lenders pursuing unpaid debt by Marylanders who have been foreclosed upon. But that could change once lenders get past more immediate problems of the housing crisis or start to sell unpaid loans to debt collectors who might want to go after that debt. Mortgage insurers, too, might seek to collect on defaulted loans they covered, experts said.

But this doesn't mean Marylanders can't get out from under an onerous mortgage.

As always, the first step whenever you are about to fall behind on payments is to contact the lender or loan servicer to review your options.

Even if a lender agrees to modify the mortgage terms - which doesn't happen often enough - some consumers still can't afford to stay in their houses.

Some homeowners might consider a short sale, in which you and a prospective buyer get the bank to agree to accept less than what's owed.

Make sure you have a lawyer or housing counselor to represent you in talks with the bank or loan servicer, Norton says. These experts can negotiate a deal so you won't be responsible for the unpaid balance.

Call 877-462-7555 to find a housing counselor, who can also refer you to a lawyer for free advice.

Beware, some real estate agents market themselves as short sale experts, but then fail to negotiate with the bank for any forgiveness of debt, says Tony DePastina, a litigation attorney with Civil Justice. Once you get your finances back in order, the lender could come back after you to collect the unpaid debt, he says.

For some, the only way to get out of the mortgage debt is to file for bankruptcy under Chapter 7, Robinson says. The lender won't be able to come after you for debt that's been discharged by the court.

All of these options have other repercussions.

Foreclosures and short sales, for example, are considered loan defaults, and will remain on your credit report for seven years, says Craig Watts, a spokesman for FICO, which created the most widely used credit score.

A Chapter 7 bankruptcy, which erases other debt besides the mortgage, causes even more damage to a credit score and stays on your credit report for 10 years, he says.

And what's on your credit report can affect your employment. Many employers, for example, review applicants' credit reports before hiring.

Maryland lawmakers earlier this year introduced legislation that would prohibit employers, with certain exceptions, from using credit reports to make hiring and firing decisions. That bill died when a House of Delegates committee voted it down on Saturday, after a Senate committee rejected a similar bill.

Another 15 states and Congress are considering similar legislation.

Monday, March 29, 2010

An FRBB Proposal to Help Distressed Homeowners: A Government Payment-Sharing Plan

This public policy brief presents a proposal, originally posted on the website of the Federal Reserve Bank of Boston in January of this year, designed to help homeowners who are unable to afford mortgage payments on their principal residence because they have suffered a significant income disruption and because the balance owed on their mortgage exceeds the value of their home. These homeowners represent a subset of the population of distressed homeowners, but according to our research they face an elevated risk of default and are unlikely to be helped by current foreclosure-reduction programs. The plan is a government payment-sharing arrangement that works with the homeowner’s existing mortgage and provides a significant reduction in the homeowner’s monthly mortgage payment. The plan does not involve principal reduction. Two options are presented; both are designed to help people with negative equity and a significant income disruption, such as job loss. In one version, the assistance comes in the form of a government loan, which must be repaid when the borrower returns to financial health. The second version features government grants that do not have to be repaid. In either case, the homeowner must provide evidence of negative equity in the home and of job loss or other significant income disruption. The costs of the plan are moderate, and the benefits should help not only the participating homeowners but also the housing industry, the financial markets, and the economy more broadly.

Download paper here: http://www.bos.frb.org/economic/ppb/2009/ppb091.htm

Saturday, March 27, 2010

Foreclosure or forgiveness?

Absent a thorough review of HAMP and its goals, the program risks helping few, and for the rest, merely spreading out the foreclosure crisis over the course of several years…

- Neil Barofsky, Sigtarp, Congressional Testimony

Surprised? You shouldn’t be, because as Sigtarp have previously said, this is exactly what the government is aiming for; re-inflating house prices by preventing a wave of foreclosures.

The US government is now looking at altering the centrepiece of its anti-foreclosure plans, the Home Affordable Modification Program. Where the Hamp aims to keep homeowners in their houses mainly by reducing interest payments, the new scheme will be focused on principal forgiveness.

Principal reduction is probably less prone to redefaults, but it’s something which banks have traditionally been very reluctant to offer for a number of reasons.

But Bank of America made a big principal reduction commitment on Wednesday, announcing a programme as part of a settlement with Massachusetts state.

So which is better, foreclosure or forgiveness?

Barry Ritholtz at the Big Picture and Rortybomb’s Mike Konczal, are erring towards the foreclosure side. The argument being that foreclosures generate economic activity and allow people to move into residences they can actually afford. Deleveraging is what the system needs, and all that.

(Significant) questions of moral hazard aside, which would be worse for the banks, mass principal forgiveness or mass foreclosures? Both would involve some losses — but which would be higher?

BofA’s programme, which is aimed only at certain classes of mortgages, will result in a principal decrease of $3bn — with the foregone amount possibly recognised as a loss upfront. That’s no small number given that the Bank’s loan loss reserves on its mortgage book are about $4.6bn.

But look at this chart from Barclays Capital. ‘Real-estate owned’ is what’s known as shadow housing inventory, or the properties owned by banks and mortgage companies:

And this is where the benefit of Hamp, for banks, comes in.

Even as foreclosures have continued to rise, the REO-category has for the most part fallen. As Barclays have previously put it, the time between the borrower going delinquent and the house actually hitting the market has been delayed. That eases pressure on house prices, and on banks’ books as well.

What we’re lacking here is an estimate of how painful a rise in REO-owned properties would be for banks. Would it, in the case of BofA, for instance, be more than the $3bn in principal reduction?

That’s the big question here, and one we’ve found few answers to so far.

Here, for what it’s worth, is what Barclays Capital says:

The U.S. banking industry has $1.5 trillion of residential mortgages on balance sheet and another $0.6 billion of home equity. While principal mods have proven to have lower re-default rates than traditional mods, principal forgiveness or forbearance could result in an increase in net charge-offs. We also worry that this could lead to more moral hazard. Furthermore, to the extent it is spreading out the foreclosure issues, it could take longer for normalized earnings to be achieved (see shadow inventory). Still, in some instances, the cost of foreclosures could exceed the expected reduction in principal.

More on that Hamp-lified moral hazard

The below is a very timely — and thought-provoking — data set, given that things are once again heating up in the realm of US mortgage modification post-Bank of America’s principal reduction plan.

Behold, courtesy of Amherst Securities, the charted moral hazard in US housing:

In words, those are the default transition rates for various types of mortgages divided into owner-occupied and non-owner occupied — things like investment properties, second homes, and the like.

The default transition rate is that at which previously always performing loans (i.e. never more than a single payment behind) go to two payments behind for the first time.

The idea is to show how an environment that’s increasingly geared towards borrowers, viz all those anti-foreclosure programmes, is affecting their behaviour.

It’s something that’s long been suspected (borrowers are rational economic agents who’d be foolish not to take advantage of some of these programmes, right?) but hasn’t really been proven.

By dividing default transition rates into owner-occupied and non-owner occupied you can sort of isolate the effects of all the modification schemes, since most of them don’t apply to investment properties and second homes. For instance Hamp, the centrepiece of the US Treasury’s housing plans and aimed at reducing interest payments for underwater borrowers, is just for owner-occupied houses.

