Strategic defaulters talking...

There is always a bunch of great threads going on over at loansafe.org. The tactics for delaying foreclosure, stalling short sales and just overall lengthening out the process so they live rent free.

I was enjoying this thread tonight. The protagonist in question has three non-recourse CalHFA loans and has decided to strategically default (they can still pay but see no reason to do so) and is trying to keep the process going as long as possible. When the bank calls he asked for a loan mod packet and when they call back he asks if he got his loan mod paperwork... which he hasn't sent. He also is apparently agreeable to a short sale even though he has no plans to actually cooperate for a short sale.

This persons experience isn't unique as other people are jumping into the thread with their CalHFA default experiences. The forum in question is filled with strategic default threads.

The kid glove approach by servicers (forced upon them by the administration) has help spawn this activity. It makes even more sense to strategically default the longer the timeline is for foreclosure. People have figured this out en masse and the people not smart enough to figure it out for themselves are just a click away from figuring it out.

The gaming of the system is massive and the losses are going to borne by the honest taxpayers who pay their rent or mortgage and their taxes. The reason the servicers took a hard line on borrowers over mods and forbearance is to reduce the loss severity and prevent gaming of the system. But Uncle Sugar knows better and is making it much worse in the belief they will keep home prices high. I think at the end of it all we will have the massive losses distributed to the taxpayers and lower home prices after years of market stagnation. But the politicians keep telling us this is better. Apparently they don't use google and open their eyes to what is going on.

Principal Reduction plan coming to Fannie/Freddie soon?

From the Huffington Post:

A senior Treasury official told HuffPost on Monday that the department was heading towards more writing down of principal as part of its mortgage modification efforts, and that an announcement was to be expected in the next few weeks. But a Treasury spokesman e-mailed to say that Treasury was "NOT poised to roll out a major principal write-down program."

Anyone want to bet against Fannie/Freddie rolling out a principal reduction program and the Treasury backing them in the next few months? The above quote makes complete sense when taken in that context. That way the Treasury doesn't get blamed for supporting "moral hazard" but is still putting the taxpayer on the hook for bailing out homeowners. Treasury can say that Fannie/Freddie made the decision and Treasury merely is doing everything it can to keep Fannie/Freddie afloat to keep mortgage funding going.

NYT: Easy Loans in Expensive Areas

FHA was designed for low income borrowers and has been rushed into "saving" the overheated housing market by giving a loan to much higher incomes and house prices than the underwriting was ever designed for. There is also an issue of the obvious lack of internal controls at the FHA to stop fraud and abuse by the lenders which is magnified by more loans and more loans at higher limits.

The NYT has an article about FHA loans in expensive areas. Here are some quotes:

In 2007, the government did not insure a single mortgage in this city, one of the most expensive in the country. Buyers here, as well as in Manhattan, Santa Monica and every other wealthy area, were presumed to be able to handle the steep prices and correspondingly hefty down payments on their own.
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Policy changes such as the shift in insurance, while often introduced on a temporary basis, are becoming so popular that they could prove difficult to undo.

Like most government programs, once they start they are almost impossible to stop. The special interests will insure they keep going. As will be shown later, The politicians simply can't help themselves.

Kenneth Donohue, inspector general for the Department of Housing and Urban
Development, the parent agency of the F.H.A., said the higher loan limits were increasing the potential risk to the F.H.A. Last week, the agency said its cash reserves had fallen below their Congressionally mandated minimum because of the large volume of foreclosures.

“If one of these higher-limit loans fail, that’s equivalent to two or three cheaper loans,” Mr. Donohue said. “You have to ask yourself, was the F.H.A. ever intended to address these markets?”

He sees another risk: larger loans will be a greater draw for those who want to commit fraud. That would exacerbate a problem already besetting the agency.

This is their own Inspector General saying these things. I'm sure he will be replaced soon with someone who will be more of a "team player".

And I often say that Barney Frank is always good for a blood boiler.. He certainly doesn't disappoint this time.

A few weeks ago, Congress extended the higher lending limits for another year. Representative Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said in an interview that he planned to introduce legislation next year raising the maximum F.H.A. loan by another $100,000, to $839,750.

His bill would make the new limits permanent.

They simply can't help themselves. Housing is unfortunately seen as sacred by one side of the aisle and that view is easily exploited by the special interest and/or gives an fig leaf to cover the massive subsidies to the market. We had this housing crisis because housing was viewed as sacred by one side and the free market was viewed as sacred by the other.. the confluence of those two views culminated into a massive unregulated credit bubble with housing as it's engine of growth.

