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.

Administration quietly announces short sale plan

Since the housing news was dominated today by the administrations announcement of their displeasure for the low number of HAMP trial modifications going permanent the "foreclosure alternative" plan received little press. There is no mention of it on FinancialStability.gov or MakingHomeAffordable.gov, the only place it can be found is on the servicer specific website HMPAdmin.com. Clearly the administration wants the public to focus on the fact that they are trying to keep everyone in "their" homes while quietly planning for the reality that many could never afford the homes they bought over the long term. People are clearly overleveraged and getting out from under their debt through a short sale or deed-in-lieu is a smart move for both sides. The houses maintain their value better because they are occupied and the borrower reduces their debt load and reduces the time before they are able to get another home through FHA or the GSE by cooperating with a short sale.

The high level details from the press release (My comments added in red):

Foreclosure Alternatives
The HAFA program simplifies and streamlines the use of short sale and DIL options by incorporating the following unique features:

Complements HAMP by providing viable alternatives for borrowers who
are HAMP eligible. In other words, borrowers who are eligible for HAMP but smart enough to realize it isn't in their best interest.

Utilizes borrower financial and hardship information collected in conjunction with HAMP, eliminating the need for additional eligibility analysis.

Allows the borrower to receive pre-approved short sale terms prior to the property listing. Extremely important point, this turns short sales from the nightmare they are now into a smooth transaction. Short sale prices will improve as a result and transaction volume should go up.

Prohibits the servicer from requiring, as a condition of approving the short sale, a reduction in the real estate commission agreed upon in the listing agreement. Clearly a win by the NAR, the max commission is set at 6%. In many places in California 5% is pretty much max. Investors will be getting 1% less in California as agents will be sure to be smart enough to be asking for 6%. The listing agent will probably get that particular bonus right now with inventory so low there is no reason to up the selling office commission.

Requires that borrowers be fully released from future liability for the debt. A clear win for borrowers, especially in many of the recourse states or who refinanced in places like California which allows recourse on refinances. Borrowers will be much more likely to participate if they realize after the sale is done they are out from under their massive debt. Like the commission deal point this one comes at a cost to investors.

Provides financial incentives to borrowers, servicers, and investors. Borrowers get $1,500 for completing a short sale, Servicers get $1,000, investors only get money for settling junior liens, up to $1,000.

One may ask what is in it for the investor since several of these deal points take money from them. The loss will most likely be less in the above scenario over a foreclosure. Since it takes so long to foreclose that is many months the investors money is tied up with no return. Also the house will most likely not be maintained once it is clear foreclosure is inevitable. Then there is the turn around time for getting the house onto market once it is foreclosed. All add up to increasing the investors loss.

This is the best program I've seen yet from the Administration because it deals with the reality of the market. It has tremendous potential of reducing the overhang of "shadow inventory" on the market. The only downside I have seen so far in a quick skim of all the documentation is that the program doesn't officially start until next April though services may opt to start sooner. I think with the political pressure being brought on servicers to reduce foreclosures and the desire for servicers to please both their investors and regulators this program could become a home run and could be a real beginning of the end of the housing crisis.

Trial modification difference between servicers.

In an American Banker article titled Shame May Be Only Stick U.S. Holds Over Mortgage Servicers servicers with a lower number of trial modification explain that the lower level is caused by underwriting the loan upfront before the trial mod is given instead of giving the trial mod based on verbal information and then later underwriting the modification.

From Wells Fargo:

Heid said, saying the servicer did not want to put borrowers in a trial modification and later re-underwrite the loan. "We took more of a 'gather the documents first' path. We wanted to make sure that we had the actual pay stub, the actual tax returns in hand… Now that we've got some operating experience on the program, we feel we can be less restrictive on that."

From Ocwen:

Ron Faris, president of Ocwen Financial Corp., which helped 5% of its eligible borrowers, said in an earnings call Tuesday that some of the numbers are deceiving. He said some servicers are just taking verbal income information from the borrower and sending them an offer immediately, following up at a later time with required information. He argued such a method would result in a high number of modifications initially, but they may not last.

