bubbleinfo.com

EDIT: The Fannie/Freddie overhaul got rolling yesterday, and hopefully they’ll get the answer right – leave loan guarantees in the hands of the private mortgage insurance industry.  The new FHA model, where they are ranking the risk based on the borrower’s credit score and amount of down payment (the more security, the lower the mortgage insurance premium) is what PMI companies do – just let them insure the loans, and pass along the risk premium to the borrowers, not the taxpayers.

From Bloomberg – they didn’t allow embedding of their video, here is link to Berman’s interview, who says the overhaul is gaining “traction”: 

http://www.youtube.com/watch?v=A8CLV4i5Xds

The Obama administration, looking to overhaul the U.S. mortgage-finance system, gathered support from lenders and the real estate industry for reducing, without ending, the government’s role in insuring loans.  A limited government backstop “has a lot of traction,” said Michael Berman, chairman-elect of the Mortgage Bankers Association, in a Bloomberg Television interview after a Treasury Department conference in Washington to discuss proposals.

The Obama administration is seeking advice on how to rebuild a system at the center of the 2008 credit crisis. Some Republicans have sought to abolish Fannie Mae and Freddie Mac, the main sources of U.S. mortgage financing. Yesterday, Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the U.S. should consider “full nationalization” of the system.

“To suggest that there’s a large place for private financing in the future of housing finance is unrealistic,” Gross said at the meeting. “Government is part of our future. We need a government balance sheet. To suggest that the private market come back in is simply impractical. It won’t work.”

Fannie Mae, based in Washington, and Freddie Mac of McLean, Virginia, have drawn almost $150 billion in Treasury aid since September 2008, when they were seized by the government amid soaring losses on mortgage investments. The U.S. has promised unlimited support for the two companies. Including Ginnie Mae, the government insured almost 97 percent of U.S. mortgages in 2009, according to Inside Mortgage Finance.

“There is a strong case to be made for a carefully designed guarantee in a reformed system,” aimed at providing access to mortgages, even during economic slumps, Treasury Secretary Timothy Geithner said. “The challenge is to make sure that any government guarantee is priced to cover the risk of losses and structured to minimize taxpayer exposure.”

Hat tip to clearfund for sending this along:

The other cnbc.com report:

For American taxpayers, now on the hook for some $145 billion in housing losses connected to Fannie Mae and Freddie Mac loans, that amount could be just the tip of the iceberg.

According to the Congressional Budget Office, the losses could balloon to $400 billion. If housing prices fall further, some experts caution, the cost to the taxpayer could hit as much as $1 trillion.

Two things are clear: Taxpayers don’t want to foot the bill, and Fannie and Freddie, taken over by the government in 2008 to stanch the financial bloodletting, need a major overhaul.

“Some of us who don’t even own homes are paying to support others and their home ownership, and they ask ‘why?’ said Robert J. Shiller, a Yale University economics professor and co-creator of the S&P/Case-Shiller Home Price Indices.

Shiller added that the mission of Fannie and Freddie should be severely cut back “so that they’re not helping middle-class homeowners, [but] they’re helping poor people get into the housing market.”

At the crux of the financial crisis, the government took over Fannie and Freddie to avert possible massive losses for banks, money-market funds and, perhaps, most importantly, foreign institutions that purchased billions of Fannie and Freddie debt because of its implied government guarantee.  The Chinese, for example, had invested heavily, and the US decided it didn’t want them to take a loss on their investment.

One possible scenario for the entities is to turn them into utilities, said Sean Dobson, CEO and chair of Amherst Securities, whose company trades as much as $50 billion in mortgages annually.

“Freddie and Fannie could be used to standardize the mortgage product,” Dobson said, “to completely describe what the risks are and then act as a conduit for the capital markets to take the risk.”

From cnbc.com

The long-term mortgage, which began as a Depression-era remedy to keep Americans in their homes, may be out of step, given the current housing crisis.  

Could it be time to say good-bye to the popular 30-year mortgage?

“The 30-year mortgage is outdated, the standard fixed-rate mortgage is outdated, and it has to be improved,” housing expert Robert J. Shiller told CNBC.  Shiller is Yale University professor and author, who is best known for co-creating the S&P/Case-Shiller Housing Indices, which track home prices in the United States.  “People want a more modern vehicle, and that’s something we need to think about next,” Schiller said.

With the sweeping financial regulations bill nearly finished, the next big job of Congress may be to revamp the broken housing market and scrutinize all its key elements, even the vanilla 30-year mortgage.

Once Americans look more closely at this country’s housing situation, they may realize, and maybe even be surprised by, the fact that even though the US leads the world in 30-year mortgages, it doesn’t in home ownership.

“We spend a whole lot on housing in the US and don’t necessarily get a very big bang for the buck,” said Mark A. Calabria of the Cato Institute.

