HAMP changes.

The HAMP insanity continues. Back in July of last year the administration took servicers to task for not offering enough trial modifications. The servicers said it was because they asked for a minor amount of paperwork from the borrower first since it made no sense to start a trial mod if there was zero hope of the borrower getting a modification. The administration, wanting to hit their announced trial mod number, said that wasn't good enough and that anyone calling for a HAMP mod should immediately be put in a trial mod. This had the effect of the administration hitting their announced modification number. Then it turns out very few of the trial mods were turning into full modifications. Turns out many of the borrowers wouldn't qualify for a full modification and many months were lost and the losses built up. So what does the administration do? It now has brilliantly directed that servicers shouldn't put any borrower in a trial mod without getting some basic paperwork from them first.

One of the good news that came out of the latest directive is a bit of sense of dealing with reality. The directive stated that trial mods that missed payment or missed the majority of the paperwork should be kicked out and go into "foreclosure alternative" (short sale / deed in lieu) phase. That is good news in that the stagnant market might be getting some more supply on the market. The sooner we get to dealing with the facts on the ground instead of dreaming up pie in the sky magic bullets the sooner we will be done with this mess.

You can read all the HAMP changes coming here.

Note: Although this post sounds vaguely optimistic, I fully realize that the administration is working on another modification proposal and that we will be going back to fantasy land soon enough.

On the FHA guidelines changes

Recently the FHA changed their underwriting guidelines. They have increased the up front mortgage insurance premium from 1.75% to 2.25% of the loan, required FICO's under 580 to have 10% down and capped the maximum seller contributions at 3%.

Considering the losses that FHA is facing these are extremely mild changes and will be negligibly felt by the market. The FHA is even looking to soften the blow by getting authorization to increase the monthly premium to a rumored 75bps up from 55bps and then decreasing the up front premium back down to 1.75%.

The lending industry breathed a big sigh of relief that the changes were so minor. The taxpayers on the other hand get to pay for the losses.

I got a loan modification, now what?

Note: The thread title is deceptive, I didn't get a loan modification. That would be especially difficult since I rent. I thought it apropos based on the NPR article I read today.

NPR hits the nail on the head about a homeowner who successfully got a loan modification. The question now becomes... Now what?

Salter needed to lower his $2,300 monthly payment because he lost his job as a human resources executive — and with it, 40 percent of his family's income.

It took a year, but his lender, Chase, offered to extend the mortgage from 30 to 40 years and lower the interest rate from 6.8 to 2 percent. That would cut his payment roughly in half, which makes Salter's initial reaction to the offer seem bizarre.

"I call it extortion," Salter said. "Government-backed extortion. I mean, who in their right mind would accept this? No one would. No one should."

The mortgage modification solves a short-term problem: It allows Salter to stay in his home. But it doesn't address a long-term issue. Salter's mortgage is about $300,000. Today, his home is worth $125,000. He's underwater.

To prevent fraud and to gain on any upside in housing lenders will defer principal to the end of the loan. The balance isn't due until the end of the loan. This borrower got $107,000 deferred. He is just now realizing he is renting the home from the bank. He always was. I just wonder how many loan mod success stories will come to the same realization.

The "Black Box" and loan modification

MSNBC had an article today on the "flaws" in HAMP modifications. I think it misses the mark almost entirely about the real purpose of the program and also misses much of the publicly available information about HAMP.

First on the "Black Box" of the Net Present Value calculation:

Under HAMP guidelines, lenders can deny a loan modification if the “net present value” of the new loan is less than the return they would get from not offering a new loan and going through In other words, the official guidelines allow mortgage servicers to base their decision entirely on whether the outcome is in the best interest of the lender or investor, not the homeowner.

Because the Treasury has kept the formula a secret, homeowners who have been rejected for modification can't check the lender’s math to correct possible mistakes about the borrower's income, home value, credit score or other critical pieces of
data.

Just for clarity, the servicer does a calculation and says is the present value of cash flows of the modified mortgage worth more now than foreclosing on the borrower. If the cash flows are worth more now, don't foreclose. The guidelines for the formula itself are on the HAMP servicers site here and here. What is of more interest is the inputs to the formula than the formula itself. If you are negative about price appreciation then it is harder to do loan modification, differences in geography and loss severity will affect the ability to get a modification as well. Also what the return on investment an investor thinks they can get will affect the ease of modification. The servicer is a FIDUCIARY of the investor, not the homeowner. It must have the best interest of the investor at heart. The homeowner doesn't have the right to check the servicers math, they can pay or not pay, that's their choice.

