Mortgage Industry News

Ruth Lee

So… what happens when the academics encourage people to walk away from their homes?  With almost a quarter of Americans underwater on their home….what could go wrong?  This professor is telling Americans to emulate Wall Street… but I question the wisdom.  Wall Street affects macro…while being this cynical and self-serving in a local community is definitely micro.  Sage words – don’t mess where you sleep.

If we are okay with this “it’s all about me” attitude, then we cannot blame Wall Street for the same thing.  I am horrified by the notion that you should abandon your “inconvenient” obligations… there’s no cost…right?  But there is always a cost… always… from destruction of the local economy – you know, the one we actually live in – to the disintegration of the wealth and investment of our friends and family – to the erosion of local community banks… Fabulous idea!

Right now the government is our lender, because we screwed up so badly (IN HOUSING) that the rest of the world won’t invest.  So the best way to court investors?  Default!   That promise to pay was only a “sort-of” promise… you know, with fingers crossed behind your back…predicated on only favorable and optimistic assumptions of infinite appreciation and 50% bonuses!

How do we engender investor confidence when risk is solely shouldered by the investor?  When we don’t even retain the ethos that a promise to pay is a personal matter?  That integrity is just an ancillary quality for chumps when it comes to credit.  (Sounds very subprime doesn’t it.)

Buyers consider abandoning troubled mortgages

December 1, 7:18 AM Baltimore Real Estate Examiner Rashida Bandy

Despite stabilizing home prices in many areas, foreclosure numbers are still reaching record numbers. According to First American CoreLogic, a company that provides real estate information data, 23 percent of American homeowners have negative equity in their homes, classifying almost 10.7 million households as “underwater borrowers.” The 5.3 million of these households which owe at least 20% more than the home’s value are more likely to default on their mortgage loans and end up in foreclosure status.

In fact, the mortgage dilemma some homeowners are now experiencing has led to an interesting debate about whether underwater borrowers should simply cut their losses and walk away from their homes (and their mortgage payments). Brent White, an associate professor at the University of Arizona, thinks it is a mystery that more homeowners aren’t abandoning their homes. In a discussion paper White wrote, “Homeowners should be walking away in droves.” Trends show that homeowners under 30 (who are likely unattached to their homes and lack strong community ties) are more likely than other age groups to feel it’s okay to simply walk away.

The bottom line, however, is that a resulting surge in foreclosures will affect progress in the real estate arena if left unchecked. As a result, the U.S. administration is boosting its foreclosure-prevention efforts. On Monday a plan is expected to be announced that will crack down on mortgage companies who aren’t fully committed to assisting borrowers at risk of losing their house. Currently, companies that lower payments for troubled borrowers received financial incentives. The new plan will likely withhold these incentives unless mortgage modifications are made permanent.

What do you think? Is it okay for borrowers to simply walk away from their mortgage?

More confirmation with regards to what we’ve already stated.  See previous entry and data here.  

Another Wave of Foreclosures Looms

Washington Post (09/09/09) P. A13; ElBoghdady, Dina

A new report from Fitch Ratings estimates that fatter payments on resetting option adjustable-rate mortgages will lead to another round of foreclosures for the housing market. About $134 billion in option ARMs will reset by 2011, and monthly payments are expected to surge 63 percent on average, or by $1,053 a month, according to Fitch, which also notes that many borrowers are struggling. As of April, more than 35 percent of option ARMs were already two months or more late even though they had not reset.

(More)

From CNN Money:

Foreclosure plague: No cure yet
The housing market is still sick, with a record number of foreclosure filings posted in July.
By Les Christie, CNNMoney.com staff writer

“NEW YORK (CNNMoney.com) — The foreclosure plague continued to devastate last month. There were more than 360,000 properties with foreclosure filings — including default notices, scheduled auctions and bank repossessions — an increase of 7% from June and 32% from July 2008, according to RealtyTrac, an online marketer of foreclosed homes. In fact, one in every 355 U.S. homes had at least one filing during July.

“July marks the third time in the last five months where we’ve seen a new record set for foreclosure activity,” said James J. Saccacio, chief executive officer of RealtyTrac. “Despite continued efforts by the federal government and state governments to patch together a safety net for distressed homeowners, we’re seeing significant growth in both the initial notices of default and in the bank repossessions.”

The jump occurred as several foreclosure moratoriums phased out. They were initiated by many states to give the administration’s foreclosure-prevention efforts time to work. But for many help did not come: The modification and refinancing programs have met with less success than hoped.

