By Dennis Norman, on June 21st, 2010  Dennis Norman UPDATE June 21, 2010- I said I would update this post after the proposed rules were published on the Federal Register with info on how to submit a comment -If you would like to comment, see the comment instructions in the Federal Register (I highlighted them) by clicking here -end of update.
June 4, 2010
Are they really going to repeat the same mistakes that helped cause this housing recession?
I say this because of a release I received from the Federal Housing Finance Agency (FHFA) last week announcing that the FHFA “has sent to the Federal Register a proposed rule implementing provisions of the Housing and Economic Recovery Act of 2008 (HERA) that establish a duty for Fannie Mae and Freddie Mac (the Enterprises) to serve very low-, low- and moderate-income families in three specified underserved markets — manufactured housing, affordable housing preservation, and rural markets.” While the statement is a little ambiguous on the surface it sounds like a nice thought, “serve the underserved.”
However, as I read on I couldn’t believe my eyes as I read other aspects of the proposed rule. The “Enterprises” (Fannie and Freddie) would be required to take actions to “improve the distribution of investment capital available for mortgage financing for underserved markets” and are expected to continue their support for affordable housing (again, something that sounds great, just depends how you plan to go about supporting “affordable housing”). The rule would establish a method to evaluate the Enterprises performance in these underserved markets for 2010 and subsequent years. Of the four criteria the enterprises are to be evaluated under, one really got my attention; “the development of loan products, more flexible underwriting guidelines, and other innovative approaches to providing financing“. WHAT?? More FLEXIBLE underwriting, INNOVATIVE approaches to provide financing? Isn’t this the stuff that got Fannie Mae and Freddie Mac (not to mention thousands of homeowners) in trouble to start with? Now, I don’t claim to be an economist or even that smart for that matter, but this sure appears to me to be the Federal Government putting pressure on Fannie Mae and Freddie Mac to make loans they shouldn’t be making….again.
I’m not saying that the pressure on Fannie Mae and Freddie Mac to make loans to borrowers that weren’t really qualified is the only cause of the housing bust as there were many contributors to it, but this was certainly one of them and definitely a large part of what led to their financial demise and need for a tax-payer bailout.
A book I’ve read that I think has the most complete and thorough analysis of what caused the housing market to have it’s longest positive run only to be followed by a collapse is Thomas Sowells’ “The Housing Boom and Bust“. In his book Mr. Sowell says this about the housing bust and the demise of Fannie Mae and Freddie Mac; “in reality, government agencies not only approved the more lax standards for mortgage loan applicants, government officials were in fact the driving force behind the loosening of mortgage loan requirements.” So is this deja vu or what?
Mr. Sowell goes on to say “the development of lax lending standards, both by banks and by Fannie Mae and Freddie Mac standing behind the banks, came not from a lack of government regulation and oversight, but precisely as a result of government regulation and oversight, directed toward the politically popular goal of more ‘home ownership’ through “affordable housing,” especially for low-income home buyers. These lax lending standards were the foundation for a house of cards that was ready to collapse with a relatively small nudge.”
Correct me if I’m wrong, but it appears to me the government has opened the deck of cards and begun construction again.
There will be a 45 day period for public comments once the proposed rule is published in the Federal Register. I just tried to access the website site and it is down so I don’t know if it’s published yet but will check again and update this post with info on how to comment on the rule if you like.
By Robert Fishel, on June 16th, 2010  Fannie Mae and Freddie Mac notified the New York Stock Exchange (NYSE) of its intent to delist its common and preferred stock. The Federal Housing Finance Agency (FHFA), the conservator for Fannie and Freddie, has directed the companies to delist their common stock and their preferred stock from the NYSE. “FHFA’s determination to direct each company to delist does not constitute any reflection on either Enterprise’s current performance or future direction, nor does delisting imply any other findings or determination on the part of FHFA as regulator or conservator,” FHFA Acting Director Edward J. DeMarco said in a press release.
The mortgage market has benefited from the “flight to quality” mentality since the news of the uncertainty of debt defaults in Europe over the last few weeks. As the perception of these uncertainties diminish, mortgage rates should hold steady if not rise.
St. Louis Mortgage Interest Rates – June 16, 2010 *
- 30-year fixed-rate mortgage 4.75% no points
- 15-year fixed-rate mortgage 4.25% no points
- 5/1 adjustable rate mortgage 3.85% no points
- FHA/VA 30-year fixed rate mortgage 4.75%
- Jumbo 5/1 ARM 4.125% no points
- Jumbo 15 year fixed rate mortgage 4.625%
For more information or if you have questions on mortgage rates in St. Louis you may contact me by phone at my direct line, (314) 372-4319, email at rfishel@paramountmortgage.com or you can visit our company website at http://www.paramountmortgage.com.
*Note- The above rates are based upon a typical sale price of $187,500 with a 20% percent down payment leaving a loan amount of $150,000 to a borrower with a 720 credit score for a loan with no discount points charged. Rates and terms will vary depending upon loan amount, home value, credit and income of borrower.
This information is provided by this author and this site for informative purposes only and is not warranted or guarteed in any way.
By Dennis Norman, on June 14th, 2010  Dennis Norman
Will the Bears or Bulls prevail in 2010?
