While there has been much discussion about the causes and effects of the Housing Boom as well as the Bust (including by yours truly in prior posts) I don’t think we need to refrain from continuing to examine this part of history that is affecting millions of people across the country. Perhaps we can learn some lessons from this that will help us avoid another such collapse of the housing market in the future.
My topic today actually has a silver lining of sorts. The topic is debt and how so many homeowners across the country leveraged themselves into a mountain of debt during the housing boom only to later have that mountain collapse on them. My attention was drawn to this subject by a presentation done by Karen Dynan of the Brookings Institution entitled “Household Leveraging and Deleveraging“.
American’s Debt Grew At a Much Faster Pace Than Income
As you can see from the chart below the percentage of American’s disposable personal income that is needed to pay debt payments on mortgage and consumer debt peaked in the mid to late ’80s just over the 12 percent range but then dropped back down to just below 11 percent by the early 90’s. By the height of the real estate boom this percentage had grown significantly and peaked at just under 14 percent in 2007. Clearly the cost of home ownership during the boom was increasing at a faster pace than homeowners income.
Chart by Information St. Louis, Inc. - Data Source Board of Governors of the Federal Reserve
Dynans’ report attributes the rise in debt to having probably been “the combination of increasing house prices and financial innovation.” I think “financial innovation” is a nice way to describe sub-prime, interest only and other such creative ways to finance homes that became prevalent during the boom.
As the chart below depicts, consumers mortgage debt grew dramatically during the housing boom even though “other debt” remained fairly constant.
Source: Household Leveraging and Deleveraging - Karen Dynan
“Everyone” Was Borrowing – Not Just Sub-Prime Borrowers
Contrary to what is sometimes portrayed, it wasn’t just sub-prime borrowers that were racking up debt during the housing boom. The chart below shows a fairly consistent increase in household debt across several demographics.
Source: Household Leveraging and Deleveraging - Karen Dynan
Obviously this rather rapid and intense increase in household debt, particularly mortgage debt, is a major factor behind the record number of mortgage delinquencies and foreclosures we are currently seeing. Rising home prices (at astonishing rates in some markets) during the boom forced many homeowners to take on more mortgage debt than they should. Many even admit buying homes with initial “teaser” interest rates realizing they would not be able to afford the payment in two years when the teaser is gone, but simply planned to sell the home (at a profit) beforehand and move on. This, like musical chairs, works until the music stops as it did in 2007.
The Importance of Defaults
If you have defaulted on your mortgage or lost a home in foreclosure, you are helping out our economy! Well, sort of. According to Dynan’s report, the record rates of charge-offs by lenders of mortgages as a result of defaults and foreclosures that have occurred in the past year has resulted in mortgage debt in 2009 declining 2 percent rather than staying flat.
Source: Household Leveraging and Deleveraging - Karen Dynan
Now for the Silver Lining-
I promised you a silver lining and here it is. American’s now have less household debt! Beginning with the 2nd quarter of 2008 consumers home mortgage debt, after increasing over a trillion dollars just two years before, actually decreased and has continued decreasing every quarter since. Consumer started decreasing as well in the 4th quarter of 2008 but has grown slightly again in the 1st quarter of this year.
Source: Household Leveraging and Deleveraging - Karen Dynan
In addition, as the debt-service chart at the beginning of this post shows, the portion of income that is necessary to pay debts for the American consumer has fallen over 1 percent from it’s peak and is still headed downward.
Is This Self-Control Or Is There No Choice?
Ah, critics could argue that the consumer has not really learned anything from the housing bust and the only reason debt has dropped is that banks and other lenders aren’t lending. Well, it is certainly true that lending standards have tightened significantly and bankers are acting like, uh, well, bankers again (the pre-boom ones) as shown by the chart below. However, Dynan’s report indicates that 20 percent of senior loan officers reported in May 2010 that demand for consumer loans had fallen relative to 3 months earlier. Probably better proof that consumers are exercising self-control is the MBA mortgage application survey which, in recent weeks, have shown a decrease in mortgage applications from both home-buyers as well as home owners seeking to refinance.
Source: Household Leveraging and Deleveraging - Karen Dynan
What Does The Future Hold In Store?
Karen Dynan suggests that we are going to see consumers continue the trend of reducing debt. She bases this on the high ratio of average household debt to assets which, as the chart below illustrates, peaked in the past year at a level that was 50 percent higher than in 2000.