The servicers are in between a rock and a hard place. If they want to stay in the servicing business they better listen to their investors but the regulators can make their life hell if the don't listen to them. Add in a new directive coming from the Treasury every week changing the HAMP guidelines and it is no wonder the servicers are paralyzed. We now have the the Tresury telling the servicers not to foreclose in almost all cases while awaiting further HAMP guideline changes. The state of paralysis of the market will reach even more staggering levels. The servicers are being asked to underwrite loans after the loans have been made and if the decision comes out to basically "not make the loan" the Treasury says "then you must be doing it wrong, go back and try again".

The loan modification process is easily defrauded. Borrowers are benefitted for reduced cash flows, if you have an extended family and were using money from them living at home to pay your mortgage... just say now that money isn't available and ask for a modification based on your salary (this is just one example, there are many others, especially for self employed or people getting paid under the table). The lender can't tell who is pulling a fast one and who is in need of true help. We are maximizing the loss to the banking system instead of minimizing it. Foreclosing on people gives them a real choice to make. They can step up and pay or lose the house. In areas with a large amount of supply the NPV test leans towards modification, with less supply on the market the investor can liquidate for less loss severity so the NPV test leans to foreclosing.

We have had several incredible programs available for rate and term refinances of underwater homes, that should be sufficient to save the ones that can and should be saved. Standard forebearance options should be available for the temporary hardship issues. All the rest should be given the option of paying or going. It really isn't much more complicated than that. Loan modifications aren't a magic bullet for stemming losses, There are no magic bullets. The industry has known and tried modifications before and has seen their flaws.

San Fernando Valley home sales report - December 2009

San Fernando Valley Single Family Home sales for December 2009 came in at 637 which is up 9.45% MoM and down 7.81% YoY. The median price for single family homes came in at $400,000 which is up 1.27% MoM and up 13.31% YoY. The supply constrained market is hurting sales in the SFV. I don't see any near term catalyst to drive sales higher, just a long slow slog while we get to wait and guess what the government is going to next to "fix" housing.

Condo sales came in at 236 which is up 17.41% MoM and up 2.16% YoY. Median price for condos came in at $240,000 which is up 6.67% MoM and up 6.67% YoY. Condos are faring a bit better than SFH because there is more supply and it appears some buyers are choosing to buy a condo when they can't find what they want in a detached home.

The red line was my attempt to create a predictor for sales but it hasn't been working out so well since May of this last year. IMHO, it appears that some pendings are being double counted, instead of falling out and going BOM (which would reduce my predictor), they are just switching buyers and updating the pending date which gets them counted in the current months pendings again. This is supposition on my part since I don't know how SRAR constructs their numbers but nothing much else makes sense.

Ventura County December 2009 Home Sales

Dataquick reported home sales for Ventura County for December 2009 today. Home sales came in at 896 up 2.3% YoY. The median sales price came in at $360,000 up 6.5% YoY. This report was a bit surprising to me because all of the data up through January 3rd (last time I looked) showed sales coming in down 10% YoY. The number of late reporters this year was much higher than normal by at least triple. Also the number of sales that aren't seen through my data sources were higher than average so my formula for predicting sales under predicted by much more than I have seen. This was the strongest December in the last 3 years but still a very weak sales volume. To put it in context if you look at the top chart you will notice this December doesn't even match the ultra-slow January/February sales volume for most years this past decade.

I still believe we will have a weak spring due to constricted supply caused by HAMP and higher mortgage rates. We shall see how things unfold this coming year.

ForeclosureRadar: More trustee sale cancellations than trustee sales

The ForeclosureRadar December 2009 foreclosure report is out:

Foreclosure activity dropped dramatically in December, especially when looked at on a daily average basis. For example while Notices of Default dropped 17.5 percent in aggregate, they actually dropped 32.5 percent on a daily average basis due to the fact that December had 22 days on which documents were recorded, versus 18 in November.

“The dramatic drop in foreclosure activity may have been a Christmas gift to homeowners,” says Sean O’Toole, Founder and CEO of ForeclosureRadar.com, “however, given rising mortgage delinquencies it is becoming increasingly clear that foreclosure activity no longer fully represents market realities”.

Less supply, less sales, paralyzed market for 2010 if something doesn't give.

The walking away meme.

Since the New York Times did an article on walking away from a mortgage a bunch of people are commenting that walking away will become mainstream. I've always wanted walking away to be talked about for its pros and cons, a rational discussion of all the facets regarding the option. Many people think the moral obligation trumps all others. Others think it is a pure business decision and if X is greater than Y you walk away.

