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From HW:

Guidance for dealing with Fannie Mae and Freddie Mac is not included in the recently passed Dodd-Frank Act, and Edward DeMarco, acting director of the Federal Housing Finance Agency, which oversees the government-sponsored entities (GSEs) says there is no “silver bullet” for adequately winding down these firms.

Speaking at SourceMedia’s Best Practices in Loss Mitigation Conference in Dallas, Texas, DeMarco said two factors are necessary to establish before this can happen.

The first is that the “hybrid structure of private gain and public risk” needs to be expunged from the operations of the GSEs. The second is that any reform will need a period of transition in order to create the appropriate infrastructure to complete these tasks.

He said that streamlined and transparent loss mitigation is “critical” to saving the GSEs. In the Q&A, DeMarco told an attendee that the FHFA believes the area of principal forgiveness remains “fraught with difficulty,” and in cases “where there is no borrower,” even if homeowners are avoiding contact, then the bank should foreclose.

“If you have an abandoned property or a borrower not willing to discuss or work with anything, then get going,” he advised.

DeMarco added that the government remains committed to providing adequate liquidity and credit guarantees to the US mortgage finance market, saying that the actions of the FHFA will not change that aspect.

From HW:

The amount of REO properties held by Citigroup reached $1.4bn in Q210, an 81% increase from the same time last year.

In the second quarter of 2009, Citigroup held $789m in REO in North America. The latest total is a 10% increase from the $1.2bn in North American REO totaled in Q110. The bank did not break down the total among the continent’s countries.

Citigroup defines its REO as the carrying value of all property acquired by the bank through foreclosure or other legal proceedings. Worldwide, Citigroup holds $1.6bn in REO, up 73% from a year ago.

Citigroup reported earnings of $2.7bn in Q210 after posting $4.4bn in the previous quarter.

Through its servicing arm, CitiMortgage, the bank continues work to reduce the amount of foreclosures on its balance sheet. According to the latest Home Affordable Modification Program (HAMP) report from the Treasury Department, Citi has converted 25% of its trial modifications into permanent status through May, totaling more than 34,000 modifications.

For those who don’t read Dr. Housing Bubble regularly, click here for his most recent examples of how neg-am mortgages are being modified. 

One borrower was given interest-only payments for 10 years – with a rate of 3.75% for the first five years!  Another borrower got modified onto a 40-year program, which saves about $260 per month on a $500,000 mortgage at 5.5%.

His point was that these loan modders are getting long-term fixed payments that are as much as 20% to 30% below market rents.  But it will also frustrate those of us that are hoping for more well-priced inventory coming to market, because these mods have a better chance of sticking.

Hat tip to MB, from the WSJ:

Fitch Ratings forecasts that most borrowers who get lower mortgage payments under a federal government program will default within 12 months.

Among those with loans that aren’t backed by any federal agency, the redefault rate within a year is likely to be 65% to 75% under the Obama administration’s Home Affordable Modification Program, or HAMP, according to a report to be released Wednesday by Fitch, a New York-based credit-rating firm. Almost all of those who got loan modifications have already defaulted once.

Diane Pendley, a managing director at Fitch, said the failure rate was likely to be high largely because most of these borrowers were mired in credit-card debt, car loans and other obligations.

The Treasury Department has said that among people who have been given loan modifications under HAMP, the median ratio of total debt payments to pretax income is still 64%. That often means little money is left over for food, clothing or such emergency expenses as medical care and car repairs.

“The borrower remains in a very high-risk situation,” Ms. Pendley said in an interview. “The other debts don’t go away.”

A Treasury official said HAMP “is making a real difference in the lives of hundreds of thousands of homeowners.” He said the government has reduced the risk of redefault by offering financial incentives to borrowers who remain current on loan payments.

Fitch based the redefault forecast on the performance of loans that were modified in the first quarter of 2009. Those modifications were done outside of HAMP, which took effect later in the year. But Ms. Pendley doesn’t expect a major difference between the results of HAMP modifications and those made under lenders’ programs.

