Thursday, April 29, 2010

Geithner vows crackdown on mortgage servicers

Original posted in the Washington Post:

Treasury Secretary Timothy Geithner on Thursday slammed mortgage service companies for failing to do enough to help Americans avoid losing their homes and promised to crack down on shoddy practices.

"We do not believe servicers are doing enough to help homeowners -- not doing enough to help them navigate the difficult and frightening process of avoiding foreclosure," Geithner said in prepared remarks for delivery to a Senate appropriations subcommittee.

He said Treasury was "troubled" by reports that servicers had done things like foreclose on homeowners who were potentially eligible for relief under the government's Home Affordable Mortgage Program, lost documents or claimed to have done so and even steered troubled homeowners away from available assistance.

"None of this is acceptable," Geithner said, adding that Treasury was doing "targeted, in-depth compliance reviews" to make sure that servicers were acting in good faith.

"In circumstances where servicers are not compliant we will withhold incentives or demand their repayment," he said, referring to fees that servicers earn through the HAMP program by helping homeowners adjust their loan payments so that they can avoid foreclosure.

Geithner said Treasury soon will publish "much more detailed data on the performance of servicers" so that lawmakers and ordinary citizens can gauge for themselves whether the service companies are acting in good faith.

House Democrats Introduce Right-to-Rent Bill for Borrowers Facing Foreclosure

Original posted on the Housing Wire by Austin Kilgore:

Borrowers who have exhausted all options for saving their homes may be thrown yet another retention lifeline, if House Democrats are successful with recently introduced legislation.

A bill filed in the US House of Representatives would allow mortgage borrowers to remain in their homes, as renters, for up to five years after receiving a foreclosure notice.

The “right to rent” bill, House Resolution (HR) 5028, would allow borrowers to petition a judge to stay in their homes as renters under a lease for up to five years. The judge would be empowered to appoint an independent appraiser to set fair market value, which would be allowed to rise with inflation, Representatives Raúl Grijalva (D-OH) and Marcy Kaptur (D-OH) said in a joint release. The bill is an updated version of a similar bill Grijalva introduced in 2008.

Grijalva said reports of increased foreclosure activity are “an indication of the profound, historic crisis we face and the need for creative solutions like Right to Rent. I’m proud to work with a champion of workers’ rights like Marcy Kaptur to address this problem, and I call on the rest of Congress to take a hard look at why we’ve allowed things to get this bad.”

While the Making Home Affordable Modification Program (HAMP) continues to make some effort in attempts to prevent foreclosures, Grijalva said it is not enough.

“HAMP is simply an insufficient response to this crisis,” Grijalva said. “Right to rent is a fair and sensible solution for struggling homeowners. Banks will still get reliable rental income, and families will be able to stay in their homes and significantly lower their monthly housing costs.”

The right to rent program would be limited to homes purchased at or below the median price for its metropolitan statistical area, and must have been the borrower’s principal residence for no less than 2 years. Only mortgages originated before July 1, 2007 will be eligible.

“Passing this bill will help neighborhoods avoid the spiral of decay, crime and lower property values that often follows mass vacancies without creating any new bureaucracy or transferring a dime of taxpayer money to homeowners or banks,” Grijalva said.

‘Strategic’ Mortgage Defaults Jump to 12% of Total

Originally posted on Bloomberg by Jody Shenn:

Decisions by U.S. homeowners to walk away from mortgages they can afford account for an increasing share of defaults, according to Morgan Stanley.

About 12 percent of all mortgage defaults in February were “strategic,” up from 4 percent in mid-2007, New York-based Morgan Stanley analysts led by Vishwanath Tirupattur wrote in a report today. Borrowers are more likely to stop paying their mortgages the higher their credit scores and the larger their loans, the analysts said.

Defaults by borrowers who owe more than their homes’ values are among the biggest risks for the housing market, according to analysts including Zelman & Associates’ Ivy Zelman and Amherst Securities Group LP’s Laurie Goodman. Last month, the Obama administration said it would adjust its anti-foreclosure program to encourage reductions to borrowers’ principal amounts, instead of just the payments they make, to address the issue.

That change “gives us hope that policy makers are serious about curbing future strategic defaults,” the Morgan Stanley mortgage-bond analysts wrote.

Strategic defaults also increase based on how much more borrowers owe in housing debt than their homes are worth, they said in the report, which made use of consumer credit data from Transunion LLC and Standard & Poor’s home-price indexes.

That finding concurred with reports by Goodman, a New York- based mortgage-bond analyst, who has said there will be as many as 12 million foreclosures over the next few years unless lenders can effectively modify borrowers’ debt.

Falling Prices

A fifth of U.S. homes carrying mortgages were worth less than their loans in the fourth quarter, according to Seattle- based, which runs a real estate data Web site. Home prices in 20 metropolitan areas tumbled 33 percent from July 2006 through April 2009, then rose for five months before falling for the next five, leaving them up 2.8 percent from lows, according to an S&P/Case-Shiller index.

Morgan Stanley said many previous studies of strategic defaults have been limited by a lack of a “precise definition” of when they are occurring.

The analysts classified a default as strategic only when homeowners who hadn’t been previously delinquent were making on- time payments one month, then skipped them for the next three, even while staying current on other consumer debt of at least $10,000.

Prime-Jumbo Problem

For mortgage-bond investors, the data signals a problem with prime-jumbo debt and strengthens the case for investing in subprime, the analysts wrote. That’s in part because strategic defaults are less prevalent among borrowers with subprime characteristics and they may benefit from government-aid programs that don’t target large loans, the analysts wrote.

Jumbo mortgages are larger than government-supported Fannie Mae and Freddie Mac can finance, currently from $417,000 to $729,750 in high-cost areas.

Details needed to implement the planned changes to the federal “Home Affordable” mortgage-modification program for delinquent borrowers are expected by “early fall,” Phyllis Caldwell, the Treasury Department’s chief homeownership preservation officer, told lawmakers April 14. The program will then push for cuts in the principal amounts of some borrowers that owe more than 115 percent of their home’s value.

A total of 9.47 percent of all home mortgages were delinquent at the start of this year, with an additional 4.58 percent in the foreclosure process, according to seasonally adjusted Mortgage Bankers Association data.

‘Big Overhang’

Housing won’t recover for three to five years as mounting foreclosures hold down prices, mortgage-bond pioneer Lewis Ranieri said yesterday in a panel discussion at the Milken Institute Global Conference in Beverly Hills, California.

“There’s another big leg down,” he said. “You can’t have much of a rally when you’ve got this big overhang.”

In an April 13 congressional hearing, JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp., and Wells Fargo & Co., the biggest U.S. home lenders, said their foreclosure- prevention efforts are working and rejected plans that could force them to reduce balances for distressed homeowners.

“Broad-based principal reduction could result in decreased access to credit and higher costs to consumers because lenders will price for forgiveness risk,” said David Lowman, head of New York-based JPMorgan’s mortgage unit.

Bank of America last month agreed to cut the principal on some loans that exceed 120 percent of the value of underlying properties as part of a settlement with 44 state attorneys general over lending by Countrywide Financial Corp., which the Charlotte, North Carolina-based bank bought in 2008.

Commercial Defaults

Strategic defaults are also increasing in the commercial real-estate market, where prices are down 42 percent from their peak in October 2007, according to Moody’s Investors Service.

Morgan Stanley last year defaulted on a $2 billion loan two years after it bought Crescent Real Estate Equities Co. and handed over 17 million square feet of office buildings to lender Barclays Capital. The bank also agreed to relinquish five San Francisco office buildings to its lender, two years after buying them from Blackstone Group LP.

In January, Tishman Speyer Properties LP and BlackRock Inc. defaulted on a $3 billion mortgage on Manhattan’s Stuyvesant Town and Peter Cooper Village apartments, the largest residential enclave in New York City. Its sale in 2006 for $5.4 billion marked the biggest single real estate transaction in history U.S. history.

Moody’s Assigns Redwood RMBS Triple-A as S&P Warns on Credit Risk

Original posted on the Housing Wire by Diana Golobay:

Redwood Trust closed a $237.8m prime jumbo residential mortgage-backed security (RMBS) sponsored by its wholly-owned subsidiary, RWT Holdings. The deal marks the first private-label RMBS in the US since 2008, and is already bringing about disagreements from the credit rating agencies on the strength of predicted performance.