So, here’s what the Amherst analysts, led by Laurie Goodman, says:

There is no question that the current environment is much more “borrower-friendly” than it was a year ago, by which we mean that delinquent borrowers have more options available to delay or avoid foreclosure. For starters, there have been offand- on foreclosure moratoriums at both the state and federal level. Servicers are also now “strongly encouraged” not to move a borrower along in the delinquency/foreclosure pipeline before testing to see if they qualify for a HAMP loan [modification] . . .

Moreover, borrowers could be going delinquent in order to get a modification. For borrowers already 2 payments behind, modification had been semi-automatic. The borrower must qualify for the program on the basis of stated income and must pass the NPV (net present value) test. If a borrower is current, he must do all of the preceding, plus the servicer must be convinced that default is imminent (requires additional documentation, albeit with no clear guidance on what constitutes “imminent”).

Have borrowers been taking advantage of the more borrower-friendly environment? Has the more borrower-friendly system, which allows borrowers to prolong the rent free period they can live in their home, encouraged further delinquencies?

Using that contrast between owner- and non-owner occupied then, Amherst suggests that borrowers are taking advantage of current circumstances; they’re going into default for the first time.

In fact judging from the above chart, the difference between the two transition rates actually appears to be widening. First-time defaults — strategic or otherwise — are on the rise.

Incidentally, the contrast between the two transition rates is even more stark if you throw the timing of the Hamp programme — which began about a year ago — into the mix:

And here’s Amherst’s conclusion:

. . . Borrowers can stay in their home rent free for a much longer period than was previously the case. However, few of these benefits apply to investor properties. Thus, when we look at the difference pre- and post-HAMP in the behavior of owner-occupied borrowers versus that of non-owner occupants—we find a dramatic difference in performance. Owner-occupied borrowers behave far worse than their non-owneroccupied counterparts.

One wonders what the default transition rate would be for a principal reduction scheme.

Studies Show HAMP Promotes Strategic Default on Mortgages

Original posted on the Housing Wire by Jon Prior:

The current state of the mortgage market is promoting owner-occupants to default, according to research released today, in an indication of the growing moral hazard behind government-led homeowner rescue programs.

When the analytics firm Equifax looked at the November 2008 vintage of mortgages, it found that owner occupants default at a lower rate than investors or borrowers with second homes. But the vintage studied was in the pre-HAMP era of course, and since then, borrowers are now taking advantage of a new market, one that is especially favorable for owner-occupants, according to Amherst Securities.

Non-agency investors trying to navigate through the murky values of mortgage bonds could take note, according to the Equifax report, as owner-occupancy is considered to be a “key determinant” of loan and deal performance. Investors used to rely on such loan-level data, but when mortgage fraud increased during the current housing crisis, the information became unreliable.

Equifax analysts evaluated a specific sample of loans that were outstanding in November 2008. The 12-month default rate for loans identified as a principal residence at origination was 4.5%, compared to 6.5% for investment properties and 5.5% for second homes.

Analysts found that the trend continued for seasoned loans. According to the report, 18% of loans reported as owner-occupied at origination were no longer labeled as such. Those properties defaulted at a rate of 7%. However, the 66% of those loans were owner-occupied and defaulted at a rate of only 3.7%. To Equifax, the remaining 16% of loans had unclear owner-occupancy status but had a 5.3% default rate.

Investors also need to know what properties are eligible for modification. The US Treasury Department launched the Home Affordable Modification Program (HAMP) in March 2009 to provide incentives to servicers for the modification of loans on the verge of foreclosure. Only owner-occupied mortgages are eligible for the program.

According to the research firm Amherst Securities, HAMP changed the economic environment to a friendlier place for owner-occupants. The Treasury today even launched an initiative to reduce the principal of a loan under the program.

The graphs above show owner-occupied borrowers and investors had similar default transition rates until early 2009. But in early 2009 – HAMP launched in March 2009 – behavior for owner-occupied borrowers began to weaken.

“[T]he environment for borrowers who own investor properties has changed much less than for owner-occupied borrowers,” according to the Amherst report. “[T]hey can live in their house rent free during the time it takes to establish if they qualify for a HAMP mod. And if they qualify, they can stay in the program for at least 3 months, even if they do not make a single payment.”

Here's Why Obama's New Mortgage Forgiveness Push Still Isn't Going To Work

Posted on the Business Insider by Megan McArdle:

The Obama administration has just released the details on yet another "major" push to help homeowners who are underwater on their mortgages--a number now estimated at something like 20% of all homeowners.

The last big pushes yielded little in the way of results. The problem we thought we had a year ago--vulnerable homeowners being rocked by resetting "teaser rates" on their adjustable mortgages--turns out to be much less pressing than we thought. Instead, we an income problem: a lot of homeowners whose income has fallen too far to afford any reasonable payment on their homes. This is actually a particularly tragic subset of a larger problem, which is the market rigidities introduced by underwater mortgages.

Until around 2005 or 2006, home equity actually cushioned other income shocks. If anything bad happened, you could always refinance, or in extremis, sell. Now people who have had income shocks can do neither. People who need to move for career or family reasons are also trapped.

That's why many people have suggested principal writedowns. But this has run into multiple problems.

  1. The ownership structure of mortgage securities makes this very complicated
  2. Banks reasonably fear that if you make it easy to demand a principal reduction, everyone will do it, causing them to lose money on loans that would otherwise have paid off
  3. This moral hazard problem is particularly pressing for second lien holders. Second mortgages became popular, either to tap home equity, or to avoid the need for mortgage insurance on low-downpayment loans. To do principal reductions, second-lien holders usually have to sign off on taking a total loss on the loan--knowing that they are going to encourage more creditors to stiff them in a similar fashion.
  4. In households that have suffered a job loss, there is often not enough money to pay the loan even with a sizeable principal reduction.
  5. The above is also true of the worst mortgages, which were given to people who never had any reasonable hope of repaying even at a more realistic market price.
  6. Servicers have little incentive to do principal writedowns, which are complicated and don't help them.

The old plan to deal with the problem was to offer modest incentives for modifications, which barely dented most of these issues. So now the administration is going to give lenders incentives to temporarily reduce payments for homeowners who are unemployed, and to do principal reductions large enough to let homeowners refinance into FHA loans.

This probably has more chance of working than earlier efforts--and by working, I mean reducing foreclosures. But there are a few things to worry about:

  • The temporary payment reductions only seem to last 3-6 months. Given the long-term unemployment problems we're now facing, I'm not sure how much this will help--and if it does help, it seems likely to assist only the least needy. In fairness, however, it at least keeps people with a brief job loss from racking up arrearages that send them into an otherwise unnecessary foreclosure.
  • The easier you make this, the more moral hazard there will be. You may not care, thinking that this is just about transferring money from banks to needy people--but with the aggressive deployment of FHA loans, that ultimately means the taxpayers are going to be on the hook for a lot of marginal mortgages. Given how badly the FHA has already been overstretched by the collapse of the private market, this is worrysome.
  • The new plan, like the old plan, will probably provide minimal relief for borrowers in the worst-afflicted areas. The FHA will not finance anything that results in more than 115% being owed on the home, while places like Las Vegas and parts of Florida have seen price decreases of 50%.