As the real estate market is beginning to show signs that we are “bottoming out” and that the down-slide is leveling off the discussion has become what the rest of 2010 holds in store. Some say we are entering a Bull market and expect prices to increase from the depressed levels they have reached citing the greatly increased affordability of homes and record low interest rates; others say we are entering a Bear market and that over-supply in the market, largely a result of record foreclosures, will continue to beat prices down.
Here’s what the “Bulls” say:
- Home prices are at levels significantly lower than their peak levels during the “boom” and affordability is at the lowest level in years.
- Interest rates are at record lows and, while obtaining financing is currently somewhat of a challenge, lenders are expected to ease up on their lending policies and make financing more readily available. The government is already pushing a rule change for Fannie Mae and Freddie Mac to have them loosen their underwriting guidelines.
- Richard DeKaser, Contributing Economist to The Kiplinger Letter, in a recent article cited three reasons why he felt supported being optimistic, or “Bullish”, on the housing market:
- Affordability – it now takes 18 percent of the typical household income to afford a home, compared with a long-term average of 26 percent.
- Consumer confidence – says that consumers are beginning to take on expensive, long-term commitments.
- Credit conditions will ease up – The Fed Reserve’s April survey of senior loan officers show banks were reporting “essentially no change” in their underwriting standards on mortgages over the past three months. (so I guess since it didn’t get worse that is good)
Here’s what the “Bears” say:
- The recent upward spike in home sales is, for the most part, nothing more than the temporary and artificial market that was created by the government’s home-buyer tax credit program.
- While recent reports have shown that the rate of increase of mortgage delinquencies and foreclosures has decreased over the past couple of months, we are still at record levels of both which will continue to flood the market with foreclosures and REO’s.
- Even during the recent uptick in home sales brought on by the expiring tax credits, home prices still dropped in many markets. This shows there is still some uncertainty about home values in the market place, which, coupled with the downward price pressure caused by foreclosures, will continue to put heavy negative pressure on home prices.
- The rate of unemployment is still high and our economy still has many challenges: off the charts spending and debt by the Federal govt, States and Cities struggling to balance budgets not to mention the international issues brought on by lagging economies in Europe and China, Greece’s financial issues and so on.
So what it is, a Bull or a Bear coming our way?
Remember, I’m in the real estate business, I WANT it to be a bull. But….here’s what I see coming…
 Sorry!
By Dennis Norman, on May 28th, 2010  Dennis Norman Talk about the housing market not being able to catch a break….it seems every time something positive happens to give us a little encouragement, something else pops up to give the market another black eye. Here we are less than a month after the home-buyer tax credit deadline has passed and we are seeing reports of home prices dropping again as well as the volume of sales, and now, the National Flood Insurance Program (NFIP) is set to expire on May 31st. Of course Congress could extend the program prior to the expiration, but the word I hear from the National Association of REALTORS is that is not going to happen.
So what happens after May 31st?
The NFIP will no longer have the authority to issue new flood insurance policies nor renew existing policies until Congress reauthorizes the program. This will not affect existing policies however, nor policies purchased prior to the May 31st expiration. Obviously for sellers with homes in flood plains, this will not help them sell their homes, and for those homeowners that have existing flood insurance policies expiring (particularly with hurricane season approaching) it’s probably going to put them a little on edge.
There is some help and alternatives…
FEMA will allow buyers to assume existing flood insurance policies on homes they are buying, so if you are purchasing a home in a flood plain and the current homeowner has flood insurance you can assume it….now, if the expiration date of the policy is not far off that may make a buyer hesitate for fear that their insurance could lapse before Congress takes care of things.
An alternative is to purchase private flood insurance from a company such as Lloyd’s of London, Chubb or AIG….get ready for premium shock though as flood, when not subsidized through a government program like NFIP, is expensive.
Hopefully when Congress gets back to work after the Memorial Day break they will get the program extended before too much time lapses.
For more information you can check out the following web sites:
FEMA
FHA
Fannie Mae
Freddie Mac
VA
By Dennis Norman, on May 25th, 2010 Dennis Norman Today the S&P/Case-Shiller Index report for the first quarter of 2010 was released showing that the U.S. National Home Price Index fell 3.2 percent in the first quarter of 2010, but remains above it’s level from a year-earlier.
In March, 13 of the 20 MSA’s covered by the Case-Shiller report, as well as both the 10-city and 20-city composites, were down for the month however both the composites as well as 10 of the 20 MSA’s showed year-over-year gains. The report cites the end of the tax incentives and the increasing foreclosure rate as reasons the housing market is seeing some “renewed weakness“.
Other highlights from the report –
- The S&P/Case-Shiller U.S. National Home Price Index for first quarter 2010 is up 2.0 percent from the first quarter of 2009.
- In March the 10-City Composite was up 3.1 percent from the first quarter of 2009, and the 20-City Composite was up 2.3 percent for the same period.
- These two indices are reported monthly and have seen improvements in their annual rates of return every month for the past year.
“The housing market may be in better shape than this time last year; but, when you look at recent trends there are signs of some renewed weakening in home prices,” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s. “In the past several months we have seen some relatively weak reports across many of the markets we cover. Thirteen MSAs and the two Composites saw their prices drop in March over February. Boston was flat. The National Composite fell by 3.2% compared to the previous quarter and the two Composites are down for the sixth consecutive month.