Other institutions, like Ocwen, are requiring borrowers to submit all the documentation first before underwriting a modification.

Offering a trial modification based on verbal information seems like a very bad idea. It doesn't take long to produce income and employment documentation, run a credit report or sign a 4506-T (allowing the servicer to get the borrowers tax returns). Full underwriting does take longer but will have to be done anyways before giving out the full modification. Why not do it up front? If you were an investor and saw your servicer handing out trial mods so easily wouldn't you be worried? The servicer is the fiduciary to the investor not the borrower and it is looking like some servicers are caving to political pressure knowing ultimately the money they lose by handing out more modifications than prudent is not their own. In fact the HAMP and related programs incentivize the servicers to set aside their fiduciary duty.

As I sit back watching all of this unfold I keep asking myself who (besides the Federal Reserve) would ever buy a mortgage bond ever again.

Loan modifications dropping FICO scores

Bloomberg has a story up on loan modifications effect on FICO scores. While many homeowners FICOs are trashed anyways due to late payments, those hoping to preserve a high FICO and get a loan modification might not realize that the payments will reported as less than the agreed amount and reduce the FICO score. This does represent a higher risk to lenders and is entirely appropriate but some might not realize there credit will be affected adversely.

From the article (emphasis added):

Victor Stern thought his money troubles were over when he got approval to modify his home loan. Then his credit score dropped 121 points.
...
“There should be clear disclosures so consumers understand this is a major hit on the credit score,” said Evan Hendricks, Washington-based author of “Credit Scores & Credit Reports.” “There’s no sugar-coating the reality of the negative impact.”
...
“We view an account that has been settled or renegotiated for less than the full amount as a negative because historically consumers on reduced payment plans represent a greater risk,” said Ethan Dornhelm, a principal scientist at FICO’s San Rafael, California, office. The size of the impact may be more for borrowers with higher credit scores, he said.
...
“If you’re a lender, you want to know that a borrower had to have a loan modified to keep up with payments,” said Greg McBride, senior financial analyst at Bankrate.com, who is based in North Palm Beach, Florida. “It’s not unfair that a loan modification impacts a credit score since the borrower didn’t meet the original obligation.”

HELOC / 2nd lien mod program ramping up

From Bloomberg:

U.S. banks are likely to begin signing contracts as soon as this month that would let second mortgages and other home-equity debt be reworked under a government-subsidized program, a Treasury official said.
Contracts may be signed this month or in early August, the official, who asked not to be identified discussing private talks, said in an e-mail yesterday. On April 28, when provisions for the expansion of President Barack Obama’s $75 billion “Home Affordable” plan were announced, officials said the second-lien program would be up and running in about a month.

Looks like the bank stocks will be under some stress again this fall:

“It is well understood that the four major banks would likely need an additional capital injection should they be forced to mark the second-lien mortgages on their balance sheets to a realistic value,” Greenwich Financial’s Frey said.

A realistic look at loan modifications

Calculated Risk linked to a research report by the Federal Reserve bank of Boston. It directly contradicts the popular theory that is pushed by politicians and the media that loan modifications are "win-win" for the borrower and lender. The risk of re-default and the risk of giving modifications to people who would have cured in the face of foreclosure turn out to tilt the net present value test to foreclosure in most cases. The fact that so many loan modifications are happening are really more a testament to the political pressure faced by lenders and servicers rather than the economic reality surrounding modifications. Put simply, if loan mods were really all that and a bag of chips, lenders would have already been doing them.