American homeowners, it turns out, have a very sweet deal to buy their home sweet homes, with the government being their candy man. For instance, America is nearly alone in not charging a fee for paying off mortgages early. And it’s one of the most liberal countries in allowing interest to be tax-deductible.

“If America wants the government out of housing, it has to get used to a number of things,” said Raghuram G. Rajan former IMF economist, author of ‘Fault Lines: How Hidden Fractures Still Threaten the World Economy’ and professor at the University of Chicago’s Booth School of Business.

“For example, shorter mortgage durations, higher interest rates [and] potentially lower housing prices, because the cost of financing has gone up. Is it ready for that? I don’t know.”

Hat tip to Rick for sending this along, from the WaPo:

TORONTO — When he bought a home last week with a 40 percent down payment, lawyer Kevin Fritz didn’t see the transaction as particularly relevant to the debate over global financial stability.

But consider: With U.S. home sales and prices still shaky, Fritz bought in a Canadian market that already has rebounded beyond pre-crisis levels. Without the key tax advantages available to U.S. home buyers, he amassed as much as possible for the down payment, and he expects to pay off his 15-year mortgage with the same bank that gave him the loan — a rarity in the United States, where finance companies typically resell mortgages.

“Canadians are debt-averse,” said Fritz, an attitude that’s part cultural and part shaped by banking practices and regulations designed to keep people out of homes unless they can clearly afford them. “People here don’t leverage.”

Canadian tax law is neutral: Interest on mortgage payments is not deductible, a fact that encourages home buyers to make larger down payments and avoid withdrawing equity. The banks themselves expect to hold on to the mortgages they make and collect the interest. Most loans allow interest rates to be reset after five years, and most also carry prepayment penalties — rare in the United States.

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Hat tip to JimG for leaving this comment yesterday:

Really can’t say if this is a one day event or will be something more but LPS, who is a outsourcer of REOs for many banks just dropped 609 REOs in California today, all from Bank of America. Guess that means BAC has been sitting on foreclosed properties and who knows how many they have in their little piggy bank. About 40 of the 609 are in San Diego County today. Normal California daily assets for LPS is around 20-30 as a point of reference with 2 to 3 in San Diego County.

We’ll never know if there is any big changes afloat with any of these banks, unless they come out and say it.  But I’ve had a couple of new items too.

I got Bank of America to sign off their rights to pursue a deficiency judgement on a short sale, when the mortgage was purchase money.  You’d think it would make sense for the lenders to cooperate when the borrower can walk without recourse, but it’s not automatic.

Maybe this example is a sign of BofA trying to clean out the drawer?  This short sale has been in process since September, and we already lost the buyer.

In addition, for the first time they’ve issued a prompt for me to hurry up with my BPOs.  They are making their agents produce two opinions of value before listing, which is annoying, but getting some additional pressure from them might mean they’re trying to pick up steam?

I was also told that they are giving their loan managers some pull with the supervisors to push short sales through.  The Equator system is still hit and miss, but a good idea.  If we can get some assistance with return calls/emails, it could only help.

Let’s get this ship moving!

From our friends at the W-S-J:

The struggling housing market appears as if it will sustain less damage than expected this year from a spike in the monthly payments on hundreds of thousands of exotic adjustable-rate mortgages.

The number of such loans scheduled to adjust to higher payments this year has shrunk. Lower-than-expected interest rates, coupled with efforts to aggressively modify loans, are likely to mute payment shocks for some borrowers. Many others already have defaulted on their loans even before their payments adjusted upward.

“The peaks of the reset wave are melting very quickly because the delinquency and foreclosure rates on these are loans are already very high,” says Sam Khater, senior economist at First American CoreLogic.

The housing market still faces enormous challenges, and a full recovery is likely to take years. The threat posed by resetting payments, Mr. Khater says, is “a drop in the bucket” compared to problems posed by the sheer volume of borrowers who owe more than their homes are worth, known as being “under water.”

Still, for years, housing analysts have worried about the threat of an aftershock from a big spike in mortgage defaults from so-called option adjustable-rate mortgages, which require low minimum payments before resetting to sharply higher levels, and “interest-only” loans, for which no principal payments are due for several years.

Most option-ARM borrowers made minimal payments, so their loan balances grew. That sparked worries about what would happen when those loans “recast” and begin requiring full payments on larger loan balances, usually five years from when they were originated or when the balance reached a designated cap.

Option ARMs may be among the most likely to benefit from the White House plan, announced on Friday, to force banks to consider writing down loan balances when modifying mortgages. Until now, the administration’s Home Affordable Modification Program, or HAMP, has focused on lowering monthly payments by reducing interest rates and extending loan terms to 40 years.