CitiMortgage originated the 255 underlying first-lien mortgages in 2009, Redwood said. The first prime jumbo RMBS in years has been praised by the industry for beginning to thaw the jumbo market.

“This transaction has broken the ice in the private mortgage securitization market, which has been essentially frozen since 2008,” said Brett Nicholas, chief investment officer of Redwood Trust, in a press statement Wednesday.

Moody’s Investors Service rated the most senior securities in the deal — representing 93.5% of the principal amount — triple-A, Redwood said. But fellow credit-rating agency Standard & Poor’s is warning investors of the possible risks associated with the pool characteristics.

Moody’s assigned ratings from triple-A to double-B 2 on five certificates issued by the Redwood RMBS, formally Sequoia Mortgage Trust 2010-H1. Moody’s expects cumulative net loss of 0.5% on the pool, the credit-rating agency said. The 6.5% subordination on the triple-A certificates is driven by both collateral and structural analysis.

“The transaction is backed by high quality prime loans, employs a highly simplified structure compared to past transactions, has a strong governance mechanism with respect to representation and warranties, has good alignment of interests and benefited from a third party review of every loan in this collateral pool,” Moody’s said in an e-mailed statement.

Standard & Poor’s (S&P) on the other hand said that, while the loans have never been delinquent and the borrowers have a weighted average credit score of 768, the average balance of $932,699 poses a “concentration risk.”

In RMBS ratings criteria released in September 2009, S&P established a 7.5% credit enhancement “as an anchor point” for a typical pool of prime mortgages it will rate triple-A. But the Redwood RMBS bears only 6.5% credit enhancement.

“If 33 average-sized loans or the 19 largest loans in the pool were to default at a 50% recovery (the weighted average original LTV ratio is 56.57%), we estimate that either scenario would result in the complete write-down of all the subordinate classes, which provide 6.50% credit enhancement to the senior class,” S&P said in e-mailed commentary Wednesday.

The pool consists of entirely five-year adjustable-rate mortgages, S&P noted, which means the loans will experience reset risk after five years, when the initial fixed rates become adjustable. Nearly 74% of the loans contain a 10-year interest only period, indicating 74% of the borrowers will experience additional reset when the loans become fully amortizing.

“If mortgage rates rise, property values remain flat, and the extension of credit is limited, we believe borrowers may face difficulties refinancing,” S&P said.

Here's the S&P press release:

NEW YORK (Standard & Poor's) April 28, 2010--As part of its efforts to provide
insight to investors on structured finance transactions, Standard & Poor's
Ratings Services has chosen to comment on Sequoia Mortgage Trust 2010-H1
(Sequoia 2010-H1), a U.S. prime jumbo residential mortgage-backed securities
(RMBS) transaction slated to close today. We chose to comment on this
transaction--which appears to be one of the first private-label U.S. RMBS
transaction containing newly originated loans offered this year--because we
believe the transaction is important to the marketplace and that our views can
add value for investors. Standard & Poor's may, from time to time, choose to
provide our views on structured finance transactions across various asset
types and geographies, even if we did not rate the transaction, if we deem the
transaction important to the market and we believe that our opinions would
provide value to investors.

We have reviewed the public information available on the recently announced
Sequoia 2010-H1 transaction, including the preliminary offering document filed
with the Securities and Exchange Commission (SEC), and have assessed various
credit strengths and risk considerations for the transaction (see below),
which we considered relative to our criteria.

The shifting interest structure of this transaction, which uses subordination
for credit enhancement, contains a seven-year lockout period for principal
prepayments, subject to a "two-times" test (which we describe in more detail
below) and delinquency and realized loss performance tests.


  • 100% of the borrowers have never been delinquent on their mortgage loans;
  • The weighted average original credit score of the borrowers is 768;
  • The weighted average original loan-to-value (LTV) ratio is approximately
    56%, and of the 27% of borrowers that have a simultaneous second-lien
    mortgage, the weighted average combined LTV ratio is under 60%;
  • Over 96% of the properties are owner occupied, and over 76% of the
    mortgage loans are rate/term refinances;
The offering document indicates that the transaction documents will include
the following provisions:

  • The definition of 60-plus-day delinquencies includes modified loans for
    the first 12 months following the modification;
  • The definition of realized losses includes principal forgiveness and
    principal forbearance; and
  • The transaction places an annual cap on administrative and trustee

Concentration Risk:

  • The pool consists of 255 residential mortgage loans with relatively high
    balances (the average stated balance at cutoff is $932,699.35); as such,
    the default of one loan may have a greater impact on overall credit
    enhancement than for a pool that contained a greater number of loans or
    loans with lower current balances.
  • If 33 average-sized loans or the 19 largest loans in the pool were to
    default at a 50% recovery (the weighted average original LTV ratio is
    56.57%), we estimate that either scenario would result in the complete
    write-down of all the subordinate classes, which provide 6.50% credit
    enhancement to the senior class.
Reset Risk:

The pool consists entirely of five-year adjustable-rate mortgage loans, and
nearly 74% of these loans contain 10-year interest-only periods. All borrowers
will experience reset risk after five years, when their initial fixed rates
become adjustable, and 74% of borrowers will experience an additional reset
when their loans become fully amortizing. If mortgage rates rise, property
values remain flat, and the extension of credit is limited, we believe
borrowers may face difficulties refinancing.

Geographic Concentration Risk:

More than 46% of the properties in the collateral pool are in California, and
over 16% are in New York State (more than 12% are in New York City).

The "Two-Times" Test:

The offering document provides that in the event that the percentage of
subordinate classes equals twice its original value, subordinate classes may
begin to receive principal prepayments as early as May 2013, if the
transaction passes certain performance tests. If substantial defaults and
losses occur after the time that subordinate classes begin to receive
principal prepayments, then there may be less credit enhancement available to
the senior classes.

Pre-Offering Review Of Property Valuations:

There may have been differences in property valuations of the collateral
arising from variations in the methods that the sponsors, underwriters, and
third-party agents used, which may affect any potential losses for these


The Sequoia 2010-H1 collateral pool is consistent with the following Standard
& Poor's archetypical pool assumptions for U.S. RMBS (see "Methodology And
Assumptions For Rating U.S. RMBS Prime, Alternative-A, And Subprime Loans
published Sept. 10, 2009):

  • It includes at least 250 loans;
  • It includes loans that are current at the time of issuance;
  • It includes loans with 30-year maturities; and
  • It includes first-lien mortgages.
The collateral pool for Sequoia 2010-H1 is not completely consistent with the
following Standard & Poor's archetypical pool assumptions (in each category, a
value of 100.00% would indicate complete consistency with these criteria):

  • 17.55% of the loans were newly originated (within the past six months);
  • 81.53% of the loans are secured by single-family detached residences;
  • 19.41% of the loans are for home purchase;
  • 26.26% of the loans are fully amortizing;
  • 0.00% of the loans are fixed-rate; 
  • 72.84% of the loans have no simultaneous second liens;
  • 83.75%-93.55% of the loans appear to have FICO scores greater than or
    equal to 725; and
  • 87.35% of the loans appear to have an original combined LTV of less than
    or equal to 75%.
In addition, the collateral pool for Sequoia 2010-H1 is not as geographically
diverse as Standard & Poor's archetypical pool (46% of loans are from
California, and 16% are from New York State).

The collateral pool for Sequoia 2010-H1 may or may not be consistent with the
following Standard & Poor's archetypical pool assumptions (all of the loans in
the pool would need to comply in order to be completely consistent with these

  • Inclusion of loans with full appraisals (with an interior inspection) on
    the secured properties;
  • Inclusion of loans with full underwriting and the verification of
    borrower assets;
  • Inclusion of loans with full documentation and income verification
    through IRS Form 4506T; and
  • Inclusion of loans with a "back-end" (which includes total debt)
    debt-to-income (DTI) ratio of 36%.
For transactions with pools that are completely consistent with our
archetypical pool criteria, credit enhancement at the 'AAA' rating category
would begin at 7.50%.


Historically, Standard & Poor's has published quarterly trends reports
describing collateral characteristics for various product types (see "RMBS
Trends: Amid Volatility, U.S. Third-Quarter 2007 Prime Jumbo Securitization
Volume Is Slightly Down
," published Feb. 4, 2008).