“While year-over-year results for the National Composite, 18 of the 20 MSAs and the two Composites improved, the most recent monthly data are not as encouraging. It is especially disappointing that the improvement we saw in sales and starts in March did not find its way to home prices. Now that the tax incentive ended on April 30th, we don’t expect to see a boost in relative demand.”
 FHFA Shows Lower Home Prices in First Quarter Also:
The Federal Housing Finance Agency (FHFA) released their report on first quarter home prices today as well. The FHFA report data and methodology differs from NAR and Case-Shiller, in that the FHFA home price index is based only on the sale prices of homes that are financed with a conforming loan (by Fannie Mae and Freddie Mac’s standards).
The FHFA report for the first quarter of 2010 shows home prices fell 1.9 percent from the quarter before, so not terribly far off from the 3.2 percent decline the Case-Shiller report showed. In contrast to the Case-Shiller report however, the FHFA report showed March’s home prices rose 0.3 percent from February. Also, the FHFA report shows home prices for this quarter fell 3.1 percent from a year ago.
St. Louis Home Prices Doing Better:
For the St. Louis metro and surrounding areas, the median home price for the quarter ended April 30, 2010 was $130,000 an increase of 1.6 percent from the prior quarter’s median price of $128,000 and an increase of 8.3 percent from a year ago when the median home price was $120,000. In case you are wondering, the median home price for the St. Louis area has dropped 3.0 percent in the past six years.
 Median Home Prices in St. Louis Metro and Surrounding Areas for Past Six Years - Source: Mid America Regional Information Systems (MARIS)
 Comparison of St. Louis Median Home Prices to Prior Periods - Source: Mid America Regional Information Systems (MARIS)
Where are home prices headed?
As we are frequently reminded, “all real estate is local”, so there will be markets that do better than others, but in general I think we are in store for soft home prices for a while. I think after the “sugar-rush” of the tax credit incentive wears off as the deals close over the next couple of months, and the next wave of foreclosures hit the market we will see prices regress again in many markets, enough so to bring overall home prices in the US down modestly in the coming months.
By Dennis Norman, on April 15th, 2010
Dennis Norman As readers know, I have been somewhat critical of the Home Affordable Modification Program (HAMP) which is part of the Obama administrations’ Making Home Affordable Program for a few reasons, one is I believe it is just a temporary “band-aid” and not a cure for the problem and two, it does not appear the program is going to help near as many people as the Obama administration initially said it would. Yesterday a report was issued that shows there is progress being made and, through the end of March, a total of 230,000 homeowners have received a permanent loan modification, which is good, but it is not enough to put the program on track to help 3-4 million people by 2012 as originally promised (although as I addressed in a recent post, the administration has changed their position on what was promised).
Highlights from the report:
- HAMP Trials offered to borrowers since inception of program – 1,436,802
- All HAMP Trials Started Since Program Inception – 1,166,925
- 57,000 new trial modifications were added in March, down from 72,000 in February.
- Permanent modfications have been received – 230,801
- Over 60,000 trial modifications converted to permanent modifications in March, and increase from almost 53,000 in February.
- Current Active Modifications (Trial and Permanent) – 1,008,873
- Active Trial Modifications – 780,951
- Active Permanent Modifications – 227,922
- Pending Permanent Modifications – 108,212
- Trial Modifications Canceled – 155,173
- Permanent Modifications Canceled – 2.879
By Dennis Norman, on April 1st, 2010 Dennis Norman The Treasury Department Plans to Spend $50 Billion on HAMP…Is it Going to “help keep “3 to 4 million Americans in their homes” as Promised Though?
Last week Herbert M. Allison, Assistant Secretary for Financial Stability for the U.S. Department of the Treasury, testified before the House Committee on Oversight and Government Reform as to “Is the Home Affordable Modification Program Preserving Homeownership?”.
Early in his testimony Allison states that, at the time the HAMP program was announced, President Obama said the program would “enable as many as 3 to 4 million homeowners to modify the terms of the mortgages”. Allison goes on to say that now that we are one year into the program that “HAMP is on track to have actual trial modifications for up to 3 to 4 million homeowners by 2012.” Hmm…am I missing something, or did the President’s message get watered down here? When HAMP was announced and there was all the talk by the administration of modifying loans for 3 to 4 million Americans to “keep them in their homes” I assumed that they meant for Americans to keep their homes longer than an extra month or two which would be the hoped for outcome of borrower’s receiving a permanent loan modification. Unfortunately now it looks like, based upon Allison’s testimony, the administration is changing their postion now and are now saying the 3-4 Million people they referred to includes not only the people that actually receive a permanent loan modification (so far only 12 percent of the people that were offered a trial modification) but all of the people that received a trial modification (lower payment for 3 months) and even those people that were offered a trial modification but didn’t take it. It appears to me the benefit of the HAMP program has been greatly overstated; the benefit of HAMP appears to have over-promised and under-delivered.
Later, in his testimony, Allison says that HAMP was “designed to keep eligible homeowners in their homes with long term affordable mortgages” which seems like a contradiction to me. Based upon his earlier statement it seems a large part of the plan is just to offer a borrower a temporary short-term modification and call it a success.
