How Forgiveness Fits in Housing-Fix Toolkit

The Wall Street Journal, 7/30/2012

“Already, Fannie and Freddie have relaxed refinancing rules so that anyone with a loan backed by the firms can refinance, no matter how underwater, as long as they are current on payments. Accelerating amortization provides less of a break than principal reduction, but it nevertheless returns the borrower to terra firma much sooner.”

COMMENT: Borrowers who are current are not asking for forgiveness. They and their lender have underwater loans and merely want to drop their interest rate. If the loans were not underwater, they could easily do this. If the lender drops the rate, the borrower can more easily make the payments—improving the security for the lender. With a lower monthly payment, the borrower has more money to spend—helping the economy. Fannie and Freddie have the policy right. Now the implementation. Merely send a letter to every borrower, “Your interest rate was 6%. It is now 3%. Your new monthly payment is ____.”

More from the article--
“Columbia University economists Glenn Hubbard, Christopher Mayer, James Witkin and mortgage-bond veteran Alan Boyce spelled out in a paper how this might work. A homeowner who owes 117% of his home's value and who took out a 30-year loan with a 6.7% rate five years ago could refinance now into a 15-year loan with a 3.1% rate. That would increase the monthly payment by just $24. But it would leave the borrower with positive equity in less than three years, assuming home prices stay flat; within five years, the homeowner would have 17% equity. Doing nothing, the borrower would be underwater for more than seven years.”

COMMENT: If the term  were 20 years or 25 years instead of 15 years, the borrower would have a lower monthly payment, helping the borrower, the lender, and the economy. If the borrower has been mature enough to make payments on a bad deal since 2008, then the borrower is mature enough to select the term. Just do it. All the other borrowers whose loans are not under water have been able to do it.

Counties taking refinancing into their own hands

 

BY NICK TIMIRAOS

A bond-investor group is suggesting rules that would make it difficult for banks to provide the lowest-cost mortgages to homeowners in cities that plan to use eminent domain to modify mortgages.

In a draft of the rules circulating among members, the Securities Industry and Financial Markets Association has proposed preventing home loans in those communities from being bundled into the most commonly used—and cheapest—pools of mortgage-backed securities.

This year, California's San Bernardino County and two of its largest cities, Ontario and Fontana, created an entity charged with restructuring mortgages for certain borrowers who owe more than their homes are worth. ...

Banks' Skittishness Limits Impact of Low Mortgage Rates

83% of U.S. banks are much less or somewhat less likely now than in 2006 to provide mortgages to households with relatively low (620) credit scores and a 10% downpayment, according to the Wall Street Journal. Thus, despite the Fed's efforts to stimulate the economy by easing credit, "Monetary policy is having no effect on the vast majority of people," the newspaper quotes Fed researcher Paul Willen as saying.

Source: Fed Wrestles with How Best to Bridge U.S. Credit Divide

Obama Plan

The headline says, "Obama plan to lower home mortgage payments, but how much?"

"Obama's argument is that as more families refinance at a low interest rate, incidences of default and foreclosure will diminish, helping to stabilize home values and restore consumer confidence. The families who benefit will also get extra cash in their pockets each month, which they can use to buy other things in the economy or to pay down debt.”

Of course there are too many conditions:

"Participants must live in the home and be current on the mortgage. Availability would be more limited if a loan is deeply underwater (loan more than 140 percent of home value) or if borrower is unemployed."

Just tell Fannie and Freddie to do it. Refinance all borrowers who are current. Forget the appraisal. They have been the major roadblocks to refinance. They know who is current. Just press a button on their computer, send those borrowers a letter, "Your payment is now lowered to _____. "

This could be one small step for mankind. But the conditions will make it a very small step.

Invasion of the House Snatchers

"Invasion of the House Snatchers" is the latest in Rolling Stone

http://www.rollingstone.com/politics/news/17390/232611

Here are two quotes, "the borrower-lender relationship can only go one of two ways: full payment or total war." And "Why don't the banks want us to see the paperwork on all these mortgages? Because the documents represent a death sentence for them.... Bank of America...is required by law to buy back every faulty loan."