Source: Household Leveraging and Deveraging - Karen Dynan
Dynans’ report goes on to say the following about the future:
Mortgage charge-offs are likely to remain high
Foreclosures will be on the rise again after being delayed by HAMP and other factors
Even when lender’s ease up, new borrowing is going to be dampened due to borrowers lacking home equity
So, you have the money to pay on your ‘underwater’ mortgage, or to afford the reduced payment amount offered to you under the HAMP program, but think, rather than throw good money after bad you’ll just do like so many borrowers are doing and ‘walk-away‘? Well, if you have any plans to buy a house again in, say the next seven years, particularly with a Fannie Mae loan, think again.
Today Fannie Mae announced policy changes to “encourage borrowers to work with their servicers”. These policy changes include, a seven-year “lock-out” period for borrowers that default that had the capacity to pay, or did not complete a workout alternative offered to them in good faith. Those borrowers will be ineligible for a new Fannie Mae-backed mortgage loan for a period of seven years from the date of foreclosure. Borrowers that in fact do have extenuating circumstances may be eligible for a new home loan in a shorter period.
“We’re taking these steps to highlight the importance of working with your servicer,” said Terence Edwards, executive vice president for credit portfolio management. “Walking away from a mortgage is bad for borrowers and bad for communities and our approach is meant to deter the disturbing trend toward strategic defaulting. On the flip side, borrowers facing hardship who make a good faith effort to resolve their situation with their servicer will preserve the option to be considered for a future Fannie Mae loan in a shorter period of time.”
Thinking about a “Strategic Default”?
There has been a lot of talk lately about borrower’s that “strategically default”; for example, borrowers that have the ability to pay their mortgage payments but stop doing so in the hopes they can get out from under their home in an easier method than selling it in a down market, particularly if they are underwater on their mortgage.
Troubled borrowers who work with their servicers, and provide information to help the servicer assess their situation, can be considered for foreclosure alternatives, such as a loan modification, a short sale, or a deed-in-lieu of foreclosure. A borrower with extenuating circumstances who works out one of these options with their servicer could be eligible for a new mortgage loan in three years and in as little as two years depending on the circumstances. These policy changes were announced in April, in Fannie Mae’s Selling Guide Announcement SEL-2010-05.
According to data from NeighborWorks America, a national nonprofit organization created by Congress to provide community-based revitalization efforts, every 13 seconds in America, there is another foreclosure filing. This means there are more than 6,600 home foreclosure filings per day and currently, more than 4.5 million households are at risk of foreclosure. Unfortunately there is no end in site as industry experts are predicting 1.5 – 2.0 million new foreclosures in 2010 and as many as a total of 8.1 million by 2012.
This many people in financial distress provides great opportunity for loan modification scam artists, who prey on unsuspecting homeowners with unethical and sometimes unlawful tactics to scam them out of money and often times their homes according to the report. Many of these homeowners have turned to loan modification or foreclosure “rescue” companies for help — only to realize they’ve been scammed. Loan modification scams are proliferating at a rapid pace.
To combat these scam artists and try to protect and educate consumers, NeighborWorks America has launched a “Loan Modification Scam Alert” campaign. Their scam alert website has many resources available to help consumers protect themselves and I would suggest that consumers that are facing falling behind on their mortgages, facing foreclosure or with other housing-related financial issues, check out the site.
The scam alert identifies the following as the most common loan modification scams :
Phony Counseling or Foreclosure Rescue Scams
The scam artist poses as a counselor and tells you he can negotiate a deal with your lender to save your house—if you pay him a fee first. He may even tell you not to contact your lender, lawyer or housing counselor—that he’ll handle all details. He may even insist that you make all mortgage payments directly to him while he negotiates with the lender. Once you pay the fee, or a few mortgage payments, the scammer disappears with your money.
Fake “Government” Modification Programs
Some scammers may claim to be affiliated with, or approved by, the government, or they may ask you to pay high, up-front fees to qualify for government mortgage modification programs. The scammer’s company name and Web site may sound like a real government agency. You may also see terms like “federal,” “TARP” or other words related to official U.S. government programs.
Your lender will be able to tell you if you qualify for any government programs to prevent foreclosure. And you do not have to pay to benefit from these programs.
Bait-and-Switch
The scam artist convinces you to sign documents for a “new loan modification” that will make your existing mortgage current. This is a trick. You actually just signed documents that surrender the title of your house to the scam artist in exchange for a “rescue” loan.
Rent-to-Own or Leaseback Scheme
A scammer urges you to surrender the title of your home as part of a deal that will let you stay in your home as a renter and then buy it back in a few years. He may tell you that surrendering the title will permit a borrower with a better credit rating to get new financing—and keep you from losing your home. However, the scammer may have no intention of ever selling the home back to you.
But the terms of these deals usually make buying back your home impossible. Worse yet, when the new borrower defaults on the loan, you’re evicted.
