The federal government’s response to the home mortgage crisis always has been an exercise in living down to one’s lowest expectations.
The $25-billion settlement with five big banks over foreclosure abuses that U.S. housing officials and 49 state attorneys general announced last month was supposed to be an exception. Here, at last, was real compensation from those who played key roles in the disaster.
But with every passing day, the shortcomings of this deal appear to proliferate. That is, as far as we know, because the specific terms of the settlement are still not public, nearly one month after it was unveiled in Washington with the sort of fanfare formerly associated with the splashdown of a space capsule.
When the principal reduction program was rolled out two years ago, those incentive payments weren’t extended to Fannie and Freddie, and their regulator has said there are less costly ways to help borrowers avoid foreclosure. The firms are being propped up with massive taxpayer infusions of their own, and the FHFA is tasked with preserving the firms’ assets.
By providing new taxpayer funds, the administration is making it harder for the FHFA to maintain its stance that principal reduction is less costly because Treasury funds will effectively subsidize some of those losses. The FHFA has said it is currently evaluating the newest proposal.
The firms are “working right now…to make a decision on whether they are going to begin principal reduction,” said Mr. Donovan. “We certainly hope that they will start to do that based on these incentives. That’s why we made them available.”
The government’s program to turn foreclosed Fannie Mae, Freddie Mac and FHA properties into rentals “is here to stay,” according to housing analysts at Morgan Stanley.
One of the greatest effects of it, the bank’s analysts say, is job creation, with the possibility of creating more than 1 million jobs in the hard-hit construction and real estate industries. The jobs could be created by private capital without the use of taxpayer dollars.
The program’s purpose is to clear the national backlog of distressed housing. “On a macro level, (the REO rental program) could not have come at a better time,” the analysts say.
According to the Bureau of Labor Statistics, the economy lost million 2.5 million housing-related jobs over the past five years. Of those, 2.16 million were in construction and 240,000 were in real estate.
Employment in construction increased by 21,000 in January, following a gain of 31,000 in the previous month.
Analysts estimate about eight million properties will be sold in some form of distressed sale over the next five years.
“Even if only half can be turned into rentals, which would represent only a 20% increase in the total number of single-family rental properties available today, that could result in the creation of one million one-time construction-oriented jobs plus a possible additional 800,000 in permanent jobs, mostly in some of the hardest-hit sectors and the hardest-hit economic areas of the country,” they say.
The 800,000 jobs would comprise the cottage industry for servicing REO rental units, from cleaning properties to collecting the rent.
The chart below shows Morgan Stanley’s full-time job-creation numbers per distressed property turned into rental by each category and for total jobs. The calculation is based on anecdotal labor-usage feedback the firm received from current single-family operators.
Capital Economics called the program to move REO properties to rentals the “best housing fix so far” and “possibly more significant” than President Brack Obama’s refinancing proposals announced late last month.
Support for a government-led program was the most popular disposition strategy among panelists at January’s American Securitization Forum.
But when Federal Reserve Chairman Ben Bernanke sent a letter in January to Congress proposing the REO rental program, it highlighted the deep political divide on how to repair housing.
Private investors, with the government’s support, are gearing up for what they perceived as a massive and long-term investment opportunity.
“With the added benefit of the potential for significant private sector-led job creation, potentially in the hardest-hit sectors in the hardest-hit regions, we are increasingly confident that (the program) can have a positive impact on housing and the macro economy as a whole,” the analysts say.
The FHFA set off a firestorm of discussion in 2011 when it announced an REO-bulk sales initiative that aims to repair the hardest-hit housing markets by selling off bulk assets to investors who have the ability to turn those properties into rentals.
The FHFA, as conservator for the government-sponsored enterprises, says investors can now enter the pre-qualification process to establish whether they have the financial ability and property-management capacity to bid on transactions during the initial pilot phase of the program.
“This is an important step toward increasing private investment in foreclosed properties to maximize value and stabilize communities,” said FHFA acting director Edward DeMarco. “I am grateful for the collaborative effort by the many stakeholders including investors, nonprofit organizations, and state and local government officials, who have worked together on this Initiative.”
