bubbleinfo.com

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.”

Having trouble finding those bulk purchases?  You’re not the only one, from NMN:

Stan Kurland, the former Countrywide president who hoped to make a killing by purchasing distressed mortgage assets at bargain prices, is facing a cold reality that’s thrown a monkey wrench into his strategy: banks and Wall Street firms aren’t selling.

The financial garage sale of the century — with an anticipated $1 trillion in trash changing hands — is a bust or as Penny Mac notes in a recent public filing: “Through its interactions in the marketplace, our manager [a unit of the company] has observed that during our initial period of operations, relatively few holders of distressed mortgage loans have offered these loans for sale.”

In other words, Penny Mac’s entire reason for being has (for now) turned out to be a bad idea — even though in its IPO filing and “road show” to institutional investors Mr. Kurland and other company executives were talking as if it was the Gold Rush of 1849. The sky was the limit. Well, maybe not. Mr. Kurland and his team, which includes several former Countrywide executives, hoped to raise $700 million when it went public in August. It appears that even though the potential to make a killing in nonperforming loans is there, investors were queasy. The publicly traded REIT raised just $300 million — during a bull market.

To date, Penny Mac has bought just one portfolio of size, a $558 million pool of loans from the FDIC, which it paid just $226 million for. That’s it. Meanwhile, Penny Mac isn’t talking to the press these days, this columnist included. It recently pulled its profile from YahooFinance.com so if you want to take a quick look at who its top executives are and what they earn you’re out of luck unless you have an account with the SEC’s EdgarOnline system. (Luckily, I do.)

So, what’s its game plan? Let’s go to the SEC filing. It still believes there are opportunities in distressed mortgages, but its first quarter as a publicly traded company was less than stellar. It lost just under $1 million. And now it has a new idea. It wants to be a mortgage banker. Huh? Mr. Kurland wants to re-enter the lending arena by having Penny Mac start a conduit. Why? I guess it’s obvious. The firm isn’t making it as a vulture fund (and specialty servicer) but it sees an opportunity acting a middleman between the GSEs and what it calls “smaller mortgage lenders.”

It plans to find (presumably) nonbanks that are ineligible to become Fannie Mae, Freddie Mac and GNMA seller/servicers, buy their loans and securitize them using the government eagle. It also believes that in time the private-label market might come back and that its conduit (which is being organized as I write this) would be in the catbird seat should such a revival occur. Then again, maybe Mr. Kurland isn’t familiar with Sen. Chris Dodd’s bill to have nongovernment MBS issuers retain 10% of the risk.

from NMN:

Residential servicers, a sector that is grappling with a potential tidal wave of loan modifications, are beginning to hire “like crazy” according to Mary Coffin, a senior servicing executive with Wells Fargo Home Mortgage.  Ms. Coffin, speaking at SourceMedia’s Loan Modifications Conference in Dallas, noted that new servicing employees working on modifications are receiving four to five weeks of training in order to deal with the volumes they are facing.

“When you think about the number of people being added, and this is one of the most painful subjects for me, our history had always been to train early and often to make sure we were ahead of the default, delinquency and foreclosure forecast,” said the EVP in charge of loan servicing and post-closing for the nation’s second largest player in mortgages.  “We would hire people, bring them in and maybe start them in collections, easier calls, and over tenure let them encounter workout situations. We no longer have that advantage in this environment. We are hiring people by the thousands and thousands. It is very painful. The borrower has high anxiety and a lot of fear, complex documents to sign and return to us, and you are hiring people that get four and five weeks of training.”

She said servicers are going much deeper in collecting financial information from the borrower. Ms. Coffin described a transformation of servicers and what has evolved as the foreclosure crisis began and where the company sits today.

“In the old way of doing business, when the borrower first went delinquent, we would start with a repayment program. They don’t work to the point to where we have almost tried to get rid of them. It is a circular process that ultimately ends up with a different solution that needs to be found,” she told conference attendees.