Here are the facts and figures from the testimony:
- Since HAMP began 1.4 million people have been offered a loan modification for a trial period of 3 months
- As of the end of February, 1.1 million people that were offered a trial period (78.5 percent), have entered the trial modification.
- As of the end of February, 822,000 (58.7 percent of those offered a trial and 74.7 percent of the people that entered into the trial phase) people had been in the trial phase of the modification process for more than three months and could be eligible for conversion to a permanent loan modification subject to “submitting all necessary documents, remaining current on payments and meeting other technical requirements”. (The number of people of the 822,000 that completed the trial but failed to receive a permanent modification due to one of more of the aforementioend conditions was not given but would be an interesting stat to see).
- As of the end of February 170,000 people have received a permanent loan modification (12.1 percent of the total number of people offered a trial, 15.5 percent of the total people that entered a trial and 20.7 percent of the total people that completed the trial)
- As of the end of February 92,000 more borrowers have been approved for a permanent modification but have not yet received it. Assuming those borrowers can comply with the conditions mentioned above that will bring the total permanent loan modifications up to 262,000 or 18.7 percent of the total people offered a trial and 32 percent of those people that completed the trial period.
- Allison stated that, even those borrowers receiving a permanent loan modification, “a significant number will redefault.”
- Allison states “In fact, we designed our program specifically to protect the taxpayer.” Hey, I thought the purpose was to keep 3 – 4 Million Americans in their homes??
- For those borrowers that have received a permanent loan modification, the median payment reduction has been around $500 per month.
Is this really helping the borrower?
While I don’t want to take away from the significance of someone being able to keep their home, from what I see I question whether or not HAMP is really doing that. The numbers appear to be more window dressing than anything. To count the offer of a 3 month reduction, or even the trial period itself, as a success I think is wrong..in fact, for the homeowner in that situation it may be down-right cruel and just dragging out their agony. I have heard stories of many borrowers that got their hopes up only to end up back in the same spot a couple of months down the road.
There are some stats that, if I can figure out how to get them, would be interesting such as; the percentage of people that complete the trial period and then fail to obtain a permanent modification for not meeting the conditions discussed above and, as time moves on, the percentage of people that, 6 months or so after receiving a modification, are still able to keep up with their payments.
What is the cost of HAMP?
According to the testimony,the Treasury has set aside $50 Billion in TARP funds for HAMP and they plan on “using the full $50 Billion budget.”
Now lets do a little cost/benefit analyis. For the sake of my analysis we will need to make some assumptions. Below are my assumptions:
- Let’s give the program the benefit of the doubt and assume that by the time the program ends 4,000,000 borrowers have been offered a trial loan modification.
- Even though currently only 12.1 percent of the people offered a trial have received a permanent modification, I’m going to use 18.7 percent for the projection of the number of people that receive a permanent loan modification as that is what the number would be if all the people currently approved actually get a modification (I think I’m being generous). Based upon this, by the end of the program 748,000 borrowers will have received a permanent loan modification.
Based upon my assumptions above, if this program ends up costing $50 Billion as indicated and 748,000 borrowers receive a permanent modification, then it works out to costing $66,844 per borrower for the program. The big question is, does this actually “fix” the problem for these folks and are they truly able to stay in their homes or will it do nothing more than delay the inevitable and give these borrowers a few extra months before they find themselves facing the loss of their home again?
Ask me in a couple of years and I’ll have the answer.
By Dennis Norman, on February 25th, 2010  Dennis Norman According to a report issued this morning by the the Federal Housing Finance Agency (FHFA) St. Louis area home prices increased by 1.32 percent in 2009. Granted that’s not much but, hey, after what we’ve seen the last couple of years in the housing market I think this is very good news.
This information comes for the FHFA’s purchase-only price index which is based upon repeat sales of the same single-family properties therefore making it a much more accurate barometer of the market than just looking at median prices of homes sold as many reports do. In addition, since FHFA obtains the sales data from mortgage records of Fannie Mae and Freddie Mac, which form the nation’s largest database of conventional mortgage transactions (more than 5 million repeat transactions) which represents probably the most comprehensive sampling of data available.
One thing to remember though, is Fannie Mae loan limits are $417,000, so the data compiled does not reflect what is happening in the upper end of the market with loans in excess of $417,000 however here in St. Louis that makes up a very small part of the market . In 2009 there were 23,565 homes and condos sold in the St. Louis metro area and only 808 of them (3.4 percent) sold for $500,000 or above.
Other highlights from the report:
- St. Louis ranked 8th of the 25 largest metro areas in terms of price appreciation for 1 year. Washington-Arlington-Alexandria topped the list at 10.55 percent. Miami-Miami Beach-Kendall, FL was at the bottom of the list iwth -12.86 percent
- For the 4th quarter of 2009 St. Louis home prices increased 0.83 percent.
- St. Louis home prices have appreciated 3.91 percent in the past 5 years, coming in 7th of the 25 largest metros. Houston-Sugar Land-Baytown, TX came in 1st at 21.63 percent and Riverside-San Bernardino-Ontario, CA came in last at -37.18 percent.
