Principal Reductions

by Jim the Realtor | Feb 28, 2011 | Bailout, Mortgage News | 5 comments

From HW:

Thirteen of the 20 largest mortgage servicers participating in the Home Affordable Modification Program have begun principal write-downs, according to Laurie Maggiano, director of policy at the homeowner preservation office inside the Treasury Department.

While outlining changes to HAMP at the Mortgage Bankers Association servicing conference last week, Maggiano said several thousand modifications have had the principal written down by an average between $50,000 and $100,000. That number was confirmed by the Treasury late Friday.

The Treasury announced the initiative in March 2010. The Treasury said then that the write-downs would apply only to borrowers with 115% or higher loan-to-value (LTV) ratios. Servicers initially forbear some or all of the balance exceeding 100% of the home’s value, down to a 31% debt-to-income ratio. Then, the servicer forgives the forborne amount in three equal installments over three years, contingent on the borrower’s ability to remain current on payments.

A spokesperson for the Treasury told HousingWire that the program is still very new and that it will begin reporting on the write-downs in March.

“Additionally, each servicer has a plan in place for implementation of the program – so principal reduction is on those loans they have targeted in their portfolio,” the spokesperson said.

Despite an increase in existing home sales, analysts at FNC, said home prices continued to decline in December because so many of those sales were foreclosures.

“Driven in part by rising sales of distressed properties and higher foreclosure-sales discounts, home prices declined for the seventh straight month in December and suffered their largest one-month drop during the year,” according to FNC.

Of the 30 major metro areas tracked by FNC, 23 had price declines in December by an average of 2.2%.

FNC’s dim view of house prices is not theirs alone. CoreLogic Chief Economist Mark Fleming expects home prices to decline between 5% and 10% through 2011. Fleming added that stabilization should occur by the end of the year, but the damage has been extensive and the road to recovery will be a long one.

“The flooding may have finally stopped,” Fleming said. “But the living room is half underwater.”

Shot Across Bow

by Jim the Realtor | Feb 25, 2011 | Bailout, Mortgage News | 5 comments

From HW:

Any potential settlement U.S. regulators reach with large mortgage lenders and servicers to modify loans and pay $20 billion or so to help borrowers underwater on their mortgage will do little to help the already fragile market recover, according to Bank of America Merrill Lynch analysts.

Discussing details of the settlement first reported by The Wall Street Journal, mortgage-backed securities strategists Chris Flanagan, Vipul Jain and Timothy Isgro said the likelihood of a fine and principal reduction program is low. The Journal cited anonymous people familiar with the negotiations of the settlement, and said the nation’s largest banks have yet to receive any proposal.

“We believe that a $20 billion levy on banks to fund principal reduction would bring with it enormous costs that would far outweigh any potential benefits,” the analysts said.

Analysts at Keefe, Bruyette & Woods said the suggested amount of the settlement “seems high” and talks are in the early stages, so “it is too soon to draw significant conclusions” regarding companies that could be effected.

“We believe the most likely scenario would be a settlement where the servicers agree to a certain amount of money to provide principal writedown as part of mortgage modifications,” Bose George, Jade Rahmani and Ryan O’Steen said in a research note.  The proposed $20 billion fine would do little to address the nation’s aggregate negative equity of $744 billion, as estimated by CoreLogic, according to BofAML.

The analysts think banks would tighten private credit availability if this proposed settlement or others come down, “which in turn could damage the housing recovery, and force the government to assume an even larger role in housing finance than its current 94% share.”

Admitting that quantifying negative-equity risk is “almost impossible,” Flanagan said BofAML thinks banks “would immediately recognize that they have to incorporate the risk of future levies into the pricing of mortgage credit.”

In short, mortgage lending could come to a complete halt.  “In our view, this proposal would re-open the property question and create somewhat unquantifiable tail risk to the downside for home prices,” the analysts said.

“There is a simple way for banks to manage this tail risk: namely stopping mortgage lending, which clearly would be an unacceptable outcome,” BofAML analysts said.