I highly recommend reading the whole paper but here is part of the conclusions from the paper (emphasis added):

Since we conclude that contract frictions in securitization trusts are not a significant problem, we attempt to reconcile the conventional wisdom held by market commentators, that modifications are a win-win proposition from the standpoint of both borrowers and lenders, with the extraordinarily low levels of renegotiation that we find in the data. We argue that the data are not inconsistent with a situation in which, on average, lenders expect to recover more from foreclosure than from a modified loan. At face value, this assertion may seem implausible, since there are many estimates that suggest the average loss given foreclosure is much greater than the loss in value of a modified loan. However, we point out that renegotiation exposes lenders to two types of risks that are often overlooked by market observers and that can dramatically increase its cost. The first is “self-cure risk,” which refers to the situation in which a lender renegotiates with a delinquent borrower who does not need assistance. This group of borrowers is non-trivial according to our data, as we find that approximately 30 percent of seriously delinquent borrowers “cure” in our data without receiving a modification. The second cost comes from borrowers who default again after receiving a loan modification. We refer to this group as “redefaulters,” and our results show that a large fraction (between 30 and 45 percent) of borrowers who receive modifications, end up back in serious delinquency within six months. For this group, the lender has simply postponed foreclosure, and, if the housing market continues to decline, the lender will recover even less in foreclosure in the future.

We believe that our analysis has some important implications for policy. First, “safe harbor provisions,” which are designed to shelter servicers from investor lawsuits, are unlikely to have a material impact on the number of modifications and thus will not significantly decrease foreclosures. Second, and more generally, if the presence of self-cure risk and redefault risk do make renegotiation less appealing to investors, the number of easily “preventable” foreclosures may be far smaller than many commentators believe.

Unemployment and loan modifications don't mix.

Turns out it is kind of hard to modify loans when there is no income. Those pesky NPV tests keep coming back that it is better to foreclose than modify. From the Wall Street Journal (emphasis added):

Rising unemployment is complicating the Obama administration's effort to reduce foreclosures and stabilize the housing market.

The first wave of mortgage delinquencies was sparked by borrowers who took out subprime mortgages and other risky loans that became unaffordable, causing them to fall behind on their monthly payments. But the current wave is increasingly driven by unemployment or underemployment, economists and housing counselors say.

The Obama foreclosure-prevention plan was "built around the subprime crisis model, not the unemployment crisis model," said Michael van Zalingen, director of homeownership services for the nonprofit Neighborhood Housing Services of Chicago.

But many borrowers don't have sufficient income to qualify for a loan modification under the plan. Mr. van Zalingen said roughly 45% of the more than 900 borrowers who sought help at two recent counseling events would fall into that category even if their interest rate were dropped to 2% and their loan term were extended to 40 years.

Many of those unqualified borrowers suffered job losses or a reduction in income, Mr. van Zalingen said. Roughly 27% of borrowers who called the mortgage industry's national "Hope Hotline" in the second quarter of 2009 cited unemployment as the primary or secondary reason for their mortgage problems, up from 9.7% in the second quarter of 2008.

The article goes on to talk about various suggested remedies to the issue. Investors in mortgages are increasingly looking like unsecured creditors. There isn't much point of a asset backed security if you can't ever get your hands on the asset when the other party isn't performing. At what point do the investors get a say?

Major servicers exempt from 90 day foreclosure delay

Here is the list of servicers exempt from the additional 90 day delay in foreclosure.

As expected this law will have little to no impact on the current foreclosure pipeline. Last years foreclosure moratorium was much drastic.


Note: I have added a foreclosure research link to the site, see here.

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.

Mark Zandi: "There was a regulatory failure, and taxpayers have a fiduciary responsibility to make it right"

Mark Zandi thinks we haven't gone far enough bailing out homeowners (emphasis mine)...

The administration and Congress should therefore prepare a plan B. And it must be simple: For example, anyone who got a mortgage from 2005 to 2008 on a home they live in that was inherently unaffordable at origination - their debt-to-income ratio exceeded 31% or the loan was more than 90% of the home's value - qualifies for a loan modification that reduces the principal to the current appraised value of the home. Taxpayers would bear the cost of the principal reductions, appraisals, income verification and other paperwork.