Variations:
The scammer raises your rent over time to the point that you can’t afford it. After missing several rent payments, you are evicted, leaving the “rescuer” free to sell your house.
The scammer offers to find a buyer for your home, but only if you sign over the deed and move out. The scammer promises to pay you some of the profit when the home sells. But the scammer simply rents out your home and keeps the profits while your lender proceeds with the foreclosure. You lose your home and are still responsible for the unpaid mortgage, because transferring the deed does not affect your mortgage obligation.
Bankruptcy to Avoid Foreclosure
The scammer may promise to negotiate with your lender or get refinancing on your behalf if you pay a fee up front. Instead of contacting your lender or refinancing your loan, he pockets the fee and files a bankruptcy case in your name—sometimes without your knowledge.
A bankruptcy filing often stops a home foreclosure, but only temporarily. Filing bankruptcy stops any collection and foreclosure while the bankruptcy court administers the case. But, eventually you must start paying your mortgage, or the lender will be able to foreclose.
You could lose the money you paid to the scammer and your home. Worse yet, a bankruptcy stays on your credit report for 10 years, which makes it difficult to obtain credit, buy a home, get life insurance or even get a job.
In addition to visiting the Loan Modification Scam Alert website, one of the best things you can do to protect yourself is to educate yourself about programs such as HAMP (the Home Affordable Modification Program) for loan modifications as well as HAFA (The Home Affordable Foreclosure Alternatives program) so that you understand how the programs actually operate and see that you don’t need to necessarily pay someone for assistance.
I’ve written many articles on both the HAMP as well as HAFA program with complete information on the programs as well as links to information on the programs. To access these articles easily, simply click on the links below:
UPDATE- June 2, 2010: The National Association of REALTORS obtained answers from the Treasury Department on 3 common questions about HAFA:
agents are not permitted to rebate a portion of their commission to the buyer,
sellers who are real estate agents must list their home for sale with another broker, not their own broker, and
the incentive allowed for subordinate lien holders (6% of any one subordinate lien, up to a total of $6,000 for all subordinate liens) is a hard cap and may not be supplemented from any source.
Dennis Norman
In March I did an update on the Home Affordable Foreclosures Alternative (HAFA) Program which was scheduled to go into effect April 5, 2010. Today, Fannie Mae issued guidelines to their servicers outlining the policies and produres Fannie Mae had adopted as a result of HAFA.
What is HAFA? In a nutshell it gives qualifying homeowners the opportunity to do a short-sale or deed-in-lieu rather than face foreclosure:
The Home Affordable Foreclosure Alternatives Program provides financial incentives to loan servicers as well as borrowers who do a short-sale or a deed-in-lieu to avoid foreclosure on an eligible loan under HAMP. Both of these foreclosure alternatives help the lender out by avoiding the potentially lengthy and expensive foreclosure proceedings and also by protecting the property by minimizing the time it is vacant and subject to vandalism and deterioration. These options help out the borrower by avoiding the foreclosure process and the uncertainty that comes with it and allows the borrower to negotiate when they will give up possession of their home as well as, under the HAFA program be released from any further liability from the loan including short-fall and deficiencies.
Highlights of the guidelines given to mortgage servicers by Fannie-Mae:
Servicers are “encouraged to adapt their processes to implement these Fannie Mae HAFA policies and procedures immediately;” however, they have until August 1, 2010 to implement them.
The HAFA Short-Sale and HAFA DIL (deed-in-lieu) program will be offered to borrowers through December 31, 2012
Borrower Eligibility for HAFA Consideration:
A borrower cannot be considered for HAFA until the borrower has been evaluated for a HAMP modification (including, but not limited to, providing all required income documentation).
Once a borrower has met all of the eligibility criteria for HAMP, the borrower must be considered for a HAFA short sale or DIL (after all home retention options have been considered) if the borrower:
was not offered a trial modification due to inability to meet the HAMP qualifications (for example, did not pass the net present value (NPV) evaluation or meet the target monthly mortgage payment ratio based on verified income);
failed to complete the trial period successfully;
became two consecutive payments (31 or more days) delinquent on the modified mortgage loan; or
requests a short sale or DIL.
Lender’s are not allowed to consider a borrower for a Fannie Mae HAFA short sale or DIL (without consent from Fannie Mae) if:
a foreclosure sale is scheduled to be held within 60 days of the borrower’s request for a Fannie Mae HAFA short sale or DIL, ordetermination that a borrower is ineligible for HAMP, or;
a foreclosure proceeding could be initiated and reasonably be expected to result in a foreclosure sale being held within 60 days of the borrower’s request for a Fannie Mae HAFA short sale or DIL or determination that a borrower is ineligible for HAMP; or;
the mortgage loan is secured by a property in Florida on which foreclosure proceedings are pending, judgment has been obtained, or a hearing on summary judgment or trial is scheduled within 60 days.
