bubbleinfo.com

From NMN:

The SwapRent concept has been slow to find traction and faces some challenges, but its potential benefits make the case that there may be hope for it yet.

Among a host of benefits that could be realized from its large-scale implementation is its ability to address today’s loan resolution problems, according to creator Ralph Liu, founder/chairman of consultancy Advanced e-Financial Technologies Inc. and a veteran of the derivatives and global financial markets.

SwapRent could allow borrowers to reversibly and flexibly sell some, but not all, of the equity in their property back to the lender in exchange for a reduction in payment.

Although Mr. Liu’s ideas come from the derivative and swaps markets, which have come under fire during the recent financial crisis due to their complexity, in the case of SwapRent the concept is made simple for consumers.

“Everybody understands ‘renting vs. owning,’” he said.

Say a consumer is struggling to meet payments in a market where it costs $3,000 to own and $1,000 to rent. Using SwapRent, consumers could have a third option of making a $2,000 payment in which half the payment would be to rent the property and the other $1,000 would be for the right to 50% of future appreciation. The “temporary rent-own switching” could buy the time needed for a depreciating property to appreciate again, make the property more affordable for the borrower as well as avoid the foreclosure process costs and potential damage to the property.

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From the U-T:

WASHINGTON — With the Obama administration and private lenders now actively considering mortgage principal-reduction programs to help financially distressed homeowners, the Internal Revenue Service has issued a new advisory to taxpayers who receive — or seek to receive — such assistance if it’s offered.

The IRS gets involved in mortgage principal write-downs because the federal tax code generally treats any forgiveness of debt by a creditor in excess of $600 as ordinary taxable income to the recipient.

However, under legislation that took effect in 2007, certain home mortgage debt cancellations — such as through loan modifications, short sales or foreclosures — may be exempted from tax treatment as income.

Sheila C. Bair, chairman of the Federal Deposit Insurance Corp., recently confirmed that her agency is working on a new program to expand the use of principal mortgage reductions to keep underwater borrowers out of foreclosure. Major banks and mortgage companies have preferred monthly payment reductions and other loan modification techniques over cuts of principal balances, but a handful have made limited use of the concept.

One of the largest servicers of subprime home loans, Ocwen Financial Services of West Palm Beach, Fla., has strongly advocated principal reductions to keep people out of foreclosure, and claimed broad success with them. Ron Faris, president of Ocwen, testified to a congressional subcommittee earlier this month that borrowers with negative equity are as much as twice as likely to re-default after a standard, payment-reduction loan modification than those who receive partial forgiveness on their principal debt.

But what are the tax implications when your lender essentially says: OK, we recognize you’re underwater, maybe you’re thinking about walking away, and we’re going to write off some of what you owe to keep you in the house? IRS guidance issued March 4 spelled out step by step how financially troubled and underwater borrowers can qualify for tax relief when a lender agrees to lower their debt.

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It looks like servicers are coasting into the HAFA/short-sale era, which officially begins April 5th. Here are the foreclosure stats from the last 12 weeks:

My guess?  The HAFA package will encourage borrowers to pick a lane – either loan modification or short-sale.  But there are probably enough strategic defaulters to keep it busy down at the court house steps, but so far there have been very few quality properties at attractive opening bids.  I’m checking the list everyday, and I haven’t gone down to the ’steps once this year!

From NMN:

A Rumson, N.J., company is giving underwater borrowers a reason not to walk away from their homes, a move that could help prevent further deterioration in the value of a sizable chunk of the problem loans and properties still bogging down the market.

The company, Loan Value Group, has an incentive-based patent-pending concept and automation that could help address a problem posed by what studies show are roughly more than 10 million homes in the United States that have substantial negative equity. This affects almost $2 trillion of mortgage debt, according to LVG.

