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From Diana Olick at cnbc.com:

I have argued many times that just because a loan is underwater (value of loan is higher than value of home) it doesn’t necessarily mean that the borrower will stop making timely payments.

Yes, the incentive to abandon the home is there, but for most homeowners, their home is their community, their daily life, and not just an investment. Most probably think the value will come back over time, and unless they desperately need to move, they have no reason to stop paying.

Amherst analysts disagree with me. “Borrower equity status is the single most important predictor of success,” they claim. To explain their premise, they use two definitions of performing loans: A “successful” loan is one that is always performing, re-performing or voluntarily prepaid. A “clean success” takes out the re-performing loans. Here’s what they found:

For loans with equity, 88.9% were successful after 2 years, and 84.4% represented a clean success.

For loans with CLTV >120, only 53.6% of loans were successful and only 40.9% represented a clean success.

We talk a lot about the shadow inventory of foreclosed properties overhanging the market and weighing down inventories, but the inventory of potential new defaults is clearly high; that potential, even with steady economic recovery, exists and must be factored into the equation.

The latest home price reports are not good, and even though sales appear to be bottoming in some markets, prices always lag. Also, many of the sales are foreclosures (around 30 percent), so that knocks the price recovery premise on its head as well.

Hat tip to David for sending this along, from USA Today:

Steven and Tamara Gewecke are three years behind on their mortgage payments, but they’ve fought off foreclosure.  The Minnesota couple refinanced in 2006 to start a business. It failed. Debts mounted. The Geweckes went bankrupt and failed to win a loan modification. But they bought time.

In 2009, the Geweckes filed a lawsuit to block their foreclosure. At the heart of their case is this question: Who owns their mortgage?

They allege the investor trust that claims to doesn’t because there’s no proper record of the mortgage’s transfer to the trust. Their complaint also alleges that the mortgage didn’t get to the trust until 18 months after the trust closed to new loans. If US Bank, the trustee, can’t prove ownership, it can’t foreclose, the Geweckes say.

The Geweckes want a loan modification so they can stay in their home of 16 years. Their current loan has an adjustable 9.25% interest rate. They owe more on the house than it’s worth.

They’re not looking for a “free ride,” says Steven, 40, who works in marketing. Neither do they want to pay off one firm and then face a future claim by another.  They also hope their case will send a message to mortgage companies that they must obey rules, too.

“I understand that if you don’t make your payments, you’ll lose your home,” says Tamara Gewecke, 41. “But make sure you do it right. Make sure you’ve got your paperwork done.”

Hat tip to both SM and RE for sending along the Wells Fargo announcement of neg-am bailouts.  If principal reductions gain momentum (which is doubtful), the moral hazard would be hard to imagine – and it could start a revolution in the streets.  From Eric at nctimes.com:

Wells Fargo & Co. agreed to modify $2 billion of mortgage loans and to pay $33 million to foreclosed California borrowers, the California Attorney General’s office said Monday.

The deal applies to borrowers with “pick-a-pay” loans, which typically included “teaser” periods of two to five years during which borrowers could make monthly payments for less than the monthly interest costs. At the end of the teaser period, interest rates could skyrocket, and outstanding balances were rolled into large fixed payments. This loan type became one of the hallmarks of the housing bubble because it allowed homebuyers to take out mortgages that far exceeded borrowers’ long-term ability to repay them.

“Customers were offered adjustable-rate loans with payments that mushroomed to amounts that ultimately thousands of borrowers could not afford,” Brown said in a written statement. “Recognizing the harm caused by these loans, Wells Fargo accepted responsibility and entered into this settlement with my office.”

The settlement includes loans made by World Savings Bank and Wachovia Bank, both of which were acquired by Wells Fargo when they failed. No loans made by Wells Fargo were covered by this deal.

Under the agreement, 14,900 former World Savings and Wachovia customers will be eligible for $2 billion in loan forgiveness, much of which will include principal forgiveness, the statement said. A separate statement from Wells Fargo said they’d be working with customers between Monday and June 30, 2013, and the loan modifications could be worth $2.4 billion.

Roughly 12,000 borrowers will be eligible for the $32 million settlement worth an average of $2,650 each, the statement said.

The company will contact customers eligible for modifications or settlement cash, and maintain a help line for customers at 888-565-1422.

The Wells Fargo statement said the bank anticipated making payments for roughly these amounts when they bought Wachovia in 2008.

“The majority of Wachovia’s Pick-a-Payment customers reside in California,” Mike Heid, co-president of Wells Fargo Home Mortgage, said in a separate written statement. “We’re pleased that going forward the attorney general’s office will assist with outreach, so that we can continue to work with as many customers as possible on the options available to them to prevent foreclosures.”

Wells Fargo came to similar agreements with nine other states, including Florida, Arizona and Nevada.

Excerpts regarding the fed/state plan for principal reductions, from latimes.com:

The most controversial part of the program, and the one most difficult for banks and investors to sign on to, dedicates $790 million to principal reduction. This would write down the value of an estimated 25,135 “underwater” mortgages, which are loans in which homeowners owe more on their properties than what they are worth.

The California plan — as well as programs created by Nevada and Arizona — would pay lenders $1 for every dollar of mortgage debt forgiven. Experts say reducing principal on such underwater loans would go far to reducing foreclosures in the three states because home values have fallen so steeply that homeowners are tempted to walk away from their obligations.

But the financial industry has been reluctant to participate in government-administered programs that would require them to reduce the amount that borrowers owe them.

“If you can’t do the principal write-down, you are limited in what you can do,” said Dan Immergluck, an associate professor at the Georgia Institute of Technology, who studied the different state plans developed with the federal bailout money.

