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HomeGaming Uncle Sam’s Mortgage Modification Program
Posted by Larry Doyle on March 31st, 2010 11:08 AM |
A new release by the SIGTARP (Office of the Special Inspector General for the Troubled Asset Relief Program) is exceptionally enlightening in detailing how a likely significant percentage of those homeowners who entered the trial mortgage modification process gamed the system.
Once again, major high five to our friends at 12th Street Capital for sharing this report and providing insightful commentary. As 12th Street points out this morning:
With all of the hoopla surrounding the government and Bank of America announcements to push principal forgiveness to the top of the waterfall for mortgage modification triage, it would have been easy to miss the latest report from the SIGTARP (Special Inspector General of TARP). I have attached the report here and would encourage you to print it out and read it. (more…)
Socialized Housing Manifesto
Posted by Larry Doyle on March 26th, 2010 10:36 AM |
Thank you to our friends at 12th Street Capital for sharing a sneak peek of Uncle Sam’s release of his new “Socialized Housing Manifesto.” (Click on the image to access pdf document.)
What is the one word that Uncle Sam is clearly trying to emphasize throughout the 4-page release? Responsible. Who the hell is Uncle Sam to define who and what is responsible or not? (more…)
Mortgage Modification Applications Decline in November
Posted by Larry Doyle on December 14th, 2009 4:01 PM |
If you don’t buy a ticket, you can’t get into the game.
The Obama administration’s attempt to stabilize the housing market has been an abysmal failure. That fact has been widely broadcast here at Sense on Cents and increasingly at other outlets. While the administration is now attempting to revive this initiative, the fact is the trend in this program is declining. What trend? How is that defined?
Just as a student won’t gain admission to a school without having applied, similarly homeowners will not gain the benefits of a mortgage modification without processing an application. Thank you to our friends at 12th Street Capital for sharing a recent report produced by Bank of America highlighting a number of trends in mortgage modifications, including applications. Let’s navigate. Bank of America reports:
Last month we said that we expected the focus of the HAMP program to shift from outreach and initiation of new trial modifications to completion of modifications and much of this has been confirmed now. The number of trial modifications started over the last month was the lowest yet at about 77k. This represents more than a 50% drop from the prior month. Also, the number of offers given over the last month was at all time lows dropping 30% from the previous month. This month’s report also disclosed permanent modifications for the first time. So far, 31k trial modifications have been successfully converted to permanent modifications. This represents only 4% of started trial modifications. Furthermore, an equal number have failed and are no longer active.
What are the actual figures for mortgage modification applications since this program was launched last spring? BofA reports:
May: 50,130
June: 93,146
July: 110,397
Aug: 133,192
Sept: 100,216
Oct: 163,913
Nov: 77,414,
While Uncle Sam will try to make a go of saving this program, the fact is it’s a pea shooter in the midst of a sandstorm. What would be the heavy artillery? Principal reduction via mortgage cram-downs.
Although Congress has shot down that plan twice, look for a return engagement in 2010.
For those interested in reviewing the Bank of America Mortgage Modification Monitor, click on the image below to access the entire pdf document:
LD
Mortgage Cram-Downs Revisited
Posted by Larry Doyle on December 11th, 2009 2:03 PM |
Having broached the topic of mortgage cram-downs this morning, Bloomberg reports that an amendment adding this capability to pending legislation was voted down today. Mortgage ‘Cram-Down’ Bankruptcy Amendment Fails in U.S. House:
Republican lawmakers defeated a mortgage “cram-down” amendment that would have given federal judges the power to lengthen mortgage terms, cut interest rates and reduce loan balances for homeowners in bankruptcy court.
The U.S. House of Representatives voted 241-188 today, stripping the amendment from a broader package of proposed laws to rein in excess on Wall Street. The cram-down provision was identical to legislation that passed the House in March and then failed in the Senate amid opposition from the banking industry.
This vote against mortgage cram-downs is the second time it has been struck down. As the dynamics within the mortgage crisis linger well into 2010, I fully expect this proposed piece of legislation will be back up in front of Congress again.