Data on the percentage of all defaults overall that have been “strategic” vary from about 18% to 25%, depending on the study. However, “this number changes amount according to the LTV of the loan,” said Alex Edmans, an assistant professor of finance at Wharton and an academic advisor to Loan Value Group. He cites one study by European University Institute professor Luigi Guiso, Northwestern University professor Paola Sapienza and University of Chicago professor Luigi Zingales that indicates mortgages with loan-to-value ratios around 120% start to become more prone to strategic default. Mr. Edmans also noted that a Federal Reserve study found a 50% likelihood of default when LTVs were as high as 150%.

LVG may have a “snapshot” of data on how effective its program is within a month, according to Frank Pallotta, executive vice president and managing partner at LVG. It may also release the name of the client testing it, which is said to be a major multibillion-dollar mortgage market participant.

Customers can private-label the program, which would be used in situations where high LTVs made it compelling for certain borrowers to stop making payments and walk away from their homes even though those borrowers might have the funds available to pay. The Responsible Homeowner Reward program is designed to realign borrower incentives so that such borrowers will be encouraged to pay off their loans instead.

Through RHR, a certain amount of incentive funds are set aside separate from the unchanged existing loan. These funds accumulate every month a borrower makes a scheduled payment for a period such as five years, regardless of home price direction. The borrowers would lose all funds and accrued value if they were 30 days late on a payment in any 12-month period. Homeowners that meet the program’s requirements for timely payments receive the funds when the loan is paid off. Some other options for the incentive funds have been discussed such as using them to pay down the outstanding balance of a refinance loan.

Mortgage risk holders ultimately decide the size of the payment to the borrower but can base it on a behavioral model LVG offers. The model provides a range based on factors that include negative equity, income and geography, Mr. Pallotta said. The company offers as part of the service other additional information about borrowers on a regular basis that may be helpful to clients, Mr. Pallotta said. Servicers, who are already largely overburdened and have their roles constrained by contracts, don’t have to take on responsibility for the RHR program, which LVG and its operational partner take care of. They may benefit from it, though, Mr. Pallotta said.

RHR also can be used in conjunction with other programs that address “affordability” default, where the borrower does not have the funds to pay an existing loan and may need a modification.

The distinction between affordability and strategic defaults is key when sizing up how big the “strategic default” issue is, according to Alan Paylor, president and chief executive officer of REO Leasing Solutions LLC, Houston. When default is strategic, or “voluntary,” then “incentives start to matter,” Mr. Edmans said.

Mr. Pallotta said he believes mortgage risk holders need to focus more on default that is “strategic” rather than due to affordability concerns, something Mr. Edmans indicates represents a departure from traditional thinking for the industry.

“They’re using an affordability platform to address a negative equity crisis,” Mr. Pallotta said. “If there’s too much negative equity borrowers are going to default, regardless of income and mortgage assets. I don’t think the owners of mortgage risk have their eye enough on the ball as far as negative equity.”

RHR may allow lenders and other parties to avoid other types of more costly loan remediation efforts such as reduction of principal in cases where strategic default is the real concern, he said.

Because RHR offers incentive payments to the borrower that are totally separate from the loan, it does not affect, for example, second liens or accounting for the mortgages. It aims to better align the incentives for the parties with a stake in the loans. Owners of mortgage risk can split what Mr. Pallotta said is a relatively low cost for the service. He said the ongoing cost for administering RHR is roughly less than 5 basis points of coupon annually. The present value cost to the provider for the incentive itself could be as little as 3-6 points of principal on a $200,000 mortgage with a 135%-145% LTV.

Kelly at the Voice of SD reviews the current market conditions in the San Diego real estate market at this link, here’s an excerpt:

There were 9,243 active homes and condos for sale on the Multiple Listing Service on Tuesday, according to Klinge. That number pales next to the number of distressed properties that have yet to be repossessed: 7,260 homes that have received at least one default notice and 10,221 that are headed for auction, according to Klinge. None of those nearly 17,500 properties have gone back to the bank yet.