Even if two-thirds of the loan modifications fail, Ms. Pendley said, that doesn’t mean HAMP is a failure. “If you can save one-third of the borrowers, I think it is worth the exercise,” she said.

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NEW YORK (CNNMoney.com) — Pressure is mounting on loan servicers and investors to reduce troubled homeowners’ loan balances…but the two largest owners of mortgages aren’t getting the message.

Fannie Mae and Freddie Mac, which are controlled by the federal government, do not lower the principal on the loans they back, instead opting for interest rate reductions and term extensions when modifying loans.

But their stance is out of synch with the Obama administration, which is seeking to expand the use of principal writedowns. In late March, it announced servicers will be required to consider lowering balances in loan modifications.  And just who would tell Fannie and Freddie to start allowing principal reductions?  The Obama administration.

Asked whether they will implement balance reductions, the companies and their regulator declined to comment. The Treasury Department also declined to comment.

What’s holding them back is the companies’ mandate to conserve their assets and limit their need for taxpayer-funded cash infusions, experts said. If Fannie and Freddie lower homeowners’ loan balances, they are locking in losses because they have to write down the value of those mortgages. Essentially, that means using tax dollars to pay people’s mortgages.

The housing crisis has already wreaked havoc on the pair’s balance sheets. Between them, they have received $127 billion — and recently requested another $19 billion — from the Treasury Department since they were placed into conservatorship in September 2008, at the height of the financial crisis.

Housing experts, however, say it’s time for Fannie and Freddie to start reducing principal. Treasury and the companies have already set aside $75 billion for foreclosure prevention, which can be spent on interest-rate reductions or principal write downs.

“Treasury has to bite the bullet and get Fannie and Freddie to participate,” said Alan White, a law professor at Valparaiso University. “It’s all Treasury money one way or the other.”

Though servicers are loathe to lower loan balances, a growing chorus of experts and advocates say it’s the best way to stem the foreclosure crisis. Homeowners are more likely to walk away if they owe far more than the home is worth, regardless of whether the monthly payment is affordable. Nearly one in four borrowers in the U.S. are currently underwater.

Principal reduction in the long run will lower the risk of redefault,” said Vishwanath Tirupattur, a Morgan Stanley managing director and co-author of the firm’s monthly report on the U.S. housing market. “It’s the right thing to do.”

Meanwhile, a growing number of loans backed by Fannie and Freddie are falling into default. Their delinquency rates are rising even faster than those of subprime mortgages as the weak economy takes its toll on more credit-worthy homeowners. Fannie’s default rate jumped to 5.47% at the end of March, up from 3.15% a year earlier, while Freddie’s rose to 4.13%, up from 2.41%.

On top of that, the redefault rates on their modified loans are far worse than on those held by banks, according to federal regulators.

Some 59.5% of Fannie’s loans and 57.3% of Freddie’s loans were in default a year after modification, compared to 40% of bank-portfolio mortgages, according to a joint report from the Office of Thrift Supervision and Office of the Comptroller of the Currency. This is part because banks are reducing the principal on their own loans, experts said.

So, advocates argue, lowering loan balances now can actually save the companies — and taxpayers — money later.

“It can be a financial benefit to Fannie Mae and Freddie Mac and the taxpayer,” said Edward Pinto, who was chief credit officer for Fannie in the late 1980s.

What might force the companies’ hand is another Obama administration foreclosure prevention plan called the Hardest Hit Fund, which has charged 10 states to come up with innovative ways to help the unemployed and underwater.

Four states have proposed using their share of the $2.1 billion fund to pay off up to $50,000 of underwater homeowners’ balances, but only if loan servicers and investors — including Fannie and Freddie — agree to match the writedowns. State officials are currently in negotiations with the pair.

“We remain optimistic that we can get a commitment from Fannie, Freddie and the banks to contribute to this strategy,” said David Westcott, director of homeownership programs for the Florida Housing Finance Corp., which is spearheading the state’s proposal.