Drop the rates, fewer foreclosures. Better for the bank. Better for the borrower.

True interest rates and default rates

From Minyanville:

"Default rates estimate the probability of getting your money back; interest rates how much you get paid for taking that risk. Banks and dealers made gobs of loans valuing them way too high because they under-estimated default rates and over-estimated the interest rates they'd receive (the bank gave full value to the paper assuming the borrower would successfully be able to pay higher rates when the lower teaser rate converted to a higher fixed rate).

"So all this paper was carried on the books at a high price: The banks showed profits by marking up the value of the paper.

"That brings us to our paradox. Now we know that those variables were fallacious: higher default rates and lower interest rate assumptions are forcing those banks to write-down the value of those loans. … If banks assume higher interest rates so they get more cash over the life of the loan, they must then assume higher default rates for those go up when interest rates, the cost of a loan, goes up."

http://www.minyanville.com/businessmarkets/articles/todd-harrison-midterm-elections-quantitative-easing/11/2/2010/id/30895

And, if interest rates on a given loan goes down, the default rate goes down. The rate which the bank makes, net of defaults, improves. Just lower the mortgage rate on exisiting loans!

Appraisals prevent refinance

1. Think about it. You are an appraiser. All the appraisals you did for the last 3 years are "wrong." And every media outlet claims you made a mistake by "over-valuing" houses. They question your integrity. What do you do today to compensate? .... Undervalue. So current owners can not refinance their own home and get a lower interest rate. Does this mean appraisers are now operating with more integrity now than in the past? Or less?

2. It gets worse. One method of appraising is "Capitalizing" the expected cash return. This is not normally applied to houses, since houses don't have an "income stream." (Or do they? Isn't a mortgage payment a negative income stream?) The "cap rate" is normally related to the interest rate on a loan. The appraisal process incorporates sophisticated arguments, but basically just divides the income stream by the "cap rate." Apply that approach to the 7%, 30 year, $100,000 house loan. The monthly payment is $661.44. Cap that at 7% and the "value" is $113,000. ($100k/7% x 12).
Now cap it at the current mortgage rate of 4.5% and the "value" is $175,000. The lower the interest rate, the higher the value of the home.

Of course it makes intuitive sense. The lower the monthly payment, the more likely the borrower can make the payment, the more secure the loan. Lower the interest rates!

3. "The real estate market depends on such homeowners being able to sell and move up; without them the trade-up market can't grow." -LA Times. What if these underwater borrowers lived on Cove Street and just got the lower rate but did not lower their monthly payment? Assume they are currently 75% underwater. With their current 7% interest rate, they would take over 14 years to reduce the principle to 75% of their original balance. After 14 years, their home is now worth the amount of the mortgage. After 14 years, they can trade up.
However, if rates were dropped to 4.5% and they kept making the old monthly payment, it would take less than half that time. And, if houses stop depreciating, (which they will if rates are dropped), and modestly appreciated (which they will if rates are dropped), then that 6 years compresses to less than 5. They can trade up in less than half the time. Drop the interest rates!

Millions of homeowners keep paying on underwater mortgages

But a bigger problem may turn out to be the millions of Americans who are still faithfully paying their mortgages, but on houses worth far less than before the bubble burst. It's not that these homeowners will stop making their payments. It's just the opposite — that they will keep doing it.

How could that be a source of future trouble? Because, with home prices stagnant in much of the country, payments on mortgages that are underwater could absorb billions of dollars that might be used for other forms of consumer spending — a drag on family finances, the housing market and the overall economy.

http://www.latimes.com/business/la-fi-economy-mortgages-20101101,0,722187,full.story

Just drop the rates, without the hazing of refinancing.

Foreclosure

The Wall Street Journal reports that foreclosure is a stealth stimulus

"Defaulters living in their homes are getting a subsidy worth about $2.6 billion a month, according to a Wall Street Journal analysis based on mortgage data from LPS Applied Analytics and rent data from the Commerce Department. That's 0.25% of U.S. personal income, roughly equivalent to the benefit top earners receive from Bush-era tax breaks.

"It's hard to know how much of that money will find its way into the economy through consumer spending. Some defaulters sock away their mortgage payments, in hopes that they'll strike a modification agreement with their bank and get current again."

