bubbleinfo.com

Carl Levin is the chairman of the subcommittee that investigated the WaMu disaster – from the latimes.com:

“Washington Mutual built a conveyor belt that dumped toxic mortgage assets into the financial system like a polluter dumping poison into a river,” Levin said. “Using a toxic mix of high-risk lending, lax controls and destructive compensation policies, Washington Mutual flooded the market with shoddy loans and securities that went bad. . . . It is critical to acknowledge that the financial crisis was not a natural disaster, it was a man-made economic assault.“

Today the WaMu executives are testifying before Congress:

“As CEO, I accept responsibility for our performance and am deeply saddened by what happened,” said Kerry K. Killinger, WaMu’s former chief executive. But he and other executives said in their prepared remarks that they had worked to limit the company’s mortgage lending as the housing market began slowing and that, more than anything else, the bank was overtaken by economic events out of its control.

“Beginning in 2005, two years before the financial crisis hit, I was publicly and repeatedly warning of the risks of a housing downturn,” Killinger said. “Unlike most of our competitors, we aggressively reduced our residential first-mortgage business.”

Stephen J. Rotella, WaMu’s former president and chief operating officer, testified in his prepared remarks that he and others worked to reduce the company’s exposure to the deteriorating housing market but were unable to do enough — or to anticipate the historic market collapse.

“As the former COO of WaMu, I would like to be able to say that after my arrival at the bank in 2005, every decision that was made was correct,” he said. “But I was neither more prescient about the future than the chairman of the Federal Reserve Bank or the secretary of the Treasury, nor did I have complete decision-making authority at the company.”

In his first public statement since the bank was seized by regulators and sold for $1.9 billion to JP Morgan Chase, Rotella said the failure was principally the result of the company’s risky concentration in the housing market and rapid growth “magnified and exacerbated by the extreme conditions in the economy.”

“The executive team and all of our people worked very hard to mitigate those risks right up until the seizure and sale of the bank,” Rotella said.

Read the rest of this entry »

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.

Read the rest of this entry »

Our old friend Zach Fox has moved on to more illustrious things than the NC Times, he now works for a big-time financial publication back east.

But he hasn’t forgotten us little guys, especially the data geeks:

Jim,
 
We’re finally sending out some free links as we move toward getting our brand more to the public and not just Wall Street. I thought these stories might interest you and was hoping to piggy back on your ever-growing fame:
 
I got an update on that infamous Credit Suisse ARM reset chart, along with some interesting speculation from Greg McBride at Bankrate:
 
http://www.snl.com/interactivex/article.aspx?CDID=A-10770380-12086
 
I also thought this piece by one of our banking/insurance gurus was interesting. It runs through responses to FDIC’s securitization reform:
 
http://www.snl.com/InteractiveX/article.aspx?CDID=A-10788544-11055
 
Also, here is our bare-bones free site that has some TARP info. News is on the left-hand side, let me know if you see any links you can’t click on and would like to check out:
http://www.snl.com/Sectors/Financial-Institutions/FIG/Home/Tarp.aspx
 
 
Best,
Zach

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.

Business Week had this article in April entitled “Good News: Option ARMs Resets Delayed”, which included the latest Credit Suisse chart on recasting neg-ams: 

http://www.businessweek.com/lifestyle/content/apr2009/bw20090416_103126.htm

Dr. Housing Bubble added the extra text and graphics to help explain the chart (above), and included it on his post today.  His point is that not only are there many homeowners sitting on neg-ams about to recast, but many specuvestors used them to purchase flips that are now unable to sell:

http://www.doctorhousingbubble.com/financing-the-flipping-dream-alt-a-mortgages-and-california-mortgage-equity-giants-number-one-alt-a-owner-occupied-state-is-california-say-what-alt-a-and-pay-option-arms-fueled-out-of-state-bu/#postcomment

***********************************************************************************

Let examine what happens when an option-arm recasts – DO TODAY’S LOWER RATES HELP?

Here’s an example using the terms that CHL used for non-owner occupied option-arm loans:

$500,000 loan

1.375% start rate (teaser rate)

9.95% life cap

115% of original loan = maximum limit of loan balance

3.025% margin over MTA (which in July, 2005 was 2.737 + 3.025 = 5.762%)

Recast every five years, or at 115%

An option-arm/neg-am borrower has the choice of paying the minimum payment, based on the teaser rate, or the “fully-indexed” rate, which is the index + margin:

1.375% payment = $1,689.84

5.762% payment = $2,921.68

Difference = $1,231.84

If the borrower only makes the minimum payment, the $1,231.84 is added to the loan balance.

I plotted the monthly payments in our example using the actual monthly MTA rates, and added the index to compute where the loan balance would be today.  Coincidentially, the rising loan balance would be hitting the 115% mark, or $575,000, right about now – if the borrower only made the minimum payment.

What would today’s new payment be after recast?    $2,823.61

May’s minimum payment?   $2,106.65

The increase in monthly payment after recasting would be $716.96 per month. 

Even with lower rates, that’s a hefty increase for a rental property, especially one with a long-term lease, – the difference will be coming out of the borrower’s pocket.