I believe this ties in with the comments we have made on foreclosure moratoriums expiring and when seen in conjunction with that CreditSuisse graph on the future of resets in ALTA and POOs. It corroborates the statement that maybe these comments that the “recession” is over is a little premature. (Ruth Lee)

Home prices hit their lowest point in more than two decades in Q4 2008 according to recent reports, indicating that the price backlash from the incredible price inflations of the early 2000s are not yet over. From the Washington Times:

Home prices across the nation were 18.2 percent lower on average in the fourth quarter of 2008, compared with year-earlier levels, as foreclosure rates jumped to record highs last year.

The price decline during 2008 was by far the biggest drop since the Standard & Poor’s/Case-Shiller national home price index was first published 21 years ago. Separately, Zillow.com, a Web site that tracks real estate prices, estimated recently that the collective plunge in U.S. home values last year totaled $3.3 trillion. And there appears to be little relief in sight, both for home prices and foreclosures, experts said.

“With the number of homes for sale at an all-time high, housing prices will continue declining for quite a while, and quite a bit more,” said Patrick Newport, U.S. economist at IHS Global Insight. “Indeed, just as house prices overshot on the way up, they are likely to undershoot on the way down because of the inventory overhang.”

Read the full article “Real Estate’s Descent.” Foreclosure rates are staying strong as well, according to RealtyTrac, which recently reported that foreclosure activity in January was 18 percent higher than in January 2008. To try and address these issues again, Congress is currenly debating a proposed piece of legislation allowing bankruptcy judges to modify mortgages on primary residences. The Congressional Budget Office expects bankruptcies to rise significantly as a result of this bill which, although possibly staying the foreclosure rate somewhat, will simply pass consumer financial difficulties on to other sources. Is this solving the problem? From the Washington Post:

“More than one million distressed homeowners could benefit from filing for bankruptcy under proposed legislation allowing bankruptcy judges to modify mortgages on primary residences, according to the Congressional Budget Office.

“The CBO estimated that of the million, about 350,000 homeowners would take advantage of the proposed change by filing for bankruptcy during the next 10 years. But the report said, “The number of additional bankruptcy filings that would occur under the bill is, however, very uncertain.”

“The House is expected to take up a housing package Thursday that would include a provision allowing bankruptcy judges to modify such mortgages, including lowering the principal owed on loans. The change is fiercely opposed by the financial services industry, which complains that it would drive up their losses and force mortgage rate increases.”  (“Bankruptcy Filings Would Rise Under Mortgage Bill, CBO Says“)

The CBO’s website has provided a full rundown of current stimulus proposals here. The House Financial Services Committee is also holding hearings this week to examine TARP oversight (A Review of TARP Oversight, Accountability and Transparency for U.S. Taxpayers) and loan modifications (Loan Modifications: Are Mortgage Servicers Assisting Borrowers with Unaffordable Mortgages?). Are any of these measures really going to affect real change in the current mortgage crisis, or is the old guarde still firmly in place? Are all of these measures simply band-aids that may keep the industry afloat for a little longer? More commentary on that coming soon.

The MBA NewsLink reported today that a week holiday season is increasing the probability of delinquencies on commercial real estate loans in addition to the already record high foreclosures in the residential mortgage market. Is this the final phase? Or is there more to come?

“After weak holiday sales, a likely wave of retail store closings this year could pile on to current delinquencies in commercial mortgage-backed securities and other loans secured by retail properties.

“Based on data from the Bureau of Labor Statistics, the International Council of Shopping Centers projected 73,000 stores could close in the first half of this year and announced store closings could top 3,100 during the same time.

“That didn’t take into account what was going to occur in the fourth quarter with real data,” said John Connolly, research analyst at ICSC. “We’ll have to see how that falls.”

“Some reports said the holiday season did not meet expectations and could lead to a high number of store closing announcements early this year. Last month, the National Retail Federation reported electronics and appliance stores sales declined by 5.4 percent in November, year-over-year, as clothing and clothing accessories stores sales dropped by 7.4 percent from November 2007.”

Read the full article here: “Delinquencies Rise Off Retail Store Closings”

Retailers cited as having difficulty – either closing stores, pulling back expansions or leaving the market entirely – include Mervyn’s, Linens ‘N Things, Circuit City, Starbucks, KB Toys, Office Depot and Borders, among others.

Ruth Lee

Ah…they are at it again.  The Treasury Department is cooking up a  doozy of a plan for those that can capitalize on the devastating loss of their fellow citizens who have lost their home to foreclosure.  The notion is that if you lower rates to historical lows (like 4-4.5%) first time homebuyers will snap up the volume of homes in inventory left by foreclosures and this will cause housing values to magically rebound.  At a modest price tag of $25b a year for the taxpayer, what are the potential effects of this plan:

THE LOSERS:

1.    Current homeowners:  It does NOTHING to address the reason so many homes are on the market… foreclosures, their contingent loss to investors, the effect it has on the local market or the families that have lost everything they have.   And if you are in a bad loan, one that could be modified with some thoughtful approach, too bad… they will just make it easy for the next guy to buy your American dream on the cheap!