LD
UPDATE: Mortgage Modifications Leading to Mortgage Cram-Downs
Posted by Larry Doyle on December 11th, 2009 11:38 AM |
Despite overwhelming efforts on the part of Uncle Sam, the simple fact of the matter is the program to successfully and permanently modify mortgages has not gained truly meaningful traction. Public pressure on mortgage servicers specifically and the mortgage modification program at large have generated a slight, but hardly significant, increase in permanent modifications over the last month. Let’s review the statistics provided by Uncle Sam’s Making Home Affordable Program:
(more…)
Uncle Sam’s New Mousetrap to Stem Foreclosures
Posted by Larry Doyle on October 13th, 2009 2:40 PM |
Despite hundreds of billions of dollars in support of Freddie Mac, Fannie Mae, the Federal Housing Association, and mortgage modifications, our housing market continues to be swamped with an ever increasing wave of foreclosures. The shadow supply of homes overhanging the market is estimated to be in the realm of 15 month’s worth. Last week, I wrote that Washington needed to address this issue in my post “Washington Needs a New Housing Model.”
Thanks to our friends at 12th Street Capital, we learn today that Treasury will release a new plan next week to stem the wave of foreclosures. How might this work? Let’s navigate a release which came from the Mortgage Banker’s Association convention currently ongoing in San Diego. Housing Wire reports, Treasury to Announce New Program to Avoid Foreclosure:
The United States Department of the Treasury is launching, with an official announcement expected next week, a new program to help ailing borrowers escape foreclosure.
The Chief of the Homeowner Preservation Office at the Treasury, Laurie Maggiano, released information on the Home Affordable Foreclosure Alternatives (HAFA) while speaking at the MBA’s 96th Annual Convention going on in San Diego. The official launch is expected in the next week or so.
HAFA already holds the support of Fannie, according to a VP at the agency, Eric Schuppenhauer, who believes the new program allows borrowers in imminent default to “make a graceful exit” from their home. HAFA will keep the stigma associated with foreclosure away from the borrowers, he added, and help keep communities intact.
Maggiano adds that HAFA will offer financial incentives to both servicers and borrowers, and associated secondary investors, in order to facilitate a short sale or deed in lieu of the property.
Borrowers will need to be Home Affordable Modification Program (HAMP)-eligible and Maggiano released some stats for the crowd’s consumption. 2,484,783 homeowners have requested information on HAMP. 757,955 HAMP plans were offered. 487,081 trials are underway.
Other additional [1] incentives to the short sale industry are nearly developed. The IRS will soon offer a 4506EZ form that will enable servicers to pre-fill out the information so that it only requires a borrower’s signature. It also will include softer language so as not put potential participants off.
For those unaware, a “short sale” entails a home being sold for less than the balance of the mortgage. The homeowner is not held responsible or liable for making up the difference between the proceeds generated by the sale and the mortgage balance. That difference is eaten by whomever ‘owns’ or is holding the mortgage. The owner or holder could be the originator if that entity never sold the mortgage. The owner or holder could be a trust on behalf of investors if the loan had been securitized.
What is the motivation to promote short sales rather than allowing the foreclosure process to run its course? Short sales may be short in terms of proceeds although they are not necessarily short in terms of time. That said, short sales typically do expedite the sale of a home. Short sales have typically occurred at a 10-20% discount to the market. Why? The homes have not been prepared for sale, meaning ‘dressed up.’
The monetary incentive provided to mortgage servicers to promote short sales will likely have a similar impact as the monetary incentive provided to modify mortgages. What has that impact been? Not much.
While many of Uncle Sam’s programs have been designed to buy time and allow the market and economy to recover, that approach has proven not to work so far in housing. Will this short sale program work to support housing? I doubt it.
I think what this program will look to achieve is to actually lessen the negative stigma associated with the term foreclosure. If Uncle Sam can say foreclosures are declining, he can then wave the flag as making progress on housing. What he will be doing, however, is merely ‘redefining’ foreclosure or in other words, ‘putting perfume on a pig.’
This program theoretically will negatively impact bank capital as banks will be forced to take a loss sooner rather than later on those mortgages they hold which are involved in short sales.
Aside from that development, real integrity in this process would include:
>> Add short sales to foreclosures as a more robust measure of housing supply stemming from delinquent mortgages.
>> Assess home prices along with rental rates to measure overall cost of housing.