In our view, the collateral pool for Sequoia 2010-H1 appears to differ from
historical prime jumbo collateral in the following ways:

  • The average loan balance is higher; 
  • The percentage of interest-only loans is higher;
  • The percentage of loans for home purchases is lower;
  • The weighted average FICO is higher; and
  • The weighted average original LTV is lower.

Tuesday, April 27, 2010

Recourse and Non-Recourse Mortgages: Foreclosure, Bankruptcy, Policy

By Ron Harris, Tel Aviv University - Buchmann Faculty of Law

Abstract: The recourse-non-recourse dimension is fundamental in any loan as it deals most directly with the pool of assets out of which lender can collect at delinquency and default. This paper calls attention to an exceptional feature of the American home mortgage market, compared to mortgage markets elsewhere in the world, the prevalence of non-recourse mortgages as created by foreclosure rules in leading states such as California and Arizona and federal bankruptcy law. It explains how the legal impediments on recourse to personal assets and future income, together with the recent drop in home prices, led to a dramatic rise in strategic foreclosures (ones that resulted from negative equity rather than from cash-flow problems). No less than 588,000 strategic walk-away mortgage defaults took place, representing nearly 20% of all foreclosures in 2008. Most of these were not likely to happen in a recourse regime.

The paper then deals with policy. It uses a few theoretical frameworks: put option, default insurance, asset partitioning and screening. It examines the pros and cons of recourse regime and of non-recourse regime. It concludes that there is no compelling justification for prohibiting either recourse or non-recourse loans. The benefits and pitfalls of a dual regime are then examined. The question relating to why we don't observe a dual regime in the real world is addressed. The paper recommends that jurisdictions that prohibit recourse loans lift this prohibition. It concludes that both recourse and non-recourse should be on the table, on the levels of regulation policy and lending practices.

Download paper here:

Monday, April 26, 2010

Philly Fed: What "Triggers" Mortgage Default?

Abstract: This paper assesses the relative importance of two key drivers of mortgage default: negative equity and illiquidity. To do so, the authors combine loan-level mortgage data with detailed credit bureau information about the borrower's broader balance sheet. This gives them a direct way to measure illiquid borrowers: those with high credit card utilization rates. The authors find that both negative equity and illiquidity are significantly associated with mortgage default, with comparably sized marginal effects. Moreover, these two factors interact with each other: The effect of illiquidity on default generally increases with high combined loan-to-value ratios (CLTV), though it is significant even for low CLTV. County-level unemployment shocks are also associated with higher default risk (though less so than high utilization) and strongly interact with CLTV. In addition, having a second mortgage implies significantly higher default risk, particularly for borrowers who have a first-mortgage LTV approaching 100 percent."

The paper can be downloaded here:

Tuesday, April 20, 2010

Force Banks to Cut Mortgage Principal: Watchdog

Original posted on CNBC:

The Obama administration should consider forcing lenders to make principal reductions for struggling homeowners who owe more than their home is worth, the watchdog overseeing the $700 billion bank bailout said in a report released on Tuesday.

Late last month, the White House announced a significant expansion to its efforts to help homeowners by providing subsidies for lenders who write down principal for so-called "underwater" borrowers.

Foreclosure Sign
Getty Images

Those programs are voluntary.

"Treasury should consider changes to better maximize its effectiveness," said Neil Barofsky, the Special Inspector General for the Troubled Asset Relief Program, or SIGTARP.

Barofsky said the voluntary nature of the Home Affordable Modification Program (HAMP) principal reduction plan sets up situations where some borrowers benefit, while others who may be just as deserving, do not.

"Giving (mortgage) servicers the discretion to implement principal reduction introduces a questionable inconsistency into the HAMP program and stands in stark contrast to the mandatory nature of the other significant mortgage modification triggers," Barofsky wrote.

The report also urged the administration to consider extending the amount of time unemployed homeowners are forgiven from making mortgage payments as the maximum six months now allowed may not be long enough.

"Although no program will assist all unemployed borrowers, Treasury should strive for a program that will at least assist the typical unemployed borrower," the report said, noting the average duration of reported unemployment is more than 31 weeks in the latest recession, the longest stretch since records began in 1948.

Rising Tide of Foreclosures

Weakness in the housing market and high unemployment continue to weigh on the U.S. economic recovery, though consumer confidence itself is growing.

The Obama administration introduced the $75 billion homeowner assistance program in early 2009, which includes $50 billion allocated from the bailout funds.

After receiving substantial criticism from Barofsky and others, the administration announced in March a major expansion of the program, which has used just a fraction of that money.

Those changes included the principal write-down incentives, and subsidies for lenders to provide forbearance for up to six months for unemployed borrowers.

Barofsky noted that nearly 2.8 million foreclosures were initiated in 2009 and that figure is likely to climb for 2010.

In the first quarter, there were more than 932,000 foreclosure filings, an annualized pace of more than 3.7 million foreclosures. "Unfortunately, HAMP has made very little progress in stemming this onslaught," Barofsky said.

As of the end of March, the HAMP program has 1,008,873 total active modifications, including 227,922 modifications that have been made permanent, according to the Treasury Department.

That's up from 1,003,902 total modifications and 168,708 permanent modifications through February.

Barofsky also said the program changes and the lack of clear guidelines associated with those changes may end up leaving the government susceptible to increased fraud.

"Criminals feed on borrower confusion, and frequent changes to the program provide opportunities for experienced criminal elements to prey on desperate homeowners who have not been educated as to the risks of fraud," the report said.

House Financial Services Committee holds hearing on Second Liens

Original posted on Lexology:

Today, the House Committee on Financial Services held a hearing entitled “Second Liens and Other Barriers to Principal Reduction as an Effective Foreclosure Mitigation Program.” Committee Chairman Barney Frank (D-MA) opened the hearing by stating that its purpose was to address the ongoing question of how to handle the home foreclosure crisis that has damaged the national economy. Mr. Frank acknowledged that the issue could not be resolved with “magic wands” or “buttons to push” but stated that a “series of efforts” have been made. Testifying before the Committee were executives representing the four largest bank-affiliated mortgage lenders, Bank of America Home Loans, CitiMortgage, Inc., JPMorgan Chase Home Lending and Wells Fargo Home Equity Group. In early March, Chairman Frank sent letters to each of the four banks urging them to adopt more aggressive principal forgiveness programs.

Appearing before the Committee were the following:

  • Barbara Desoer, President, Bank of America Home Loans
  • Jack Schakett, Credit Loss Mitigation Strategies Executive, Bank of America Home Loans
  • Sanjiv Das, President and Chief Executive Officer, CitiMortgage, Inc.
  • Steve Hemperly, Executive Vice President, Citi
  • Molly Sheehan, Senior Vice President, Housing Policy, JPMorgan Chase Home Lending
  • David Lowman, Chief Executive Officer, JPMorgan Chase Home Lending
  • Mike Heid, Co-President, Wells Fargo Home Mortgage
  • Kevin Moss, Executive Vice President, Wells Fargo Home Equity Group

Each of the witnesses provided an update on their institution's foreclosure mitigation and mortgage loan modification efforts and the status of their current initiatives under the Home Affordable Modification Program ("HAMP"). Most discussed their intent to implement the Treasury Department’s Second Lien Modification Program ("2MP").

The witnesses addressed the topic of principal reduction as an element of their loan modification programs, but urged caution in its use. Mr. Heid noted that "principal forgiveness is not an across-the-board solution" and that "we have found that principal forgiveness is best used to assist those customers [whose] homes are owner-occupied and concentrated in geographic areas with severe price declines where there is little prospect for full recovery of home values." Similarly, Mr. Lowman stated that a "broad-based program of principal reduction would be very expensive" and Ms. Desoer echoed that "we must [use principal forgiveness] in a measured, responsible way so that only customers with a legitimate hardship and genuine interest in maintaining homeownership qualify." Among other concerns, the bank executives cautioned that more aggressive principal forgiveness "could raise issues of fairness" in the eyes of other borrowers and taxpayers generally.

Ranking Member Spencer Bachus (R-AL) also expressed concerns that principal reduction could increase the cost of borrowing and the amount required for home down payments and that the financial burden of principal reduction programs would be borne by responsible taxpayers.