A separate program could benefit borrowers who are current on their loans but under water by allowing investors to refinance those borrowers into loans backed by the Federal Housing Administration. Investors are most likely to refinance the riskiest loans that qualify.

The majority of option ARMs are set to recast over the next two years. But the volume of outstanding loans has fallen sharply because many borrowers, prior to facing higher payments, received modifications, refinanced or defaulted. Option ARM volume peaked at 1.05 million active loans in March 2006. At the end of last year, there were 580,000 loans outstanding, according to First American CoreLogic.

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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?

Here is a report on the seller-assisted down payments, where the seller donates an amount of money (equal to the buyer’s down payment) to a “non-profit entity”, who then gifts it to the borrower. 

From NMN:

WASHINGTON-It was well known inside HUD that a special program where nonprofit housing groups arranged downpayments for low-income homebuyers was bad news for the Federal Housing Administration mortgage insurance fund. Department of Housing and Urban Development officials tried to stop the seller-funded downpayment assistance program several times over the past decade – only to be blocked by the courts or supporters in Congress.

The homebuyer assistance program allowed sellers to fund the downpayment and then turn around and inflate the home price to recoup the expense. The seller also paid a fee to the nonprofit for qualifying buyers and arranging the transactions. HUD saw it as a scam, though the DPA providers denied it.

It was well documented that DPA buyers generally paid too much for the properties and ended up in high LTV loans that were generally three times more likely to default than other FHA single-family loans.

And default they did. The latest FHA actuarial report calculates the damage the seller-funded downpayment program inflicted on the FHA Mutual Mortgage Insurance Fund with startling findings. If the government had never endorsed SFDP loans, the economic value of the fund would be $13.2 billion as of Sept. 30 – instead of $3.6 billion – a difference of almost $10 billion. In other words, FHA would be in much stronger financial shape today.

The government began insuring SFDP loans in 1998. Over the years the program grew steadily, accounting for nearly 20% of coverage from fiscal 2004 through fiscal 2008.

Congress finally banned seller-funded downpayments and FHA stopped insuring the loans on Oct. 1, 2008.

“On the positive side, following the elimination of this type of high-risk loan … the performance of the FY 2009 and future FHA books of business will be much improved over what would have been the case if these loans were still being endorsed in significant amounts,” the actuarial report says.

The actuarial report also points out that credit scores on FHA single-family loans have improved recently. The average FICO score in September hit 689, up 10% from September 2007.

Lenders originated a record $328 billion in FHA loans in FY 2009 and 44% of the loans have FICO scores above 680 and only 13% have FICO scores below 620, generally considered subprime. In FY 2007, when FHA endorsements totaled $55.5 billion, only 19% of the loans had FICO scores above 680 and 47% of the loans had FICO scores below 620.

“The improved credit quality of FHA’s recent originations debunks the myth that FHA is being overrun by subprime loans,” said Brian Chappelle, a mortgage banking consultant in Washington. The founding partner of Potomac Partners noted that loans with FICO scores above 680 perform four times better than loans with FICO scores below 620.

FHA still has $30.7 billion in reserves (and set-asides of $27.1 billion) – but that’s after auditors made a $4.9 billion positive adjustment in recognition of the improved credit quality for FHA’s current originations.

“No one can dispute that FHA defaults are increasing. However, the cause is the worst housing market since the Great Depression and not that FHA is insuring poor quality loans,” said Mr. Chappelle.

At least here people have to contribute to others to help themselves – from latimes.com:

http://www.latimes.com/business/la-fi-habitat27-2009nov27,0,6797289.story

Unfortunately, for low-income families, even deeply discounted foreclosures are out of reach because of competition from more prosperous first-time buyers and investors. “If it wasn’t for this program, they wouldn’t qualify for something like this,” Quezada said. “Someone like them wouldn’t stand a chance to an all-cash offer.”

The home, which was bought out of foreclosure by Habitat, will cost the couple $208,000. In order to afford the property, Habitat arranged for the couple to receive a $65,000 silent loan through the city of Lynwood. (A silent loan, repaid only when the property is sold or refinanced, is often offered by cities and other local governments to facilitate affordable housing.) They will get a traditional loan for the rest.

The couple put in 125 hours working construction sites and other jobs for Habitat to qualify to buy the home.

Habitat for Humanity, Greater Los Angeles, aims to buy and renovate 20 properties during the fiscal year ending June 30. Rank said she sees the new availability of bank-owned properties as a way to preserve the group’s mission despite sagging donations from traditional donors, including banks, builders and the entertainment industry.

“We have a heavy investment in these communities, and we don’t want to see the families fall down again because of a high number of foreclosed homes sitting boarded up and vacant in their neighborhoods,” Rank said. “Right now it is really hard for low-income buyers to get a loan on properties, so Habitat is the builder and the lender, and we lend at zero interest.”