Also remember that Fannie Mae and Freddie Mac jumped in to "save the housing market" as more and more lenders abandoned the market.. Look how well that has ended up for the American taxpayer. It is clear policy that everything will be done to "save" housing, and by save I mean to keep asset prices as high as possible. This will require a massive amount of money from the taxpayer much of which should be borne by bondholders and equity holders instead. The end game was clearly revealed by Mr. Stevens last week when he said that the FHA doesn't have to go to Congress to get a bailout. It already has an unlimited blank check for funding straight from the Treasury provisioned. This dogmatic belief that housing must be "saved" combined with no checks and balances (one party effectively controls the legislative and executive branch) will prove to be very expensive for the all of us.

More FHA: Higher premiums coming and the need for humility

First from Bloomberg, It seems extremely likely the premiums FHA charges will be going up relatively soon:

Insurance premiums for mortgages guaranteed by the Federal Housing Administration may rise as the Obama administration looks for ways to shore up the agency’s finances, Housing and Urban Development Secretary Shaun Donovan said.

Increasing premiums is preferred because it rebuilds the capital base quicker. If they were looking at truly reducing their risk there would be underwriting changes like higher FICO's and higher down payments. Since those issues are political hot potatoes and the fact that premiums can be financed into the loan it is likely that we see the premiums increase before underwriting changes.

Secondly, The FHA needs to find some humility and realize that if they were a private business they would be on the verge of bankruptcy. Instead the FHA director David Stevens is giving speeches like this trumpeting the FHA (emphasis mine):

Federal Housing Administration Commissioner David Stevens said Saturday that concerns the agency is headed for the same financial trouble that snared Fannie Mae, Freddie Mac and the subprime sector are unwarranted.
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But Stevens sought to dampen those concerns, noting that despite the most severe housing recession in decades, the agency has $31 billion in capital — $3.5 billion more than it had a year ago.
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FHA is "the only participant in home financing services in the U.S. economy that hasn't needed a bailout, hasn't needed (funds from the government's Troubled Asset Relief Program), hasn't needed special assistance and is still completely self-sustaining," Stevens said.
"Without FHA there would be no (housing) market, and this economy's recovery would be significantly slower," he said.
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About 17 percent of FHA borrowers are at least one payment behind or in foreclosure, compared with 13 percent for all loans, according to the Mortgage Bankers Association.
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"That is why we're still standing while many of others did not survive this tumultuous time," he said.

FHA has more capital than last year but much less reserves a very important distinction. The capital is being set aside for expected losses and is only this high because the FHA is using new business to offset its previous losses it hadn't properly set aside capital for. Since FHA messed up so bad on its old book of business its only way of staying "self sustaining" would be to write new business with fewer losses (stricter underwriting) and they could increase their premiums.

Also hyperbole like "Without FHA there would be no (housing) market" is just stupid. There is always a market. It would be lower than it is now, but there is always a market. It reminds me of Mozilo back when Countrywide was unraveling making similar type of comments to justify the risky lending which ultimately doomed the firm. Fannie and Freddie were similarly arrogant before being placed in conservatorship. FHA will only survive this bust because of its backing by the US Government. It is that simple. It would be helpful if they learned some humility because in businesses with long lags between making decisions and then seeing the consequences of those decisions the bold words of management usually come off pretty stupid when looked at through the lens of history. Management needs to be worried about limiting the damage already done instead of going around tooting its own horn.

How not to reassure the public, FHA style.

The FHA is looking to reassure taxpayers and politicians that it won't need a bailout from all the bad loans it has made and is still making.

From WAPO:

"It is absolutely a myth that they would have to go to Congress for money," said Marvin Phaup, a former budget analyst at the Congressional Budget Office and now a budget expert at Pew Charitable Trusts. "The FHA has permanent authority to get money from the Treasury because it is backed by the full faith and credit of the federal government."
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. The agency is in effect tapping money it previously parked with Treasury. But if losses on FHA-backed loans continue, the agency could find itself overdrawn, yet payments from Treasury would not stop. They would automatically continue, rescuing the agency with taxpayer money

Great, well I am sure the politicians feel blessed that they won't have the political embarrassment of funding another bailout (and they WOULD). But the taxpayer still gets the shaft which is the whole point. So I am not sure why the FHA is going around tooting the horn on how they won't need a bailout.

More:

"FHA could not compete as well for the best borrowers, and it was left with some of the riskier borrowers,"

Here is a radical idea.. Don't try to compete for bad borrowers. It turns out you lose a lot of money doing that.

More:

FHA Commissioner David H. Stevens has said that the audit results will appear dire because they offer a snapshot of the agency's financial standing at the depths of a severe recession without taking into account new loans the FHA will insure or the fact that many of these loans have been made to more creditworthy borrowers than the FHA typically caters to.

Bernie Madoff could have had the same logic. That accounting for losses as the fund stands now doesn't account for all the people he is about to swindle in the future. If the only way the fund is solvent is to take in more business then it isn't a solvent insurance fund. But no politician will touch this with a ten foot pole, taking away any "support" from the housing market is verbotten. So the taxpayers will continue to pay. But nobody in politics can look further forward than today so they can have an excuse that nobody can possibly have seen it coming.