FHA Mortgage Workout Lacks Incentives and Creates Problems

Original posted on the Housing Wire by Austin Kilgore:

New plans to push lenders to offer principal forgiveness and originate Federal Housing Administration (FHA)-backed refinance mortgages are leading borrower advocates to argue that the program isn’t enough to entice lenders and servicers to participate. Additionally, industry players are concerned over the potential moral hazard the initiative potentially presents.

The Obama Administration announced the allocation of $14bn in Troubled Asset Relief Program (TARP) funds to incentivize lenders to provide principal reductions and refinance underwater borrowers into FHA-backed mortgages.

Under the terms of the voluntary program, lenders will be required to write down at least 10% of the mortgage principal for borrowers who are current on their payments. The program is open to borrowers whose mortgage isn’t currently insured by the FHA. The principal reduction must bring the new FHA loan to value (LTV) to 97.75% and make the new payments account for 31% of the borrower’s monthly income. The program also offers incentives to lenders who offer borrowers with second lien mortgages similar principal reduction and refinance options. The maximum allowed LTV of the combined loans is 115%.

John Taylor, president and CEO of the National Community Reinvestment Coalition is one such advocate. In a prepared statement, Taylor said there is a discrepancy between government support for large financial institutions and individuals.

“We rush to give banks tax breaks, but we dawdle to help homeowners who through no fault of their own lost their jobs because of the economic crisis or bought defective loans that caused the economic crisis,” Taylor said. “Let’s not be so quick to forget that we bailed out banks, but we’ve nickeled and dimed innocent borrowers. Moral hazard? The moral hazard is allowing borrowers to pay the price for the crimes of Wall Street.”

Lee Howlett, president of mortgage technology and service provider ISGN’s servicing practice, told HousingWire that the principal forgiveness initiative was expected. “We’ve seen sequential progress toward that over the past year and a half,” he said.

But Howlett believes the industry would have been better served had the principal forgiveness incentives been implemented from the start.

“It’s frustrating in the sense that the people that have gone through some kind of modification, now come back and say I want my principal reduced,” he said. “Every time you announce a program six months after the old one, you run that risk of everybody that’s in the midst of a current trial modification to quit.”

Friday’s announcement left many unanswered questions. According to a Treasury Department release, full details will be announced in an upcoming mortgagee letter. In the meantime, some have questioned how the program will interpret a borrower’s current payment status.

Cheryl Lang, president and CEO of Integrated Mortgage Solutions believes the rules will be fairly lenient and the program’s requirements will turn a blind eye in the event a borrower has had a few slip-ups in the fast.

“If they’re allowing FICOs in the 500s, then they will pretty much put up with anything,” Lang said.

That being said, Lang believes the program will serve as an alternative to borrowers considering strategic default and deter borrowers from purposely defaulting to qualify for other workout programs.

Steve Horne, president of specialty servicer Wingspan Portfolio Advisors, said principal forgiveness “absolutely” has a place at the table as a loan resolution strategy and makes more sense than foreclosing at the rate that the industry has been foreclosing, though like many things, he said, the devil is in the details.

“I am a little concerned that the borrowers get the immediate benefit of principal forgiveness without any requirement for future performance,” Horne said. “I’d like to see some more contingent forgiveness.”

Another lingering question what valuation method will be used to determine the LTV of the underwater borrower. While the Making Home Affordable programs rely on broker price opinions (BPOs), Brian Coester, CEO of appraisal management company (AMC) Coester Appraisal Group, said appraisals are the most appropriate valuation method for the FHA refinance program because he believes the reports will most accurately gauge a property’s value, but that could limit the number of borrowers eligible for the program. But, he added, limiting the number of participants is a better alternative than working off inaccurate valuations.

“Ultimately it’s not going to do any good to the lender or the borrower’s community as a whole because working with bad information leads to bad decisions,” Coester said.

HAMP Principal Write-downs and Other Improvements

Originals posted on Calculated Risk (here and here):

There are a number of changes to HAMP announced today. This includes help for unemployed homeowners and more outreach. David Streitfeld at the NY Times gives an overview: U.S. Plans Big Expansion in Effort to Aid Homeowners.

Here is a fact sheet from Treasury on these changes.

The key changes are principal reductions and larger payments to 2nd liens (including for HAFA short sales). For short sales, the 2nd lien payment has been doubled from 3% of the outstanding balance to 6% - although this is probably still below the typical recovery rate for 2nd liens.

From Treasury on short sales (and deed-in-lieu):

Increase payoffs to subordinate lien holders who agree to release borrowers from debt to facilitate greater use of foreclosure alternatives including short sales or deeds-in-lieu.
  • The new payoff schedule allows servicers to increase the maximum payoff to subordinate lien holders to 6 percent of the outstanding loan balance and doubles from $1,000 to $2,000 the incentive reimbursement that is available to investors for subordinate lien payoffs, subject to an overall cap of $6,000.
  • For 1st lien principal reduction, the incentive from the Federal Government (taxpayers) is to pay 15 cents on the dollar for reductions in the unpaid principal balance for LTVs (loan-to-values) between 115% and 140%. For LTVs above 140%, the payment is 10 cents on the dollar, and for reductions below 115%, the payment increases to 21 cents on the dollar.

    The Treasury has some examples here for the various changes.

    An example of principal reduction (optional):

    HAMP Principal Reduction Click on example for larger image in new window.

    So this is 133% LTV. So the taxpayers will pay 15 cents on the dollar to the lender to reduce the principal by $33,000. This is a payment of $4,950 (the lender takes a loss of $28,050). This still leave the borrower with a LTV of 115%.m

    To recap... there are four elements to the Making Home Affordable Program Enhancements:
    1. Temporary Assistance for Unemployed Homeowners While They Search for Re-Employment

    2. Requirement to Consider Alternative Principal Write-down Approach and Increased Principal Write-down Incentives

    3. Improvements to Reach More Borrowers with HAMP Modifications

    4. Helping Homeowners Move to More Affordable Housing
    The focus is on principal writedowns, but possibly the bigger impact will be from the fourth point - the HAFA program (short sales and deed-in-lieu).

    The temporary assistance is just that - temporary. Hopefully the homeowner will find a job otherwise most borrowers will be moved on to #4.
    4. Helping Homeowners Move to More Affordable Housing
  • Increase incentives to provide more homeowners with foreclosure alternatives
  • Increase payoffs to subordinate lien holders who agree to release borrowers from debt to facilitate greater use of foreclosure alternatives including short sales or deeds-in-lieu.
  • The new payoff schedule allows servicers to increase the maximum payoff to subordinate lien holders to 6 percent of the outstanding loan balance and doubles from $1,000 to $2,000 the incentive reimbursement that is available to investors for subordinate lien payoffs, subject to an overall cap of $6,000.
  • Increase servicer incentive payments from $1,000 to $1,500 to increase use of foreclosure alternatives and encourage additional outreach to homeowners unable to complete a modification.
  • Double relocation assistance payment for borrowers successfully completing foreclosure alternative to $3,000
  • Help homeowners who use a short sale or deed-in-lieu to transition more quickly to housing they can afford.
  • I think this change will impact the most borrowers (I think principal reduction will be a limited tool). Treasury is doubling the incentive for 2nd lien holders (may still not be enough), and increasing the incentive for servicers and borrowers.