- Since 1991 St. Louis home prices have increased 99.17 percent, coming in at 14th place of the 25 largest metros. Denver-Aurora-Broomfield, CO had the highest appreciation in that period at 177.80 percent and Warren-Troy-Farmington Hills, MI came in last at 30.99 percent.
So there you go….some good news from me for a change. :)
By Dennis Norman, on February 4th, 2010 Dennis Norman Bank of America announced that it is the first mortgage servicer to sign an agreement formally committing to participation in the pending second-lien component of the federal government’s Home Affordable Modification Program (HAMP).
 Bank of America has systems in place to begin implementing the Second Lien Modification Program (2MP) with the release of final program policies and guidelines by federal regulatory agencies, which is expected soon. 2MP will require modifications that reduce the monthly payments on qualifying home equity loans and lines of credit under certain conditions, including completion of a HAMP modification on the first mortgage on the property.
“For many homeowners facing severe financial difficulty, decreasing the payment on the first mortgage without a reduction in the payment on the second lien may not produce an affordable combined mortgage payment,” said Barbara Desoer, president of Bank of America Home Loans.
This is a pretty significant move since Bank of America is the largest mortgage servicer in the country with nearly 14 million loans, approximately 3 million of which are second liens. The bank says they will modify eligible second liens regardless of whether the first lien is serviced by them or another servicer.
By Dennis Norman, on January 28th, 2010 Dennis Norman This week the Treasury Department issed a report which included stats on the Home Affordable Modification Program (HAMP) which is part of the Obama administrations’ Making Home Affordable Program and “is a loan modification program designed to reduce delinquent and at-risk borrowers’ monthly mortgage payments”. The HAMP program got underway around March of this year and is set to expire December 31, 2012. According to the government website HAMP is intended to help keep “3 to 4 million Americans in their homes by preventing avoidable foreclosures.”
Permanent modifications triple in December from November:
According to the report there was great progress made in December with getting borrowers moved from the trial loan modification period to a permanent modification. Last month when I wrote about the November report there were just a little over 30,000 permanent loan modifications done since the program started, however the December report shows that over 112,000 permanent loan modifications have been done or offered to borrowers.
Here are highlights from the report:
- Number of Trial Period Plan Offers Extended to Borrowers (Cumulative) – 1,164,507
- All HAMP Trials Started Since Program Inception – 902,620
- All Active Modifications (Trial and Permanent) – 853,696
- Active Trial Modifications – 787,231
- Permanent Modifications – 66,465
- Permanent Modifications Pending Borrower Acceptance – 46,056
- Total Permanent Modifications Approved by Servicers – 112,521
By Dennis Norman, on December 17th, 2009
- Dennis Norman
Last week I did a post about the Obama Administrations’ Home Affordable Modification Program (HAMP) and showed how it really has not been effective in helping keep families in their homes and avoid foreclosure as was the intention by the administration. When my kids tell me they don’t like the way I want them to do something I usually challenge them with “if you don’t like my way, tell me a better way to do it“. So with this in mind I went looking for an answer to this question.
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Why Do Homeowners Default on Mortgages?
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Issues With Current Solutions to Mortgage Default
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An Alternative Approach to Mortgage Default
I focused primarly on number two as it addressed the problem I was looking for the answer to. Their (Loan Value Group) analysis of the situation was consistent with my post last week in that they determined that government programs to provide solutions to borrowers defaulting on mortgages “have so far proven to be ineffiective for two main reasons…first, certain solutions are founded on the idea that default occurs becasuse households have no choice due to insufficient income, and thus fail to address deafult that is a rational choice that depends on the homeowner’s balance sheet. Second, certain solutions face substantial practical hurdles to implementation.”
Translation:
-
Some borrowers choose to default as they are underwater and tired of throwing good money after bad, not because they cannot make the payments.
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Government programs have too much red tape.
The report goes on to assess the effectiveness (or lack thereof) of various government programs that were supposed to be the answer. Here are the results:
- Tax Credits. These improve the homeowner’s income, but are ineffective for balance sheet driven strategic default. First, the effect of tax credits is very small compared to the amount of negative equity, and so does little to repair the homeowner’s balance sheet. Second, the homeowner can use the tax credits to rent a new property, allowing him to default on his existing mortgage. In addition, if they fail to prevent default, they are simply a cost to the government. Finally, while the most recent plan to provide tax credits is relatively new, there is increasing evidence that fraud is being used to secure those credits.
- HOPE for Homeowners Act of 2008. This involved the FHA insuring lenders that refinancetroubled loans into fixed-rate mortgages. As of February 2009, only 451 applications had been received and 25 loans finalized, compared to the expected participation of 400,000. The low participation has been mainly attributed to two issues of loan modifications discussed in the prior subsection: the fees associated with a modification, and the need for the lender to reduce loan principal to 90% of a property’s current value.
- Home Affordable Modification Program (HAMP). This is similar to a payment reduction: the servicer modifies the loan to reduce monthly payments to 31% of a homeowner’s pre-tax income. As of August 2009, only 9% of delinquent borrowers (235,000 loans) were in trial modifications, compared to the goal of having 500,000 participants by November 2009.
