REO-To-Rental Analysis

Key points to whether the REO-to-rental plan is attractive enough for investors, from HW:

Any long-term REO-to-rental strategy will need to adopt extensive refurbishment plans in order to resell the assets.  Further, much of the foreclosed property that financial institutions would look to bulk-sell is currently in need of repair.

Morgan Stanley analysts say that nearly 95% of distressed homes are in no shape to rent out, in some key markets. Only a tiny fraction of these properties are less than a decade old, they add.

“The importance of getting construction — or specifically, re-construction or rehabilitation — right cannot be overstated,” according to a report from lead author Oliver Chang, sent to Morgan Stanley clients. “The quality and cost of rehabilitation can continue to benefit or haunt the asset far past the initial completion of work. For example, shoddy plumbing or other infrastructure work can result in significantly higher maintenance costs over time, and can also affect eventual exit pricing.”

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Reduction vs Forebearance

More on this year’s bailouts du jour – from MND:

Acting Federal Housing Finance Agency Director Edward J. DeMarco spoke to the Boston Security Analysts Society on Wednesday, in part defending his stand against principal reductions for Freddie Mac and Fannie Mae Loans.

DeMarco said that the two government sponsored enterprises (GSEs) own or guarantee 60 percent of the outstanding mortgages in the country but account for only 29 percent of seriously delinquent loans.

Even with this small share of the nation’s delinquencies over half of the modifications done through the Home Affordable Modification Program (HAMP) are on GSE loans.  Between HAMP and the GSEs’ own proprietary programs there have been more than 1.1 million modifications of GSE loans completed since the fourth quarter of 2008.

It has been well-publicized, DeMarco told the audience, “that there is one form of loan modification that FHFA has not embraced, that being principal forgiveness.”  The disagreement is not about helping underwater borrowers, he said, both the GSEs and FHFA have been making great efforts on their behalf when they have the ability to make their payments and a willingness to do so.

The fundamental point of a modification is to adjust the payment to an affordable level.  This lower payment rather than loan-to-value has proved to be the key to a successful modification.

The GSEs achieve this through principal forbearance, which is charging a zero rate of interest on the forbearance amount and deferring its repayment.  This makes the monthly mortgage payment affordable, keeps the borrower in the home, and if the borrower is successful in this modified loan preserves for taxpayers an ultimate recovery on the debt.

In other words, the method used by the GSEs produces the same lower payment as a modification based on principal forgiveness and if the borrower ends up defaulting on a forbearance the loss to the taxpayer will be the same.  However, if the borrower is successful the taxpayer retains the opportunity to benefit from the upside, “a reasonable deal given the support the taxpayer has provided to assist the family in keeping their home.”

DeMarco said this approach also recognizes that three out of four deeply underwater borrowers on the GSEs books of business are current on their loans.  Their continued willingness to meet their obligations should be recognized and encouraged, not dampened with incentives to discontinue payment.

The Treasury Department recently proposed an incentive program for principal reductions through HAMP and DeMarco said that FHFA is evaluating the proposal and expects to have a decision this month.

Extending Debt-Relief Tax Deadline

Hat tip to Kingside for sending this in – he noted, “It will be interesting to see if these go anywhere”:

The exemption of debt-relief taxation is due to expire this year.

Bills have been introduced to extend the deadline to January 1, 2015.

The House version, sponsorsed by Rangel & Co.

http://www.gpo.gov/fdsys/pkg/BILLS-112hr4202ih/pdf/BILLS-112hr4202ih.pdf

The Senate’s bill here.

More Talk of Principal Reductions

Principal reductions are the government’s next bailout device, and they are getting pushed hard.  Excerpts from an article at thestreet.com:

NEW YORK – Fannie Mae and Freddie Mac continue to face pressure to reduce principal for homeowners underwater on motgages, but the debate still rages on who will end up paying for it.The FHFA has said it will review its analysis on principal reductions over the next few weeks, taking the incentives into account.

The Federal Housing Finance Agency Acting Director Edward DeMarco remains fundamentally opposed to the idea of principal reductions, arguing that any large-scale reduction would only benefit banks.