2.    The economy:  OBJECT LESSON:  Nothing can quite destroy an economy like overly cheap credit and pressure on banks to extend it.  Wait – that would mean learning from our mistakes, which is too much to ask.

3.    Future homeowners:  What happens when these first time homebuyers…often at the lower end of the economic scale… are the first to be fired in a constricting employment market?  I know this was planned with the notion that FHA (read taxpayer) would be insuring most of these loans… so we get two losers…the future homeowner AND the taxpayer.  Now that sounds about wrong.

Did we really hire these guys?  Seriously, is it that they wake up in the morning and think some cooky taxpayer funded/borrowed plan to not address the issue will be THE ONE, the NEO of our economic matrix?  How about comprehensive strategy… you know what the real business people out here have to do because we know that Congress isn’t our lobbyist’s call away for our bailout?  I would rather that we employed a single mom of three kids that knows what a budget means and how to creatively figure out how to get out of a mess…at least we would get something real.

Read more here: “Treasury’s Plan for Mortgage Rates Could Be Costly”

Ruth Lee

Today leading Congressional Dems join with a growing Rep consensus in questioning the authorization of the second half of the $700b to Paulsen without conditions that he use some or part of the money to shore up against foreclosures.   So far the bailout has been a lot of money (with only $20b of the initial $350b uncommitted) with little results.  I don’t think anyone was really thinking it would be a magic wand that would ratchet the economy out of a recession – but something – some result would have been dandy.  As of today, there has been no relief in credit markets… which are virtually frozen.   There has also been no relief in foreclosures…which are at the heart of losses for banks, exacerbated by the effect on property values.  It has been officially announced that the economy has been in recession since Dec 07 (quel surprise!).  And today we learned that last month our economy shed over half a million jobs…the most in over 30 years.

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From Bloomberg today: U.S. Mortgage Foreclosures, Delinquencies Reach Highs

Everyone wants to know when this “market correction” is going to end.  You can watch media pundits and dime store economists throwing their expertise into the ring.   CEOs of the largest Wall Street firms underscore the monkey with a dart theory of prognostication, considering that we have reached the “bottom” almost every quarter since the inception of this fiasco.  In reality, it doesn’t seem that anyone really has a clue.  Paulsen has been wrong on at least three occasions; however, to his credit, it’s his job to inspire confidence in the market knowing that his words carry the possibility of dismantling entire economies.   The Administration still maintains a delusional optimism that things really aren’t as bad as they seem.   

This month we hit a new bottom… Foreclosures are at an all time high….unemployment is exceeding gloomy expectations… the Fed doesn’t have a lot of wiggle room to lower interest rates… the stock market had its worse selloff since June.  Fortunately, the price of gasoline has finally started to drop… easing the pain on the middle class.  Visa and Mastercard are having a great year, as many Americans leverage their credit again to maintain some quality of life. 

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Ruth Lee

With the impending election, Congress left for its July 4th recess unable to face constituents with any real headway on foreclosure legislation. Having started and stopped the discussion of The Foreclosure Prevention Act of 2008 several times, it is disappointing to see that Congress is faithfully endeavoring to do as little as possible even when they have a consensus. Conventional wisdom projected that Congress would be able to finalize the bill prior to the recess, following a test vote of 83 in agreement. But procedural hurdles reared, the final passage undone by a dispute over an unrelated issue for tax breaks on renewable energy, an issue also supported by 88 Senators. (By way of explanation, HR 3221 was initially an energy bill that was gutted and renamed TFPA of 2008)

Essentially, what was once a “gentleman’s” game based on philosophical and political differences is now a cutthroat gauntlet of gaming the system. While one can debate the merits and expense of what many view as a bailout bill, on some level, one would expect some kind of response after months of debate, negotiation and compromise to produce a bipartisan bill. But the fact is, it is an election year. With both sides of the aisle maneuvering for political currency, they are using the procedural rules of the Senate to gain advantage, with the ancillary disadvantage of causing any progress to grind to a halt.

HR 3221 was introduced July 30th, 2007 to the House. It passed the House August 4th, 2007. It passed the Senate April 10, 2008. The Senate bill still has to be resolved with the House version. It is now July again… and still nothing. Other bills like HR 3915 and S 2452 which address predatory lending, have been mostly tabled for partisan concerns, most likely to be revisited post-election. The problem is… we have a consensus, the bill has been voted on and ready to go, so what is the holdup?
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Ruth Lee

I thought it would be interesting to share FRB Chairman Ben S. Bernanke’s Comments on Delinquency Rates and the Federal Reserve’s Homeownership and Mortgage Initiatives given in a speech at the Columbia Business School’s 32nd Annual Dinner on May 5.