This low take-up has been attributed to a number of causes. From the borrower’s side, the confusion and disclosure requirements described above have been an impediment; the New York Times (“Winning Lower Payments Takes Patience, and Luck”, 11/29/09) discusses “the confusing and frustrating ways of the Obama administration program aimed at keeping millions of troubled American borrowers in their homes.” One large institution tasked with using a third party to modify loans through HAMP has found that in Q2 2009, nearly 42% of loan modifications that would have resulted a monthly payment reduction were never completed by the borrower.
So what is the answer?
Almost 11 million homeowners underwater on their mortgage (they owe more than their homes are worth) and this is leading to the “strategic mortgage defaults” that are addressed in this report. In order to curtail these defaults there must be new thought given to how to prevent them. Since these underwater homeowners will be choosing to default there must be incentives for the homeowner to choose not to dafault and instead enable the borrower to make payments. In addition, since this decision is driven by negative equity rather than the inability to make payments, there must be something done to address the principal balance.
While reducing the principal balance of an underwater borrower’s loan (principal forgiveness) seems to be the answer to the problem the report does point out problems associated with principal forgiveness including:
- It triggers a full and immediate accounting write-down to the value of the loan.
- It is irreversible and cannot be subsequently “clawed back” for those who redefault or had committed fraud (e.g. when applying for the principal reduction).
- The lower balance reduces the interest received by the lender. Thus, if the homeowner still ends up defaulting, the lender has been made worse off by the loan modification.
- It creates a “moral hazard” problem: the homeowner may attempt to make further risky housing investments in the future, believing that he will receive principal forgiveness if he falls into negative equity
- The impact on homeowner behavior may be limited for two reasons.
- Even a large dollar reduction in absolute terms is small relative to the size of an existing mortgage. If the homeowner “frames” the reduction together with the mortgage (i.e. compares its magnitude to the size of the mortgage rather than evaluating it in isolation), he may feel that his overall position has changed little – for example, a $10,000 reduction on a $200,000 mortgage is only a 5% decrease.
- The loan modification is “non-salient”: it is a one-time event which may be subsequently forgotten, and thus have little ongoing incentive effect.
The above practical and conceptual issues with a principal reduction are serious in reality. As a result, banks have been very reluctant to write off mortgage principal: only 10% of loan modifications involve principal forgiveness. Considering all types of loan modification, 58% of the modifications made in Q1 2008 ended up redefaulting.
So while we have identified the problem, negative equity, and even the solution, principal forgiveness, you can see from this report by Loan Value Group there are many hurdles along the way. What will happen first? Will the government figure out a way to address this issue without so much red tape that the program is actually successful? Or, will the real estate market come back to the point that underwater borrowers see light at the end of the tunnel? I hate to be pessimistic, and I am not pessimistic by nature, however I don’t have confidence in either of these things happening any time soon which is very unfortunate for all the homeowners that have found themselves underwater.
By Dennis Norman, on December 11th, 2009 Dennis Norman This week the Treasury Department issed a report which included stats on the Home Affordable Modification Program (HAMP) which is part of the Obama administrations’ Making Home Affordable Program and “is a loan modification program designed to reduce delinquent and at-risk borrowers’ monthly mortgage payments”. The HAMP program got underway around March of this year and is set to expire December 31, 2012. According to the government website HAMP is intended to help keep “3 to 4 million Americans in their homes by preventing avoidable foreclosures.”
So is the Loan Modification plan working?
To try to find an answer to this, let’s look at the data in the Treasury Department report (data is through November, 2009): Continue reading “Is the Obama Administrations’ Home Affordable Modification Program (HAMP) working?“
By Dennis Norman, on December 7th, 2009
- Dennis Norman
For the first year or so of the real estate slump, it appeared to just be concentrated in the residential market, specifically homes and condos. However, over the past few months the attention has shifted more and more to the commerical and multi-family markets as well as the economy remains weak.
By Charles Hugh Smith, on November 4th, 2009 Loose lending standards in government-backed mortgages is setting up the next wave of defaults and sharp declines in housing prices.
 Charles Hugh Smith, Of Two Minds Beneath the hype that housing has bottomed is an ugly little scenario: lending standards are still loose and the low-down payment, high-risk loans being guaranteed by government agencies are setting up the next giant wave of defaults and foreclosures.
You might have thought that the near-demise of risky-mortgage mills Fannie Mae and Freddie Mac would have cooled the supply of highly leveraged government-guaranteed mortgages–but you’d be wrong, for the Feds have compensated for the implosion of the Fannie/Freddie housing-bubble machines by ramping up their other two mortgage mills: FHA and Ginnie Mae. Continue reading “Setting Up the Next Leg Down in Housing“
By Dennis Norman, on October 20th, 2009 Dennis Norman By: Dennis Norman
Yesterday the Federal Housing Finance Agency (FHFA) reported that Fannie Mae and Freddie Mac’s trial mortgage loan modifications under the Obama Administrations Home Affordable Modification Plan (HAMP) were up more than 40 percent in September 2009 from the previous month. According to the report, mortgage loans that are 60-plus-days delinquent increased to 1,401,000 borrowers in July, up a whopping 147 percent from July, 2008 when there were 566,000 borrowers 60 plus days delinquent.