But the threat of a flood of distressed properties hitting the market and driving prices down in one fell swoop has been just that — a threat — for years now. Klinge’s been monitoring the homes that hit the courthouse steps, and nearly as many auctions have been cancelled as have actually gone forward.

Here is Rich Toscano’s take on it, link here.

Bottom line?  We’ve been knocking on a lot of doors, and it appears that the servicers are keeping the loan modders on the foreclosure rolls for now, and cancelling the trustee sale once the borrowers are well into permanent-mod status.

Julie brought up the mark-to-market accounting requirement for banks.

I don’t think the banks worry much about marking to market.  Of the 43 Countrywide/B of A listings I’ve sold, I can’t think of one of the foreclosed mortgages that was actually owned by them.  CFC was selling their paper on Wall Street as private-label MBS, and those owners may have some requirement – but B of A is just the servicer on the majority of CFC paper.

Without the accounting requirements, the servicers might keep kicking down the road forever the 17,247 San Diego County properties in default.

Here is another example of can-kicking.  The FDIC just agreed to sell two portfolios of loans with a combined unpaid balance of $3.05 billion to Lennar Corporation.

MIAMI, Feb. 10 /PRNewswire-FirstCall/ — Lennar Corporation, one of the nation’s largest homebuilders, today announced the closing of two structured transactions with the Federal Deposit Insurance Corporation (“FDIC”).

The transactions represent the purchase of two portfolios of loans with a combined unpaid balance of $3.05 billion.  A subsidiary of Lennar, Rialto Capital Advisors, will conduct the day-to-day management and workout of the portfolios. Lennar acquired indirectly 40% managing member interests in the limited liability companies created to hold the loans for approximately $243 million (net of working capital and transaction costs), including up to $5 million to be contributed by the Rialto management team.  The FDIC is retaining the remaining 60% equity interest and is providing $627 million of non-recourse financing at 0% interest for 7 years. The transactions include approximately 5,500 distressed residential and commercial real estate loans from 22 failed bank receiverships.

My point is that here are another 5,500 loans that should be foreclosed on, but instead they are being shuffled off for additional processing.

For those of us who are seeking more REO inventory, it appears that we may be in for a long wait.

San Diego County defaulted properties (thanks foreclosureradar!):

Yesterday Sean saw these NSDCC January numbers posted here:

REO resales on MLS: 21
Short sales on MLS: 14
Trustee sales, REO: 32
Trustee sales, bought by 3rd party: 18
Trustee sales, cancelled: 56

and he asked about the cancelled trustee sales – how do they break down? 

I ran each of the addresses through the MLS and foreclosureradar, and was surprised to see that NONE of the 56 have re-started the foreclosure process, at least not yet.

Here is the breakdown:

MLS short sales:  19

MLS sale, not short:  1

MLS active listing:  2

Cured for now:  34

Total: 56

The short sales closed over the last three months, that’s why the 14 and 19 don’t jive – the servicers are slow to mark them cancelled.

I think we can assume that the ’cured for now’ category, those cancelled defaulters who were never on the MLS, are the loan modifications.  Some folks may be bringing in money to cure their default, but I’d guess those amount to less than 10% of the total.

If the real estate machine is handling 56 defaulters per month, and 50 trustee sales happen successfully per month, we’ll be treading water for the next decade or two.  There are 389 SFRs on the NOD list, and 532 on the auction list.

Bank of America and Wachovia are both rolling out their new and improved short-sale processing packages, and it looks like they are hoping to close short sales within 60 days.  We’ll have more on them as they develop.

With the HAFA plan directing servicers to pre-approve short sales, we might see improved timing, but nowhere do I see anyone stopping the graft and corruption that dominates the SS process.  There are no rules, regualtions, or laws to guide listing agents on how to handle a short-sale listing, and when left to their own devices, they seem to have great difficulty with handling them honestly and ethically.

It’ll be another frustrating year!