Investors who qualify will be able to purchase pools of foreclosed properties for the purpose of turning those homes into rentals.
The pre-qualification process will identify which investors have the expertise to manage the properties and the financial capacity to deal with the homes for a long period of time. Investors who participate have to sign agreements, promising to keep certain aspects of the deals confidential.
Investors who want to pre-qualify, can click here for information.
The Treasury Department will triple payments to mortgage investors for reducing borrower principal through an expanded Home Affordable Modification Program announced Friday.
Officials announced several critical changes to HAMP, including an enrollment extension to Dec. 31, 2013, from its original expiration date at the end of this year.
The Treasury will also require servicers to factor in second liens and other obligations in the debt-to-income ratio calculation. Previously, if a borrower’s first-lien mortgage monthly payment was below 31% of the income, the borrower was deemed ineligible. Factoring other debts to the DTI evaluation will expand the pool of borrowers who could receive the assistance.
To combat blight, officials said they would also expand HAMP toinvestors who are renting properties to tenants.
Since HAMP launched in March 2010, more than 900,000 permanent modifications have been conducted. The Treasury originally estimated the program to reach between 3 million to 4 million borrowers. As of Dec. 1, less than 1 million were estimated to be eligible for the program under past rules.
Of the modifications already given, roughly 36,400 resulted in reduced principal as of Dec. 1. The Treasury paid between six and 21 cents to the investors for each dollar forgiven under HAMP, but that will grow to between 18 and 63 cents, under the rule changes.
In a conference call Friday, Treasury Assistant Secretary Tim Massad would not estimate how many borrowers would be eligible after the changes, but he did say mortgage servicers were signaled some expansion, even for principal reduction.
“We have previewed the changes with the servicers,” Massad said. “We got a very positive initial reaction.”
Department of Housing and Urban Development Secretary Shaun Donovan said in the conference call Friday that the Treasury would make these payments to Fannie Mae and Freddie Mac if they participate in the principal reduction program. To date, the GSEs have not committed to such a program.
Both GSEs owe the Treasury $151 billion in bailouts, and their regulator the Federal Housing Finance Agency said a wide-scale principal reduction program would cost Fannie and Freddie $100 billion.
Of the $29.9 billion allocated for HAMP and other housing programs, the Treasury has spent only $2.3 billion. The Treasury still owes another $9 billion to $10 billion for the modifications already done, Massad said.
Donovan renewed calls for servicers to ramp up principal reductions, and reiterated that they would be a main tool in crackdowns stemming from the ongoing foreclosure settlement talks and the securitization investigations launched this week.
“These changes aren’t going to solve all the problems in the housing market, but they shouldn’t have to wait for the market to hit bottom before getting some relief,” Donovan said.
CR outlined on his show how the Fannie/Freddie HAPR refinances will escalate in March when they change to automated underwriting, and loosen the guidelines by not requiring appraisals or income verifications. See more details here:
In the State of the Union address last night, President Obama said he will send to Congress a proposal to expand the refinancing to loans carried by private lenders. An excerpt from the nytimes.com:
The new plan would require Congressional approval, a difficult hurdle for any legislation in the current polarized environment. Still, some Republicans have expressed support for expanding the availability of refinancing, and White House officials insisted that the plan was not an act of theater.
“I’m sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates,” Mr. Obama said Tuesday night in his State of the Union address. “No more red tape. No more runaround from the banks.”
Administration officials said they would release the full proposal in the near future.
The new program will be directed at people whose mortgage debts exceed the value of their homes, according to a senior administration official who spoke on the condition of anonymity because the details have not yet been finalized. The official estimated that the program could benefit two million to three million homeowners who have loans that are not guaranteed by the government, and that the program’s cost would not exceed $10 billion.