    This is the HAFA program that is scheduled to start in early April. This will probably only apply to around 3 million of the 8 million homeowners who are delinquent on their mortgage (initial guess). And probably only about half of those 3 million will receive a modification or use a short sale.

    Wednesday, March 24, 2010

    Bank of America Introduces Earned Principal Forgiveness Among Enhancements to Its National Homeownership Retention Program

    CALABASAS, Calif., March 24 /PRNewswire/ -- Bank of America announced it will look first at principal forgiveness – ahead of an interest rate reduction – when modifying certain subprime, Pay-Option and prime two-year hybrid mortgages qualifying for its National Homeownership Retention Program (NHRP). Several enhancements are being made to the program, including the introduction of an earned principal forgiveness approach to modifying mortgages that are severely underwater. The program changes are designed to encourage greater customer participation in the company's aggressive homeownership retention programs, including our continued strong commitment to the federal government's Home Affordable Modification Program (HAMP).

    (Logo: http://www.newscom.com/cgi-bin/prnh/20050720/CLW086LOGO-b)

    The Commonwealth of Massachusetts worked with Bank of America to develop these additional homeownership retention strategies that help ensure sustainable solutions and is the most recent state to join the NHRP. There are now 44 states and the District of Columbia participating in the NHRP mortgage modification program and related foreclosure relief payment and relocation assistance programs.

    Bank of America developed and launched the NHRP in 2008, in cooperation with state attorneys general, to provide assistance to Countrywide borrowers who financed their home with certain subprime and Pay-Option adjustable rate mortgages (ARMs). Bank of America removed these from the Countrywide product line upon acquiring Countrywide in July 2008.

    These new components of the agreement apply to certain NHRP-eligible loans that also meet the basic qualifications for the government's Home Affordable Modification Program. They include:

    • A first look at principal reductions in calculating an affordable payment through an earned principal forgiveness approach to severely underwater loans.
    • Principal forgiveness through a reduction of negative-amortization on certain Pay-Option ARMs.
    • Conversion of certain Pay-Option ARMs to fully amortizing loans prior to a recast.
    • Addition of certain prime two-year hybrid ARMs as eligible for the NHRP mortgage modification programs.
    • Inclusion of Countrywide mortgages originated on or before January 1, 2009, as eligible for modifications under the terms of the NHRP.
    • A six-month extension of the term of the NHRP program to December 31, 2012.

    "The centerpiece of these enhancements is a program of earned principal forgiveness that addresses severely underwater mortgages with some of the highest rates of delinquency – specifically subprime loans, Pay-Option ARMs and prime two-year hybrid ARMs that are 60 days or more delinquent with a principal balance of 120 percent or more," said Barbara Desoer, president of Bank of America Home Loans.

    "At the same time earned principal forgiveness helps homeowners, it also recognizes and addresses the interests of mortgage investors by ensuring that forgiveness is tied to the homeowner's performance, reducing the probability of a future default under the modified terms, and adjusting the total amount to be forgiven in light of any gains in property values that might occur in an economic recovery."

    Bank of America expects to be operationally ready to implement the new principal reduction components of NHRP in May. The bank will identify mortgages that may be eligible for these solutions and proactively contact those customers to ascertain their interest in a modification and to request documents necessary to determine actual eligibility.

    First Look at Principal Reductions

    With implementation of these enhancements, Bank of America will make principal reduction the initial consideration toward reaching the HAMP's target for an affordable payment equal to 31 percent of household income when modifying qualifying subprime, Pay-Option ARM and prime two-year hybrid ARM loans that are also eligible for NHRP. An interest rate reduction and other steps would then be considered, if additional savings are necessary to reach the targeted payment.

    "In our experience with Home Affordable Modification Program and National Homeownership Retention Program modifications, Bank of America has found that many homeowners who owe considerably more on their mortgages than their homes are worth are reluctant to accept a solution that addresses only the amount of the payment without an accompanying reduction in the balance due on the loan," Desoer said. "We believe that by first addressing the significant underwater condition of some NHRP-eligible loans, the rates of customer acceptance of HAMP trial modifications and conversions to permanent modifications on those loans will be improved, and the homeowners will be more motivated to make payments, yielding more sustainable modifications."

    Earned Principal Forgiveness

    Bank of America is taking an innovative "earned principal forgiveness" approach to HAMP modifications of the NHRP-qualifying mortgages that are at least 60 days delinquent with current loan-to-value (LTV) ratios of 120 percent or higher.

    • An interest-free forbearance of principal that the homeowner can turn into forgiven principal over five years resulting in a maximum 30 percent decrease in the loan principal balance to as low as 100 percent LTV.
    • In each of the first five years, up to 20 percent of the forborne amount will be forgiven annually for borrowers that remain in good standing on their mortgage payments.
    • Forgiveness installments for the first three years are set at the 20 percent level.
    • In the fourth and fifth years, the amount of forgiveness will be dependent upon the updated value of the property, so that the LTV will not be reduced below 100 percent through principal forgiveness.

    This solution will be considered when it provides a more positive outcome under the net present value test than under the standard HAMP guidelines.

    Innovative Solutions for Customers with Pay-Option ARMs

    Bank of America has begun offering two other affordable and sustainable payment solutions on certain Pay-Option ARMs.

    • If the principal balance on the loan has grown because the borrower selected an option to make payments that did not cover the interest due and this payment difference was added to principal – known as negative amortization – the bank will consider offering a HAMP modification eliminating the negative amortization feature and forgiving all or part of the negative amortization amount to reduce principal to as low as 95 percent LTV.
    • If a pending recast of a Pay-Option ARM will increase the customer's monthly payments, a preemptive modification that eliminates the negative amortization feature of the mortgage and converts it to a fully amortizing market rate loan may be offered.

    Impact of Mortgage Modification Efforts

    The bank estimates that it will be able to offer these enhanced principal reduction solutions to about 45,000 customers who qualify for a HAMP modification, for an estimated $3 billion in total reduced principal offered under this NHRP enhancement.

    From implementation of the NHRP in December 2008 through December 2009, Bank of America offered an NHRP modification or started an NHRP-eligible trial modification under the HAMP for more than 175,000 homeowners, providing potential aggregate savings of more than $7.2 billion over the full terms of the loans. The original program is ahead of schedule and certain to exceed original expectations of offering up to $8.4 billion in savings.

    Through its overall homeownership retention efforts since January 2008, Bank of America has helped more than 760,000 customers with a completed loan modification or HAMP trial modification. That includes more than 500,000 completed modifications through proprietary programs; plus nearly 21,000 completed mortgage modifications and more than 240,000 active trial modifications through the federal government's HAMP program through February.

    While Bank of America will reach out proactively to homeowners identified as potentially eligible for these enhancements to the NHRP program, customers with questions about their loans and the new programs may log on to www.bankofamerica.com/homeloanhelp for further information.

    BofA to start reducing mortgage principal

    Original posted on Reuters by David Lawder:

    Bank of America will on Wednesday announce plans to start forgiving mortgage loan principal for troubled homeowners who owe more than 120 percent of their home's value or are battling ever-expanding "negative amortization" loans.

    According to a summary of the program obtained by Reuters, Bank of America pledged to offer an "earned principal forgiveness" of up to 30 percent in two stages. The lender will first offer an interest-free forbearance of principal that the homeowner can turn into forgiven principal annually over five years, provided they stay current on their payments.