Financial Requirements of Borrower for HAFA:
The lender, prior to deciding if the borrower is eligible for HAFA, must determine if the borrower has:
the ability to continue making the mortgage payments but chooses not to do so; or
substantial unencumbered assets or significant cash reserves equal to or exceeding three times the borrower’s total monthly mortgage payment (including tax and insurance payments) or $5,000, whichever is greater; or
high surplus income.
So the bottom line here is, if you have a bunch of assets, money in the bank or high income relative to you debt, Fannie Mae is not going to be interested in letting you walk away from your deficiency after a short-sale, or DIL.
On question that has come up on other posts I’ve written about this, is the effect of bankruptcy on eligibility for HAFA….Here’s the answer from Fannie Mae:
A borrower in an active Chapter 7 or Chapter 13 bankruptcy case must be considered for a Fannie Mae HAFA short sale or DIL if the borrower, borrower’s counsel, or bankruptcy trustee submits a request to the servicer. However, the servicer is not required to solicit borrowers in active bankruptcy cases for shorts sales or DILs. With the borrower’s permission, a bankruptcy trustee may contact the servicer to request a short sale or DIL. The servicer and its counsel must work with the borrower or borrower’s counsel to obtain any court and/or trustee approvals required in accordance with local court rules and procedures. The servicer must extend the required time frames outlined in this Announcement as necessary to accommodate delays in obtaining bankruptcy court approvals or receiving any periodic payment when made to a bankruptcy trustee.
Lenders must, upon determination of eligibility for a HAFA Short-Sale or DIL, determine the fair market value of the property:
As soon as a borrower is determined to be eligible for a Fannie Mae HAFA short sale or DIL and has demonstrated a willingness to participate, the servicer must take the necessary steps to determine the market value of the mortgaged property. Fannie Mae will require a broker price opinion (BPO) based on an interior and exterior inspection of the property or, if licensing requirements in the state dictate use of an appraisal for these purposes, an appraisal
The BPO (or appraisal, if required) must be dated within 90 calendar days of the date the relevant HAFA Agreement is executed by the servicer.
Allowable Fees on Short-Sale:
Fannie-Mae will allow:
real estate sales commission customary for the market. The servicer may not require that the commission be reduced to less than 6 percent of the sales price of the property;
real estate taxes and other assessments prorated to the date of closing;
local and state transfer taxes and stamps;
title and settlement charges typically paid by the seller;
seller’s attorney fees for settlement services typically provided by a title or escrow company;wood-destroying pest inspections and treatment, when required by local law or custom;
homeowners’ or condominium association fees that are past due, if applicable.
Fees paid to a third party to negotiate a short sale with the servicer (commonly referred to as “short sale negotiation fees” or “short sale processing fees”) must NOT be deducted from the sales proceeds or charged to the borrower.
Additionally, the Servicer, its agents, or any outsourcing firm it employs must not charge (either directly or indirectly) any outsourcing fee, short sale negotiation fee, or similar fee in connection with any Fannie Mae loan.
In addition, Fannie Mae will allow;
The Lessor of 6% of the balance of a junior lien, or $6,000, to settle the second lien.
$3,000 to the Seller, to be paid out of sale proceeds, to help defray the costs of relocation.
Short-Sale Approval Should be Faster:
One of the major hindrances to short-sales has been the amount of time it takes for a lender or servicer to respond to an offer to purchaser, many times taking several months. Under these new guidelines that should not be a problem because, provided the Seller’s Agent has submitted all the required document to Fannie Mae (they only have 3 business days to submit) then the servicer must respond to the offer within 10 business days indicating acceptance or rejection of the offer. This is huge and should really help facilitate short-sales.
Deed-in-Lieu Eligibility:
Generally, for a borrower to be eligible for a Fannie Mae HAFA DIL, the mortgaged property must have been listed for sale at market value for 120 days or more. A servicer may waive the requirement that the property securing the mortgage loan previously be listed for sale in cases involving:
a serious illness or disability,
a deceased borrower or co-borrower,
a borrower or co-borrower who has been relocated or who has been deployed by the military,
a determination that local market conditions would impede a sale of the property,
a borrower who demonstrates an unwillingness or inability to maintain or market the property during the listing period, or
a borrower who has expressed an interest in doing a Deed for Lease
This is simply an overview of the Fannie-Mae guidelines and the HAFA program…there is much more, but this gives you the idea. For starters, this is nothing that a homeowner would want to take on alone in my opinion. I think you need a qualified real estate broker or agent, that has in-depth knowledge about HAMP and HAFA and the short-sale process.