House Subcommittee holds hearing on recent HAMP enhancements

Original posted on Lexology:

Today, the Subcommittee on Housing and Community Opportunity of the House Finance Services Committee held a hearing entitled, “The Recently Announced Revisions to the Home Affordable Modification Program” to discuss the enhancements to the Home Affordable Modification Program (HAMP) and Federal Housing Administration (FHA) program announced last month by the Treasury. Testifying before the Subcommittee were the following witnesses:

Panel 1:

  • David Stevens, Assistant Secretary for Housing/Federal Housing Commissioner, U.S. Department of Housing and Urban Development (HUD)
  • Phyllis Caldwell, Chief, Homeownership Preservation Office, U.S. Department of the Treasury

Panel 2:

  • Dean Baker, Co-Director, Center for Economic and Policy Research
  • Alys Cohen, Staff Attorney, National Consumer Law Center
  • Vincent Fiorillo, Trading/Portfolio Manager, Doubleline Capital LP
  • Andrew Jakabovics, Associate Director for Housing and Economics, Center for American Progress Action Fund
  • Arnold Kling, Financial Markets Working Group, Mercatus Center, George Mason University
  • Robert E. Story, Jr., Chairman, Mortgage Bankers Association
  • Alan White, Assistant Professor, Valparaiso University School of Law

Chairwoman Maxine Waters (D-CA) began the hearing by noting that while the original HAMP program helped some borrowers receive lower interest rates, the original program failed to address unemployed or underwater borrowers. Therefore, Chairwoman Waters was interested in learning how the new initiatives would address these pressing issues and what should be expected from the new initiatives. Ranking Member Shelley Capito (R-WV) noted that HAMP had fallen “woefully short” of expectations and expressed significant concerns about the program’s overpromising of assistance, noting that HAMP has provided assistance to only a fraction of the population it was designed to help.

Mr. Stevens began his testimony by emphasizing that the Obama Administration’s goal was to provide “stability for both the housing market and homeowners.” However, despite some successes, Mr. Stevens acknowledged that HAMP faced continuing challenges. Instead of attempting to assist all troubled homeowners, Mr. Stevens said that Treasury believes that HAMP should focus on helping responsible homeowners with opportunities “to obtain a modification or to refinance and prevent avoidable foreclosures and, when necessary facilitate the transition to a more sustainable housing situation.” He noted that the new FHA refinance option would “create stabilizing incentives in the housing market” by providing more opportunities for loan restructuring for borrowers who are current on their mortgage and who owe more than their home is worth. Mr. Stevens believed that HAMP was on track to offer second chances to 3 to 4 million homeowners, but acknowledged that challenges still existed before those goals could be achieved.

Responding to Chairwoman Waters’ inquiry into how the program would affect FHA reserves, Mr. Stevens noted that the option to refinance under the FHA would use currently available resources and that TARP fund would be made available if necessary to offset lender claims on defaulted loans. Therefore, according to Mr. Stevens, the new refinancing option would not expose the FHA to further risks. Finally, Mr. Stevens noted that HAMP could not permit all borrowers to avoid foreclosure and acknowledged that some borrowers will not qualify for the program. However, HAMP presents significant opportunities for homeowners assisted by the program.

Ms. Caldwell began her testimony by noting that recent modifications to HAMP were designed to assist the unemployed and underwater homeowners. Echoing Mr. Stevens’ statements that the program cannot stop every foreclosure, Ms. Caldwell emphasized that HAMP needs to focus on providing responsible homeowners opportunities “to obtain a modification or to refinance and prevent avoidable foreclosures and, when necessary, facilitate the transition to a more sustainable housing situation.” Although more than 1.4 million borrowers had been extended modification offers under the HAMP and more than 225,000 homeowners had received permanent modifications, Ms. Caldwell acknowledged that the policy and operational issues, including a complex conversion and implementation process, had been much more challenging than anticipated and that unemployment and negative equity continued to pose challenges for both homeowners and HAMP. Aggressive enhancements to HAMP, including temporary assistance for unemployed borrowers and FHA refinancing options for underwater borrowers, were implemented to assist these at-risk borrowers and to broaden the program’s impact.

Witnesses on the second panel generally shared the view that the recent modifications to HAMP remained insufficient and identified various solutions to address the current housing crisis. Mr. Baker focused his testimony on a “Right to Rent” proposal, under which Congress could change foreclosure rules to allow homeowners to remain in their homes as renters for a substantial period of time following a foreclosure. He argued that this alternative would immediately provide housing security to homeowners facing foreclosure, would not require any taxpayer dollars, and would provide the right incentive for lenders “in future market frenzies.” Ms. Cohen argued that the recently announced changes to HAMP were inadequate to address the scale of the continuing foreclosure crisis and that HAMP should be further revised to (1) increase transparency by, among other items, establishing a formal appeal process, (2) change the trial modification program’s terms to lessen adverse effects on homeowners and (3) expand the eligibility and coverage of HAMP. Mr. Jakabovics noted that the program’s biggest barrier remained “the ability of servicers to quickly and accurately modify loans” and recommended that the Treasury transfer servicing rights to those servicers who are able to meet their obligations. Mr. Story recommended implementing a waiver process, providing interest-only options for modifications to address ARMs with low interest rates, and amending the Fair Debt Collection Practices Act to permit servicers to effectively communicate with borrowers. According to Mr. White, to achieve real reductions in foreclosures and mortgage debts, the following steps are necessary: (1) enabling bankruptcy courts to write down mortgage balance for distressed homeowners, (2) rectifying the problem of junior mortgage liens and (3) addressing inadequate mortgage servicer performance.

Saturday, April 17, 2010

A Critique of Mortgage Cramdown Proposals

By Mark S. Scarberry, Pepperdine University School of Law

Abstract: Proposed amendments to the Bankruptcy Code permitting strip down of under secured home mortgages to the court-determined value of the homes and other modifications of home mortgages in Chapter 13 would substantially alter the risk characteristics of home mortgages, with likely substantial effects on future mortgage interest rates and future mortgage availability. Thus, the future societal cost of such a change in the law likely would be large.

This article explains and supports that thesis, primarily on the ground that the proposed changes would leave mortgage holders with all of the future downside risk in the real property market while denying them the benefit of future appreciation. This article also explains why a common argument made in favor of allowing strip down as a matter of fairness is simply mistaken; enactment of the proposed amendments would not treat home mortgages the same as other secured debt in Chapter 13 bankruptcy, but in fact would treat home mortgages much less favorably than other secured debt. Home mortgages would be the only secured debts that could be stripped down and paid off at a court-determined interest rate, with monthly payments lower than those required by the credit contract, over a period of up to nearly forty years, rather than the no-more-than-five year period that would still apply to other secured debts.

Additionally, the article provides a brief critique of Professor Adam J. Levitin's empirical studies. Even though serious flaws in his empirical studies have been pointed out, Professor Levitin continues to claim in congressional testimony that "permitting bankruptcy modification is unlikely to result in higher mortgage costs or lower mortgage credit availability." Supporters of strip down in Congress continue to rely heavily on Professor Levitin’s studies as showing that the proposed changes in the law would not substantially affect mortgage interest rates or mortgage availability.

Unfortunately, Professor Levitin's empirical studies, though thoughtful and creative in their design, rely on incorrect understandings of current and past bankruptcy law and of the proposed legislation. They, in effect, compare apples with oranges - or perhaps a bumper crop of apples with a frost-ravaged crop of oranges - by comparing the effects of the kind of strip down that would be widely available under the legislation now before Congress, with the effects of the very different kinds of strip down that, in limited circumstances, are currently available or were at one time available. His studies also fail to take into account the very different incentives that the proposed legislation would create were it to be enacted, both in terms of encouraging debtors with large negative equity to file Chapter 13 bankruptcy petitions and encouraging Chapter 13 debtors to argue for a low value for their homes rather than to report an inflated value. The empirical studies thus do not provide a solid foundation for the making of public policy.

In addition, adoption of the proposed amendments to the Bankruptcy Code would cause somewhat perverse results. Strip down provides the greatest benefit to debtors who have the greatest amount of negative equity. Homeowners who made the lowest down payments, paid the most inflated prices for their homes, and refinanced to take equity out of their homes for purposes of consumption thus would receive the greatest benefits - benefits that would include, in essence, a free option on future appreciation and that would not be well calibrated to the homeowners' financial need - while homeowners who made large down payments, were careful not to pay inflated prices, and did not use their home equity to finance consumption would receive the least benefits.