    The forgiveness can allow a homeowner to bring the loan value back down to 100 percent of the home's value over five years, according to the plan, confirmed by sources close to the matter.

    The plan, to begin in May, is among the first by a U.S. mortgage lender that takes a systematic approach to reducing mortgage principal to tackle the thorny issue of preventing foreclosures when home values drop well below the amount owed.

    A Bank of America spokesman declined comment.

    Announcement of the program in Washington comes as U.S. lawmakers and housing advocates are becoming increasingly vocal about the need for principal writedowns in order to save homes on a large scale. Amid stubbornly high unemployment, homeowners are seen as more likely to simply abandon an unaffordable mortgage when they have no equity or are deep "underwater" on the loan.

    The U.S. Treasury's mortgage modification program has largely relied on reducing interest rates, and has been criticized for failing to address a steep and painful reduction in home values.

    The announcement also will come two days after two Washington state residents sued Bank of America for allegedly reneging on a promise it made to modify troubled mortgages when it took $25 billion in taxpayer bailout money.

    The lawsuit alleged that the lender has "seriously strung out, delayed and otherwised hindered" modifications because it had financial incentives to do so.


    Under the plan, Bank of America also will slash the principal balance on the worst of the high-risk mortgages written during the height of the housing boom, the so-called "payment option" adjustable rate mortgages that had a negative amortization feature that allowed the principal balance to grow.

    On such loans that are delinquent and in danger of imminent default, the lender will announce that it will cut principal to as low as a 95 percent of the property's value.

    Bank of America lender also will expand its modification program to consider payment reductions on prime hybrid adjustable rate mortgages that have floating interest rates after two years and will extend its National Homeowner Retention Plan by six months until the end of 2012.

    The bank expects to be operationally ready to start the earned principal reduction plan in May. It plans to identify mortgages that may be eligible for these programs and proactively contact homeowners to request documents to verify eligibility.

    Tuesday, March 23, 2010

    HAMP applicants tanned and juiced

    Original posted on Calculated Risk by Shnaps:

    One aspect of the Making Home Affordable loan modification program known as ‘HAMP’ is almost always taken for granted in its wide reporting – that the borrowers in fact need ‘help’. Moreover, it is generally taken for granted that those seeking modification under HAMP simply cannot afford their monthly mortgage payment. It is assumed that they have made great sacrifices, assumed they have already cut back drastically on discretionary expenses, assumed that they have already gone over their monthly budgets with a fine-toothed comb to eliminate all but the most necessary expenditures in an effort to keep their home. So prepare to be shocked – shocked! – as I share with you that I have seen first-hand that this assumption is oftentimes greatly, seriously flawed.

    Let me begin with a word to the wise for HAMP applicants: unless you believe Snooki is now in charge of approving HAMP applications, it might be a good idea to cut back a bit on some of the creature comforts to which you have become accustomed at least a month before submitting your HAMP modification application.

    Allow me to explain. The guidelines for servicers participating in HAMP stipulate that the borrower must submit a “hardship affidavit”. This, ostensibly, is to serve as their sworn testimony that they have been driven into default due to some particular hardship they encountered, and despite making every possible sacrifice, they can no longer “maintain payment on the mortgage and cover basic living expenses at the same time". (see HAMP Directive)

    To demonstrate this, applicants are required to submit recent paystubs and bank statements. The statements are to help further corroborate the income they report (lest they forget to include all of their paystubs) and also to demonstrate that their monthly expenses are as described on their application. Which is to say that they have already ‘cut back to the bone’ and STILL are unable to make ends meet.

    So how do these look in practice? The very first ‘HAMPlication’ that your correspondent pulled up recently showed a wanton disregard for minimizing spending. On the contrary, it looked like “cutting back” for this applicant does not involve such Draconian cuts as eliminating:

    • visits to the tanning salon
    • the nail spa
    • some kind of gourmet produce market (have you seen the price of arugula?)
    • various liquor stores
    • A DirecTV bill that must involve some serious premium programming or pay-per-view events (or both?).
    • And over $1,700 in retail purchases, including: Best Buy, Baby Gap, Brookstone, Old Navy, Bed, Bath & Beyond, Home Depot, Macy’s, Pac Sun, Urban Behavior, Sears, Staples, and Footlocker.

    And that was just in one month! They were seeking to reduce a $1,880 mortgage payment that had just gotten to be a real cramp to their ability to keep a roof over their heads.

    I’d like to say this is the exception, but it’s much closer to the norm. Many people who request HAMP modifications submit bank statements that demonstrate little if any “belt-tightening” going on.

    Somehow, we now expect the same people who asked for ‘liar’s loans’ to be truthful on when it comes to ‘hardship affidavits’?

    The Case for Ending the Mortgage Deduction

    Original posted in the New York Times by Agnes Crane:

    Mortgages should be made less attractive. That’s one lesson of the recent housing bubble and bust. As long as borrowing seems like the easy road to riches, people will do too much of it. But right now in the United States, the tax code encourages many people to take out big mortgages. That’s why it’s a good idea to put the elimination of the tax deductibility of mortgage interest on the political agenda.

    American homeowners can for tax purposes deduct interest on mortgages of up to $1 million. It’s a politically popular arrangement, and the lure of paying a bit less to the government has been an incentive to stretch housing budgets up to, or past, the limit. Even extra cash borrowed under home equity loans can share in the tax largess, whether or not the funds go to home improvement.

    Take a married couple spending $400,000 on their home, a bit more than twice the $164,700 median price reported by the National Association of Realtors. The mortgage interest deduction, plus the deduction of property tax, is worth well over $20,000 a year, based on a 20 percent down payment, a 6 percent interest rate, and a 1 percent property tax. That’s an alternative to the $11,400 standard deduction the couple would otherwise be entitled to, but at a 28 percent tax rate, it would still reduce their annual taxes by some $3,000.

    And the more the couple borrows, the more they save. A $900,000 home could reduce their taxes by nearly $13,000, assuming a 33 percent tax rate on income.

    But not everyone benefits from the mortgage interest tax perk. The gross tax deduction for a married couple in a median home, as measured by the real estate agents’ association, would come to a bit more than $9,000, not enough on its own to make it worthwhile to forgo the standard deduction, which is available to every taxpayer.

    The high income needed to take advantage of this tax benefit undercuts the claims of supporters that tax deductibility of mortgage interest promotes home ownership, which almost all Americans seem to assume is a good thing. In fact, it is a distortion in favor of those who need the least help.

    The tax logic also encourages families to borrow rather than save. When the personal savings rate is a paltry 3 percent and policy makers are wringing their hands about global imbalances, this is the wrong message to send. Moreover, potential investment is skewed toward housing rather than, say, infrastructure, manufacturing and education.

    Economists have been pointing out these distortions for years, but for politicians, advocating the elimination of this deduction is seen as suicidal. One problem is that an immediate elimination would probably pull down house prices, the last thing the already weak housing market needs.

    The danger comes from the lower purchasing power that higher taxes would bring. For the couple who used to be able to afford a $400,000 home, the maximum purchase price would fall by 11 percent. The $900,000 home would have to drop about 21 percent in value to offset its owners’ higher tax payments. That sounds like an invitation to open another chapter of the financial crisis.