Here are highlights from the report (all the data, unless noted otherwise is from July 31, 2009): Continue reading “HAMP loan modifications up 40 percent in September; Serious mortgage delinquencies up 147 percent in past year“
By Dennis Norman, on October 14th, 2009 Dennis Norman By: Dennis Norman
In the past I have been doing weekly posts with updated current mortgage rates based upon national data from either Freddie Mac, Fannie Mae or the Mortgage Bankers Association. However, just like real estate, mortgage rates are “local” to some extent and do vary in different markets.
In an effort to help people in the St. Louis metro area get a more accurate picture of what mortgage interest rates are doing here, not to mention data that is accurate up to the minute I publish rather than delayed several days or a week as the national data is, I wanted to find a local source for timely, accurate rate information and have done just that. Continue reading “New! Local St. Louis Mortgage Rates“
By Dennis Norman, on October 9th, 2009
By Dennis Norman, on October 7th, 2009 To alleviate some suffering by homeowners, the Obama Administration introduced the “Making Homes Affordable” plan last March. Unfortunately, the plan has not yet had the intended effect.
Article by the Grand Law Firm
Economists debate whether or not the country is actually currently in a recession. Some say that there are positive signs that we have reached the bottom and the economy is turning around. Others, however, suggest that the country still has a long way to go and it may be years yet before we truly reach financial recovery. Regardless of who is right though, one thing is clear: many people are facing significant financial hardships and need help now. Continue reading “Mortgage Programs Fall Short in Keeping Homeowners out of Foreclosure“
By Dennis Norman, on October 1st, 2009 
By: Dennis Norman
Back in July I did a post about Freddie Macs “Smartbuy” sales promotion for owner-occupants buying Freddie Mac Homesteps(R) Homes. The special offer began July 17, 2009 and ends October 30, 2009 so there is less than a month to take advantage of it.
Under this promotion people buying a Freddie Mac home for their personal residence will receive at no cost:
By Dennis Norman, on September 30th, 2009
- Dennis Norman
By: Dennis Norman
In an effort to help delinquent borrowers obtain Loan Modifications under the Affordable Refinance Program of the Making Home Affordable Program Freddie Mac has hired a company to come to borrowers homes and help them put together the documents and complete other actions needed to begin their three-month trial payment periods under the Affordable Refinance Program.
The company hired by Freddie Mac, Titanium Solutions, will target late-paying borrowers with Freddie-Mac owned mortgages who have not responded to letters or phone calls from their lenders or those who have responded but need to provide additional information or documents to launch their three-month Home Affordable Modification trial period. Titanium will also help those borrowers who have started their trial periods complete the documentation process to enable them to be converted into final modifications. Continue reading “Freddie Mac offers loan modification “room service” to help borrowers“
By Dennis Norman, on September 18th, 2009 Dennis Norman According to Freddie Macs weekly mortgage market survey the interest rate on home mortgages dropped for the third-consecutive week and remains at a three-month low in the US.
St. Louis is included in Freddie Mac’s Southwest Region in which the survey shows the interest rate on a 30 year fixed rate mortgage for the week ending September 17, 2009, averaged 5.05 percent with 0.6 percent in fees and points.
 The interest rate on a 15-year fixed rate mortgage averaged 4.54 percent with 0.5 percent in fees this week. The interest rate on a five-year ARM averaged 4.47 percent with 0.5 percent in fees this week and the rate on a one-year ARM averaged 4.88 percent with 0.3 percent in fees. Continue reading “Interest rates drop for 3rd consecutive week; remain at 3-month low“
By Dennis Norman, on August 28th, 2009
Charles Hugh Smith, Of Two Minds By: Charles Hugh Smith:
In February 2007 I suggested a 4% mortgage delinquency rate could trigger a decline in the entire housing market. Since that proved prescient, we should revisit the analytic tool behind that call: the Pareto Principle.
There is a whiff of euphoria in the housing market, a heavily touted confidence that “the bottom is in.” It’s all roaring back–rising sales, multiple bids by anxious buyers, 3.5% down payments, low mortgage rates and the bonus of an $8,000 first-time home buyer credit (a gift from U.S. taxpayers). Housing Lifts Recovery Hopes (Wall Street Journal) Continue reading “Beware The False Bottom In Housing“
By Dennis Norman, on August 20th, 2009 Dennis Norman According to Freddie Macs weekly mortgage market survey the interest rate on home mortgages dropped to a new three-month low. The survey shows the interest rate on a 30 year fixed rate mortgage averaging 5.12 percent with 0.7 percent in fees and points this week, down from 5.29 percent last week. Last year at this time, the 30 year interest rate averaged 6.47 percent.
The interest rate on a 15-year fixed rate mortgage averaged 4.56 percent with 0.7 percent in fees this week, down from 4.68 percent last week. Last year at this time the 15 year interest rate averaged 6.00 percent. Continue reading “Interest Rates drop to lowest level in three months“
By Dennis Norman, on August 15th, 2009 Freddie Mac announced that in the second quarter of 2009, refinancing borrowers overwhelmingly chose fixed-rate loans, regardless of whether their original loan was an adjustable-rate mortgage (ARM) or fixed. In fact, ninety-nine percent of prime borrowers who originally had a conforming ARM selected a new conforming fixed-rate mortgage when they refinanced.