Owner-occupants might cough up the difference, in order to save the home they live in, but will tenants ante up more rent when their lease expires?  Not likely, and the landlords aren’t going to enjoy the pain long-term, unless they are really committed to saving their credit score.

The $716.96 is the difference at recast on a beginning loan balance of $500,000, you can extrapolate to determine what this means for those at higher price points.

If lenders would waive the recasts, this problem could be averted.  But I haven’t heard of any.

Are you thinking, “Wait until the neg-am resets hit”?

I asked a major title company to tell me how many neg-am loans there were in Encinitas, Carmel Valley, and Ranch Santa Fe, a good cross-section of the higher-end properties.

Here was the response:

There are 29,488 properties

Neg-Am Loans
SFR (Detached) – 682
Condo/Duplex (Attached) – 288
Total = 970

Pay Option ARMs
SFR (Detached) – 440
Condo/Duplex (Attached) – 190
Total = 630

That’s it, 1,600 out of 29,488, or about 5.4% of the properties have either a neg-am, or option-arm.

They confirmed that they read every single trust deed and ARM rider that gets recorded, whether it’s a purchase or refinance transaction.

There were 10,268 adjustable-rate mortgages, so the remaining 8,668 must be mostly the interest-only, 3-year to 10-year mortgages, the ones that lenders are modifying. Today I heard of a homeowner who was coming up to the end of his five-year term, and called Countrywide for advice. He got a five-year extension at 4.75% interest-only, at no cost!

He was so happy he took his wife to Hawaii for a week!

When considering buying a house, wouldn’t it be nice to know how many people around you have a neg-am loan?  This isn’t readily-available information, unfortunately.  But if you are thinking about buying in a new or newer tract, you can judge by the builder’s in-house lender. 

The builders give incentives to buyers to use the in-house guy, and it’s usually enough money that it’s crazy to NOT use them, as long as the rates and programs are competitive.

Take Pardee Home Loans, for example.  They are a joint-venture with Wells Fargo, and though Wells has had their share of write-offs lately, they weren’t from neg-am loans – they’ve never done one.

So those of you who might consider buying in a Pardee tract around Carmel Valley, and are waiting for the resetting neg-ams to kick in, you might be disappointed.  Work with a five-year and seven-year timetable instead, Wells Fargo is more of 5 and 7-year-fixed lender, for those borrowers who may have taken a loan other than a 30-year fixed. 

Hat tip to yourkillingmelarry for pointing out this article in BusinessWeek:

The next wave of foreclosures is expected to gather strength when the million or so option ARMs start resetting in large numbers next spring. But it seems that many of these loans, which allow borrowers to make minimum payments that don’t even cover the accrued interest, are already going delinquent.

According to a recent analysis by Lehman Brothers, option ARMs that originated in 2006 performed about as well as fixed-rate Alt-A debt for the first 12 months. But by the time they were 2 years old, about 2.1% of performing loans were going 60-days delinquent each month. Compare that to a 1.2% of current loans going delinquent with other Alt-A loans. The rate of increase in delinquencies is even beginning to approach that of subprime, which is about 2.5%.

“It’s a better quality borrower but the rate of increase in delinquency is looking closer to subprime than Alt-A,” said Akhil Mago, the head mortgage credit strategist for Lehman Brothers, said.

Strange, right? The loans were generally given to folks with good credit, most of whom are still only making minimum payments.

Looks like these borrowers might simply be giving up on the mortgages because they have less and less of an incentive to keep paying. Option ARMs give borrowers a choice of making a minimum payment that only covers a small portion of the interest, the rest of which is added to the loan balance. With years of unpaid interest accumulating and house prices falling, some homeowners have seen their equity disappear and now owe more than their initial loan balance. The gap between the original loan balance and the value of their home is only widening as home prices fall. Many of these borrowers were given the loans with only a requirement that they “state” their income rather than verify it (The result: Lots of folks exaggerated their salaries). So, these borrowers might only be able to afford the minimum payment, which can increase by 7.5% a year and then more than double when the loan recasts.

A major concern is that 70% of option arms are concentrated in California and Florida – two states that have already been hard hit by the housing slump. Subprime mortgages, on the other hand, were dispersed across the country (about 60% of them were outside Florida and California) And as prices in those states continue to fall, refinancing options for these borrowers disappear even as recasts loom.

Option ARMs originated in 2006 make up about $140 billion of the $350 billion of outstanding option ARMs and 45% to 50% of them are expected to default. The 2007 option ARMs, which were originated just as home prices began falling, are expected to perform similarly badly.

Bold added

Yesterday Ben Jones of thehousingbubbleblog.com fame was in Carlsbad as part of his west coast swing to say hello and thanks to his readers.  http://thehousingbubbleblog.com/?p=4610

CA renter, Rich Toscano, Kelly Bennett, Schahrzad, barnaby33, and a number of other familiar folks were there enjoying the beer and company (see pics below).

As I was leaving, a guy who wasn’t part of the group grabs me and mentions that barnaby33 said we should talk.