Last week, ProPublica reported that the housing giants are likely to tell the FHFA that principal reductions will likely save taxpayers money. And Freddie Mac’s CEO Edward Hadelman hinted at a conference organized by Housing Wire on Friday that the agencies might be more receptive to the idea following new incentives from the Treasury.

“I have to say recently the Treasury sweetened the program and tremendously increased the incentive payments in their offer to us,” Haldeman said, according to a HousingWire report. “We will reevaluate that to see what may be in our economic best interest. If there are very large incentive payments — which could be 50 percent of what you could write down — it may be in our economic self-interest to participate in that.”

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Principal Reductions Help Banks

From Rueters:

Mortgage giants Fannie Mae and Freddie Mac are being pushed to reduce borrowers’ mortgage balances in order to shield U.S. banks from taking losses on distressed housing debt, the companies’ regulator said in a Financial Times interview published on Sunday. “If you do principal forgiveness, who is it benefiting? … Doing principal forgiveness is what would protect the big banks,” said Edward DeMarco, the acting director of the Federal Housing Finance Agency.

DeMarco argued that writing down the principal on first mortgages would amount to a transfer of taxpayer wealth to the biggest U.S. lenders, whose “second mortgages” are normally subordinate to the primary mortgages backed by Fannie Mae or Freddie Mac.

Some officials in the Obama administration, the Federal Reserve and Congress have called on Fannie Mae and Freddie Mac to write down the value of mortgages they own or guarantee as part of an effort to help the U.S. housing market recover from a deep slump that saw one third of property values wiped out since 2006.

DeMarco has previously resisted those calls, citing concerns it would increase losses at the two companies and undermine his mission of keeping a lid on the costs of their taxpayer-funded bailout. “Certainly the environment of the last number of months have shown substantial attempt to influence or direct an independent regulator,” he told the business newspaper.

Fannie and Freddie provide funding for the bulk of U.S. home loans by buying mortgages from banks and repackaging them as securities for investors, which they then guarantee. The Obama administration has proposed using TARP funds to lessen the cost to Fannie and Freddie of doing writedowns. DeMarco is now considering whether the new money the Obama administration is laying on the table changes the equation.

Freddie Mac and Fannie Mae were taken over by the government in 2008 after massive mortgage losses at the housing giants threatened the global financial system. Since then, the U.S. government has funneled more than $150 billion in taxpayer funds into Freddie and Fannie, in part to ensure that credit remains available for homebuyers.

Moneymaker or Publicity Stunt?

Hat tip to ProfHoff and Susie who sent in stories about the BofA “Mortgage-to-Lease” program:

Excerpts from wsj.com:

Executives last year began to ask themselves “isn’t there a way to sort of combine that whole process and keep the borrower in the property? It’s just better for the market,” said Ron Sturzenegger, the Bank of America executive who last summer was put in charge of the unit that handles troubled mortgages.

The initial pilot is limited to loans that Bank of America holds on its books. Homeowners can’t apply for the program—only those who receive letters from the bank can participate.

Borrowers would agree to a what is known as a “deed-in-lieu” of foreclosure, where they essentially sign over ownership of the property to the lender. This is less costly to the bank and also does less damage to a borrower’s credit than a foreclosure.

Borrowers selected for the program must be at least two months past due on their mortgage and face considerable risk of foreclosure. Bank of America is reaching out to borrowers who have exhausted other alternatives to foreclosure or who haven’t responded to earlier solicitations. Homeowners with second mortgages or other liens won’t be selected.

http://online.wsj.com/article/SB10001424052702304724404577297904070547784.html

Excerpt from cnbc.com:

“Pilot participants will transfer title to their properties to the bank and have their outstanding mortgage debt forgiven. In exchange, they may lease their home for up to three years at or below the current market rental rate,” according to a statement. The rent will be less than the mortgage payment and the (former) homeowner will have no financial obligations to the property, like taxes and insurance.

