Wednesday, October 27, 2010

Addressing the Impact of the Foreclosure Crisis (FRB Press release)

A new publication, Addressing the Impact of the Foreclosure Crisis, details the innovative, community-based foreclosure prevention and neighborhood stabilization activities sponsored by the Federal Reserve as part of its Mortgage Outreach and Research Efforts (MORE) initiative.

The presidents of the 12 Federal Reserve Banks worked collaboratively with the Board of Governors to launch MORE in 2009. The initiative seeks to employ the Federal Reserve System's substantial expertise in mortgage markets in ways that are useful to policymakers, community organizations, financial institutions, and the public.

Highlights of the MORE group's work include bringing together housing advocates, lenders, academics, and key government officials to discuss foreclosure issues and develop solutions; partnering with the U.S. Departments of Labor and Treasury and the HOPE NOW Unemployment Task Force to assist unemployed homeowners at risk of losing their homes to foreclosure; developing online Foreclosure Resource Centers at each Reserve Bank and the Board of Governors; and sponsoring and distributing research on the foreclosure crisis, including studies on financial literacy and foreclosure prevention.

Additional information about the System's MORE activities is available in the online version of Addressing the Impact of the Foreclosure Crisis. Leaving the Board

Wednesday, October 13, 2010

A Review of Statistical Problems in the Measurement of Mortgage Market Discrimination and Credit Risk

By Anthony M. Yezer

Abstract: This paper examines the fundamental assumptions within the statistical analysis of discrimination and credit risk and the impact these flawed models had on the mortgage market ranging from false findings of discrimination to incorrectly detecting the future rise of default rates. Serving as a valuable resource to identify the flaws that continue to be overlooked in today's analyses, the paper promotes the improvement of the measurement of mortgage market discrimination and credit risk for a more accurate assessment.

Download here: papers.ssrn.com/sol3/papers.cfm?abstract_id=1684216

Collateral Risk in Residential Mortgage Defaults

By Tyler T. Yang, Che-Chun Lin and Man Cho

Forthcoming in the Journal of Real Estate Finance and Economics

Abstract: This paper presents a systematic framework for capturing the collateral-driven mortgage default risk. A forward-looking home price distribution model is developed that explicitly incorporates different sources of volatility in the market value of collateral houses. A consistent and computationally-efficient top-down approach of home price simulation is also introduced. We show that with the proper inclusion of all relevant sources of volatilities, the top-down approach provides close approximation to the results generated by a theoretically sound but computationally demanding bottom-up simulation approach. Using a numerical simulation, we demonstrate that a geographically-diversified mortgage pool entails a substantially lower level of systematic collateral driven mortgage default risk compared to a spatially-concentrated pool. However, the expected default risk is shown to remain unaffected, indicating that the benefit from geographic diversification is only realized through lower risk-based capital requirements, not in lower mortgage insurance premiums. Based on the US state level house price indices, the systematic risk of a state-concentrated mortgage pool is estimated to be about four times higher than that of a nationally-diversified mortgage pool. Our results also show that, among the different volatility components, omitting the cross-sectional dispersion of individual home prices would produce the largest bias in assessing home-price-based mortgage default risk.

For more see: papers.ssrn.com/sol3/papers.cfm?abstract_id=1684611

Monday, October 11, 2010

Primers on "Foreclosuregate" (Update 1)

There are a number of great primers on the current mortgage mess. Here are some of them, starting with Rortybomb's multiparter that gets down into the real nitty gritties:
There's also John Carny's primer at CNBC.com:
There's also some good stuff on the Credit Slips blog:
And finally Felix Salmon's take on SIFMA's take:
SIFMA's Unhelpful Take on the Foreclosure Mess

Moratorium for What? (Alan White on Credit Slips)

Originally posted on Credit Slips:

There is little to be accomplished by halting foreclosures and sales in process without some plan resolve the 5 million seriously delinquent mortgages other than by foreclosure sale. While something can be said for delays that stretch out the process of dumping more unsold homes into a saturated existing homes inventory, we are only about one-third of the way through the crisis at present (having foreclosed or forced the sale about two to three million homes since 2007). If a moratorium is to do some good, it has to result in diverting some foreclosures to better resolutions.


The two most attractive alternatives, refinancing and modification, seem to have failed already. The Administration’s HARP and HAMP programs continue to post disappointing numbers. In light of HAMP’s failure, I am asked frequently, what should we replace it with? Unfortunately there really are no other, better solutions. We can either dump another 12 to 24 months’ supply of homes on the resale market, or modify enough mortgages to make a difference. Treasury must either enforce its HAMP contracts with the banks, or fire the current servicers and transfer distressed mortgages to servicers who can do the job properly.

Modifications have not succeeded in bringing down the 5 million distressed mortgages number in part because of the massive failure of the big banks to do their jobs. In the present context, their job is to rework existing mortgages so homeowners can repay them. Modified mortgages that reduce payments are now succeeding at a rate of 65% to 75%, compared with 40% for 2007 and 2008 modifications, which typically increased or deferred payments. We know from Treasury’s monthly reports that a homeowner’s chances of getting a temporary modification, converting to a permanent modification, and getting timely action at those two stages depends hugely on which bank or servicer handles their mortgage. The variances in HAMP performance are appalling, and are clear proof that far more could be done than is being done to divert distressed mortgages out of foreclosure.

The case for modifications gets stronger every month, not only because redefault rates are declining, but because the two other key variables in the economics of foreclosure vs. modification are steadily worsening. The rate at which unmodified defaulted mortgages fix themselves, the self-cure rate, has declined from 5% or more per month to less than 1% per month (foreclosure roll rate Charts tab). Loss severities, the percentage of mortgage balances not recovered at foreclosure sales, continue to rise, and are now in the 60% range. What this all means is that even a mortgage modification that was uneconomical a year ago might be net present value positive today.

Proposals to refinance all existing Fannie and Freddie mortgages to take advantage of low interest rates and reduce payment burdens are fundamentally equivalent to across-the-board modification of those mortgages. From the homeowner’s perspective, it makes no difference whether her existing mortgage is converted to a 4% fixed rate and stretched out to 30 more years, or it is refinanced with a new, 4% fixed rate 30-year mortgage. For the economy, the refinancing program produces a few more transaction costs that will create a few jobs for title clerks and document processors, but that hardly justifies the additional debt that refinancing necessarily creates. The point is to reduce America’s home debt, not to keep postponing it.