These perverse results are not only undesirable in and of themselves from a public policy "moral hazard" perspective. They also may cause resentment among those persons who could not benefit from them or who would receive a perversely smaller benefit were they to encounter financial distress and need bankruptcy assistance. In the longer term, such resentment may undermine public support for the primary function of consumer bankruptcy laws: "to grant a fresh start to the honest but unfortunate debtor".

On the other hand, homeowners with substantial negative equity may have little incentive under current law to continue to make mortgage payments. We could expect then that if many homeowners have substantial negative equity, the rate of foreclosures on home mortgages will be high. A high rate of home foreclosures in turn helps to further depress the market prices of homes, harming not only mortgage holders whose homes are sold in foreclosure at low prices, but also homeowners who have faithfully paid their mortgages and whose home values drop when foreclosure strikes nearby homes. Thus, the foreclosures that occur due to negative equity have an indirect effect on the wealth of homeowners who have not defaulted on their mortgages. On a broader scale, the effect may be a downward spiral in which negative equity causes a high foreclosure level, which causes home prices to drop, which creates additional negative equity, which then causes foreclosure levels to remain high, which causes home prices to drop further, and so on. It is possible that steps taken to reduce the levels of negative equity, including allowing homeowners to strip down their mortgages, could help stop the spiral, help home values stabilize, and help bring the current high foreclosure rate back to a historically normal level.

But how could this be accomplished without causing unacceptable effects on future mortgage affordability and availability, without creating perverse results, and without triggering substantial resentment? First, any legislation that permits strip down should include a strong provision for recapture by the mortgage holder of a substantial portion of any future upturn in the value of the home. Such a provision would minimize the effect of strip down on the risk characteristics of mortgages by preserving for mortgage holders most of the benefit of a future upturn in the market for homes. It would also minimize the perverse effects of strip down by denying the homeowner the free option on future appreciation that strip down otherwise would provide, and it would, as a result, help to minimize resentment. Second, any such legislation should have clear eligibility criteria designed to minimize the negative effects that likely otherwise would occur. And third, alternatives should be considered to the kind of strip down that the current legislative proposals would permit, perhaps alternatives based on approach taken in the Obama administration's program for modification of home mortgages, the Home Affordable Modification Program. Any such legislation should limit home mortgage modification to mortgages originated prior to January 1, 2008, by which time it had become very clear that the nation had entered a serious mortgage crisis, such that Congress was actively considering legislation to deal with the crisis, including home mortgage strip down legislation.

Download paper here:

Response from Adam J. Levitin, Georgetown University Law Center:

Abstract: Professor Mark Scarberry has put forth a formidable critique of my empirical study of mortgage market sensitivity to bankruptcy modification risk. As this response shows, however, his critique does not hold up under scrutiny.

Professor Scarberry argues that my study design is invalid because, as he reads the current state of the law, cramdown is virtually impossible. Therefore, he contends, we should not expect markets to exhibit sensitivity to cramdown risk, so no policy conclusions can be derived from my finding of market insensitivity.

Regrettably, Professor Scarberry overreads the state of the law. The law is in fact unsettled, and that is all that is necessary to uphold the validity of my study’s design because the market can be expected to price for uncertainty about the law, and the absence of such a premium is significant.

This response article also challenges Professor Scarberry’s contention that Chapter 13 relief should be limited lest it engender “resentment” of debtors. The article questions whether prevention of resentment even provides a sound basis for limiting bankruptcy relief, much less when relief would further an important macroeconomic goal of housing market stabilization.

More broadly, the article takes issues with claims about the sanctity of secured credit. Debates about the efficiency of secured credit have all played out in the business context. In the consumer context, however, the inefficiency is manifest. Treating secured credit as inviolable would take us back to the unhappy future of Chapter XIII with higher costs for unsecured credit and the abusive consumer finance world of Williams v. Walker-Thomas.

Download response here:

Wells Fargo Analysis: 50% Fail HAMP Eligibility

Original posted on

Wells Fargo has 523,336 borrowers either in trial or approved mortgage modifications as of March 31, more of them as part of the lender’s own foreclosure prevention efforts.

Of those, 144,932 are part of the government’s Home Affordable Modification Program, HAMP, with active trial and completed modifications, also as of March 31.

Wells Fargo, which services about 16 percent of U.S. mortgages, said it initiated or completed three modifications for every one foreclosure sale on owner-occupied properties from October 2009 through March 2010.

In a statement providing an update on its foreclosure prevent efforts, Wells Fargo offered a glimpse into its analysis of the HAMP program’s troubled rate of assistance, with as many borrowers falling eligibility as those approved for the full term of mortgage relief.

Wells Fargo said half of the 138,000 homeowners who have made three HAMP trial payments as of March 31, will be offered modifications for the full term. Of the rest, 30 percent are expected to be deemed not eligible after documents are received, and another 20 percent will not provide some or all required documents.

The U.S. Treasury released HAMP’s March update Wednesday.

Overall, HAMP’s approved modifications for its five-year reduced-payment term is up to 227,922 borrowers, representing about 19 percent of all trials started. The program’s number of borrowers whose trial or approved modifications have been cancelled because of default or other reasons is 158,052 borrowers – about 13 percent of those who started trial modifications.

“HAMP is the starting point in our efforts to help borrowers facing financial challenges, but we been very successful in finding other workout options when a customer is not eligible for HAMP,” said Mike Heid, co-president of Wells Fargo Home Mortgage.

On April 5, Wells Fargo initiated its part in HAMP’s new Home Affordable Foreclosure Alternatives (HAFA) program, which provides incentives to servicers and borrowers who work on short sales or deed-in-lieu of foreclosure. Although all parties have to agree on the terms and short sale price, HAFA provides principal forgiveness on leftover mortgage balances.

Heid and counterparts at other top lenders testified this week before a House panel seeking feedback on HAMP’s expansion plans into principal forgiveness. The mortgage servicing executives expressed some reservations about the fairness and expense of mortgage writedowns.

Nonetheless, Heid said that Wells Fargo had initiated writedowns before HAMP was launched in 2009. The lender completed more than 50,000 modifications, with a total reduction in principal of more than $2.6 billion.

“On average, customers received a 15 percent reduction in principal amounting to greater than $50,000, and when combined with rate reductions and term extensions their average monthly payments dropped by 25 percent under the terms of their loan modification agreements,” Heid said.

Thursday, April 15, 2010

When right-to-rent meets principal reduction

Original posted on Reuters by Felix Salmon:

What happens when you cross right-to-rent with mortgage principal reductions, and turn the whole thing into an entirely voluntary private-sector program with no government involvement whatsoever? It might look a little bit like American Homeowner Preservation, a for-profit company which has a very interesting idea for keeping people in their homes.

The details can be found here: the core of the scheme is where AHP persuades a lender to accept a short sale on a home. That’s the principal-reduction bit; the right-to-rent bit then kicks in when the buyer of the home — an AHP client, along with the seller — agrees to rent back the home to the former owner at a low, affordable rate which can’t be more than one-third of the tenant’s income. Rent increases by 5% annually for five years; at any point, the tenant has the option to buy back the home at a predetermined price which rises year by year; tenants get financial counseling to enable them to do that.

The buyer can sell the home at any point in the first five years subject to the existing lease and option; after that, it’s put on the market and any profits over and above the option price get split equally between the buyer and the tenant.

If everything goes according to plan, the buyer makes healthy returns: here’s one financial projections sheet which foresees returns in the low double digits. And the homeowner ends up buying back their own home for much less than they originally bought it for. Meanwhile, AHP makes relatively modest fees of a few thousand dollars along the way.

I don’t know much about American Homeowner Preservation, and their website could use a bit of work. But in principle, I think there’s a very good idea here. Any bank dealing with AHP is going to want to make very sure they’re getting a genuine market rate for the house in question, but so long as that’s the case, and the bank is open to short sales in principle, this looks like a win-win for all concerned. The owner gets to stay in their house, the bank gets to avoid the expense of foreclosure proceedings, and the investor gets decent returns. Clever!