This straightforward approach benefits everyone involved. Since the eligibility criteria are clearly defined, homeowners would not be able to default on purpose to get the modification. And it is fair: If the loan was inherently unaffordable at origination, regulators should never have allowed it in the first place. There was a regulatory failure, and taxpayers have a fiduciary responsibility to make it right. Besides, taxpayers will also benefit as the foreclosure crisis abates, because house prices will stop declining, and that will end the drain on the financial system and broader economy.

I wonder if Mark realizes that pretty much every FHA loan would be eligible for his loan modificaiton.. even ones originated today. I think the failure was at every level regulatory, personal responsibility, fiduciary duty, etc. To single one area out and make that area wholly responsible for the whole mess is a tremendous leap in logic. Each area is shouldering some of the burden.

On the loan modification plan Mark Zand I agree.. it makes little sense for homeowners to get the loan modification as they are currently structured. Most homeowners would be better off starting fresh and repairing their personal balance sheets then sinking money down the black hole that they've been putting money into all these years:

The plan is also guilty of kicking the can down the road. The lower monthly mortgage payments under the plan last for only five years, and for many homeowners deeply under water, it makes no sense to keep paying on their mortgages no matter how affordable the payment is. Why spend $5,000 fixing your roof if you are already under water by $20,000? That's why many of these homeowners will ultimately land back in foreclosure.

Servicers overloaded on loan modifications

The Wall Street Journal has an article regarding mortgage servicers having trouble finding enough people to handle the surge of defaults. What is clear that the servicers are doing everything possible to get homeowners to take loan modifications over foreclosures. The biggest issue is that most loan modifications are absolutely horrible deals for current homeowners and anyone that can do a lick of math can see that. I think the servicers would be better off hiring people with sales experience instead of servicing experience because these people have the aptitude in convincing people into making economically bad choices. The above picture from the article shows that loan modifications are re-defaulting at a high rate as both the economy and the realization that they are maximizing the overpayment of a depreciation asset are taking over.

Snippets from the article:

Finding the right employees with the right temperaments is among numerous struggles facing mortgage-servicing firms. With millions of loans needing to be considered for modifying, the firms also are finding their computer systems outdated and incapable of processing the data.
At the same time, the mortgage-servicing firms are under pressure to meet the mandate laid out by the Obama administration to help keep people in their homes.
...
"You've got a situation in the industry where all of the trained, experienced collectors -- the resolution consultants -- anybody who's out there with training, they're hired. They're sopped up," Mr. Koches said. "There is an unprecedented demand. So we've got to go out there and find people who don't have that training background."

More Loan Modification Info.

The Los Angeles Times has a starter guide for mortgage modifications that is a good high level overview and also links to counseling services. But I think it is important to understand what loan modifications give and don't give the borrower. Borrowers expecting principal reduction under the plan will be disappointed. The plan is designed to maximize cash flow for the investor but keep the borrower in the home. It does this by amortizing the loan over 40 years and reducing the interest rate. This ensures the borrower pays the investor the maximum amount possible and does nothing to address borrowers being underwater. Under the plan it will be a long time before the borrowers build equity and will unable to move anytime soon.

Here is the "standard waterfall" formula for modification under the plan:

Step 1a: Request Monthly Gross Income.
Step 1b: Validate total first lien debt and monthly payments (PITIA). For purposes of making a provisional modification offer during the trial modification period, the borrower’s unverified income and debt payments can be used. Provisional information and modification terms will be verified in a timely manner.
Step 2: Capitalize arrearage (ED Note: This is just a fancy way of saying put back what you owe and haven't paid back on your principal balance). Servicers may capitalize accrued interest, past due real estate taxes and insurance premiums, delinquency charges paid to third parties in the ordinary course of servicing and not retained by the servicer, any required escrow advances already paid by the servicer and any required escrow advances by the servicer that are currently due and will be paid by the servicer during the Trial Period. Late fees are not capitalized.
Step 3: Target a Front-End DTI of 31%. The lender/investor shall follow steps 4, 5, and 6 to reduce the borrower’s payment to the level corresponding to the Front-End DTI Target.
Step 4: Reduce the interest rate to reach the Front-End DTI Target (subject to a floor of 2%). The note rate should be reduced in increments of 0.125 %, and should bring the monthly payment as close as possible to the Front-End DTI Target without going below 31%. If the resulting modified interest rate is at or above the Interest Rate Cap, this modified interest rate will be the new note rate for the remaining loan term. If the resulting modified interest rate is below the Interest Rate Cap, this modified interest rate will be in effect for the first five years, followed by annual increases of 1% (100 basis points) per year or such lesser amount as may be needed until the interest rate reaches the Interest Rate Cap, at which time it will be fixed for the remaining loan term.
Step 5: If the Front-End DTI Target has not been reached, extend the term of the loan up to 40 years. If term extension is not permitted extend amortization. The 40-year term begins at the start of the modification (after the borrower successfully completes the Trial Period). Note that the servicer should only extend to a term that is necessary to reach the Front-End DTI Target; there is no requirement to extend to a 40-year term.
Step 6: If the Front-End DTI Target has not been reached, forbear principal. If there is a principal forbearance amount, a balloon payment of that forbearance amount is due on the maturity date, upon sale of the property, or upon payoff of the interest bearing balance. If the modification does not pass the NPV Test and the servicer chooses to modify the loan, the modified balance must be no lower than the current property value.

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.

The "Obama Plan" refinance and loan modification details.

There is a ton of data to go over for both the loan modification program and the refinance portion of the Homeowner Affordability and Stability Plan.

The best place to start is of course the official website http://www.financialstability.gov/

For borrowers wanting the simplest guide to whether they generally qualify for a loan modification or refinance click here.

For a bit more detail oriented people here are the program fact sheet, summary of guidelines and modification program guidelines.

But the real meat and potatoes for true understanding the depth and breadth of the program is really found in reading the underwriting guidelines from Fannie Mae and Freddie Mac.

For Fannie Mae existing home loans they have the Home Affordable Refinance guidelines. For Fannie Mae serviced loans and even Non-GSE loans you can find the Fannie Mae Home Affordable Modification Program guidelines and also alternate options for the servicers for people who don't qualify for either option. Freddie Mac is a bit less detailed, they have two different places for refinance data, a summary type page here and a slightly more detailed guide here. The loan modification page which is linked to from their servicing guide points to here which is the old loan mod program from last year. Freddie has some work to do apparently.

"Foreclosure is best option for some owners"

This article from the San Diego Union-Tribune is heresy in a world that believes every home is a castle and a part of the American dream (regardless of price):

Home values have fallen so far that it no longer makes financial sense for some people to keep paying their mortgage, analysts say. Some contend that those who bought at the height of the market, using risky adjustable-rate loans with no money down, may have little to lose but their pride, especially if they have undermined their credit by missing mortgage payments.

Although loan default should be a last resort, homeowners mired in debt “are better off to just get on with it, take their credit hit today and get on with their lives,” said Mark Goldman, a real estate finance instructor at San Diego State University.

“Pull the rip cord and get out now,” Goldman said. “The next step is restoring your credit, and you can't begin the restoration process until you take your hit.
...
Marc Carpenter, a San Diego real estate agent who handles foreclosures, said it is not unusual to go to a children's soccer game and hear parents debating the merits of foreclosure.

“It has become so commonplace, people are talking about it like it's a normal thing,” Carpenter said. “People are comfortable talking about it.”
...
Economists say it is too soon to know if the housing market is bottoming out. They question whether modifications that temporarily reduce interest rates without reducing loan principal will help consumers in the long run. Most lenders and servicers are wary of reducing debt principal because they don't want to anger investors who own securities backed by mortgages.

“All of these politicians who have spent all of this time working so hard to keep people in their homes by modifying interest rates are not doing any good at all,” said economist Christopher Thornberg. “Is the key to helping them leaving them with a $600,000 debt on a $400,000 house? How many years will that take to crawl out of?”