    But even such a big change in tax policy could be phased in slowly enough to avoid disaster. Britain removed the tax advantages of home ownership over a period of 12 years. In the 1990s, the mortgage tax relief rate gradually fell from 25 percent to 10 percent before disappearing completely in 2000.

    The British experience teaches another lesson besides the feasibility of a fairer approach to housing tax. Mortgage tax relief ended just as a housing bubble began. Far from slumping, the median British house price rose 145 percent from 2000 to the peak in 2007, according to the Halifax bank.

    Higher taxes for mortgage borrowers would not prevent excesses in the United States housing market either. They would need to be complemented by careful controls on lending. But it would be a step in a good direction. As policy makers consider how to reshape this troubled sector of the economy — and the need to raise taxes to shrink an enormous deficit — getting rid of a poorly designed tax incentive is good place to start.

    Servicers Streamlining Short Sales as HAFA Nears

    Original posted on the Housing Wire by Jon Prior:

    With the Home Affordable Foreclosure Alternatives (HAFA) program kicking off in two weeks, servicers are making their final preparations for the oncoming wave of short sale requests. While boosting technology is key to the build-up, getting the right people in place could be more of a priority to handle the load.

    The US Treasury Department will launch HAFA on April 5, 2010 to provide incentives to servicers to provide short sales and deeds-in-lieu of foreclosure for borrowers who failed a modification through the Home Affordable Modification Program (HAMP).

    GMAC (GJM: 21.00 +1.01%) is considered the leading servicer in the Home Affordable Modification Program by providing active and permanent modifications on 53% of the more than 66,000 eligible loans in its portfolio.

    GMAC began its build-up for the HAFA demand a month after HousingWire broke the HAFA story in October. In November 2009, GMAC formed a liquidation advisor unit to proactively contact borrowers who are not eligible for loan modifications to discuss some alternatives such as short sales.

    “We don’t currently have a backlog of short sale requests as many servicers do. We typically acknowledge a short sale offer within three days of receipt,” said James Olecki, a spokesperson for GMAC.

    GMAC also revamped its technology platform in December, when the company implemented a customized short sale workflow portal to streamline the approval process. The system permits borrowers and real estate agents to electronically submit short sale offers, similar to a platform launched last month by Equator, the largest vendor management platform used by real estate owned (REO) departments across the country.

    While GMAC is making strides in its technology department, Sanjeev Dahiwadkar, founder and CEO of IndiSoft, a technology developer specializing in the default services industry, said the right people in place can play a vital role.

    “While technology has its critical place in the short sale process, we believe because of the high emotions involved in the decision making process, that there is a still a small portion that is subjective and requires human intervention,” Dahidwadkar said. “It is equally important for technology to provide a transparent and secure communication channel between all participants to help in the decision making process about how much losses to take or what they can live with.”

    Scott Gillen, senior vice president of strategic initiatives at Stewart Lending Services, an REO asset management provider, is seeing two different approaches.

    “We’re seeing two things, a build up internally just for the review of what’s coming in. What we’re also seeing though is a lot of outreach to vendors such as Stewart to support a lot of the heavy lifting, and when I say that, you’ve got all of the HAMP denials that are theoretically eligible,” he said.

    Most of the companies, according to Gillen, are looking for bandwidth support primarily in the solicitation stage and the follow up with the borrower to determine their interest in pursuing a possible short sale or deed-in-lieu.

    According to Olecki at GMAC, the servicer acknowledges a short sale request within three days of receiving one, and he has seen a reduction in the overall short sale timeline. A short sale agreement between the borrower and the servicer under HAFA expires after 120 days.

    Friday, March 19, 2010

    Why Canada Avoided a Mortgage Meltdown

    Original posted on the Wall Street Journal by Alex Pollock:

    Suppose we agree that we would like our society to have widespread home ownership and a property-owning citizenry. Does it take government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac with implied taxpayer guarantees, tax advantages for the interest paid on home mortgages, and government pressure for "creative" mortgage lending to achieve this?

    The Canadian experience shows that it doesn't.

    Canada makes a useful comparison for the U.S. Both countries are rich, advanced, stable, have sophisticated financial systems and pioneer histories, and stretch from Atlantic to Pacific. But Canada has no housing GSEs. Mortgage interest is not tax deductible. It does not have 30-year fixed rate, freely prepayable mortgage loans. Mortgage lending is more conservative and much more creditor-friendly.

    Canadian mortgage lenders have full recourse to the mortgage borrower's other assets and income, in addition to having the house as collateral. This means there is little incentive for borrowers to "walk away" from their mortgage. The absence of a tax deduction for mortgage interest probably increases the incentive to pay down debt. Most Canadian mortgage payments are made through automatic debit of the borrower's checking account—a technical but important point. Canadian fixed-rate mortgages typically have prepayment penalties to protect the lender and the interest rate on the loan is fixed for only up to five years.

    This relative creditor conservatism has meant that Canada and Canadian banks have so far come through the international financial crisis in much better shape than their U.S. counterparts. Canada didn't avoid the recession, but mortgage delinquencies have so far remained much lower than in the U.S., with the percentage of loans delinquent 90 days or more at approximately one-tenth of the U.S. level.

    What about the home ownership rate—the percentage of all households owning their own home? Isn't there a home ownership price to pay for this Canadian credit conservatism? No.

    Here's the home ownership rate in Canada: 68%. In the U.S. it's 67%. The U.S. rate peaked at the top of the housing bubble at 69%. In other words, two very different housing finance systems, one much riskier than the other, produced virtually the same home ownership rate.

    This must cause us to call into question longstanding U.S. beliefs about the relationship of government-subsidized housing finance to home ownership.

    The former savings-and-loan industry justified its special tax and regulatory privileges, including its right to pay more interest on deposits than commercial banks were then allowed to, by appealing to its role in home ownership. Then came the savings and loan collapse of the 1980s.

    Fannie Mae and Freddie Mac took over the home ownership mantra. In the vast risk expansion of their arrogant days, with very high rates of profitability made possible by government-granted privileges, they justified these privileges by appealing to home ownership. It was often said by their supporters that the GSE-dominated U.S. housing finance system generated the highest home ownership rates in the world, which was false, and that this system was the "envy of the world," which was also false. Fannie Mae's annual reports regularly featured a house with an American flag flying.

    Now it is clear to everyone that Fannie and Freddie, having done so much to help inflate the bubble and having been dragged into insolvency by its deflation, are wards of the government. The taxpayer bailout of these GSEs is likely to cost much more than the bailout of the saving and loans did a generation ago. The U.S. Treasury has unilaterally signed the taxpayers up for unlimited support of these bankrupt purveyors of government-advantaged mortgage finance.

    So the widespread previous beliefs about the desirability of having GSEs were wildly mistaken. It ought to be clear by now that an entity can be a private company with market discipline, or it can be a government body with governmental discipline, but it can't be both.

    In this context, it is important to recognize that Canada does have a government body to promote housing finance: the Canada Mortgage and Housing Corporation, which is the dominant credit insurer of mortgages in the country. Whether or not you like the idea of such a government financing operation, at least its status is perfectly clear and honest. The Canadian government owns 100% of its stock. Its guaranty from the government is explicit. It provides housing subsidies which are on budget and must be appropriated.