BoA and Chase on Second Mortgages

Original posted on Calculated Risk by Tom Lawler:

In a House Financial Services Committee meeting today on “Second Liens and Other Barriers to Principal Reduction as an Effective Foreclosure Mitigation Program, spokespersons from BoA, Citi, JPMorgan Chase, and Wells Fargo explained the potential dangers of broad principal reductions, as well as tried to dismiss the silly claim that many second mortgages have “virtually no value” because so many borrowers with seconds have total mortgage balances at or exceeding the value of the home collateralizing those mortgages. Below are some observations on BoA’s and Chase’s testimony.

BoA provided a few interesting stats: of the 10.4 million first lien mortgages that it services, 15% of second mortgages owned by BoA, while 16% have second mortgages with other lenders. (Thus, 31% have second liens!).

BoA also said that about 90% of BoA’s owned second-lien mortgage portfolio is made up of “standalone originations used to finance a specific customer need, such as education expenses or home improvements, with “(t)he remainder consists of piggy back (combo) loans originated with the home purchase.” BoA made this point to highlight that the vast bulk of its second mortgage lending was collateralized consumer credit lending, where the borrower’s ability to pay was a major factor behind extending the credit.

Here is what BoA said about their second mortgage portfolio:

“Most of our second loans continue to have collateral value, and of those where the second loan is underwater, a significant number are still performing. Indeed, out of 2.2 million second liens in Bank of America’s held for investment portfolio – only 91,000 seconds – about four percent – are (i) delinquent, (ii) behind a delinquent first mortgage and (iii) not supported by any equity.”

BoA’s spokesperson vexed a number of investors in first-lien mortgages (or securities backed by such mortgages) by saying that in cases where the first and second are held by different investors, the “logic of 2MP” (the administrations second mortgage program) where “the holder of the second lien is required to forebear a similar percentage as the first lien holder” seems “equitable” to BoA – despite the subordinate nature of the second, and despite the fact that the 2MP program does not require second mortgage holders to forgive principal, even when the first mortgage holder does!

Here is what Chase said about its Home Equity (second) mortgage portfolio:
Chase owns about $131 billion in Home Equity loans and lines as of February 28, 2010.

• Approximately $25 billion are home equity loans and $106 billion are home equity lines of credit.
• Approximately $33 billion are in first lien position and $98 billion in second lien position.
• 5% of Chase’s home equity portfolio is 30 days or more delinquent. Total home equity line, home equity loan, first lien and second lien delinquency rates are within two percentage points of the overall total.
• About 50% of the total Chase second lien portfolio is underwater, and 95% of this portfolio is performing (less than 60 days past due). 30% of second lien mortgages have combined loan-to-value ratios over 125% and 94% of this portfolio is performing.
• For $40 billion of Chase-owned second lien mortgages, Chase also services a first lien mortgage:
• 92% of these first lien mortgages are performing.
• 28% of these first lien mortgages are by themselves underwater (loan- to-value ratio of over 100%).
• 45% of first lien mortgages have a combined loan- to-value ratio of over 100%.
• About 10% of Chase’s total serviced portfolio of first lien mortgage loans has a Chase-owned second lien.
• Our best estimate is that about 20% of Chase serviced first lien mortgages may have a second lien from another lender and about 70% do not have a second lien.
And on the issue of broad-based principal reduction programs, as well as the “subordinate” nature of second mortgages, here is what Chase had to say:

“We do think that large scale, broad–based principal reduction programs raise serious policy concerns, for both first and second lien mortgage loans, and particularly for current borrowers with an ability to repay their obligations. In Chase’s view, such programs could be potentially very harmful to consumers, investors and future mortgage market conditions – and should not be undertaken without first attempting other solutions, including more targeted modification efforts.

“Like all loans, mortgage contracts are based on a promise to repay money borrowed. Importantly, there is no provision in the mortgage contract, express or implied, that the lender will restore equity or reduce the repayment amount if the value of the collateral – be it a home, a car or a stock market investment – depreciates. If we re-write the mortgage contract retroactively to restore equity to any mortgage borrower because the value of his or her home declined, what responsible lender will take the equity risk of financing mortgages in the future? What responsible regulator would want lenders to take such risk?

“We are also concerned that broad-based principal reduction could result in reduced access to credit and higher costs for consumers if market risk to lenders and investors materially increases. Borrowers likely will be required to increase their down payments, credit criteria will be further tightened and risk premiums for mortgage credit will increase and get passed on to consumers. Less affluent borrowers would likely be harmed disproportionately.

“The benefits of a broad-based principal reduction program are to a large degree unknown and in Chase’s view, outweighed by the risks and the facts that we do know.”

And here is Chase on why many second loan portfolios are performing better than firsts, as well as the risks involved in broad-based principal reduction plans:

“Many borrowers remain current on their home equity loans because they want to honor their obligations and protect their credit. Our data show that 97% of borrowers in Chase’s $98 billion second lien portfolio are performing on their loans (less than 60 days past due). For second liens that have a cumulative loan-to-value ratio greater than 100%, 95% of borrowers are performing. Regardless of loan-to-value, as long as borrowers continue to do the right thing and fulfill their contractual obligations, second liens that are current and producing cash flow to investors have value."

“Additionally, a broad-based second-lien principal reduction plan would be forgiving past consumption by borrowers rather than housing investment. According to both internal Chase and Federal Reserve data, over 50% of borrowers used home equity loan proceeds for repayment of debt or personal consumption. No more than 15-20% used home equity proceeds to purchase a home. A broad-based program of principal reduction would be very expensive. To bring underwater borrowers “even” to a loan to value ratio of 100%, we estimate:
• It would have an industry-wide cost of $700 billion to $900 billion.
• The cost to Fannie Mae, Freddie Mac and FHA alone would be in the neighborhood of $150 billion.
• The Federal Reserve and Department of Treasury would have additional exposure through their ownership interests and risk guarantees of AIG, GMAC, and other institutions.
• Mortgage lenders would incur a significant reduction in capital now, potentially impairing their ability to extend future credit – mortgage or otherwise.
• And if house prices decline further, the costs would be even higher, representing the implicit “put” at 100% CLTV. “
And on the issue of LIEN priority, here is what Chase had to say:

“It is important not to confuse payment priority with lien priority. In almost all scenarios, second lien holders have rights equal to a first lien holder with respect to a borrower’s cash flow. The same is true with respect to other secured or unsecured debt, such as credit cards or car loans. Generally, consumers can decide how they want to manage their monthly payments. In fact, almost 64% of borrowers who are 30-59 days delinquent on a first lien serviced by Chase are current on their second lien. It is only at liquidation or property disposition that first lien investors have priority.”

The banks’ testimony, of course, was in response to a letter from Barney Frank, who has been heavily lobbied (and influenced) by the Mortgage Investors Coalition to get second mortgage holders to write down their loans. In that letter Congressman Frank incorrectly argued that because many borrowers with second mortgages have total mortgage indebtedness that exceeds the value of their homes, these second mortgages “have no real economic value,” and he urged banks “in the strongest possible terms to take immediate steps to write down these second mortgages.”

Here, by the way, are some residential mortgage servicing statistics as of the end of last year for the top four mortgage servicers:
12/31/2009Delinquency Stats: Q4/09
Company NameNumber of Loans Serviced130-day60-day90+-dayIn ForeclosureTotal Past Due
Bank of America 14,011,029 3.4%1.7%6.5%3.3%14.8%
Wells Fargo 12,168,836 2.4%1.2%3.5%1.9%9.0%
Chase 9,689,312 3.0%1.4%4.6%3.2%12.2%
CitiMortgage, Inc. 5,118,563 2.3%1.4%4.9%1.7%10.4%

1 includes first liens and subordinate liens

These “mega” servicers were, through the economies of scale in processing payments, able to charge a pretty small fee to service loans and still make what appeared to be a decent amount of money. However, as problem loans mounted it became clear that the companies were woefully understaffed to deal with these problem loans effectively, leading to extremely poor loss mitigation efforts, poorly designed foreclosure prevention/modification programs.

All of these companies finally began materially increasing the size of their staffs devoted to troubled loan management, and the administration’s HAMP effort helped prompt them to do so by providing hefty premiums to servicers. However, it took companies quite a while to get staff and board and train them, as was clearly evidence in last year’s overall servicing performance.