Why not just stop the clock on fees and drop the rates for those in and out of foreclosure?

Whitehouse Brings Together Experts and Local Homeowners to Discuss Foreclosure Crisis

Senator Chairs Official Senate Judiciary Subcommittee Hearing at Rhode Island Housing
October 28, 2010

Providence, RI – U.S. Senator Sheldon Whitehouse (D-RI) today brought together a panel of local experts and homeowners to discuss the impact of the foreclosure crisis on Rhode Island families and to examine whether bankruptcy court mediation programs can help to keep families in their homes. The participants joined Whitehouse at Rhode Island Housing in Providence for an official field hearing of the Senate Judiciary Committee’s Subcommittee on Administrative Oversight and the Courts, which Whitehouse chairs.

http://whitehouse.senate.gov/newsroom/press/release/?id=2628A837-FF08-4FF1-B3A8-0C2185850808

Senator, just drop the rates!

Quest for a foreclosure fix

The 10/18/2010 Christian Science Monitor's article, "Quest for a foreclosure fix," listed three options.

"1. Create an all-out refinancing effort.

One approach, advocated by economists Glenn Hubbard and chris Mayer, would be to offer a simple refinance for most US borrowers at today's ultralow mortgage rate (just over 4 percent). ...Under this approach, the low fixed rate would be available to anyone with a loan backed by Fannie Mae, Freddi Mac, or the Federal Housing Administration.
The result would put cash in the pockets of millions of borrowers--quickly and for years to come. That could boost consumer spending and reduce the likelihood of default."

We wrote Chris and said, "skip the refinance, just drop the rate." He wrote back, "Thanks for your note. Unfortunately, Fannie and Freddie have to do a formal refinance in order to reduce payments. I am hopeful we will see some progress."

Thank you for writing back. We can put a man on the moon, but we can't just drop the mortgage rate without the childish hazing called refinance.

Over 30% of the homes in California and over 20% of the homes in Georgia are underwater. The banks get bailed out, but they continue to lean on the home owner (with the regulators cheering them on). At some point borrowers are going to get a bit churlish. Just drop the rates! The time is now. The action is simple.

Foreclosure costs

This is the 10/23/2010 Wall Street Journal. Couldn't some of these foreclosures and related costs have been avoided if the lender had just reduced the interest rate?

"Other ways the foreclosure crisis could sting homeowners"

The foreclosure mess could hurt homeowners in another way: The costs of buying a home and paying off the mortgage are likely to go up, say housing experts.

The rising costs will come both during the closing and throughout the life of the loan.

At the closing, the cost of title insurance, which protects a property buyer from claims of ownership made by other people, is likely to rise, industry officials say. Title insurance is one of those annoying costs that can sneak up on a buyer during a close; premiums average around $2,000 across states, says Tim Dwyer, CEO of insurer Entitle Direct Group.

The foreclosure mess has sent insurers scrambling. One of the largest, Old Republic Title Insurance, told its agents on Oct. 1 not to issue policies on homes that have been foreclosed by GMAC Mortgage or J.P. Morgan Chase. And on Wednesday, the nation's largest title insurer, Fidelity National Financial, said lenders must vouch for the accuracy of their paperwork before it will insure properties.

Just like homeowners-insurance rates rise after a hurricane, the rates for title insurance are expected to rise, to compensate for the added risk.

The turmoil will likely lead to pricey premiums for new homeowners, says McLean, Va.-based housing economist Tom Lawler. Adds Cameron Finlay, chief economist at mortgage lender LendingTree.com: "Any time there is uncertainty in the market or risk implied, it follows that costs go up."

Other costs could be felt during the life of the loan. Until the current mess, servicing loans was a low-margin, high-volume business. Servicers collect mortgage payments from borrowers and send them off to mortgage holders, and if the loan gets into trouble, they manage the foreclosure. Few doubt this process will get costlier now that it is under scrutiny from regulators and the courts. That higher cost likely will show up in higher interest rates for borrowers.

Both of these higher costs also would hit homeowners who refinance their loans.