On the moral decision I thought this post framed it best as to why just because you bought a home doesn't mean you are obligated to destroy yourself financially:

The loss was something that lenders could have anticipated at least as easily as borrowers. The reality is that ordinary people are lousy at figuring out the ins and outs of real estate transactions. Relying on the one act rule to get out of a mortgage is not to abuse the system--it is to use the system in precisely the way it was intended to be used. The reason that the one act rule exists is that lenders and developers have through the years shown a great deal of ability to maneuver unsophisticated buyers into crummy real estate deals. The reason that the one act rule exists is to put the risk of these deals on the lender, not the buyer. The purpose is to discourage bad underwriting, dishonest marketing, and unjustified price inflation by making it very, very hard for a lender to get back the money if they lent more on a mortgage than a house was worth. The system is designed to let people walk away. California has a system that puts a higher premium on keeping people out of debt slavery than avoiding bank losses.

There are many variables to the issue and the layers involved are enormous and extremely individual to each borrower. Some people have reputational risk. Others need access to credit so their credit scores are very important. Some have recourse mortgages. Some can ride out the loss. Some are completely emotionally tied to the home for one reason or another. Others would never be able to recover financially from the one bad decision of buying a home during a bubble.

I don't think walking away has become mainstream yet. I think most of the borrowers are sticking it out and trying to make ends meet and don't even know how to rationally weigh all the issues at hand. I think if many did the math would dictate they walk. Instead I think many will just keep paying until the money runs out or they need to move due to normal life events.

The good ole days...

From Broker's Outpost a forum for mortgage brokers regarding a recently closed refinance:

I just closed this week on a RENTAL property- NO APPRAISAL, STATED INCOME SELF EMPLOYED, STATED ASSET, 105% LTV (based on automated value). Original loan HAD Mortgage Insurance even! The customers did not have a great credit score, but as you may know the TOTAL adjustments are capped at 1.75%.

It was like 2005 all over again.

In case you are wondering how this is possible, Here is Freddie Mac's data regarding the program in question called "Relief Refinance Mortgages".

Both the Same Servicer and Open Access options under the Relief Refinance Mortgage offering allow LTV ratios up to 125 percent, unlimited TLTV/HTLTV ratios, and relief from standard mortgage insurance requirements to provide qualified borrowers with expanded refinancing opportunities.

They figure they are backing the loan anyways so they might be able to improve their book by refinancing people at todays lower rates. As far as the bubble era no underwriting, I think drinkers call it "Hair of the dog that bit you".

Trustee sales cancellation spiking, sales falling

Just a quick note, no spiffy chart or anything. In watching the Ventura County trustee sales I've noticed cancellations have been spiking and last weeks post-holiday moratorium trustee sales were lower than normal relative to the number of homes offered (by about 20-25%). The administrations haranguing of the servicers over the lack of HAMP mods is probably to blame.

What this means for the upcoming season is that inventory will be lighter and thus sales will be even more constrained. We will probably be seeing year over year sales fall through the first half of the year at least unless trustee sales pick up within the next 45 days. Then with rates going up by June due to stopping of MBS purchases by the Fed we will get constrained sales because buyers will have less purchasing power. It is shaping up to be pretty grim prospects for the year for sales volume.

New details emerge for the California tax credit..

Jon Lansner over at the OC Register points out the new tax credit will be for First Time Home Buyers only. Does this change the math much on the wastefulness of this program?

First off, Does the market need stimulating? We must have massive supply of homes just sitting on the market needing to be sold.. Right? Well looking at the facts shows otherwise. From the latest CAR report here is California's months supply of inventory. Remember 6 months is considered a balanced market. Anything under 6 months is a sellers market.

4 months! This is not a market that needs stimulating. There is a tremendous amount of supply not on the market because the government is keeping it off the market. Until that supply reaches the market the market will be supply constrained and not in need of stimulating. It is completely the wrong time for the stimulus.

Now lets see how wasteful the stimulus is, here is the percentage of first time home buyers from last year:

The real question is how many new first time home buyers would buy with the stimulus. We can roughly estimate that by the national tax credit. From the NAR press release:

NAR estimates that about 1.8 to 2.0 million first-time buyers will take advantage of the $8,000 tax credit this year, with approximately 350,000 additional sales that would not have taken place without the credit.

So about 18% of sales were stimulated, some will argue they were just pulled forward instead of new sales created but we will leave that aside. That means each additional new sale costs taxpayers $54,340! Awfully expensive way of "stimulating" sales. The CBIA estimates that $16,000 is taken in for every new home sale purchased and that 3 new jobs are created per home. We can see that the number of new homes that will be purchased during the time frame will be about 3,000 but the number of new homes that wouldn't have been purchased anyways is only about 550. We can also see that the stimulus is a money loser not a money maker like the CBIA suggests :

Snow noted that because building a new home generates some $16,000 in state tax revenues alone, a new tax credit would more than pay for itself.

If anyone has trouble with the way I have come up with the numbers please email on the right hand side, I'm a bit rushed this morning and don't have time to lay it all out in the post. The numbers all come from industry sources and are contained in todays and yesterdays post on this topic.