From bloomberg.com, hat tip PH!

Homeowners with mortgages of more than $1 million are defaulting at almost twice the U.S. rate and some are turning to so-called short sales to unload properties as stock-market losses and pay cuts squeeze wealthy borrowers.

“The rich aren’t as rich as they used to be,” said Alex Rodriguez, a Miami real estate agent with JM Group USA Inc., whose listings include a $2.9 million property marketed as a short sale because the price is less than the mortgage, leaving the bank with a loss. “People have reached the point where they can’t afford the carrying expenses of a $2 million home.”

Payments on about 12% of mortgages exceeding $1 million were 90 days or more overdue in September, compared with 6.3% on loans less than $250,000 and 7.4% on all U.S. mortgages, according to data from First American CoreLogic Inc., a Santa Ana, California-based research firm. The rate for mortgages above $1 million was 4.7% a year earlier.

 As defaults on the biggest mortgages rise, borrowers such as Steve Holzknecht, 53, are turning to short sales to exit loans that now are larger than the market value of the house. Last month he cut the asking price for his 7,280-square-foot home in Kirkland, Washington, by $550,000 to $1.25 million, lower than the balances of his two mortgages.  Holzknecht, the former owner of Four Suns Inc., a Seattle luxury homebuilder that went out of business two months ago, constructed the Craftsman-style home in 2000. He declined to identify his lenders or the amount he owes.

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Seen on CR, this summary on Bloomberg discusses the recent developments with short sales, DILs, and loan modifications. 

The article’s ending:

Short sales benefit a neighborhood because they clear out stagnant properties that may have an adverse effect on values, said Sean Shallis, a senior real estate strategist (ed. note: he’s a realtor) with Weichert Realtors in Hoboken, New Jersey. Shallis has one home with bank approval for a short sale and three others waiting approval on the same street in Jersey City with views of the Manhattan skyline.

“In every case we had multiple offers from people who had plenty of money to put down,” Shallis said. “Americans are out there still buying homes and trying to move it along.”

Short sales also help the bank, because foreclosed properties lose more value when they are vacant or a homeowner vandalizes a house on the way out, Sunlin said.

“We typically expect a 10 to 15 percent decrease of loss severity with a short sale,” Sunlin said.

Losses on prime loans going through the foreclosure process averaged 49 percent versus 34 percent for a short sale as of Oct. 1, according to a Nov. 10 report by Laurie S. Goodman, senior managing director of Amherst Securities Group LP. For subprime loans, losses averaged 73 percent for a foreclosure compared with 59 percent for a short sale.

“The loss severity of short sales is lower but it’s not low,” Goodman said.

For a borrower’s credit history, a short sale is typically reported as “settled” and considered as severe as a foreclosure, said Maxine Sweet, vice president of public education for Experian PLC, the world’s largest credit-reporting company. The impact of a short sale on a credit score is similar to that of a foreclosure. It may drop a credit score of 780 to 620, according to Minneapolis-based FICO Corp.

For sellers like Drew Schlosser, who bought 10 properties in Florida as investments during the housing bubble, getting a short sale was a relief even if the process was difficult.

Schlosser said he had to provide Wells Fargo a hardship letter, demonstrating that his financial situation merited a short sale. He also had to provide pay stubs, bank account information and past tax returns. To avoid fraud, the bank also required evidence that the transaction was an arms-length sale and not to one of his relatives, he said.

“They don’t agree to do it because you’re upside down,” Schlosser said. “If they think you can pay for it they’re not going to let you out of it.”

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The article also has a link to the government’s assistance package, which includes $1,500 moving incentive to the borrower, $1,000 to the servicer, and $1,000 to the lender for every short sale or deed-in-lieu processed successfully.

The most shocking requirement? The government is hoping to get borrowers off the hook:

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.

Will lenders/servicers agree to forfeit deficiency judgements for a measy $1,000 per loan?