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.
Carmel Valley In-Depth
The Spring Kick statistics for North SD County’s Coastal region are likely to be tepid, at best, over the next few months, just because of the low inventory – the quality buys are hard to come by.
But if there was an area that could continue to beat the odds, it’s 92130.
|Month||# of Sales||$$-per-sf||SP:LP||DOM|
I think most of us figured that Carmel Valley would be at $300/sf by now, but all four of these stats are holding up – why? The strength of the buyer pool is phenomenal, and the amount of cash is mind-boggling. Here are the down payments of the Carmel Valley SFRs closed this year (1/1-2/22):
It’s been like this for months, 77.5% of the buyers have at least 25% down, and 35% used more than 50% down payments. Two thoughts: We’re probably not going to see cascading defaults of recent buyers in the future, when they have invested so much down-payment. Their payments are lower (though not low), and they must feel comfortable with their finances to invest so much up front – they must intend to stay a while. Secondly, we should grapple with the likelihood that real estate in the area has turned into a rich-man’s game….only. We know that homeownership isn’t for everyone, but if these trends continue, buying a house will just be for the elite, at least in 92130.
Are the sellers having to take big hits to sell? From the tax rolls, here are the same-house-sales data; the amount of price change between the last sale and the most recent (between Jan.1 – Feb. 22):
2002 and before:
-10%, -17% (REO)
Will there be enough peak-buyers that either can’t afford their payments, or bail out due to being underwater that we’ll see a significant change in the trend? I think it would have happened by now, but if it’s still coming, we should see more signs in the next few months.
An indicator to watch is the amount of new listings coming on the market. This month isn’t over, but here are the number of February detached listings from 2001 to 2010:
85,70,81,63,70,79,75,73,73,and 69 so far this month.
Levitating, or just beating the odds – either way, it;’s been impressive in Carmel Valley!
Does Your Foot Hurt Yet?
A reader wanted an opinion on this quote from the latest CNN survey:
“Foreclosure sales will pick up this spring as mortgage servicers figure out who can qualify for a modification and who can’t,” said Zandi.
The bank reps on Monday’s conference call both talked about the “retention waterfall”, where they are going to try each and every step available to rescue borrowers. First they’ll try a regular refinance, then a loan modification, then offer a short sale, then consider foreclosure.
Foreclosure sales WON’T pick up this spring, like Zandi says. Why? Because the HAFA program will allow defaulters to consider short-selling their house for a few months – with only a trickle actually coming out of the retention waterfall. Then there will probably be another government program devised to try to save the day.
How about this article? (hat tip to Rick for sending it in)
Feb. 25 (Bloomberg) — The Obama administration may expand efforts to ease the housing crisis by banning all foreclosures on home loans unless they have been screened and rejected by the government’s Home Affordable Modification Program.
The proposal, reviewed by lenders last week on a White House conference call, “prohibits referral to foreclosure until borrower is evaluated and found ineligible for HAMP or reasonable contact efforts have failed,” according to a Treasury Department document outlining the plan.
As long as the government thinks foreclosure is a dreaded last-resort, the can will be kicked further down the road.
When looking at the normal indicators used throughout the real estate industry, you can get deceived. Looking at the recent median sales prices, you might think the market is steady:
If you look at the cost-per-sf, you can see a downward trend in the cheaper homes, but those over a million dollars still look to be holding their own:
It’s only when you look at the distribution that you see the squishdown. The under-$1,000,000 sales have been increasing, now up to roughly the same as they were in 2005, but the over-$1,000,000 club had less than half the number of sales as in 2005:
You can say pricing has come down, or that you’re getting more for your money.
That It Is
A view of the big park site in Encinitas, plus a quick jaunt through downtown Carlsbad:
Short-Sale Toe Stubbers
On Monday, CR had this SS post and graph on the increase in short sales. The information used was part of a package that included a national audio conference held that day about short sales, and the upcoming HAFA, which begins April 5th.
There were three speakers, from Bank of America, Wells Fargo Bank, and Freddie Mac, who discussed what they are doing about making short sales more palatable.
Bank of America rolled out their new short sale phone number, 866-880-1232, and mentioned that agents can now use their REO-processing website for short sales. The presentation was a little light on details, but I can report a recent success.
We submitted a short sale on behalf of our seller that only took six weeks to get an approval (and the notice came over on a Sunday, from Plano, Texas).
Wells Fargo Bank announced that they are placing short-sale managers in the field. They will be interviewing the sellers on-site, going to their houses to determine their eligibility, and collecting the necessary financial documents. Once in process they’ll order an appraisal, and have a response in 7-10 business days.
I think the banks are too optimistic about the sellers’ willingness to cooperate, after training them to crave the free cheese. WFB is giving $5,000 cash-for-keys to the sellers, but they need to threaten them with foreclosure if we’re going to see any real movement.
Both banks promised to pick up the pace – if they could close short sales within 60 days, it would be a big improvement. To keep the sales urgency higher, the banks have to move quicker to determine the acceptable price of the properties – buyers would be more willing to wait out the process if they knew their price was approved.
It’s hard to believe that the servicers will push to pre-approve any short-sale prices, or especially in the volumes necessary to make a difference. Pre-approvals are, in effect, a voluntary principal reduction, and servicers aren’t going to be rushing those out. Will they approve a fully-packaged short sale in 2-6 weeks? It’s possible, and getting an accurate valuation quickly is the key.
The junior lienholders have to agree to lose money too.
In the Q&A, it was asked if there are going to be deficiency judgments, or are the sellers off the hook. Freddie Mac confirmed that sellers in HAFA are released from liability, but the representatives from Bank of America and WFB were conspicuously silent.
Sellers are still subject to deficiency judgements from junior lienholders, and liable for income tax on capital gains.
For possession and occupancy to be delivered to the buyers, the sellers have to get out of the house. But they are addicted to the free rent, plus their credit report will reflect 6 to 18 months of late payments on their mortgages.
Once the short sale is approved, the buyers then conduct their physical inspection. Any required repairs fall on the realtor to resolve – expect many potential short sales to fail at this juncture due to inexperience/ineffectiveness.
The rampant fraud being committed by realtors is a turn-off.
The housing bailouts have a history of not benefiting the masses. For short sales to increase significantly, the lenders would have to commit to losing big money, and lately there has been reluctance and feet-dragging.
Another crazy day in the real estate business – just when you think you have a well-scheduled calendar, a leak at a vacant REO (that we’re about to put on the market) causes a red alert back at HQ. The asset manager expects an answer, so we deploy all resources:
Our favorite flood guy is Roni at 911 Restoration, because his quotes are reasonable, compared to most – here’s his same-day report:
From my visual inspection, I found that the supply line to the toilet burst and flooded the entire house, the carpets are saturated with water, the kitchen cabinets and both vanities are damaged, the drywall is wet about one foot high and the enclosed patio is flooded as well. – Extracting the water from all the floors (carpet, tile). – Dispose the carpet pad. – Remove the base boards all around the house. – Remove toe kick from cabinets. – Removing all the damaged drywall, insulation and dispose it (about 2feet high). – Setting up air blowers to evaporate the moister. – Operating Dehumidifier to dry the moister. – Applying antimicrobial on walls and floors. – Haul all the debris.
The price for the dry out job: $4,980.00 the process will take between 3-4 days. The work would start as soon as 911 RESTORATION would get a signed work authorization.
Hopefully we won’t lose much momentum. My BPO was $399,900, freeway included.
Bloated Foreclosure Roll
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.