To get more information I suggest your read my post from March, you can access that by clicking here, or if you really want to have some fun, you can read the complete Fannie-Mae guidelines by clicking here.
Consistent with the report on mortgage delinquencies from LPS that I wrote about last week, today TransUnion released it’s report on mortgage delinquencies showing they fell 1.74 percent in the first quarter of this year, which is the first quarterly decline since 2006. This is good news, however, not to rain on the parade, but we do need to remember that the 4th quarter of 2009 had a record-setting mortgage delinquency rate so to have the rate for the following quarter drop simply means, if you want to do the glass half-empty thing, this quarter didn’t set another all-time record for mortgage delinquencies.
After steadily increasing for 12 consecutive quarters, it is a welcomed relief to see the rate finally decrease to 6.77 percent (for borrowers that are 60+ days past due). This rate is still 30 percent higher than it was a year ago when it was at 5.22 percent.
Fairly consistent with the LPS report from last week, the trends reflected in this report are encouraging; while the ratio of borrowers that are 90 or more days delinquent increased for the quarter, the increases were the smallest since the fourth quarter of 2007.
Other highlights from the report:
Nevada continues to have the highest mortgage delinquency rate at (15.98 percent)followed by Florida (14.65 percent)
The lowest mortgage delinquency rates continued to be found in North Dakota (1.76 percent), South Dakota (2.44 percent) and Nebraska (2.68 percent)
Seventeen states showed increases in delinquency from the previous quarter with Alaska (+11.3 percent), New Hampshire (+6.3 percent) and Hawaii (+4.8 percent) leading the pack.
The average national mortgage debt per borrower decreased (0.47 percent) to $192,774 from the previous quarter’s $193,690. On a year-over-year basis, the first quarter 2010 average represents a 1.39 percent decrease over the first quarter 2009 average mortgage debt per borrower level of $195,500.
“The fall in mortgage delinquency is indeed good news for the consumer, the mortgage industry, and the current economic recovery,” said FJ Guarrera, vice president in TransUnion’s financial services business unit. “The February rise in the S&P/Case-Shiller home price index and the recent year-over-year increases in median existing home prices reflect the uptick in housing demand, despite the downward pressure exerted by the continual influx of foreclosures. With prices beginning to rise, increasing consumer confidence and positive trends in the equity markets, home owners who are currently upside down on their mortgages may be less inclined to join the ranks of defaulters, which have been growing in number since the summer of 2008.
“However, part of the first quarter demand for new homes was fueled by the First-Time Homebuyer Credit, which was extended to April 30, along with the provision allowing some current home owners to also qualify. Once this runs out, we could see some impact on mortgage demand and therefore home prices — all other things remaining equal. Finally, the dip in mortgage delinquencies is influenced in part by seasonal factors during the tax season, as many homeowners reap the benefits of real estate deductions — tax savings that can be used to keep current on existing mortgage obligations.”
Forecast
“Based on revised economic assumptions, which are now more optimistic than before, TransUnion believes that the 60-day mortgage delinquency rate will likely continue to drop in 2010, possibly to as low as 6.3 percent. Note that this forecast is dependent upon economic conditions, and may change if there are unanticipated shocks to the economy affecting the recovery in the housing market,” said Guarrera.
With regard to regional forecasts, Florida is anticipated to experience the highest mortgage delinquency rate by the end of 2010, reaching as high as 18.2 percent. North Dakota is still expected to continue to exhibit the lowest mortgage delinquency by year-end with a rate of 1.7 percent.
Champion Bank, in Creve Coeur, was closed today by the Missouri Division of Finance, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with BankLiberty, Liberty, Missouri, to assume all of the deposits of Champion Bank. Continue reading “Champion Bank Closed by the Missouri Division of Finance“
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 Programfor 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
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.
Back in early December I did a post about a new program that was announced in November, the Home Affordable Foreclosures Alternative (HAFA) Program which is scheduled to go into effect April 5, 2010. There was recently supplemental documentation published as well as FAQ’s about the program and I have to admit, it seems to me the government is getting it right with this program.
THE HAFA PROGRAM:
The Home Affordable Foreclosure Alternatives Program provides financial incentives to loan servicers as well as borrowers who do a short-sale or a deed-in-lieu to avoid foreclosure on an eligible loan under HAMP. Both of these foreclosure alternatives help the lender out by avoiding the potentially lengthy and expensive foreclosure proceedings and also by protecting the property by minimizing the time it is vacant and subject to vandalism and deterioration. These options help out the borrower by avoiding the foreclosure process and the uncertainty that comes with it and allows the borrower to negotiate when they will give up possession of their home as well as, under the HAFA program be released from any further liability from the loan including short-fall and deficiencies.