As long as mortgage modifications lack significant principal reductions and prices continue to fall ruthless foreclosure (the ability to stay in a underwater home but choosing not to do so) will be an attractive option. In going around and reading the mortgage modification forums I am amazed at how happy some home owners are at getting minor rate reduction or a reamortization of the term of the mortgage on homes that are clearly significantly underwater. The mortgage modification "trick" might end up working out well for the lenders if they can prevent the homeowner from walking and continuing to pay on an overpriced asset. How bad things get in bubble areas will be completely dependent on just how many people realize what is in their best interest not those of the banks.

Here is one way NOT to go about getting a loan modification.

The San Francisco Chronicle had an article about a group of San Fernando Valley churchgoers who are banding together in an attempt to get their loans modified en masse because they feel like their is strength in numbers. From the article:

The startling request was Lasseigne's introduction to the epidemic of foreclosures afflicting his flock in the northeast San Fernando Valley, a working-class, heavily immigrant area where more than 8,000 homes are either in default or have been foreclosed.
In the past three months, Lasseigne and other community leaders have come up with an unusual response: They have organized more than 500 Hispanic immigrant families that are behind on their payments into teams that will seek to negotiate with banks as a group, rather than individually.
They also intend to compile detailed records of how and whether lending institutions agree to modify loans - information they say could be given to government officials in an attempt to give distressed homeowners more favorable terms.

Getting a group together for political pressure isn't the bad idea but the nature of modern mortgage finance and individual profiles of each borrower means that it is essentially random how the servicers react to any one small group of mortgages. The political pressure will be useless waste of energy. Some of the people will be able to get easily modified and some of them will be essentially impossible to get modified. In many cases it is completely out of the servicers hands as to their discretion to modify some of the mortgages. The first thing people should attempt to do when figuring out if they even have a shot at a sustainable mortgage is try and find out who owns their loan. By knowing who owns the loan and who is servicing it you can then have a clearer picture of what has worked for other borrowers with the same profile by looking at some of the loan modification resources available on the internet.

From the little I have seen regarding loan modifications the modifications given out aren't really designed to do anything other than keep the cash flowing a bit longer before the eventual foreclosure. But their is another twist to it, many of the loan modifications also have a clause that the borrower gives up their right to sue for the way to loan was originally made. So the lender gets cash flow and indemnification from future lawsuits and the borrower keeps paying for an overpriced asset.

Fannie / Freddie unveil their loan modification program

One would think that the entities holding $5 trillion in mortgage debt revealing their loan modification program would be a big deal. Supposedly streamlined loan modifications will be what saves the market and the borrowers from the debt burden they got themselves into. Unfortunately the reality is that few loan modification programs strike a balance between the incentivizing the borrower to stick with the loan or convincing the lender to take the haircut. The GSE loan modification model is a horrible deal for the borrower and it is hard to see where someone will take the loan modification and have their long term situation improve in any way.

Here are the basic steps for a Fannie/Freddie loan mod. (PITIA is Principal, Interest, Taxes, Insurance and Association dues)

1. Taking any delinquent payments add it back into the loan.
2. Extend the loan term to 40 yrs, if PITIA is above 38% go to step 3
3. Reduce interest rate down to 3% in .125 increments to attain a 38% PITIA. If the final interest rate is at or above market rates then fix the interest rate on the loan for the life of the loan. Otherwise interest rate stays fixed for 5 years and then moves up 1% a year until it matches market rates at the time the loan is modified. If PITIA is above 38% go to step 4.
4. Principal forbearance. Put the amount of principal necessary to bring the loan amount down enough to get the PITIA below 38% as a balloon payment due at the end of the loan.