The really important points to remember is that the market doesn't need stimulating and that the tax credit is an extremely expensive way of stimulating sales.

Why Arnold's proposed tax credit is extremely wasteful..

“Third, to stimulate other construction jobs, you will receive a proposal for homebuyer tax credits of up to $10,000 for the purchase of new or existing homes.” (Gov. Arnold Schwarzenegger, State of the State Speech, 1/6/10)

The new proposed tax credit is for $10,000 for a purchase of a new or existing home. $200 million is going to be set aside for this purpose. This means that 20,000 buyers would be getting the credit. To put this in context there is going to about 540,000 sales this year, or average 45,000 sales a month. Less than one half of one month sales would get the credit. It would literally be a free for all to try and rush to get the credit. I could see many people wanting and expecting to get the credit not get it because it would run out instantly. Now this would fit in fine with the governments goal to encourage sales but if you bought a home expecting (or NEEDING) to get the credit and didn't get it.. that is a very bad thing. Also it would move sales forward into a very small slice of time and I could see many escrows being cancelled once the credit runs out.

For its main point of stimulating construction jobs it would fail miserably. By far the most jobs are created through new home construction. New home sales averaged 3,000 homes a month in 2008. So a half of month of sales would mean 1,500 new homes would be purchased. It would imperceptible in the jobs data to see the "improvement" caused by these sales. This would be a $200 million boondoggle, an extremely expensive way of gaining very few jobs in a cash strapped state. I hope the Governor realizes that and saves the money for education or medical. I believe the Governor had his brokers license (he saved the "loop hole" for four year degree people to get a brokers license last year) at one time and so would naturally be pro-housing.. but this is a very poorly designed measure.

The measure would largely just give money to people who were buying homes anyways. It would pull forward demand instead of create it.

If the Governor just has to spend $200 million on housing, it would be much better used either funding the state housing agencies (CALHFA) for loans or making the credit much smaller ($1,000 - $2,000) or limit it to new homes like the previous credit to be less wasteful. I respect the very difficult choices that need to be made right now but this is really an easy one as far as economic benefit.

Here is the statistics showing the stimulus would be far too small relative to the size of the market.


Here is the new homes data.

San Diego Trustee Sales December 2009

San Diego trustee sales for December 2009 came in at 1039. The drop from the previous month is mainly due to the fewer sales scheduled during the last half of the month.

Orange County Trustee sales for December 2009

Orange County trustee sales for December 2009 came in at 655. The drop from the previous month is mainly due to the fewer sales scheduled during the last half of the month.

Ventura County Trustee sales for December 2009

Trustee sales for December 2009 in Ventura County came in at 240. Most servicers know better than to schedule sales during the last two weeks of December so sales trailed off at the end of the month. Most of those sales that would normally take place during that time were just postponed another week or two into the beginning of January so the January pace should be pretty good. One fly in the ointment may be the directive that no HAMP mod can be put into foreclosure but the servicers have plenty of inventory to choose from as to who to foreclose on so it is quite possible that might have no net effect. The trustee sale investors are having a field day with the low inventory enviroment and I bet they are looking forward to the first few weeks of January.

Trustee Sales for Los Angeles County December 2009

Los Angeles County Trustee sales came in at 2575 for December 2009. The drop from the previous month is mainly due to the fewer sales scheduled during the last half of the month.

Short Sale & Foreclosures for the San Fernando Valley - December 2009

Here is the sales breakdown for the San Fernando Valley for December 2009. The SFV has a lot more late reporters as a percentage of sales and so it is a bit tougher to discern right now just how weak sales will ultimately be for December . One thing is clear, sales will be down YoY. If I estimate 15% increase (which is about right historically) due to late reporters that means there will be a 10% drop in YoY sales. This is the context of mortgage rates down YoY, prices lower and the ongoing tax credit. Limited supply means limited sales and the market is running out of supply in the price points in which people can afford to buy homes. Sales will continue to stagnate as a result.

Short Sale & Foreclosure for Ventura County - December 2009

Here are the sales for Ventura County for December 2009. December is clearly on track to again have sales down year over year a trend that has continued since July. This is because there are fewer REO's being sold, as clearly indicated by the table. Less motivated supply will mean continued slow sales. Either prices fall and sales pickup or prices stagnate and so do sales, there is no free lunch. Based on the above numbers I predict Dataquick will report sales around 760 for December.

Looking forward in 2010 it is hard to see how sales pickup. Rates will start going up after Q1 due to Federal Reserve and Treasury stopping their MBS purchases. Supply will continue to be constrained as the administration continues to not allow failed HAMP mods move to short sales and foreclosures but instead tries to re-work the modification. And the tax credit will end so buyers will have even less motivation to buy. So unless something "gives" and reality starts being dealt with 2010 will a bad year for real estate sales for everyone but the trustee sale investor.