How will the short sale process work under HAFA?
You will need to enter into a short-sale/deed in lieu agreement iwth your lender.
Before listing your home for sale your lender will approve a list price on your home or give you the amount of sale proceeds that are acceptable to them under a short sale. The lender will also let you know what costs may be deducted from the sale proceeds, such as commission and closing costs.
After you list your home and receive an offer from a buyer, you will submit the offer, along with a “Request to Approve a Short Sale form, to your lender. In addition, you will need to submit proof that the buyer has funds to purchase your home, such as a letter that the buyer is approved for a mortgage. After you provide the necessary documentation to your lender, your lender has 10 business days to approve the sale.
At the closing of the sale the lender is to release you from ALL responsiblities for repaying your mortgage. Plus, you will receive $3,000 from the proceeds to help pay some of your moving expenses.
Your responsibilities under the HAFA short sale.
Keep your house and your property in good condition and repair and cooperate with your broker to show it to potential buyers.
You may be required to continue to make full or partial mortgage payments (this will be determined by your lender)
You must be able to provide the buyer of your home with clear title. To start, determine if you have other loans, judgments or liens secured by your home, such as a home-equity line of credit or a second mortgage. If there are such liens, you will need to either pay these loans off in full or negotiate with the lien holders to release them before the closing date. Under this program, you must make sure other lien holders will agree not to pursue other legal action related to the pay off of their lien, such as a deficiency judgment. You can get help from your broker to negotiate with the other lien holders.
The program allows up to 6% of the unpaid principal balance of each loan (not to exceed an aggregate of $6,000 for all the loans in total) to be paid from the sale proceeds to help get a lien release.
At several stages of the short sale process, such as after an offer is received, you will need to complete some paperwork. You are responsible for returning all documents within the time allowed in your short sale agreement with your lender.
Additional Info on Short-Sales.
You cannot list the property with, or sell it to anyone that you are related to or have a close personal or business relationship with, it must be an “arms length transaction”.
If you have a real estate license, you cannot earn a commission by listing your owner property. Nor can you have an agreement to receive a portion of the commission.
The buyer of your home must agree not to sell the home within 90 calendar days of the date it is sold by you.
You must not have any expectation that you will be able to buy or rent (it’s your lenders discretion on the rent) your house back after closing.
HAFA Short-Sale FAQ’s
How much real estate commission can be paid out of the sale proceeds? Six Percent is the maximum commission and the seller, nor buyer, can receive any portion of the commission.
Can a lender that has a second mortgage or other junior lien request additional payments from the seller or real estate agent in addition to what they are allowed to receive from sale proceeds? No.
What if the property was a principal residence but is vacant at the time the lender evaluates the deal for a Short-Sale or Deed-In-Lieu? The property can be vacant for up to 90 days prior to the date of the Short Sale Agreement and still be eligible but only if the borrower can provide documentation showing that the borrower was required to relocate at least 100 miles from the mortgaged property to accept new employment or was transferred by the current employer, and there is no evidence indicating the purchaser has purchased a new home 90 days prior to the agreement.
Deed in lieu option.
If by the termination date of your short-sale agreement with your lender you have not been able to sell your home, but you have complied with all of your responsibilities under the agreement, then you will be given the opportunity to convey (transfer) ownership of your home to the lender. While this will not allow you to keep your home it will prevent you from going through a foreclosure and will release you from all responsibility to repay the mortgage debt. Additionally, you will still be eligible to receive $3,000 to help with your moving expenses.
Additionally, if you are unable to afford your first mortgage (and therefore not able to do a short sale) you will be considered for the deed-in-lieu option.
Today the National Association of REALTORS released it’s January Pending Home Sales Index showing a decrease of 7.6 percent in the index from December, 2009 to January 2010 (seasonally adjusted) and a 12.3 percent increase from last year.
Here are highlights from the report:
January”s pending home sales index (seasonally adjusted) was 90.4 (the index is based upon 100.0 being equal to the average level of sales activity in 2001 which we could call the last “normal” year) which was a decrease of 7.6 percent in the index from December’s revised index of 97.8 and an increase of 12.3 percent from January, 2009 when it was 80.5.
January”s not-seasonally adjusted index index was at 74.4, an increase of 17.7 percent from December and an increase of 8.8 percent increase from a year ago.
Lawrence Yun, NAR chief economist, said weather is likely to impact housing data. “January pending sales, though still higher than one year ago, remain much lower than expected given that a large number of potential buyers are eligible for the expanded home buyer tax credit. Moreover, the abnormally severe and prolonged winter weather, which affected large regions of the U.S., hampered shopping activity in February,” he said.