The following graphics show comparisons of delinquency levels between 04-07:

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Ruth Lee

Frankly while not the most conservative amongst my friends in the mortgage world, I could not help but cringe when I saw the proposed legislation for FHA to purchase and refinance “underwater” mortgage loans. This legislation would essentially make FHA the largest scratch and dent lender in the market.

Articles I have been reading note that lenders would have to mark down the principal balance to a 90% CLTV under this program. Writing down this loss is actually considerably better than most can get in scratch and dent market at 40-60 cents on the dollar. What a deal!

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Ruth Lee

Here is another great article outlining the extending effects of the subprime crash. (As my colleague put it, “Ripple effects that will end up hitting responsible borrowers in their pocketbooks and their lifestyle.”)

From the National League of Cities:

“In addition to the after-effects of foreclosure on families, NLC is educating federal lawmakers about the unexpected consequences the current mortgage crisis is having on local governments. Foreclosed houses, which often sit vacant for long stretches of time, are contributing to the blight long-associated with abandoned properties. Local governments must bear at least the short-term costs of maintaining these vacant properties until they can track down the owner. This can be difficult since mortgages are resold among lenders and investors.

Additionally, since vacant properties all too often become havens for crime, local governments are bearing increased costs for greater police presence in those areas where foreclosed vacant properties are concentrated. At the same time, cities are forecasting that there will be decreased property tax revenues due to declining assessed valuations.”

To read the full article, click here. 

Ruth Lee

“The subprime crisis is just the tip of the iceberg. Fundamental changes in American life may turn today’s McMansions into tomorrow’s tenements.”

Christopher B. Leinberger, The Atlantic Monthly, March 2008

Talk about a fascinating article. How far will the effects of foreclosures and the subprime crash really go? Stories about the suburban foreclosure epidemic are rampant, like this one and this one and this one – and that’s just a start.

I guess building and building and building on land reserve is not the best move after all for communities. It makes you wonder how much tax incentives and building subsidies many of these builders were offered for rampant housing production cost the taxpayer.

Click here to read the full article.

Ruth Lee

Over the last few months, it is hard not to notice all of the gleeful hand-rubbing and “I-told-you-so-ing,” as disgruntled ex-employees, ex-insiders and ex-originators Monday morning quarterback the potential demise of one of the country’s largest lenders. The Implode-o-meter forums froth with idle comments from bored survivors, with a few fantastic exceptions. The fact is that no one hit the meter because Countrywide’s mean old underwriters didn’t accept your trumped up appraisal… the industry hasn’t lost its potency over extended underwriting or closing turntimes… (In fact, many would argue that the push for volume over quality was instrumental in the collapse.) Even the more egregious slights, like the ones they are going to court over, well, they just weren’t the fulcrum either. The reason that we are in trouble is simple: there are many homeowners that cannot pay their mortgage and foreclosure is BAD for business.

There are a thousand reasons why homeowners can’t pay their mortgage: some chose poor loan products, others were coerced into them, many bought houses they couldn’t afford, real income is declining, productivity is increasing causing manufacturing jobs to evaporate, the value of the dollar is falling, Katrina, rising health care costs, Wall Street made some bad calls on the whole underwriting thing. One of the main reasons I would argue: we have not been compelled or incented to save; we are incented to spend. In our consumer climate, if you can’t become an millionaire in America; being a “Visa”nairre is almost as good.

Investors relied on the stability of the American mortgage; real property as collateral, a track record of strong repayment and a well-established rule of law. But, as that same collateral depreciates, the track record erodes into a Cliff’s Notes of bad assumptions and worse performance, and regulators scramble to respond with ham-fisted alacrity, those enticements are gone…leaving a sudden desire to invest in anything that doesn’t have the word mortgage in the title. Without investors, we have less liquidity. Without liquidity, loans must compete for those dollars…and guess which ones are winning…definitely not the wage-earner stated, pay option ARM on a non warrantable igloo in downtown Miami.

I am not an apologist for Countrywide; frankly, I am just a practical, steely-eyed capitalist. There is a true link between the demise of an institution the scope and size of Countrywide and investor confidence in the industry as a whole. Since investor confidence is a key factor in how we are going to rebound, and many of us still in the industry need the rebound sooner than later, I am hoping that they are able to recover and flourish. I finally understand the impulse for bailouts and intervention. Whatever the response, we need action. We need resolve to adapt and respond to our investors. Neither their family nor mine can eat “I told you so.”