He goes on to describe his real estate experience over the last two years.  Some realtor & lender encouraged him to start buying properties, so he bought three houses in Oceanside in 2006, all on neg-am mortgages.  Now, just two years later, his neg-ams are resetting.  The mortgage on the house he lives in had its payment increase from $1,900 to $3,800 per month after just two years!

In my previous example, using the actual payments over the last 35 months, it showed the reset happening between the fourth and fifth year – how did he hit his reset in just two years?

It’s because the loan originator got paid more commission from bringing in loans with a higher margin, causing the fully-indexed payment (and monthly deferred interest) to be much higher.

Countrywide, Washington Mutual, et al., were paying a bounty to mortgage brokers to originate loans that reset faster.  Think they have any regrets about that now?  They have another three properties coming back to them from this one buyer, and the disdain he had for the participants was obvious. 

The lingering effects of this mess will last a long time, far beyond the impact to this buyer’s credit report.  Think he’ll be trusting many realtors or mortgage brokers the rest of his life?  It would help if the NAR or Department of Real Estate came in with some hard-hitting sanctions or pulled licenses from those agents who took such advantage of people.   Instead, they have their hands in their pockets, looking around at everyone else, saying "who knew?"

Rich Toscano and Kelly Bennett

Schahrzad Berkland and Jim

Businessweek has a new article about neg-am loans that features an updated reset chart from Credit Suisse.  We were just talking about getting an update, and here it is:

Blue bars on the chart represent the recast schedule if all the loans were to recast five years after origination date. Gray bars represent the expected schedule of option ARM resets, which show loans recasting sooner after hitting the principal cap. By Credit Suisse

Based on the reports of 70% to 80% of the neg-am borrowers only paying the minimum payment, the resets will be coming faster (the gray bars), because their loan balances are rising – reaching their 115% reset cap sooner than the other reset possibility, ‘after five years’.  Washington Mutual and  Countrywide imposed the 115% reset cap which is much lower than the more-traditional 125% cap that Great Western, Home Savings, and World Savings used, and now it’s time they paid the piper.  If they would have left the resets at 125% or 10 years, like World Savings did, they wouldn’t be faced with nearly as big of a problem.

Let’s look at an example.

If you are only paying the minimum, and deferring the difference, once the new total balance grows to 15% over the original balance, then you lose the minimum payment option, and have to pay the full amount due each month. 

When you receive your initial truth-in-lending statement, the lender is only required to disclose what happens based on the first day’s interest rate only – there is no illustration of what happens if rates go higher.  But we can follow an example of a mortgage originated in July, 2005, and see how close they would be today to their reset point.  Here is a typical Countrywide mortgage, and how it has performed since July, 2005:

$500,000 loan amount, neg-am with a 115% reset cap or five years, whichever is first.

1% initial teaser rate, with a 2.625% margin over the MTA index.

Initial minimum payment = $1,608.20

Actual payment due, 2nd month = $2,835.81

Deferred interest after 35 months = $55,419.38

Maximum deferred interest before reset = $75,000

Amount left to defer = $19,580.62

Approximate time left before reset = 19 months

Minimum payment in 19 months = $2,141.26

Mo. payment after reset = $3,599.02

Mo. payment shock in 19 months = $1,457.76

The fully amortized payment is calculated based on the MTA index at 3.29 + the margin of 2.625% and amortized over the remaining 315 months.

The borrowers got into this deal when the payment was only $1,608.20, and that minimum payment goes up every year – getting them used to a higher payment.  If they’ve been able to handle an extra $120/month increase each year, then good for them.  But will they be able to handle it when it goes up $1,457.76 in one month?

There is an easy way for the lenders to fix this problem – just suspend the reset, and/or push it back to the 10th year.  World Savings (Wachovia) has been doing 10-year resets or 125% all along, so don’t believe the commentors when they say Wachovia is in the same boat as others – they’re not.  It was when Countrywide and Washington Mutual got greedy and pushed down the reset caps to 115% and five years that these loans became super-toxic.

But you can’t keep deferring interest forever, can you?  The technical difference in these loans is that the amount deferred gets smaller every year, and if you can catch rates dropping, the gap narrows quickly.

The difference between the minimum payment and the fully-amortized payment back in April, 2007 was $1,820.13.  By July of this year it will be down to around $1,000/month.  As that gap narrows, the reset date is pushed out further.

Back to the chart, and the 19 months.  If the neg-am in this example will be facing a reset in 19 months, that puts it in the beginning of the year 2010 – which looks like the peak of the gray-bars chart.  We remember that 2005 was the craziest part of the frenzy, so it looks like the gray-bar chart is the most accurate we’ve seen.  It also brings into question the blue-bar chart that shows 2011 is the peak.  It is based on five years after origination, and that would mean there were substantially more neg-am originated in 2006 than in 2005?  That’s hard to believe, but either way, we’re just getting started!

Hat tip to GLG for mentioning the Businessweek article about neg-ams:

http://www.businessweek.com/lifestyle/content/jun2008/bw2008065_526168.htm?campaign_id=yhoo