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Please read and comment on the entries that follow.  The most current one will be highlighted on this page; earlier entries can be found under the archives link below.


Fannie Mae Sales: 3.5 Percent Back

February 01, 2010

Fannie Mae on January 28, 2010 announced a new program through which owner occupant buyers of any of its owned real estate (REO) will receive a 3.5 percent rebate on the final sales price.  The rebate can be used either for closing costs or as a credit for purchase of appliances.  The offer is available for any purchase of one of Fannie Mae’s HomePath properties until May 1, 2010.  These properties are listed on Fannie Mae’s HomePath website.

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Show Me the Money?

January 28, 2010

Jon Stewart absolutely nails it in this clip about bankers after their fall.

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Time to Modify HAMP?

January 22, 2010

The New York Times reports on Jan. 21 that the Obama Administration is expected to announce significant changes to its Making Home Affordable loan modification program as early as next week.  

Likely changes include altering the formula used by lenders to determine whether a modification is the best economic option for borrowers by giving more weight to modifications that include a write down of principal.  As I have written earlier, principal modifications are emerging as the key variable in creating lasting, stable mortgage modifications.

Another area for possible change would be how to treat borrowers who are currently unemployed.  This could include a period of forebearance to give borrowers more breathing room to get back on their feet.  More radical proposals to provide direct loans to such households seem unlikely to emerge from the current deliberations.

The loan mod program has been plagued by long start up times, confusion and lost paperwork as lenders try to scale up parallel underwriting practices in their servicing shops.  One contributor to these delays have been documentation requirements that were adopted to prevent fraud, but seem to have been more effective in preventing legitimate modifications.  Streamlining of required documents and quicker acceptance of initial qualifying material would be a big help in reducing the paper chase that has frustrated so many borrowers.

In addition, many borrowers have been confronted with foreclosure filings and even evictions while waiting for their applications to clear or while they are in the 3-month trial modifications that are the first step under the plan.  Consumers who are in bankruptcy are another area of concern for advocates.  Clarifying their eligibility for loan mods would also be a significant advance in the program.  

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Lien On Me

January 19, 2010

Second liens are a big obstacle to any attempt to reduce outstanding principal on first mortgages as part of a modification.  When the second lien holder will not agree to take a haircut on their loan, there’s scant incentive for the first lien holder to do so.  After all, the second lien holder’s payoff in a loan failure comes behind the first one.  Why would a first lien holder agree to take less and have the second, whose risks of loss is supposed to be higher and who is charging a premium rate of interest to cover that higher risk, walk away whole?  

A recent article on Bloomberg sums up the problem very well.  It also contains this provocative passage:

The government is considering changes to permanently cut balances on which borrowers owe more than the property is worth, said Michael Barr, the assistant Treasury secretary for financial institutions.

“We are in the process of reviewing that now as we have been continually,” Barr said on a conference call last week.“You have to be very careful not to design a program that would change people’s behavior across the country.” (I noted some of these “moral hazards” in earlier posts.)

Treasury crafted a modification program for second lien holders, but according to the Bloomberg article, none of the lenders holding $1.05 TRILLION of this debt has actually signed up to participate in it. 

A program through which the government acquired these mortgages and restructured them, including through the use of “friendly” foreclosures, could break the logjam described in this article.  

So could bankruptcy.  But bankruptcy judges do not have the right to modify first mortgages through bankruptcy—authority the Obama Administration sought but failed to get Congress to grant—and forcing a bankruptcy just to clear the seconds seems a poor policy choice.

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Dukes of Moral Hazard

January 17, 2010

The Treasury Department last Friday released the latest monthly report on its Making Home Affordable mortgage modification effort.  It showed significant growth in the number of trail modifications, to more than 1 million, as well as the number of final modifications, which rose from a measly 30,000 to more than double that, with another 46,000 pending final resolution.  But as heartening as these numbers might be, they must be considered in the context of 2.8 million foreclosures in 2009 and at least another 2 million estimated for 2010.

The rapid deflation of the housing bubble also has left millions of homeowners deeply underwater on their mortgages, eg., they owe more than their homes would fetch if sold.  The GAO this month released a report that 

“estimated that one-quarter of nonprime borrowers with active loans nationwide had negative equity in their homes as of June 30, 2009. We also found that the incidence of negative equity was highest among borrowers who obtained their mortgages in 2005, 2006, and 2007.”

Stubbornly high rates of delinquency and default and negative equity appear to have a growing correlation.  In a recent report, the New York Fed concluded that loan modifications that included a write down of principal, alone or in addition to other moves such as reducing the interest rate, had a much lower likelihood of defaulting again than loans that did not.   

One of the arguments raised most often against principal reductions is the “moral hazard” associated with such moves.  When some owners have their debt forgiven and others do not, the argument goes, the hazard of other borrowers defaulting on their loans to secure similar reductions increases.  Allowing some borrowers to escape their “moral obligation” to pay off debts risks infecting the whole system with a bad case of “walk aways.”  

I don’t want to diminish this risk.  It’s real.  It’s a nightmare for lenders holding loans.  It’s a dilemma for policymakers.  But it’s worth keeping in mind that many of the loans that are so deeply underwater were extended to borrowers without adequate disclosure.  They contained tricks and traps that have made it difficult, if not impossible, for consumers to pay them back.  The broad devastation wrought by unregulated and unbridled asset-based lending has dropped the floor from beneath millions of owners whose only mistake was buying at the top of the market, or in a neighborhood where other buyers got  in over their heads.  

It’s vexing beyond belief to see some of the same policy wonks that approved using TARP money to pay Goldman Sachs and others 100 cents on the dollar for bets they made with the undercapitalized counterparty AIG argue  that hapless homeowners should be held to a higher standard of financial discipline.

Stephen Colbert nails it in this clip from the January 14, 2010 Colbert Report.  Following that is a more straightforward clip featuring analyst Josh Rosner on the same topic.

 

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