Last week a friend emailed me a link to a video titled “The Indymac Slap in Our Face” that was created by Think Big Work Small. I watched the video which gave a recap of the failure of Indymac bank back resulting in it’s seizure by the FDIC in July, 2008, and the ultimate sale by the FDIC of Indymac Bank to One West Bank in March, 2009.
According to the video, One West Bank received a cushy, “sweetheart deal” and implied it was related to the fact that the owners of One West Bank include Goldman Sachs VP, Steven Mnuchin, billionaires George Soros and John Paulsen, and that “it’s good to have friends in high places.” Here is a recap of some of the “facts” of the deal they gave on the video:
One West Bank paid the FDIC 70 percent of the principal balance of all current residential loans
One West Bank paid the FDIC 58 percent of the principal balance of all HELOC’s (Home Equity Lines of Credit)
The FDIC agreed to cover 80 – 95 percent of One West’s loss on an Indymac loan as a result of a short sale or foreclosure.
The kicker is, according to the video, is that the “loss” is computed based upon the original loan amount and notthe amount One West paid for the loan.
On the video the hosts give an example of an “actual scenario” showing how the deal worked, below is a recap:
One West Bank approved a short-sale of $241,000 on one of the Indymac loans it purchased from the FDIC (the total balance owed by the borrower at the time was $485,200).
Based upon the terms of the loss sharing agreement, One West “lost” $244,200 on this transaction, 80 percent of which ($195,360) was paid to One West by the FDIC.
So, One West received $241,000 from the short sale and $195,360 from the FDIC for a total of $436,360 on a loan they bought from the FDIC for $334,600, thereby resulting in a profit of $101,760 on the loan to One West.
One last kicker, the video claims, in addition to making over $100,000 on the loan, since the house was sold for less than what the borrower owed, One West also made the borrower sign a promissory note for $75,000 of the short-fall.
Below is a link to the video if you want to watch it for yourself.
The video got me pretty fired up like I imagine it did most people that saw it. Afterall, our federal government is running up debt faster than ever before, the FDIC has had to take over a record number of banks in the past year and now a sweetheart deal for people that are “connected.” OK, I’ll admit it, I was a little jealous….a 30 percent profit, guaranted by the FDIC? And all I have to do is discourage borrowers from doing loan modifications and force short-sales and foreclosures? Easier than taking candy from a baby, huh?
Hmm….wait a minute though, the skeptic in me (especially when it comes to anything distributed via email) made me wonder if the video was accurate or was it misunderstanding the facts, taking facts out of context or simply just wrong? To the credit of Think Big Work Small they did have links on their site to the loss-sharing agreement they were referencing.
Following are some highlights from the FDIC “Fact Sheet” on the sale of IndyMac:
The FDIC entered into a letter of internt to sell New IndyMac to IMB HoldCo, LLC, a thrift holding company controlled by IMB Management Holdings, LOP for approximately $13.9 billion. IMB holdCo is owned by a consortium of private equity investors led by Steven T. Mnuchin of Dune Capital Management LP.
The FDIC has agreed to share losses on a portfolio of qualifying loans with New IndyMac assuming the first 20 percent of losses, after which the FDIC will share losses 80/20 for the next 10 percent and 95/5 thereafter.
Under a participation structure on approximately $2 billion portfolio of construction and other loans, the FDIC will receive a majority of all cash flows generated.
When the transaction is closed, IMB HoldCo will put $1.3 billion in cash in New IndyMac to capitalize it.
In an overview of the Consortium it does identify “Paulson & Co” as a member as well as “SSP Offshore LLC”, which is managed by Soros Fund Management.
Just about the time I finished researching everything for this article I received a press release from the FDIC in response to the video which stated “It is unfortunate but necessary to respond to the blatantly false claims in a web video that is being circulated about the loss-sharing agreement between the FDIC and One West Bank.” The press release goes on to give these “facts” about the deal:
One West has “not been paid one penny by the FDIC” in loss-share claims.
The loss-shre agreement is limited to 7 percent of the total assets that One West services.
One West must first take more than $2.5 billion in losses before it can make a loss-share claim on owned assets.
In order to be paid through loss share, One West must have adhered to the Home Affordable Modification Plan (HAMP).
The last paragraph starts with “this video has no credibility.”