While 30-year fixed-rate mortgages still tend to be the preferred loan, more borrowers are choosing 15-year fixed-rate loans than before. “When interest rates hit very low levels for fixed-rate mortgages, borrowers often take tis opportunity to lower their interest rate and shorten their loan term,” said Frank Nothaft, vice president and chief economist for Freddie Mac. “In April mortgage rates reached new lows for both 15-year and 30-year fixed rate loans. Many borrowers could shorten their loan terms without having a big increase in their mortgage payments, thereby building equity faster, reducing the total interest paid over the life of the loan, and ensuring that their loan is largely paid off by their retirement.”
By Dennis Norman, on August 6th, 2009 Dennis Norman According to Freddie Macs weekly mortgage market survey mortgage rates decreased slightly for the week ending August 6, 2009 from the prior week. The survey shows 30 year fixed rate mortgages averaging 5.22% with 0.6% in fees and points, down from 5.25% the week before. Last year at this time, the 30 year rate averaged 6.52%.
Rates on 15 year fixed-rate mortgages decreased slightly as well, down to 4.63% from 4.69% the week before, 5/1 ARM’s held about the same at 4.73% and 1 year ARM’s as well as 4.78%. This time last year these arms were 6.05% and 5.22% respectively.
Missouri is included in the southwest region on Freddie Mac’s survey and rates in our region were pretty consistent with the national averages reported above for fixed rate loans, however 5/1 arms in our region averaged only 4.64% compared with 4.73% nationally, and 1/1 arms in our region were 5.05%, quite a bit above the national average of 4.78%.
“Better-than-expected economic reports helped to keep mortgage rates low this week,” said Frank Nothaft, Freddie Mac vice president and chief economist. “The economy slowed by an annual rate of 1 percent in the second quarter, which was more positive than market forecasts.”
By Dennis Norman, on July 30th, 2009 Dennis Norman By: Dennis Norman
Today we pick up where we left off yesterday with my E-View TM with respected mortgage banker, H. John Frank, President of Paramount Mortgage Co. here in St. Louis.
If you missed part one or two, there are links to both at the end of this post. And now, part three of the E-View TM:
Q-I have seen a lot of reports about “jumbo” loans and rates being artificially high on those loans. What is a “jumbo” loan and have the rates been affected in a negative way as a result of the mortgage mess?
 H. John Frank, Jr., President, Paramount Mortgage Co. A- Jumbo loans are ones that exceed the FNMA (Fannie Mae) loan limit. In most states, this limit is $417,000. There are fewer and fewer investors who make these loans because they are not as marketable (investors can always sell their ‘conforming’ loans to Fannie Mae or Freddie Mac if they need to raise funds). Without this constant outlet, the liquidity of these loans is diminished, thus demanding a higher yield for the product.
Continue reading “Mortgage information and advice from a St. Louis Mortgage Banker – Part 3 of a series“
By Dennis Norman, on July 24th, 2009 Dennis Norman According to Freddie Macs weekly mortgage market survey mortgage rates increased slightly this week from the prior week. The survey shows 30 year fixed rate mortgages averaging 5.20% with 0.7% in fees and points, up from 5.14% the week before. Last year at this time, the 30 year rate averaged 6.63%.
Rates on 15 year fixed-rate mortgages increased slightly as well, up to 4.68% from 4.63% the week before, 5/1 ARM’s held about the same at 4.74% and 1 year ARM’s as well as 4.76%. This time last year these arms were 6.18% and 5.49% respectively.
By Dennis Norman, on July 18th, 2009 Dennis Norman By: Dennis Norman
Freddie Macs weekly mortgage market survey mortgage rates dropped this past week, making it the third week in a row rates came down.
The survey shows 30 year fixed rate mortgages averaging 5.14% with 0.7% in fees and points, down from 5.20% the week before. This is the lowest rate reported in Freddie Mac’s survey for a 30 year fixed rate loan since May. Rates on 15 year fixed-rate mortgages dropped very slightly as well, down to 4.63% from 4.69% the week before, 5/1 ARM’s held about the same at 4.83% and 1 year ARM’s dropped from 4.82% to 4.78%.
“Average fixed-rate mortgage rates were lower than last week and were down 0.4 percent to 0.5 percent from the levels of early June.,” said Frank Nothaft, Freddie Mac vice president and chief economist. “For a 30-year fixed-rate mortgage, the rate reduction over the past five weeks translates into a monthly payment saving of $56 on a $200,000 loan.
By Dennis Norman, on July 17th, 2009  Dennis Norman By: Dennis Norman
Since going into effect May1st the new Home Valuation Code of Conduct (HVCC) has caused controversy, been blamed for killing sales and seems it has everyone up in arms.
In late June I did a post on another blog about a bill, H.R. 3044, that was introduced in the U.S. House of Representatives that, if passed, would put an 18 month moratorium on HVCC.
The bill was introduced by Representatives Travis Childers and Gary Miller. Since being introduced the bill is gaining some support and momentum. As of today there are 22 cosponsors that have signed on to the bill. So far none of the representatives from St. Louis (or Missouri for that matter) have signed on yet but hopefully their support is forthcoming.
To see the representatives that have signed on as co-sponsors please click here.
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Third Quarter 2009 Commercial and Multifamily Mortgage Delinquency Report 