LD
Housing’s Catch-22
Posted by Larry Doyle on October 12th, 2009 9:28 AM |
What is the optimal policy to deal with our ongoing housing crisis? Should Uncle Sam continue to throw more money at mortgage modifications? Should banks be compelled to implement a principal reduction program? Should Uncle Sam step in and subsidize the principal writedown involved in a principal reduction program? Would that be the mother of all socialized housing programs? Let’s navigate and address these topics knowing full well that none of these questions have any easy answers.
I witness further evidence again this morning of a continued increase in home foreclosures amidst the prime mortgage space. The Wall Street Journal highlights this ongoing development in writing, Foreclosures Grow in Housing Market’s Top Tiers:
The report shows that foreclosures, after declining earlier this year, began to accelerate in the late spring and that more expensive homes have more recently accounted for a growing share of all foreclosures. “The slope of that curve in recent months is much sharper than it was recently,” said Stan Humphries, chief economist for Zillow. Rising foreclosures among more-expensive homes could create added pressure for a housing market that has shown signs of stabilizing in recent months as sales of lower-priced homes pick up.
Foreclosures are rising in more expensive markets as home values in those areas fall, leaving more homeowners with mortgages that exceed the value of their properties. Prime loans accounted for 58% of foreclosure starts in the second quarter, up from 44% last year, according to the Mortgage Bankers Association. Subprime mortgages accounted for one-third of foreclosure starts, down from one-half last year.
The prime category includes so-called exotic mortgages that were increasingly used to buy more expensive homes, including interest-only mortgages that allowed borrowers to defer principal payments during an initial period. Borrowers often aren’t able to refinance out of these products because the drop in home values has left them with little equity in their homes.
Default rates are particularly high and expected to rise on option adjustable-rate mortgages, which allow borrowers to make minimum payments that may not cover the interest due. Monthly payments can increase to sharply higher levels after five years or when the outstanding balance reaches a certain level. A study by Fitch Ratings found that 46% of option ARMs were 30 days past due last month, even though just 12% of such loans have reset to higher monthly payments.
Zillow estimated that nearly one in four homes with mortgages was worth less than the value of the property at the end of June. Mr. Humphries said he didn’t expect to see foreclosure volumes level off until later in 2010. (LD’s emphasis)
![[Moving Up chart]](http://s.wsj.net/public/resources/images/NA-BB100_TOPTIE_NS_20091011211658.gif)
With the waves of foreclosures not abating, Uncle Sam’s plans to merely modify mortgages is proving largely insignificant in supporting the overall housing market. Homeowners are clearly showing a strong inclination to default on their mortgages when they are ‘underwater.’ Thus, how does Uncle Sam help people get ‘above water?’ Compel banks to reduce the principal balance of the mortgage. Will they do it? Not quickly, as a principal reduction would imply an immediate hit to the banks’ capital. (more…)
Democracy Likely Defeats Moral Hazard
Posted by Larry Doyle on April 20th, 2009 7:06 PM |
As part of Obama’s proposal to support housing, the administration pushed the application of principal reduction via bankruptcy proceedings. This process, known as a mortgage cram-down, was pushed hard by the administration and many Democrats. Virtually all Republicans and mortgage investors viewed the mortgage cram-down as another in a long line of moral hazards. In short, the mortgage cram-down would violate the implicit and explicit terms of a written contract.
I wrote What Is a Mortgage Cram Down? on January 1st. While the Obama administration pushed hard for this legislation to be approved, ultimately those with a longer term vision prevailed. What are the concerns about principal reduction? As I wrote:
I personally find it difficult to swallow the concept of government funding for this program. At this juncture, though, the horse is so far out of the barn that we are trying to prevent the illness from becoming a full blown epidemic, if not a plague.
Home prices are down 18% year over year in the top 20 cities in the country and foreclosures have increased by approximately 40%. Both of these figures are certainly headed further in those directions with continued losses for the holders of the underlying mortgages, whether those mortgages are already pooled into securities or held in whole loan form.
The unintended consequences of a principal reduction program will likely be an increase in mortgage rates over the longer term along with a more stringent credit review for those applying for a mortgage. Why will this happen? Very simply, investors in mortgage securities will demand those concessions if they are to purchase mortgages that have the chance of being “crammed down.” Additionally, this program may actually incentivize some borrowers to intentionally become delinquent in their mortgage payments, and actually risk personal bankruptcy in an attempt to be “crammed down.” Where does the madness end?