The proposal is the latest in a long series of largely unsuccessful efforts by the administration to bolster the housing market. Like most of its predecessors, the plan is focused not on borrowers facing foreclosure but on those who have been able to keep making the payments on their homes. Reducing housing payments for those borrowers will allow them to spend more money on other things. It also could help to stabilize housing prices by encouraging them to stay in their homes.
They haven’t rolled out the details yet, let along convince Congress that they should add 2-3 million more refinances of private loans to the 1 million projected to be helped by HARP.
But if they did, the last sentence is the key – it will bring fewer homes to market, which may or may not ‘stabilize housing prices’.
What his program will do is stagnate the market further, because there will be fewer distressed sales selling for retail price or less (which would stimulate sales!). Instead, the housing inventory will be dominated by equity sellers who insist on listing their homes for retail-plus prices, and holding out.
This additional program will force buyers to contend with lowly-motivated sellers – the ones who will sell, if they get their price. Will buyers be willing to pay more?
Democrats on the House oversight committee are pushing to subpoena the Federal Housing Finance Agency to obtain an analysis looking at what effects principal reductions would have on Fannie Mae and Freddie Mac.
FHFA Acting Director Edward DeMarco has long defended the agency’s policy of keeping Fannie and Freddie mortgage servicers from writing down principal. Allowing such an option would only forge more losses for the government-sponsored enterprises who already owe the Treasury Department roughly $151 billion in bailouts, he and both CEOs at Fannie and Freddie concluded.
However, both CEOs are on their way out, and other Democrats in Congress have pushed the White House to replace DeMarco as well.
Mortgage servicers primarily use principal reduction for loans held on portfolio or for private investors. And it has been used sparingly. In the third quarter of 2011, servicers cut principal on 10,722 modifications, roughly 7.8% of all workouts during the period, according to the Office of the Comptroller of the Currency. Roughly 4 million Fannie and Freddie loans are currently underwater, meaning the property is worth less than the loan on the home.
In a November committee hearing, DeMarco said he would provide the lawmakers documents and analysis used for determining the principal reduction policy.
“We have been through the analytics of the underwater borrowers at Fannie and Freddie, and looked at the foreclosure alternative programs that are available, and we have concluded that the use of principal reduction within the context of a loan modification is not going to be the least-cost approach for the taxpayer,” he said at the time.
I will have the transcript of the show hopefully by tomorrow for those who prefer to read – we covered many topics!
Bill brought up the HARP refinancing of underwater mortgages, and how they are going to automated underwriting in March. This means that the Fannie/Freddie loans over 80% LTV (though appraisals aren’t required) can berefinanced at today’s rates – with no qualifying.
The GovFed guys think this program will help another million people stay in their homes. We speculated that if it was easy (or at least easier) to get a loan mod, more people would do it, and stay in their home.
With 8-10 million foreclosures expected, if they could solve a million here, and a million there, and not have to foreclose…for now…could that be enough relief to calm the markets?
The new enhanced Home Affordable Refinance Program guidelines were released on November 15, 2011, and with this December 20th update they stated that no income ratios will be required for qualified borrowers (on page 7). It appears that they will rely primarily on credit histories.
However, these are guidelines, and the lenders will come up with their own interpretation.
Fannie Mae and Freddie Mac buy loans, they do not fund loans. Therefore, we must be reminded that these guidelines must now be met up with originators such as BofA, Wells Fargo, Chase, Citi, etc. who will then in turn create their own internal guidelines, based on their interpretation of what Fannie and Freddie have put out. In addition, the lenders may have their own comfort level, company philosophy or other internal reasons for making the program more attractive, or less.
Key components of the new HARP:
The original mortgage must have been sold to Fannie or Freddie prior to April 1, 2009.
It appears they are looking for scores at 620 and higher.
The new guidelines are permitting one 30-day delinquency within the previous 12 months on the mortgage being refinanced provided the Delinquency was not within the previous six months.
There are no LTV restrictions for fixed-rate mortgages with terms up to 30 years, including those with terms of 15 years.
Any borrower with an LTV ratio below 80% is not eligible for HARP.