The 38% PITIA as a sustainable housing payment is insanely high. It isn't even total PITIA this is all about the first lien mortgage and no other mortgage debt or any other debt is taken into account. Loan modifications programs should be designed to be sustainable if they have any chance of success but they instead are designed to milk as much cash flow out of the borrowers before the inevitable default. Also the property has to be more than 90% LTV of the mortgage being modified. This program is just like Hope 4 Homeowners, blatantly structurally flawed in such a way to ensure the programs failure. The only logic I can behind unveiling such a program is show the politicians they are "doing something" even if what they are doing will have little to no effect on the marketplace. For many borrowers in bubble areas it seems like stopping payments and saving money and staying into the home until you get kicked out is the most financially sound decision they can make. I don't see the GSE loan modification program changing the calculus of that decision much at all.

Statewide data regarding loan modifications.

I saw over on Mathew Padilla's blog that the California Department of Corporations has the results of a survey they take of loan servicers. One of the interesting statistics that matches what I am seeing in the local data is the increase in short sales that lenders are agreeing to. I think this will be the biggest growth segment of the market over the next few years as the majority of servicers work on loan modifications that adjust mortgage rates but few do loan modifications that reduce the principal balance. If the balance isn't reduced there is no way to get out from under the home except appreciation (unlikely anytime soon), short sale or foreclosure. If houses did magically start to appreciate the servicers will see the gain, not the borrower as a result of them not reducing principal balance. The possibility of selling the loan to TARP or on the secondary market is the reason I think few will reduce principal for the borrower.

In January of the the servicers surveyed only 5.69% (974) of completed workouts were short sales. By September that grew to 13.41% (3,732) of completed workouts. Reductions in principal were 0.08% (14) in January and 0.28% (79) in September. Reducing the interest rate at or below the initial/start rate was the most likely outcome for borrowers in January this represented 19.44% (3,327) and 20.36% (5,666) in September. One of the reasons why I don't think the Alt-A resets will be as big of a deal as some might think is how much latitude servicers have in dealing with rate reset issues. It is a far bigger deal for the borrower as to the type of loan they have than if the rate is resetting sometime this year or next. An Alt-A or subprime borrower is screwed because of the issues inherent in the loan and the marketplace much more than any rate reset potential.

The new FDIC plan being rumored to be unveiled is basically a standardized version of the rate reduction (usually for 5 years) for borrowers in default. There is a possibility of principal reduction under the plan but as we see from the above statistics, it is the road less traveled. I think it will do little to help the situation over the long term but may relieve some pressure over the short term.

Aggressive loan mod, the future of severely depressed markets?

This thread on Broker Outpost caught my eye:

The borrower is upside down in the property and just wants to walk away. Foreclosure has been in the works and should meet the steps of the court house soon, until....
My borrower received a FED-EX package from Countrywide. Countrywide sent a loan modification writing the second mortgage off and reducing the first mortgage. The new loan is a 4.5% Interest Rate for 40years and the borrower does not have any payments until July 1st. His new payment is now reduced a total of $1,000.00 making his payment affordable.

Why would this happen? The second could easily just given up or the mortgage insurer come to a deal with the second (some seconds bought insurance protection) in the recognition that the second lien is now worthless. The first might do this willingly, but I think a more likely scenario is the first just sold the note and someone probably bought a non-performing note for 50-60 cents on the dollar. Throw in a 40 yr amortization and they have a pretty good note if it performs.

Here is the simplistic math, I'm just going to do Interest Only to make things simple.
$100,000 total = $80,000 first , $20,000 second
If the borrower has a blended rate of 7% that would be $7000 a year.
Second goes to zero. First gets sold for 50 cents on the dollar ($40,000) new rate is 4.5% * $80,000 = $3,600. That is a 9% note to the new holder. Borrower gets a deal, new note holder gets a deal, original lenders liquidates and moves on.

I don't think the lenders are doing this out of generosity or compassion, there are places with severe oversupply like parts of Florida, Arizona and central California that will take decades to resemble normal housing markets. Once the foreclosure values start getting near what they can get for the notes on the secondary, things like this will happen. Penny Mac is a company organizing to buy non-performing loans cheap, get them performing and then sell them off. At some point I don't the moral hazard aspect (if borrowers starting hearing the lenders are giving out a deal they'll start defaulting) even is a factor if prices have fallen far enough.