    Let's remember that the original sin of making Fannie a GSE in 1968 was to get it off the federal budget so the deficit looked smaller. Canada in this respect looks superior to the U.S. in candor as well as credit performance.

    Sign Up For A HAMP Mod And Your Credit Score Drops 100 Points

    Original posted by the Associated Press:

    Some homeowners who sign up for the government's mortgage assistance program are getting a nasty surprise: Lower credit scores.

    For borrowers who are making their payments on time but are on the verge of default, the Obama administration's loan modification program can reduce their credit score as much as 100 points. That makes it harder to get a loan and can present a problem when applying for a new job.

    Housing counselors say it's unfair, especially because the news often comes as a surprise to homeowners.

    "Why should people's credit be hurt even worse when they're trying to do the right thing?" said Eileen Anderson, senior vice president at Community Development Corp. of Long Island, a housing counseling group in New York.

    And many homeowners are angry that a program designed to help carries such a penalty, said Kathy Conley, a housing counselor with GreenPath Inc., a nonprofit group in Farmington Hills, Mich.

    "It's a feeling of being duped," she said.

    Still, the impact is far less severe than a foreclosure, where borrowers typically find their credit is in tatters for years. That's due to the cumulative impact of many months of missed payments and the foreclosure itself, which drags down a homeowner's' credit by 150 points or more on a scale of 300 to 850.

    To enroll in the Obama administration's $75 billion "Making Home Affordable" program, borrowers enter a trial period in which they make at least three payments. But some are finding out that their credit score takes a dive during this trial phase. It happens once their mortgage company notifies the three big credit bureaus -- Experian, Equifax and TransUnion.

    For delinquent borrowers, the damage was done when they fell behind on their loans.

    But for homeowners who are having financial troubles but managing to pay their bills, a request for a loan modification is the first sign of difficulty. And that means a sharp drop in the borrower's credit score.

    The credit rating industry defends the practice. People who sign up for loan modifications would not be asking for help unless they were having severe money troubles, said Norm Magnuson, spokesman for the Consumer Data Industry Association, a trade group in Washington that represents the credit bureaus.

    "The consumer is going into the program because they're in a financial bind," he said. "Other lenders would need to be aware of that."

    The Obama administration acknowledges that enrolling in the program can hurt credit scores. But Meg Reilly, a Treasury Department spokeswoman, said that foreclosure "brings far more serious financial consequences for borrowers and their families."

    The credit score issue is an unexpected consequence of the program that has been plagued with problems and disappointing results since its launch last year. Only about 170,000 homeowners had completed the process as of February. Hundreds of thousands more are still in limbo.

    Jim Owens, 46, of Harrisburg, Ore., was accepted on a trial basis for the Obama plan last year.

    He and his family were in bad financial shape. They were barely able to pay the mortgage and utility bills.

    The main reason: After being laid off and unemployed for six months, he took a job as maintenance director at a retirement home. But it paid only around $25,000 year, about $10,000 less than his former job in a city public works department.

    He and his wife were also struggling with debt, after taking out a second mortgage four years ago to pay off debt and medical bills.

    Late last year, he was searching for a used sport-utility vehicle. He got a 30-day approval for $2,000 car loan.

    But that time ran out before he found a car, so he had to reapply for the loan. He was shocked to learn that, after signing up for the Obama plan, he was denied.

    "I should have been told," that this might happen, Owens said. "Without credit, you can't do a whole lot in life."

    A Citi spokesman, Mark Rodgers, said the company follows the Treasury Department's guidelines for reporting to credit bureaus. "We do not determine credit scores," said Rodgers, who declined to comment on Owens' case.

    The impact is worse for borrowers who enroll in the Obama program and are then ruled ineligible.

    If homeowners do manage to get accepted into the Obama program and have their loans permanently modified, lenders update the credit bureaus. The new status neither hurts nor helps the borrower's credit score. Over time, they can see their score increase.

    "The best way to build credit back is to continue to pay bills as agreed, to use credit wisely," said Tom Quinn, vice president of scoring solutions at Fair Issac Corp., which designed the well-known FICO score system. "As time goes on, the score gradually increases."

    Supply of Foreclosed Homes on the Rise Again

    Original posted in the Wall Street Journal by James Hagerty:

    The supply of foreclosed homes that banks need to sell is rising again, signaling further downward pressure on home prices in some parts of the U.S.

    Mortgage analysts at Barclays Capital in New York estimated that banks and mortgage investors held a total of 645,800 foreclosed homes in January, up 4.6% from 617,286 a month earlier.

    According to Barclays, the supply peaked at around 845,000 in November 2008 and then declined through 2009.

    Even though the number of people behind on mortgage payments kept rising last year, the flow of homes into bank ownership slowed markedly because of time-consuming efforts to figure out which distressed borrowers could qualify for programs that attempt to avert foreclosures by reducing monthly payments. Meanwhile, brisk demand from investors and first-time home buyers helped banks unload many of the homes they held.

    Now the supply is rising again because banks are determining that many homeowners don't qualify for loan modifications and are completing more foreclosures. Home sales also have slowed in recent months.

    Barclays projects that the supply of foreclosed homes will rise to about 733,000 in April, then begin to decline again gradually. Foreclosed properties now account for roughly a fifth of all homes listed for sale nationally.

    The outlook for sales of foreclosed homes depends heavily on whether the economy continues to heal and manages to create enough jobs to boost demand for housing. It also depends on how many distressed borrowers can be rescued from foreclosure through loan modifications. Nearly eight million households, or 15% of those with mortgages, are behind on mortgage payments or in the foreclosure process. Foreclosures are heavily concentrated in a few states, notably Florida, Arizona, Nevada, California and Michigan.

    Estimating the number of homes owned by banks and mortgage investors isn't an exact science. Barclays uses foreclosure-related data from mortgage securities packaged by Wall Street and extrapolates from that to estimate the entire market.

    John Burns, a real estate consultant in Irvine, Calif., projected that home prices as measured by the S&P/Case-Shiller national index will fall an additional 6% before leveling off later this year.

    While he expected many lower-end homes to show price increases this year, he said that would be offset by steep declines on some luxury homes. He assumed mortgage rates would rise to about 6% by year end and job growth would resume in the second half.

    Thursday, March 18, 2010

    Mortgage Penalties: IRD vs 3 Months Interest Payment

    Original posted on RateSupermarket.ca:

    We all know mortgage rates are near all time lows and that rates will inevitably go higher. Long term bond yields, which affect fixed mortgage rates, have increased over the past few weeks, so we’d expect fixed rates to increase as well. But that didn’t happen. Many of the big banks are doing a massive market share push right now, and have surprisingly decreased fixed mortgage rates despite bond yields increasing. Variable rates have stayed constant as the Bank of Canada recently re-iterated there conditional commitment to keep them at this level until the summer, although we’ve seen a slight increase in the discounts to prime with a Prime – 0.55% or 1.70% 5 year variable come out last week.

    This has resulted in people starting to prepare for the rate increases, and much talk in the media over the past week about mortgage penalties. When you take out a mortgage, it is a contract that comes with a commitment, but like many contracts, there is an out clause if you’d like to terminate the contract early. However, that out clause comes at a price – and this is the penalty fee.