How much the costs of buying a home will rise is unknown. Mortgage industry officials say it is too soon to tell. And no one believes the costs will significantly change the price of a home. But with the housing market still weak, the uncertainty is making the prospect of buying—or selling—a home that much dicier.

I Can Afford My Home With the Right Loan

This is from the Wall Street Journal.

http://online.wsj.com/article/SB10001424052748703369704575461920484221104.html#articleTabs%3Dcomments%26commentId=1536726?mod=djemcomnewtrackedcomment

Your editorial "The Housing Mirage" (Aug. 25) reflects a common misconception held by many outside the housing meltdown ground zero regions. You categorize the troubled borrowers as people unable to become "reliable" simply through modifying their home loans, and that efforts focused on keeping people in "homes they can't afford" should be abandoned.

I am one of those "troubled borrowers." My problem is not that I can't afford my home, but that I can't afford my existing 15-year mortgage. I need a 30-year mortgage, but I'm unable to refinance because of my home's decline in value. I could easily afford to buy my home at today's value with a 30-year mortgage at today's interest rates. And the miserable irony is that the next owner of my house, after the foreclosure sale, will receive exactly that deal.

Clearly, the maximum misery of the housing meltdown is concentrated in certain regions of our country, in much the same way natural disasters don't affect everyone. Victims of localized disasters are usually deemed worthy of collective help since, after all, it could have been your state or your zip code where housing values have fallen 50%.

I've been turned down for HAMP modification and see no way of keeping my home.

Mortgages & Ethics

“Mortgages aren’t ethical documents, they’re legal contracts. The typical residential mortgage for an owner-occupied home gives the borrower 2 options: pay on time and in full, and keep paper title to the house and full entitlements to any appreciation upon its later sale after the mortgage is satisfied; or stop making payments, and hand the keys back to the lender.

“Morality and ethics don't even enter the equation. Both options are perfectly legal for the borrower, and the only criteria should be business-based. All the ethics you need are contained within the 4 corners of the pages of the mortgage contract.

“Indeed, the ethical thing to do is for each borrower who’s underwater to look without blinders at their family's financial situation -- not just now, but over the long term."

From Mike Shedlock in Minyanville.

A Tishman Speyer-led partnership is in default on debt tied to a large office portfolio in the Washington area. Tishman itself isn't at risk. 8/19/09 Wall Street Journal

Modification falters

"U.S. Effort to Modify Mortgages Falters
By RUTH SIMON Wall St Journal 7/28/09

"The Obama administration in February laid out its foreclosure-prevention plan to much fanfare.

"One issue was that mortgage companies were waiting for final federal guidelines on key issues such as how to determine whether a loan modification is preferable to a foreclosure, said Mary Coffin, head of loan servicing for Wells Fargo Home Mortgage

"Employees at mortgage-servicing companies often tell borrowers they can't be helped if they are current on their loans, said Michael van Zalingen, director of homeownership services for the nonprofit Neighborhood Housing Services of Chicago.

"Other borrowers complained of long waits for help. Suzanne DeNick of New Jersey said J.P. Morgan Chase & Co. told her it would take four to six weeks for her modification request to be assigned to an analyst and another 90 to 120 days before she received a decision. The company also asked her to resend her application, further delaying the process.

"Mortgage companies say that to be considered at risk of imminent default, borrowers must typically have liquid reserves that amount to less than three months of mortgage-related payments and, after figuring in expenses, a few hundred dollars or less left at the end of each month."

On Cove Street, the interest rate is merely dropped. There are no costs to the borrower. No hassling evaluation by the banks--which is expensive for the banks. Banks can focus on lending. The government is not involved. Borrowers on the borderline are in better shape. Borrowers above the border have more free cash.

Mortgage Rescue II

The 7/2 Wall Street Journal says that our Feds are raising the limits on borrowers. The first program said the refinanced loans couldn't be more than 105% of the new value of the homes. Now these fine folk have said they would consider refinancing the loans they have already made even if (shock) the loan was now 125% of the value of the home. These are loans which the feds already made to borrowers who previously "qualified," living in homes which previously "appraised." Now the feds are thinking they might lower the interest rates if their borrowers can survive the refinance torture chamber and only if they "qualify." The final paragraph says, "Some analysts and regulators who oversee Fannie and Freddie say expanding the program could decrease credit risks to the government-controlled mortgage companies because they already own or guarantee these mortgages; a refinancing to lower monthly payments could make those borrowers less likely to default."
Of course borrowers are less likely to default. Just get on with it and lower all the rates.