Hat tip to shadash, who is fuming:

Bank of America wants to give struggling mortgage customers who are collecting unemployment benefits up to nine months with no mortgage payment.

That’s right. Zero payment.

Customers would have to agree that, if they haven’t found a job within the nine months, they will sign over their house to the bank. The Charlotte bank would give them at least $2,000 to help with moving expenses.

The proposal needs regulatory approval, and the bank doesn’t know when, or if, that will happen.

Some experts say the plan could become an industry model and is the most substantial, creative approach yet to addressing the fallout from stubbornly high unemployment, which is driving mortgage delinquencies and foreclosures.

The plan also could provide families with faster relief, allow them to save money and provide a timetable for making decisions. The bank could avoid millions in collection and foreclosure expenses.

“It’s an innovative way for Bank of America to demonstrate it’s working with its customers,” said Mark Williams, a former Federal Reserve bank examiner. “Regulators should view this as a positive step as well.”

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From the W-S-J:

After losing her condo in San Diego to foreclosure last year, Charissa Kolich thought that at least she was free of mortgage bills.

But Wells Fargo & Co., which holds a home-equity loan made five years ago to Ms. Kolich, last month filed a lawsuit against her in the Superior Court of California, San Diego County, seeking to collect the nearly $72,000 it said she still owed on that second mortgage. “This was all kind of a shock,” says Ms. Kolich, a food-service administrator recently diagnosed with inoperable brain cancer.

Banks are coming under increasing political pressure to write off or at least write down second-lien and other junior mortgages as a way to help borrowers keep their homes or extract themselves from heavy debt. As the Wells Fargo suit shows, however, banks often are reluctant to give up on loans when they see a chance of recovering all or part of their money.

This issue will be the focus of a hearing Tuesday by the House Financial Services Committee in Washington. Panel members are due to quiz executives from Wells Fargo, Bank of America Corp., Citigroup Inc. and J.P. Morgan Chase & Co. about their junior-lien mortgage policies.

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Bank of America is sending out emails confirming that they are participating in the HAFA program, and linking to the N.A.R. description:

HAFA Provisions

Here is the link that provides the details about going from HAMP to HAFA:

The Home Affordable Foreclosure Alternatives (HAFA) Program provides additional options to avoid costly foreclosures and offers incentives to borrowers, servicers and investors who utilize a short sale or deed-in-lieu (DIL) to avoid foreclosures. HAFA alternatives are available to all HAMP-eligible borrowers who: 1) do not qualify for a Trial Period Plan; 2) do not successfully complete a Trial Period Plan; 3) miss at least two consecutive payment during a HAMP modification; or, 4) request a short sale or deed-in-lieu.

In a short sale, the servicer allows the borrower to list and sell the mortgaged property with the understanding that the net proceeds from the sale may be less than the total amount due on the first mortgage. Generally, if the borrower makes a good faith effort to sell the property but is not successful, a servicer may consider a DIL. With a DIL, the borrower voluntarily transfers ownership of the property to the servicer – provided title is free and clear of mortgages, liens and encumbrances. With either the HAFA short sale or DIL, the servicer may not require a cash contribution or promissory note from the borrower and must forfeit the ability to pursue a deficiency judgment against the borrower.

HAFA simplifies and streamlines the short sale and DIL process by providing a standard process flow, minimum performance timeframes and standard documentation.

HAFA is all well and good in areas around the country where Fannie/Freddie loans prevail.  We’re on the lookout for any sign that major lenders/servicers are fully releasing borrowers from future liability on non-Fannie/Freddie loans.  It may take a while before it filters down, because borrowers have to apply for a HAMP first, and then HAFA.  If anyone hears about a policy authorizing full release of a non-Fannie/Freddie deficiency, or pre-approved short sale, let’s us know!  Our BofA rep said last week it will depend on the investor, but if you have to process the whole package just to find out, and the answer is no release, who cares – nothing has changed.