Bank of America will work through property management companies to handle the pilot. A Bank of America spokesman tells CNBC, “We’ll own the properties only in the pilot and only initially. If a decision is made to roll out a full program, Bank of America would not be in the ownership position at all.”

Banks Extracting “Excess Profits”

Hat tip to evansea for sending this along from HW:

The nation’s largest banks are charging borrowers who refinance under the Home Affordable Refinance Program significantly higher rates than other types of refinance loans, according to Amherst Securities Group.

HARP 2.0, announced in November, introduced new benefits to servicers for refinancing their own loans. Different-servicer refinances received only marginal improvements, however, often requiring the new servicer to provide full representations and warrants on the new loan.

“This tends to lock a borrower into refinancing with their existing lender, which conveys tremendous pricing power to the banks,” Amherst’s Laurie Goodman says in an analysis of the program.

Under the program, different-servicer refinancings require servicers to gather more information about borrowers than under a same-servicer refinance.

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Rich Get Richer

Hat tip to SM and jpinpb for sending this along….from Reuters:

Dan Magder recently gave up a top job with private equity firm Lone Star Funds to strike out on his own and become a landlord.

He’s joining a growing list of big and small investors who see fat profits to be made in renting out foreclosed homes, especially now the U.S. government is moving ahead with a trial project to sell big pools of single-family homes that Fannie Mae currently owns in some of the hardest-hit housing markets.

Investors seeking higher yields are drawn to foreclosures because the rental market is red hot. But the heated competition for foreclosed homes is reminiscent of the frothy expectations that seem to accompany each new Wall Street investing craze.

Even proponents of buying foreclosed homes are advising caution about the kind of returns that investors can expect to reap and the potential negative headlines that can come with being a landlord.

Critics, meanwhile, contend the federal government is fostering a transfer of wealth of sorts by selling big pools of foreclosed homes to big fund investors and high-net-worth individuals. There’s also concern that some of the players who helped create the housing crisis will now benefit by buying foreclosed homes at a steep discount.

Between them, Fannie and Freddie Mac own more than 200,000 foreclosed homes. The nation’s banks own more than 600,000 single-family homes, according to RealtyTrac, a housing tracking service.

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Mortgage-Debt Forgiveness

I haven’t seen any official N.A.R. statement regarding an extension of the tax exemption of debt relief, but there was a mention here in the first paragraph from their tax counsel:

http://rismedia.com/2012-03-11/what-you-need-to-know-about-cancellation-of-mortgage-debt/

“NAR will be working to obtain an extension throughout the year”.

It sounds like they are getting ready to begin to think about starting their calls to Congress.  But this is an election year, and if they don’t already have this well in hand by now, how much luck will they have in the next nine months?

Could it be positioned as a vote-getter?

It’s about the only way to get the attention of a politician, and even then there will be plenty of disgust among the good-paying Americans.

I think it will be allowed to expire.

The closer we get, the more panic we’ll see on the streets.  The natural inclination will be to aggressively price a short sale, so it sells immediately.  But it will be smarter to price them at the comps, so there aren’t appraisal issues later.

Even though the servicers have done wonders lately to pare down the processing time to 2-3 months, if a surge of short sales rolls in, will they be able to handle them?

Probably not, and they shouldn’t have any liability to process them expediently. “Heck, we’re doing the best we can!”

For buyers and sellers alike, to have some assurance that your short-sale escrow will close in time, you should be in process by mid-summer at the latest.  Otherwise, the sellers will be hoping that the N.A.R. lobbyists can pull off a last-minute miracle, or get the new Congress to approve a new version, and back-date it.

Sellers will want to cancel sales that cause them to pay regular income tax on the debt relief – they’ve had it so good for so long that they’ll expect more favors.

Listing agents should write in their counter-offers that if the sale is not consummated by 12/31/12, then it automatically cancels if there is no new exemption in place.

How many buyers will go for that?

The exemption applies to those who get foreclosed too – will lenders do borrowers a favor and hurry up and foreclose on them by the end of 2012?  It should provide more thrills to our wild ride the rest of the year!

Straight from the IRS:

http://www.irs.gov/individuals/article/0,,id=179414,00.html

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