The GSEs provided specifics on which liabilities would be lifted and noted that the rep and warranty adjustment is one of the most important components of the new program in order to create competition. The lender will not be responsible for any of the representations and warranties associated with the original loan. As long as the new loan has no fraud associated with it, for the most part the new lender is off the hook as far as buy backs are concerned. This is a major point and will cause additional refinances.
The lender is not required to make any representation or warranty as to value, marketability, or condition of the subject property unless they obtain a new appraisal. It should mean that the lender would rather NOT order an appraisal. They will likely order one in the event they believe that the subject property may have challenges that are not being fully disclosed.
They are removing the requirement that the occupancy of the Mortgage being refinanced and the occupancy of the Relief Refinance Mortgage be the same
The GSEs are also removing the requirement that the borrower (on the new loan) meet the standard waiting period following a bankruptcy or foreclosure. The requirement that the original loan must have met the bankruptcy and foreclosure policies in effect at the time the loan was originated is also being removed.
NEW YORK (CNNMoney) — Delinquent borrowers facing foreclosure are learning that they can stay in their homes for years, as long as they’re willing to put up a fight.
Among the tactics: Challengingthe bank’s actions, waiting to file paperwork right up until the deadline, requesting the lender dig up original paperwork or, in some extreme cases, declaring bankruptcy.
Nationwide, the average time it takes to process a foreclosure — from the first missed payment to the final foreclosure auction — has climbed to 674 days from 253 days just four years ago, according to LPS Applied Analytics.
It takes much longer than that in Florida, where the process averages 1,027 days, nearly 3 years. In D.C., foreclosure averages 1,053 days and delinquent borrowers in New York often stay in their homes for an average of 906 days.
Because California is a trustee-sale state, the delays are shorter – only 11 months on average:
And while some borrowers are lookingfor ways to make good with lenders and get their homes back, many aren’t paying a dime. Nearly 40% of homeowners in default have not made a payment in at least two years, according to LPS.
Many of these homeowners are staying in their homes based on a technicality. There is rarely any dispute over whether or not they have stopped paying their mortgage, said David Dunn, a partner at law firm Hogan Lovells in New York, who represents banks and other financial institutions in foreclosure cases.
“In my experience, they never say, ‘I’m not delinquent’ or ‘I want to pay my bill but I’m confused over who to send it to,’ or ‘Oh my God, you mean I didn’t pay my mortgage?’ They’re not in technical default. They’re in default because they’re not paying,” he said.
Does anybody know someone who got a principal reduction? FromHW:
A borrower is more likely to get a principal reduction than a short sale or deed-in-lieu of foreclosure under the Home Affordable Modification Program.
The Home Affordable Foreclosure Alternatives program launched in April 2010 to give borrowers who are eligible for HAMP a chance at a short sale or DIL. Participating servicers completed about 20,700 of these deals as of October, with less than 600 of them deeds-in-lieu, according to Treasury Department data.
The principal reduction alternative, or PRA, began in October 2010 and only for mortgages not guaranteed by Fannie Mae or Freddie Mac. But in six fewer months, servicers started 33,376 modifications by writing down principal.
The effect of the reduction is eye catching. The Treasury released characteristics of HAMP modifications last week. The median loan-to-value ratio on modifications that went through principal reduction was 158%. After the workout was complete, the borrower held an LTV of 115%, meaning he or she owed 15% more on the mortgage than the home was worth rather than being 58% underwater.
The average amount reduced is more than $65,000 or 31% of the unpaid principal balance.
Through PRA, the Treasury pays investors for every dollar of principal forgiven on a sliding scale depending on how far underwater the borrower is.
HAMP enters its final year next month, and it has been criticized at nearly every turn since it launched in March 2009. It will not reach the 3 million to 4 million originally predicted. After redefaults are factored in, roughly 800,000 homeowners will avoid foreclosure thanks to HAMP, according to the Congressional Oversight Panel.
The federal government’s response to the home mortgage crisis always has been an exercise in living down to one’s lowest expectations.
