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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.

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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Cushy Mortgage Settlement

Excerpts from the latimes.com:

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.

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HARP 2.0

From the latimes.com:

The most ambitious federal mortgage program to date aimed at millions of underwater homeowners is poised to take off in the coming two weeks, yet some key issues could hinder borrower participation. One of them involves something most owners know nothing about: Who was your mortgage insurer on your underwater loan?

Though it was announced by the Obama administration late last year, “HARP 2.0” — the second version of the Home Affordable Refinance Program — will finally hit full stride around the middle of this month, when Fannie Mae and Freddie Mac finish tweaking their automated underwriting systems to accept applications, and lenders and mortgage insurance companies start handling large volumes of requests.

The revisions are crucial for owners who have outstanding mortgage balances in excess of 125% of the current resale values of their homes. Under the second version of HARP, there is no upper limit on permissible loan-to-value ratios (LTVs). You can owe twice or even three times the value of your home and still qualify for a refinancing at today’s low interest rates. The earlier version imposed a limit of 125%, which cut out millions of the hardest-hit victims of the real estate bust.

The latest HARP also comes with streamlined underwriting — no requirement for physical appraisals in many cases, speedy processing and elimination of some of the deal-breaker fees imposed by Fannie Mae and Freddie Mac in recent years.

The objective, federal officials say, is to get it right this time around by removing the previous obstacles to widespread participation by lenders and severely underwater borrowers. Industry studies estimate that as many as 6.9 million loans could fit the broad requirements for refinancing, but that far fewer — around 2 million borrowers — are likely to qualify on all the detailed eligibility criteria.

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Treasury Backs Principal Reduction

Thank you taxpayers!  From HW:

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 to investors 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.

Obama To Squeeze Buyers

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:

https://www.bubbleinfo.com/2012/01/11/harp-no-income-refis-in-march/

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?

HARP No-Income Refis in March

Thanks to everyone who participated in the blog talk radio show last night with Bill McBride!

Based on the responses here and at CR, people enjoyed hearing from Bill, and are encouraging him to do more – hopefully we can do it again.

Here is the link to the two hours:

http://my.blogtalkradio.com/jim-the-realtor/2012/01/11/bill-mcbride-of-calculated-risk

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 be refinanced 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:

  1. The original mortgage must have been sold to Fannie or Freddie prior to April 1, 2009.
  2. It appears they are looking for scores at 620 and higher.
  3. 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.
  4. There are no LTV restrictions for fixed-rate mortgages with terms up to 30 years, including those with terms of 15 years.
  5. Any borrower with an LTV ratio below 80% is not eligible for HARP.
  6. 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.
  7. 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.
  8. They are removing the requirement that the occupancy of the Mortgage being refinanced and the occupancy of the Relief Refinance Mortgage be the same
  9. 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.

https://www.efanniemae.com/sf/mha/mharefi/pdf/refinancefaqs.pdf

http://www.freddiemac.com/sell/guide/bulletins/pdf/bll1122.pdf
https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2011/sel1112.pdf1.

You may look up to see if Fannie Mae owns your mortgage by clicking here; http://www.fanniemae.com/loanlookup/ and click here to see if your loan is owned by Freddie Mac; https://ww3.freddiemac.com/corporate/

An Occasional HAMP

From Huff:

Less than 20 percent of homeowners who theoretically qualify for a government mortgage modification are actually eligible, according to data released Monday by the Treasury Department.

Although roughly 4.6 million U.S. homeowners have missed at least two mortgage payments — making them technically eligible for Making Home Affordable, the federal government’s flagship homeowner assistance program — a whopping 80 percent of those borrowers cannot be helped by the program. According to the Treasury report, just 900,000 homeowners actually qualify for a loan modification under Making Home Affordable.

Dean Baker, an economist and co-director of the Center for Economic and Policy Research, said that fact reflects the program’s low goals. “If 900,000 are eligible, and this is your main program for helping underwater borrowers, and we know that not all 900,000 can be helped, this doesn’t look very ambitious,” he said.

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Mass Refinancing in the Works?

From theenterpriseblog:

This could be just the beginning. If President Barack Obama’s legally dodgy appointment of Richard Cordray to head the consumer finance agency should stick, it may open the door to more such actions. Here’s Jaret Seiberg of the Washington Research Group:

To us, the most important takeaway from a recess appointment of Cordray is that the President could use this same maneuver to put a housing advocate in charge of FHFA.

And why is that important? The Federal Housing Finance Agency is the regulator and conservator of Fannie Mae and Freddie Mac. And the FHFA currently has an acting director, Edward DeMarco. If Obama replaces him with a “housing advocate” via the same recess appointment process, here’s what might happen next, according to Seiberg:

That could lead to a mass refinancing program for agency-backed mortgages that would go well beyond the existing HARP program. That could hurt agency MBS pricing and result in higher financing costs going forward. Yet it also could be a big boost for the economy and housing going into the election.

Indeed, my sources tell me the Obama administration has been eager to implement just such a plan, but needs to have its own man heading the FHFA to make it happen. The plan would be modeled after one originally devised by Columbia University economists Glenn Hubbard (a campaign adviser to Mitt Romney and AEI visiting scholar) and Christopher Mayer. In recent congressional testimony, Mayer described how the mass refinancing plan would work:

Under our plan, every homeowner with a GSE mortgage can refinance his or her mortgage with a new mortgage at a current fixed of 4.20 percent or less. … To qualify, the homeowner must be current on his or her mortgage or become so for at least three months. … Other than being current, we would impose no other qualification or application, except for the intention to accept the new rate (that is, no appraisal, no income verification, no tax returns, etc.).

Mayer estimates that some $3.7 trillion of mortgages would be refinanced. That’s right, this would be the Mother of All Mortgage Refinancing Plans. It would help roughly 30 million borrowers save $75 billion to $80 billion a year. As Mayer puts it: “This plan would function like a long-­lasting tax cut for these 25 or 30 million American families.”

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