Wednesday, April 14, 2010

Bank of America now supports bankruptcy cramdowns

Original posted on the Huffington Post:

Bank of America, the nation's largest lender and its biggest bank by assets, now supports changing the law to give federal judges the power to modify mortgages in bankruptcy.

The bank joins Citigroup, the nation's third-largest bank by assets, in supporting a change to existing law to give homeowners more leverage. Unlike other forms of debt, bankruptcy judges presently lack the power to change mortgage terms. The banking and home mortgage industry want to keep it that way -- by not allowing judges the authority to change the terms, troubled homeowners are at the mercy of their lenders. They take what they get.

But Tuesday, before a nearly-empty Congressional hearing room, Barbara J. Desoer, president of Bank of America Home Loans, said her bank now supports leveling that playing field.

"As we've gone through the lessons that we've learned with modifications and other programs, there probably is some segment of borrowers for whom that would be an appropriate alternative," Desoer said before the House Financial Services Committee.

"So you would support that in some circumstances?" asked Rep. Brad Miller (D-N.C.) in a follow-up to his original question.

"In some circumstances, yeah," Desoer responded.

How loan servicers milk the foreclosure-prevention program

Original posted on Reuters by Felix Salmon:

If there’s one consistent villain in the tale of attempts to minimize home foreclosures, it’s the loan servicers. They lose paperwork, they foreclose on homes they have no right to foreclose on, they accept borrowers into modification programs while trying to foreclose on them at the same time, they deny borrowers a modification even when they shouldn’t, they’re impossible to get ahold of, their communication with borrowers is atrocious, they claim to be owed vastly more money than they actually are owed, and so on and so forth.

Which is why it’s so depressing that servicers are actually the biggest winners of the way that the government is doing mortgage modifications — at the expense of homeowners, no less. Shahien Nasiripour, who is not giving up in his attempt to push principal reduction as a solution to the mortgage-modification problem, finds this in the latest COP report:

“HAMP’s original emphasis on interest rate reduction, rather than principal reduction, benefits lenders and servicers at the expense of homeowners,” the report reads. “Lenders benefit from avoiding having to write down assets on their balance sheets and from special regulatory capital adequacy treatment for HAMP modifications. Mortgage servicers benefit because a reduction in monthly payments due to an interest rate reduction reduces the servicers’ income far less than an equivalent reduction in monthly payment due to a principal reduction.

“Servicers are thus far keener to reduce interest rates than principal. The structure of HAMP modifications favors lenders and servicers, but it comes at the expense of a higher redefault risk for the modifications, a risk that is borne first and foremost by the homeowner but is also felt by taxpayers funding HAMP.”

The report explains:

Servicers’ primary compensation is a percentage of the outstanding principal balance on a mortgage. Thus, principal reductions reduce servicers’ income, whereas interest reductions do not, and forbearance and term extensions actually increase servicers’ income because there is greater principal balance outstanding for a longer period of time.

It’s worth noting here that another set of losers in this set-up is the people who bought mortgage-backed securities. Banks benefit from this system because they don’t need to write down their mortgages, and because they often own servicers. But investors in mortgages mark to market: they have no choice when it comes to taking losses. And when a servicer keeps the principal amount high and the interest amount low, that just means that the owner of the mortgage pays unnecessary extra money to the loan servicer.

That’s true of private mortgage investors at mutual funds and hedge funds — but it’s also true of the biggest mortgage investors of them all, Fannie Mae and Freddie Mac. Is it too much to hope that they might start pressuring the government to force more principal reductions?

Updated HAMP FAQs issued

Click here for the general FAQs and here for the Conversion Campaign FAQs.

US Treasury Seeks Public Input on Reform of the Housing Finance System

WASHINGTON - The Obama Administration today released questions for public comment on the future of the housing finance system, including Fannie Mae and Freddie Mac, and the overall role of the federal government in housing policy. The questions have been designed to generate input from a wide variety of constituents, including market participants, industry groups, academic experts, and consumer and community organizations. The questions will also be published in a Federal Register notice requesting public comments, and information on the process for submitting comments will be included in that notice.

"A well-functioning housing finance system is critical to the long term stability of the housing market," said Treasury Secretary Tim Geithner. "Hearing from a wide variety of perspectives as we embark on this process is an important part of establishing a more stable and sound housing finance system for the American people."

"This open process will help shape the future of our housing finance system," said U.S. Housing and Urban Development (HUD) Secretary Shaun Donovan "The Obama administration is committed to engaging the public as we consider proposals for reforming the housing finance system in the context of our broader housing policy goals, and the best steps to get from where we are today to a stronger housing finance system."

The Obama Administration will seek input in two ways. First, the public will have the opportunity to submit written responses to the questions published in the Federal Register online at Second, the Administration intends to hold a series of public forums across the country on housing finance reform. Together these opportunities for input will give the public the chance to deepen the federal government's understanding of the issues and to shape the policy response going forward.

This effort is both in keeping with this Administration's commitment to openness and transparency and the President's Open Government Initiative. This initiative represents a major change in the way federal agencies interact with the public by making agency operations and data more transparent and creating new ways for citizens to have an active voice in their government.

Questions for Public Solicitation of Input:

1. How should federal housing finance objectives be prioritized in the context of the broader objectives of housing policy?

  • Commentary could address: policy for sustainable homeownership; rental policy; balancing rental and ownership; how to account for regional differences; and affordability goals.

2. What role should the federal government play in supporting a stable, well-functioning housing finance system and what risks, if any, should the federal government bear in meeting its housing finance objectives?

  • Commentary could address: level of government involvement and type of support provided; role of government agencies; role of private vs. public capital; role of any explicit government guarantees; role of direct subsidies and other fiscal support and mechanisms to convey such support; monitoring and management of risks including how to balance the retention and distribution of risk; incentives to encourage appropriate alignment of risk bearing in the private sector; mechanisms for dealing with episodes of market stress; and how to promote market discipline.

3. Should the government approach differ across different segments of the market, and if so, how?

  • Commentary could address: differentiation of approach based on mortgage size or other characteristics; rationale for integration or separation of functions related to the single-family and multi-family market; whether there should be an emphasis on supporting the production of subsidized multifamily housing; differentiation in mechanism to convey subsidies, if any.

4. How should the current organization of the housing finance system be improved?

  • Commentary could address: what aspects should be preserved, changed, eliminated or added; regulatory considerations; optimal general organizational design and market structure; capital market functions; sources of funding; mortgage origination, distribution and servicing; the role of the existing government-sponsored enterprises; and the challenges of transitioning from the current system to a desired future system.

5. How should the housing finance system support sound market practices?

  • Commentary could address underwriting standards; how best to balance risk and access; and extent to which housing finance systems that reference certain standards and mortgage products contribute to this objective.

6. What is the best way for the housing finance system to help ensure consumers are protected from unfair, abusive or deceptive practices?

  • Commentary could address: level of consumer protections and limitation; supervising agencies; specific restrictions; and role of consumer education
7. Do housing finance systems in other countries offer insights that can help inform US reform choices?

75% In HAMP Still Owe More Than Their Homes Are Worth

Original posted on the Huffington Post by Shahien Nasiripour:

More than three-quarters of homeowners who have had their monthly mortgage payments reduced under the Obama administration's primary foreclosure-prevention program owe more on their mortgage than their house is worth, according to a new report by government auditors.

Download the report here:

Over half of the roughly 170,000 distressed borrowers who have gone through the program are seriously underwater, meaning they have negative equity of at least 25 percent, the report shows, citing data through February. In other words, for every $1.00 their home is worth, they owe at least $1.25.

The average homeowner that's received a five-year modified mortgage under the administration's plan had negative equity of about 35 percent prior to the program, according to a Wednesday report by the Congressional Oversight Panel, a federal bailout watchdog. After modification, that burden actually increased for the average homeowner, who is now underwater by more than 43 percent, according to the bailout watchdog's report. Research shows that the more under water homeowners are, the more likely they are to fall behind on payments, default, or walk away.

But that data understates the problem, the report said. Those figures are for first-lien home mortgages only. Debt owed on junior liens, like second liens and home equity lines, isn't part of that calculation. The Obama administration estimated last April that "up to 50 percent of at-risk mortgages currently have second liens."