“Today, we’re underwriting the financial condition of the borrower in order to pick the right solution that is sustainable. That is the first big change that has happened for servicers.”

The Wells executive noted there has been confusion regarding documentation under the government’s Home Affordable Modification Program, including re-requesting documents from borrowers and instances of losing documents.

“We are still dealing with pulling documents. We have gone back to the administration and I’d like to thank them. They already streamlined the documentation requirements for the HAMP. If we receive what are called the ‘critical documents’ then we are able to do the underwriting and the decisioning that we don’t turn the customer down if every paper is not signed perfectly. That’s a real plus,” said Ms. Coffin.

“We still have work cut out for us. We have customers where the administration has extended it four to five payments. We have a few borrowers sitting in that situation. We have heavy, heavy lifting to do in the next couple months to pull these customers through.”

Wells is trying to be as innovative as possible, working with external third-party providers, using phone calls, mail, door-knockers, branches, its sales teams, everything possible to help these borrowers get these documents in and finalized.

Wells is seeing short-term modifications as another solution for people who are able to regain employment immediately or who require only a short-term mod. It is taking an aggressive approach to the option ARMs from Wachovia. It is the one area where Ms. Coffin says they are doing principal forgiveness.

“We have lower redefault rates. Our key to these pay-option ARMs, if a customer is able to make a payment, we have to find a way to continue to allow that payment to be able to be made. What we are doing is restructuring the loan looking at net present value. It’s been very effective. Many of these customers need to be bridged from a negative amortization to an interest only. If you took them to a fully amortized product, there’s no way they are going to be able to make it. Over time, they will from an IO, step up, so there’s no payment shock.”

Early on, after analyzing its portfolio, Wells quickly saw that yes, HAMP was going to be a great tool and valuable to use, but it was not going to save 100% of their problems.

“Thirty percent to 40% of our portfolio who would be eligible for HAMP was coming to us for solutions. The remainder did not meet the criteria for eligibility. The biggest one was they were coming to us with DTIs below 31%. So, we also went to work on our in-house modification programs.”

This included the payment-reduction mod and the implementation of a full-quality review so no loan can go to a foreclosure before it actually goes through a quality review test to make sure all opportunities have been reviewed.

“These loans are going through multiple looks before they ever go to the foreclosure sale,” she said.

After the creation of the HAMP program, the volume for Wells jumped to over 40% of borrowers who were current on their mortgage that tried to get modifications.

“I knew from talking to investors, their biggest concern was the moral hazard of this program and people going delinquent to get a mod. The guidelines were not provided on default definitions. We worked to provide consistency.”

Because of all the attention on modifications “we went from a day when borrowers who were truly in need called to say, ‘What can I do?’ and we know what to do. Now we are sorting through hundreds of calls from borrowers who have been educated to some extent. We are still educating them on what you truly have to look like before you can get a modification,” she said.

From latimes.com:

In a flurry of end-of-session bill signings, Gov. Arnold Schwarzenegger approved seven new laws that provide a range of consumer protections to home-mortgage holders and may allow some to hold on to their houses.

Late Sunday night, the governor signed AB 260 by Assemblyman Ted Lieu (D-Torrance). The measure, which takes effect Jan. 1, tightens restrictions on mortgage brokers so they cannot steer borrowers to riskier, higher-interest loans when they qualify for less-expensive ones.

The new law also bans so-called negative-amortization loans, which offer the option of monthly payments so low that the loan amounts can actually grow over time.

The law also limits prepayment penalties to no more than 2% of the loan balance and allows state regulators to enforce federal lending laws.

The governor vetoed similar legislation last year at the urging of some groups in the mortgage and real estate industries.  The California Assn. of Mortgage Brokers, the California Mortgage Assn. and the California Assn. of Realtors unsuccessfully opposed this year’s version of the bill.

Lieu, the bill’s author, successfully argued that his proposal was needed more than ever to help California homeowners avoid foreclosure.  Lieu noted that, according to RealtyTrac, a real estate data service, 92,326 homeowners were hit with foreclosure notices during August.

