California Loan Modifications update

The Department of Corporations has required mortgage servicers to report their workout and foreclosure prevention effors. Recently the DoC released a report for Q1 - 2009 as to how to what progress (to them) was being made on the workout front. The good thing about this data is it is California specific, Hope Now is national.

Here are the Trustee Sales (Foreclosures) versus Total Workouts over each month:

(click to enlarge)

As you can see from the above charts foreclosures were greatly affected by the various foreclosure moratoriums starting in late July.

(click to enlarge)

Workout closed by type. This is the end result of the previous graphs Total Workouts line broken down by type. Account paid current means the account was brought back into good standing. Deed-in-lieu means the borrower surrendered the house and the lender voluntarily took it back without a foreclosure sale. Short sale means the borrower agreed to sell the house and the lender agreed to be paid back less than the full amount. Modification means an adjustment to the terms of the loan (see next graphic). Forebearance plan means the lender agrees to not accept payments for a few months and places the balance back onto the end of the loan to give the borrower some breathing room.

(click to enlarge)

The above graphic is the previous graphics "Modification" line broken down into its constituent parts. I used some abbreviations to save space:

• IR : Interest Rate - Current Interest Rate for the loan.
  
• SR : Start Rate or Initial Rate - Initial Interest Rate for the Loan
  
• RR : Reset Rate - Rate at which the loan will reset

One thing that jumps out that Reducing Principal Balance is the lowest line on the chart and effectively zero. If borrowers are expecting significant principal reductions they will be disapointed. It simply won't happen. A borrower looking to stay in a home must expect to pay off the balance in full. While modifications are increasing the borrowers are only getting adjustment in interest rates and amortization length. This still leaves underwater borrowers underwater and unable to move (outside of short sale or foreclosure) or expect to create equity when writing out the monthly mortgage payment. Note on the second graph that the only other upward trending line besides modifications is short sales. I expect this to be the growing part of the market moving forward.

Interest rate pressure on the market increasing.

The WSJ had a story about interest rates today with the following comment:

"Mortgage rates at these levels will hobble the [housing] recovery, and it was just the beginning of the recovery," says Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley.

While I still have a hard time wrapping my head around 5.75% interest rates as "high" it is clear that the sub-5% rates of the last couple of months were definitely a driver of increased buying activity. What is unknown is the effects on supply. Loan modifications are based off of prevailing interest rates, people who can refinance may stay instead of short sale, etc. There is a massive pipeline (application already taken, some but not all locked) of 5% and below interest rate refinances that will simply go away if rates continue at this level. Lenders give priority to purchase deals and we have seen the climbing numbers of homes under contingent contract on the weekly inventory reports here. Many of those, especially the short sales, will not be able to continue without either a concession from the seller on price. Over the short term though rising rates put pressure on buyers with rate locks to make a decision.

I think a lot of people are holding their breath right now hoping this is just a short term issue. But investors are showing more of an appetite for risk and are shying away from treasuries and moving into corporate bonds & equities and that pressure mortgage rates. Also as rates rise the prepayment speeds on portfolios fall and investors are left with longer duration portfolios. Many will try to re-balance the portfolios duration by selling off the longer duration mortgages adding to the pressure on mortgage rates. Mortgage rates could fall if the Fed steps up some of their purchases or more bad economic news destroys investors risk appetite.

I recommend following the Mortgage Rates Blog if you would like to see what is going on in the mortgage market on a daily basis.

Major mortgage investors balking at the administration modification plan?

From the WSJ:

Investors who hold billions of dollars of residential mortgage-backed securities are pressing the Obama administration to make changes in its housing rescue plan.
...
Some investors say they are contemplating legal action because they think the administration's plan and legislation before Congress would violate their rights. They are particularly concerned about measures that would prevent lawsuits against mortgage servicers, which collect loan payments for the investors and are responsible for modifying loans with homeowners.
"Investors are given rights through the contracts in the securities, and we expect those rights to be honored," said Jeffrey Gundlach, chief investment officer of TCW Group Inc., which manages roughly $52 billion in residential mortgage-backed securities.
...
Mr. Grundlach says the program would be more palatable to investors if, for instance, modifications weren't given to borrowers who lied when they took out their initial mortgage.
...
Mortgage investors say that rewriting the first mortgage without touching the second violates their rights, because second mortgages are supposed to be repaid second. Modifying the first loan can help the holder of the second mortgage, because it increases the chances the loan will be repaid, they say.
...
many loans are serviced by big banks that also hold second mortgages -- and as a result have a financial interest in how these loans are handled.

I keep wondering why any group would ever want to buy a RMBS ever again.

California Mortgage Modifications

The Department of Corporations has required mortgage servicers to report their workout and foreclosure prevention effors. Recently the DoC released a report for 2008 as to how to what progress (to them) was being made on the workout front. The good thing about this data is it is California specific, Hope Now is national.

Here are the Trustee Sales (Foreclosures) versus Total Workouts over each month in 2008:

(click to enlarge)

As you can see from the above charts foreclosures were greatly affected by the various foreclosure moratoriums starting in late July.

(click to enlarge)

Workout closed by type. This is the end result of the previous graphs Total Workouts line broken down by type. Account paid current means the account was brought back into good standing. Deed-in-lieu means the borrower surrendered the house and the lender voluntarily took it back without a foreclosure sale. Short sale means the borrower agreed to sell the house and the lender agreed to be paid back less than the full amount. Modification means an adjustment to the terms of the loan (see next graphic). Forebearance plan means the lender agrees to not accept payments for a few months and places the balance back onto the end of the loan to give the borrower some breathing room.

(click to enlarge)

The above graphic is the previous graphics "Modification" line broken down into its constituent parts. I used some abbreviations to save space:

• IR : Interest Rate - Current Interest Rate for the loan.
• SR : Start Rate or Initial Rate - Initial Interest Rate for the Loan
• RR : Reset Rate - Rate at which the loan will reset

One thing that jumps out that Reducing Principal Balance is the lowest line on the chart and effectively zero. If borrowers are expecting significant principal reductions they will be disapointed. It simply won't happen. A borrower looking to stay in a home must expect to pay off the balance in full. While modifications are increasing the borrowers are only getting adjustment in interest rates and amortization length. This still leaves underwater borrowers underwater and unable to move (outside of short sale or foreclosure) or expect to create equity when writing out the monthly mortgage payment. Note on the second graph that the only other upward trending line besides modifications is short sales. I expect this to be the growing part of the market moving forward.