"If junior liens were to be included, the percentage would be significantly higher," the report notes. "The continuing deep level of negative equity for many HAMP permanent modification recipients makes the modifications' sustainability questionable; even with more affordable payments, deeply underwater borrowers may remain tempted to strategically default or may be compelled to because core life events, such as death, divorce, disability, marriage, child birth, job loss, or job opportunities necessitate a move."

HAMP refers to the administration's Home Affordable Modification Program, which seeks to lower troubled borrowers' monthly payments primarily through interest rate cuts. Strategic defaults occur when homeowners are able to make the payments, yet willingly choose not to and instead walk away from the mortgage. Recent research estimates strategic defaults are on the rise.

"Negative equity is the single most important driver of defaults," Laurie S. Goodman, senior managing director at Amherst Securities and a top mortgage bond analyst, said in February during a panel discussion at the American Securitization Forum's annual conference.

After months of sustained criticism -- including by the bailout watchdog and by Democrats in Congress -- the Treasury Department finally outlined a plan late last month that calls for principal reductions, which is the only way to address the problem posed by underwater homeowners. (Absent a rise in property values, the only way to give borrowers equity is to reduce the overall amount owed). But that plan doesn't kick in until the fall. Meanwhile, the foreclosure crisis does not show any signs of abating, the panel's chair, Harvard Law professor Elizabeth Warren, said during a Tuesday evening conference call with reporters.

Her panel's report notes that "principal forbearance was rare and principal forgiveness rarer still." Deferred principal accounted for about 28 percent of the mortgage modifications, while "only" six percent of them involved principal cuts. An additional six percent incorporate principal cuts and deferred principal.

"[T]he Panel has concerns as to whether the modifications make homeownership sufficiently affordable to avoid foreclosure, given borrowers' broader circumstances. As noted previously, the program...without considering the existence of junior liens, leaves borrowers still paying a significant percentage of their income for housing," the report notes. "This is particularly problematic because most HAMP modification recipients are underwater.

"This points to the problem with the lack of principal forgiveness in HAMP up to this point. Lack of principal forgiveness means that homeowners will continue to be underwater. It also means that more of each payment will be going to interest, rather than paying down principal, and it may mean that some borrowers have to pay for a longer period of time. All of these factors increase the re-default risk on modified mortgages, and to the extent that a permanent modification is not sustainable, it merely delays a foreclosure and the stabilization of the housing market."

Less than a quarter of eligible homeowners have converted from temporary trial modification plans into five-year plans, the report notes. Treasury originally forecast up to a 75 percent conversion rate. And while it's too early to tell the rate at which these modified loans will default, Treasury estimates a 40 percent re-default rate, the report notes, citing testimony from Treasury officials. The administration originally promised to help three to four million homeowners avoid foreclosure.

The panel estimates that in the end as few as 276,000 foreclosures will be averted. Last year lenders foreclosed on more than 2.8 million homes, according to real estate research firm RealtyTrac. The firm estimates three million homes will get foreclosure notices this year; more than one million of them will be repossessed by lenders.

"For every borrower who avoided foreclosure through HAMP last year, another 10 families lost their homes. It now seems clear that Treasury's programs, even when they are fully operational, will not reach the overwhelming majority of homeowners in trouble," the panel's report notes.

In an e-mail to reporters, Treasury spokeswoman Meg Reilly said that the department's latest monthly report on HAMP will show that more than 230,000 homeowners have transitioned into five-year modification plans. Additional 108,000 have been approved and are awaiting borrower acceptance. The report is expected to be released Wednesday, Reilly wrote.

One issue that's been pondered by investors and housing analysts, but hasn't been fully addressed by policymakers is the supposed backdoor-bailout nature of the HAMP program. While it's supposed to help homeowners, many have criticized its design as benefiting the mortgage servicers instead. The four biggest mortgage servicers are the four biggest banks -- Bank of America, JPMorgan Chase, Citigroup and Wells Fargo -- and taxpayers pay them for every successful modification. Also, because those modifications rely primarily on interest rate cuts, rather than principal writedowns, they end up increasing troubled homeowners' amount of overall debt, according to the panel's report.

"HAMP's original emphasis on interest rate reduction, rather than principal reduction, benefits lenders and servicers at the expense of homeowners," the report reads. "Lenders benefit from avoiding having to write down assets on their balance sheets and from special regulatory capital adequacy treatment for HAMP modifications. Mortgage servicers benefit because a reduction in monthly payments due to an interest rate reduction reduces the servicers' income far less than an equivalent reduction in monthly payment due to a principal reduction.

"Servicers are thus far keener to reduce interest rates than principal. The structure of HAMP modifications favors lenders and servicers, but it comes at the expense of a higher redefault risk for the modifications, a risk that is borne first and foremost by the homeowner but is also felt by taxpayers funding HAMP."

Treasury allocated $50 billion to help struggling homeowners, and an additional $25 billion for government-backed housing giants Fannie Mae and Freddie Mac. The nation's four biggest banks by assets received a combined $140 billion alone in initial taxpayer bailout money.

"Foreclosure prevention is not just the right thing do for suffering Americans, but it is the linchpin around which all other efforts to achieve financial stability revolve," said Richard H. Neiman, New York's top bank regulator and a member of the Congressional Oversight Panel.

Over the past two months alone more than 450,000 homes have received a foreclosure notice. Slightly more than 100,000 homeowners have been helped by Treasury's anti-foreclosure efforts over the same time period.

"In the final reckoning, the goal itself seems small in comparison to the magnitude of the problem," the panel said in its report.

*Source: Congressional Oversight Panel

Musings on mortgage modification-obfuscation

Here’s something to ponder ahead of the US bank earning season.

Mortgage modifications — that is, changes to the terms of home loans — have been running rampant just as banks’ non-performing loans and net-charge-offs appear to be peaking. Coincidence?

Banks like JP Morgan, Citigroup and Wells Fargo are very large mortgage servicers and underwriters, which means they’re at the forefront of these modification efforts, including the US Treasury’s Hamp programme. Many of the loans they underwrite have been sold on to securitisations, or to the two Government-Sponsored Enterprises, Fannie Mae and Freddie Mac.

Mortgage modifications aren’t really a problem as long as they’re transparent; they clearly show up in the servicers’ and investors’ books. The problem, however, is that that’s not always the case.

From mortgage analyst Laurie Goodman, and team, at Amherst Securities:

[Non-Hamp] Modification payment records are often incomplete. It is not unusual for the servicer or trustee to report the new interest rate, but not specify how long the new rate will last. When this is done, Intex [the biggest provider of securitisation modeling software in the US] assumes it is only good until the next reset unless the user specifies otherwise. In reality, many ARMs are converted to fixed rates, with the reduced rate good for 5 years or longer.

There are many situations in which a modification is suspected—the rate changes, there is a capitalization event, principal balance changes etc, but no modification is reported. In this case, Intex labels the loan a “suspected modification” but does not use this information. Users can go in manually loan by loan and change the assumptions.

Besides the transparency problem, not reporting that a loan was modified has obvious implications for reported cash flows from the bond. According to Amherst:

Consider a simple, one loan example. Assume the loan has been modified to a 5% fixed rate. Meanwhile Intex is assuming that the ARM is rolling to LIBOR +600; forward LIBOR is 4.3% 3 years out. Thus, the cash flows are being calculated off a note rate of 10.3%, versus an actual coupon rate of 5%. In a deal in which credit enhancement is provided, in part, by excess spread and overcollateralization, the model would assume that after paying the coupon, the remainder of the cash flows are available to absorb losses. Hence, without consideration of the modification, this loan would be making a large contribution to the absorption of losses; with the modification (using forward rates for the analysis), the contribution would be very low.

Placing non-Hamp mortgage modifications to one side, there still seems to be a degree of uncertainty as to how to treat those forborne (modified) cash flows. The US Treasury says that for Hamp modifications, at least, altered loans within securitisations should be treated as realised losses.

That is, the amount of principal forbearance should be treated as a loss.

But there still appears to be some interpretation taking place.

From Amherst:

In fact, at least one large servicer is still not treating forbearance as a realized loss. This has implications for cash flow allocation within the deal. If the cash flows are treated as a realized loss, the junior tranches will be written down more quickly.