    Historically, the penalty fee has been a payment of 3 months worth of interest, but some lenders use the higher of 3 months interest or an IRD or “interest rate differential”. The IRD is based on the difference between your original interest rate and the interest rate that the lender if they were loaning the funds out today. Some banks cheekily use the posted rates to calculate this differential, although that is usually not the actual rate people get for their mortgages.

    As different lenders use different penalty calculations, it can be difficult for consumers to know how much the penalty is. As a result, the government announced in the recent budget that as a move towards greater “consumer protection” they would look at standardizing how lenders disclose and calculate prepayment penalties. This is applicable to fixed rate mortgages as variables don’t have IRD penalties.

    IRD calculation

    Here is an example of how to calculate the IRD:

  • First, take the principal balance, multiply it by the difference between the previous high interest rate and the newer low interest rate [i.e. if the old higher rate was 5.5%, but now is 3.5% = 2%]
  • Divide that by 12
  • Multiply that number by the remaining months on the mortgage term to get the approximate IRD payment owed
  • IRD vs 3 months interest

    If you’re looking at refinancing to break your current mortgage and move to a lower rate then you simply need to:

  • Calculate the IRD penalty
  • Determine how much interest would be paid on the current mortgage rate and term
  • Compare that to the interest that would be paid with the newer rate

    If the IRD is less than the savings between the two rates then it could be worth switching.

    The refinancing penalties have become such an issue that the Ombudsman for Banking Services and Investments (OBSI) has seen a rapid increase in the number of new cases that have been reported. In the most recent quarter they received 301 complaints, which is almost twice the number received in the same quarter last year and three times as much over 2008.

    So if you’re considering refinancing, find your mortgage documents, see what type of penalty you have to incur to break your current mortgage contract, do some quick calculations and then as always speak to a mortgage specialist before making any final decisions, and in this case, to make sure your calculations are correct.

    Happy refinancing.

  • Wednesday, March 17, 2010

    TARP Inspector Barofsky Puts HAMP Under the Microscope

    Original posted on the Housing Wire by Jon Prior:

    Neil Barofsky, special inspector general to the Troubled Asset Relief Program (TARP), initiated an audit of the Home Affordable Modification Program (HAMP), according to a letter from Barofsky’s office to Sen. Jeff Merkley (D-Ore.).

    The US Treasury Department allocated $75bn from the TARP fund to HAMP when the program launched in March 2009. Through February, those 113 servicers provided more than 170,000 permanent modifications. Critics of the program point out that the numbers are far short of the 3-to-4m target set by the Obama Administration last year and claim the program doesn’t address key difficulties for troubled loans.

    Barofsky will conduct the audit after receiving a letter from Merkley, addressing concerns over the program’s formula for the Net Present Value of a troubled loan. The NPV refers to the value-to-date of a cash-generating investment, such as a mortgage. When a borrower falls behind on the payments, the investor or servicer generates an NPV for the loan “as-is” or if it is modified. If the NPV of modified loan is higher, the modification is said to be “NPV positive.”

    Under HAMP guidelines, if the loan is “NPV postive” after modification, the servicer must provide the workout if it is to receive the incentive payment.

    Barofsky’s audit will investigate whether or not the servicers are correctly applying the NPV test under the program and how much the Treasury is doing to ensure cooperation. Barofsky will also look at how servicers are communicating to borrowers that their NPV test has failed and how they identify any other options for borrowers.

    The House Committee on Oversight and Government Reform, also began an investigation of HAMP in February on concerns of the “effectiveness and efficiency” of the program.

    HUD announces plan to modify FHA insurance premiums

    Original posted on Lexology by Patton Boggs LLP:

    Department of Housing and Urban Development (HUD) Secretary Shaun Donovan, in written testimony before the House Appropriations Subcommittee on Transportation, Housing and Urban Development, and Related Agencies, addressed a plan to modify insurance premiums for Federal Housing Administration (FHA) loans.

    Secretary Donovan noted that HUD already increased the upfront insurance premium for FHA loans to 2.25 percent effective for loans with case numbers assigned on or after April 5, 2010. Please see the January 25, 2010 edition of Mortgage Banking Update for an article on previously announced FHA program changes.

    Secretary Donovan stated that HUD plans to eventually reduce the upfront insurance premium to 1.0 percent, and that this reduction would be offset by a planned increase in the annual insurance premium to 0.85 percent for loans with loan-to-value ratios of up to 95 percent and to 0.90 percent for loans with loan-to-value ratios over 95 percent. The Secretary noted that such change will require legislative authority from Congress.

    Tuesday, March 16, 2010

    An Odd Way to Measure the Success of Mortgage Mods

    Posted in the Wall Street Journal by James Hagerty:

    The Obama administration has an odd way of assessing the results of its $50 billion Home Affordable Modification Program, or HAMP.

    When the program was announced a year ago, the administration said it would “offer reduced monthly payments for up to three million to four million at-risk homeowners,” people in danger of losing their homes to foreclosure. That phrase, though qualified by the words “up to,” set high expectations.

    Given the complexities of the program and the bureaucratic inertia of the big banks that are struggling to carry it out, it isn’t very surprising that the results so far have failed to meet those expectations. As of Feb. 28, 168,703 households had “permanent” loan modifications under the program, while 835,194 were in the trial stage. Borrowers accepted for the program are expected to make three monthly payments before their modifications can be deemed permanent, though in many cases it’s taking far longer for the banks to decide whether to proceed with a long-term mod.

    Many of the people in trial mods will crash out of the program. Some are unable or unwilling to document their financial situations; others turn out not to qualify once banks take a closer look at their finances. Some fail to keep making the reduced payments. Wells Fargo & Co. said last week that, among the 108,000 borrowers who had completed three trial HAMP payments to Wells as of Feb. 28, only about half were expected to qualify for permanent mods.

    Even so, the administration argues that HAMP is going well because more than 1.3 million homeowners have received offers of trial modifications. That’s closing in on half way to three million, the lower end of the original goal, and the administration has given itself until 2012 to hit that target.

    Yet getting an offer of help doesn’t translate into home-saving success in a huge number of cases, though it does delay the foreclosure process considerably.

    Asked about whether it makes sense to measure the program in terms of trial offers made rather than durable modifications achieved, a Treasury spokeswoman said: “The three million to four million as a goal by 2012 has always been for offers extended to borrowers.”

    One reason so many trial-mod offers have been made is that the Treasury, in a rush to show results, last year made the mistake of encouraging banks to offer trials before completing the paperwork to make sure borrowers really qualified. The Treasury has since changed its policy and now will require the banks to verify the financial information before starting the trials. But the initial policy already has puffed up the number of people in trials and so helps the Treasury argue that the program is working.

    Even for those who do get “permanent” mods, many eventually will default because they are still drowning in debt. HAMP is designed to shrink payments for the mortgage, property taxes, insurance and homeowners association or condominium fees to 31% of pretax income. But many of the eligible households have huge wads of credit card and other debts. Even after loan modifications, the median ratio of monthly debt payments to pretax income is 60%, the Treasury says.

    Despite the huge expectations the administration built up for HAMP, dealing with this situation was never going to be easy. Nearly eight million U.S. households, or 15% of those with mortgages, are behind on payments or in foreclosure in what has become by far the worst wave of defaults since the 1930s. Stand by for more rescue plans from Uncle Sam, and perhaps more inflated expectations.