“It is one thing for them to agree not to write down principal when they are being asked to foot the whole bill,” he said, “but when the states are agreeing to match this 50-50, it seems rather ridiculous of the servicers and the investors not to agree to this.”

Read the rest of this entry »

Hat tip to Susie for sending in this latimes.com article:

For example, Jean C. Wilcox of Irvine has sued EMC Mortgage Corp., accusing it of stringing her along for three years while making several offers to modify her nearly $800,000 loan, losing documents repeatedly and never intending to permanently change the terms of the mortgage. An EMC spokesman declined to comment.

“It was just ‘extend and pretend,’ ” said Wilcox’s lawyer, Anthony Lanza of Irvine. “And it was like they had the fax machine hooked up to a shredder.”

Anaheim lawyer Damian Nassiri said his firm had filed about 100 lawsuits against mortgage lenders since 2007. Earlier suits alleged that lenders misrepresented terms of mortgages or engaged in other shady practices to foist abusive loans on borrowers. Most of his firm’s suits now accuse lenders of dealing in bad faith with borrowers who have become delinquent on loans.

Worse, Nassiri said, in cases where foreclosure was inevitable, banks misled borrowers into accepting trial loan modifications. The intent, he claimed, was “to get some kind of money out of them” while stalling actions to seize the homes.

“There are too many bad loans for the banks to handle, and they can’t dump all these properties out on the market all at once because we would have another Depression,” Nassiri said.

Similar allegations of breaches of contract and acting in bad faith have cropped up in lawsuits around the nation, said Anthony Laura, a Washington lawyer who represents lenders accused of wrongdoing and tracks litigation trends.

Some suits allege that the problem is so widespread that courts should certify the plaintiffs as representing an entire class of aggrieved borrowers. Wilcox’s suit, for example, seeks class-action status on behalf of other California borrowers with similar complaints about EMC.

Boston consumer lawyer Gary Klein, a longtime antagonist of mortgage lenders, has filed suits seeking class-action status against the top three loan servicers — Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co. — and others.

A multidistrict panel of federal judges on Oct. 8 consolidated eight such suits, including two from California, for pretrial proceedings in federal court in Boston.

The suits allege that trial loan modifications extended by Bank of America under the Obama administration’s anti-foreclosure plan were contracts that the bank violated by denying permanent modifications to borrowers who fulfilled their obligations.

In court documents filed in one of the cases, Bank of America said the plaintiffs mistakenly believed they were guaranteed loan modifications if they made three trial payments under the government’s program.

“A borrower must actually qualify, including income verification, an analysis of the modified loan’s affordability and other factors,” the bank said in the filings.

Wilcox said she had about $250,000 in equity in her home when EMC first offered to modify her loan and would have sold the house had she not relied on the company’s promises for a permanent modification. Now it’s not clear whether any equity remains.

“You’re paying out all this money,” she said, “and all the time the value of your house keeps going down.”

If the top-20 servicers are turning over their distressed loans at a 3.9% clip, that’s a 25-month supply on average (and a boatload of free rent!). From HW:

Carrington Mortgage Services liquidates distressed loans faster than any other subprime servicer, according to a report from Deutsche Bank.

Analysts modeled liquidation speeds of servicers across four different loan categories using the Conditional Liquidation Rate since April 2010.

The CLR is a model that includes the amount of liquidated loans divided by the aggregated balance of all outstanding mortgages in either 60-day delinquency or worse. That includes 90-day delinquency, foreclosure and REO.

Record-high distressed housing inventory has attracted a lot of investor attention to servicers’ loss-mitigation strategy. With the government’s Home Affordable Modification Program and the Home Affordable Foreclosure Alternatives program reducing principal, interest and even short selling a home, investors are making adjustments based on the speeds these loans are worked out.

For subprime mortgages, Carrington is the fastest servicer to liquidate loans in the distressed pipeline. Homecomings Financial and HomEq, which was recently bought by Ocwen, made up the top-three.

According to Deutsche, Carrington, which rents out its REO properties, has traditionally been the slowest to liquidate these loans. But as of August 2010, the REO rate at Carrington reached 21.9% compared to 3.9% for the rest of the top-20.

Wilshire Credit Corp. used to hold the fastest liquidation speeds, but it is slowest since April. The serious delinquency rate on the Wilshire portfolio has increased to 65% compared to 40.7% for the rest of the subprime servicers. This, according to Deutsche, could be because the recent merger of the Bank of America and Wilshire servicing platforms.

BofA, and its acquired Countrywide operation, were among the slowest in each category.

Read the rest of this entry »

From HW:

Bank of America converted 3,559 trial mods into permanent status through the Home Affordable Modification Program in August, down 18.6% from the 4,300 done July and less than half the amount done in June.

BofA has totaled 79,859 permanent HAMP mods through August since the program launched in March 2009. It has modified more than 680,000 through HAMP and its own programs since January 2008.

The Treasury Department launched HAMP in March 2009 to provide servicers an incentive to modify the mortgage. Those servicers have completed 434,716 through July.

“Our HAMP results in recent months show a reduced number of customers starting new trial modifications, due mainly to the implementation of a full documentation requirement,” said Rebecca Mairone, default servicing executive of Bank of America Home Loans. “As a result, we are seeing a smaller increase in completed HAMP modifications month-over-month at this time.”

In November 2009, BofA reported just 98 permanent modifications after more than nine months in the program. Since then, both BofA and the Treasury have adjusted guidelines to collect modification documents before putting the homeowner into a trial modification.

The entire August HAMP report is scheduled for released later this week.

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.