My Analysis
Before I get into this, I need to point out that while I have reviewed the sale agreement between the FDIC and One West as well as the loss-sharing agreement, watched the video above and read the FDIC’s press release, this is complicated stuff and not easy to understand. However, I think I have my arms around the deal somewhat so the following is my best guess analysis of the IndyMac deal with regard to the loss-sharing provision:
The FDIC says the loss sharing agreement only applies to 7 percent of the IndyMac Loans serviced by One West. It appears there is $157.7 billion in loans serviced, 7 percent of that amount is about $11 billion. So my guess is the loss-share applies to about $11 billion worth of loans.
One West agreed to a “First Loss Amount” of 20 percent of the shared-loss loans. The attachment for this was blank but the FDIC’s press release indicates this amount is $2.5 Billion. If that is the case then the total amount of loans the loss-share provision applies to is $12.5 billion. Obviously there is a $1.5 billion discrepancy between my calculation above and here (what’s $1.5 billion among friends?) but I’m going to go with the $12.5 billion because the amount of loans serviced I referenced may have been adusted at closing.
One West purchased the $12.5 billion in loans covered by the loss-sharing agreement for less than$8.75 billion. I say “less than” $8.75 billion as that is 70 percent of the loan amount which represents the amount One-West paid for residential loans that were current. The amount paid for current HELOC’s was only 58 percent and the price for delinquent mortgages went as low as 55 percent and as low as 37.75 percent for delinquent HELOC’s. Therefore I would assume the actual price paid by One-West was less than the $8.75 billion.
Once One West has covered $2.5 billion in losses, then the FDIC starts covering 80 percent of the losses up to a threshold at which time the FDIC covers 95 percent of the losses. Figuring out the threshold was a little trickier…I see a reference to 30 percent of the total loans covered by the loss-share so I’m going to use that which works out to $3.75 billion.
Now let’s figure the profit One West stands to make on the loans covered by the Loss-Share agreement;
If all the borrowers would pay off their loans in full, not less than $3.75 billion (not likely though that all borrowers will pay off in full).
Let’s be real pessimistic and look at the “worst-case” scenario: Lets say 100 percent of the loans bought by One West (covered by the loss-share) go bad and have to be short-sales or foreclosures at a loss. For the sake of conversation lets say the losses equal 40 percent of the loan amount, or $5 billion ($12.5 billion times 40 percent).
One West would have to cover the first $2.5 billion at which time the 80/20 rule would kick in for the next $1.25 billion in losses resulting in One West recovering $1.0 billion of those losses from the FDIC. Then for the next $1.25 billion ($3.75 to $5 billion) One West would recover 95 percent of the loss fro the FDIC or $1.1875 billion.
Recap: Of the $12.5 billion in loans, under the scenario above, One West would have realized $7.5 billion from foreclosures or short sales (60 percent of the debt) and would have recovered $2.1875 billion from the FDIC of the $5 billion in losses, for a total to One West of $9.6875 billion for loans they paid not more than $8.75 billion for a profit of a little less than $1 billion.
Keep in mind, my analysis above is based somewhat on fact and some on speculation and my “profit” scenario is based purely on speculation and pretty negative assumptions as to loan losses. This coupled with the fact that, as I stated above, One West probably bought the loans for less than I indicated, probably makes this a better deal with more than the $1 billion profit at the end of the day.
So is is a sweetheart deal or not? You be the judge…
One thing to keep in mind is the investors only put $1.3 billion cash into the deal to buy IndyMac, and they got a lot more than just the loans covered by the loss-sharing agreement. I’m thinking it’s a pretty good deal and one I probably would have jumped on…well, if I had $1.3 billion sitting around doing nothing…
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.
This week the Treasury Department issed a reportwhich included stats on the Home Affordable Modification Program (HAMP) which is part of the Obama administrations’ Making Home Affordable Programand “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
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.
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.
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.
This week the Treasury Department issed a reportwhich included stats on the Home Affordable Modification Program (HAMP) which is part of the Obama administrations’ Making Home Affordable Programand “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.”
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.
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.
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“
Last week, Michael S. Barr, the Assistant Secretary for Financial Institutions, testified before a congressional sub-committee on the status of these programs. In his testimony Mr. Barr said that weakness in the US housing market developed over many years and that during this period “inadequate regulation of lending and securitization practices, including lax underwriting standards, helped cause widespread over-leveraging in the residential mortgage sector that has contributed to millions of borrowers having mortgage payments they are unable to afford.” Continue reading “Fed’s plan to modify loans to prevent foreclosure shows progress; but only for 12 percent of those eligible“
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According to the video, One West Bank received a cushy, “sweetheart deal” and implied it was related to the fact that the owners of One West Bank include Goldman Sachs VP, Steven Mnuchin, billionaires George Soros and John Paulsen, and that “it’s good to have friends in high places.” Here is a recap of some of the “facts” of the deal they gave on the video:
Bank of America 