“Look out Wall Street, California is no longer the Wild West,” Lieu said in a statement Monday. “Although it took two years, I am pleased to have been able to overcome the powerful interests blocking reform so that future generations won’t ever experience this type of crisis.”

Other mortgage-related bills signed by the governor:

* SB 36, by Sen. Ron Calderon (D-Montebello), sets licensing requirements for all residential loan originators.

* SB 239, by Sen. Fran Pavley (D-Agoura Hills), makes it a felony to commit fraud on a mortgage loan application.

* AB 329, by Assemblyman Mike Feuer (D-Los Angeles), requires lenders to give more and clearer information to those interested in reverse mortgages, which let seniors borrow against their homes’ equity.

* SB 237, by Calderon, creates a registration program for appraisal management firms.

* AB 957, by Assemblywoman Cathleen Galgiani (D-Stockton), allows buyers of foreclosed homes to choose local escrow officers, rather than being forced to use the escrow company chosen by the seller.

* AB 1160, by Assemblyman Paul Fong (D-Cupertino), requires that mortgage loan documents be written in the same language the verbal negotiations were conducted in.

from Paul M., at NMN:

The business of brokering residential loans has enjoyed a good run — about 25 years by most measurements — but now there are increasing signs that not only are these third-party salesman facing a bleak future, but that they have no future at all.

Recently, David Olson of Wholesale Access made headlines in the industry press when he predicted that by yearend there would be just 15,000 brokerage firms in existence. Mr. Olson, who has made a good living the past two decades studying brokers, cites a number of reasons: restrictions on yield-spread premium payments, new national registration requirements and licensing costs, and a general lack of interest on the largest remaining wholesalers in growing their broker channels. (A few mortgage insurance firms have said they either won’t accept broker loans or put bans on condominium mortgages sourced through them.)

“Chase?” asked Mr. Olson. “They don’t like brokers and are out that channel. Bank of America and Wells are seeing their TPO (third-party origination) volumes going down, down, down.” He added, “Everyone is writing brokers off.”

Three years ago there were 54,000 brokerage firms in existence, which means if Mr. Olson’s prediction comes true, the peak-to-trough decline translates into 72% of the industry going bust over three years, not a pretty picture. Keep in mind, though, that many brokerage firms are small “mom and pops” that employed less than five people. Some were sole proprietor operations.

Every month or so Wholesale Access would hear from 1,000 brokers, picking their brains about the state of the market and reselling that research to some of the largest wholesalers, as well as Fannie Mae and Freddie Mac. But today, Mr. Olson says he’s talking to just a handful of brokers each month and many are “looking for something to do.” Some he said are selling car insurance on the side or doing loss mitigation work.

Yet, Mr. Olson sees a ray of hope in the industry’s future. The chief reason is costs. He and many other mortgage veterans know that it can get expensive keeping full-time loan officers on their books, especially when origination volumes begin to swoon. “Brokering is a form of outsourcing,” he said. “It has to be viewed that way.”

In other words, if a loan doesn’t close, a broker doesn’t get paid by the wholesaler. And because a broker is really just an outsourced employee, it costs the wholesaler nothing in terms of fixed salary costs. Banks and thrifts have to maintain retail branches — another fixed cost.

As for how long it will take the brokerage sector to revive, Mr. Olson is uncertain. There have been scattered reports of regional banks launching small, targeted wholesale divisions, a positive sign for the industry. And recently, Michael Ashley, chief business strategist at Lend America, Melville, N.Y., started to lay the groundwork for a new wholesale channel.

According to Mr. Ashley, there “are still plenty of brokers around that would want to do business if they had a source [of funding].” He said he believes the declining numbers in the Wholesale Access report reflect a “survival of the fittest” dynamic among brokers. In many cases he believes those remaining “know how to responsibly and ethically originate a loan.”

In other words, perhaps all the sector’s “bad actors” have left the building and only the cream of the crop are left. We shall see.