Appraisers squash sales

New York Attorney General Andrew Cuomo’s lawsuit against Washington Mutual has led to new appraisal rules for loans guaranteed by Fannie and Freddie. The new rules created a new middleman--the Appraisal Management Company--who assigns appraisers. What is your guess as to which appraiser is selected? Might it be that the jobs are handed out on the basis of the cheapest appraiser and the fastest turn-around time? Does that sound like a government quality improvement program?

"The increase in sales is less than expected because poor appraisals are stalling transactions. Pending home sales indicated much stronger activity, but some contracts are falling through from faulty valuations that keep buyers from getting a loan. Lenders are using appraisers who may not be familiar with a neighborhood, or who compare traditional homes with distressed and discounted sales." National Association of Realtors

Condo Boards Take on Lenders

Attorneys for condo boards claim some banks are intentionally slowing the foreclosure process to keep from forking out condo dues. In Florida, lenders are on the hook for as much as six months of late condo dues once they take title.

"It's become common practice to delay foreclosure," said Eric Glazer, a condo-association lawyer in Hallandale Beach, which is between Fort Lauderdale and Miami. "Banks are forcing the associations to take them the distance."

Last year, a unit in Miami Beach's Bath Club held by Wells Fargo & Co. racked up $32,000 in unpaid condo dues. The board attached a lien on a unit and filed to foreclose in December 2007. The unit sold in July at a foreclosure auction for $438,000; the condo association took its $32,000 and gave the balance to Wells Fargo.

The condo board that governs the Grand Condominium in downtown Miami has taken back 20 units in the 810-unit luxury development and collects a total of $25,000 a month in rent. The banks that hold the defaulted mortgages will eventually file to foreclose on the units. But meantime, the condo association uses the money to pay for building services. "I've had some units for over 16 months and I haven't heard one word from the bank," says Brendon Grubb, the general manager of the building.

With empty pockets, more condo associations are forced to raise homeowner dues. "We call it the downward spiral. How many of those owners are actually going to be able to pay an additional assessment?" says Kristy Phillips, a condo-association attorney in Hallandale Beach. "They're picking up the pieces for the banks." -Wall Street Journal, 6/18/09

How much simpler it would be to drop the interest rates on loans? What are the banks going to do when the next wave of foreclosures hit in the fall when the Alt-A's reset?

Loan Redoes Get Tangled in Thicket of Red Tape

"Getting a mortgage modified can take months, slowed by thin staffing and mountains of paperwork. With so many loans bundled and sold to investors, it's sometimes hard to figure out who even owns them. The new federal program requires borrowers to meet slightly different requirements than bank programs do, meaning banks need to navigate two procedures.
...[For one borrower] The interest rate on her $412,000 mortgage rose to 9.943%, and by last year, she couldn't afford her $4,735 monthly payment. It took her 10 months of working with Chase to get a lower rate. She was recently approved for a trial modification program that will cut her payments by nearly 40% to $2,937. "This has been the most grueling 10 months of my life," she says." Wall Street Journal , 6/17/09
A page one story. As if this travesty is news.
Is there anyone who seriously thinks that 10 months is acceptable? The borrower hasn't changed. The property hasn't changed. The bank hasn't changed. How long can it take to write a note to the borrower? "Dear Borrower, Your new monthly payment is $2,937. Have a nice day." How long did that take? 20 seconds. Banks can't find enough people to work. No wonder--they take 10 months and billions of TARP money to do 20 seconds worth of work.
And don't forget. This is only a "trial." Perhaps Chase should be on trial? They are trying.

Relief for Commercial Real Estate Debt?

Your Treasurey is working on changes that will enable commercial real estate borrowers to more easily restructure debt. How? Lower the interest rate! -Wall Street Journal, 6/10/09
Why just commercial real estate? How about lowering the interest rate for home loans?