Mortgage modification

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See also FHA and HAMP.


Obama "pocket vetos" foreclosure-friendly bill

President Barack Obama won’t sign legislation that critics said would have eased the way for banks to process home foreclosures, his spokesman said.

The bill would have required courts to recognize notarizations across state lines, including electronic signatures. White House press secretary Robert Gibbs said the administration was concerned about the potential impact on home foreclosure proceedings.

“Out of an abundance of caution, and to ensure that those unintended consequences don’t harm consumers, the president will send the bill back,” Gibbs said.

Obama’s “pocket veto” puts to an end, for now, a five- year effort by some of the nation’s 4.8 million notaries to streamline court proceedings involving notarized documents. The Interstate Recognition of Notarizations Act for years had won approval from Democrats and Republicans in Congress as a piece of mundane, good-government legislation.

The measure was approved by the House without fanfare in 2006 and 2007 only to languish in the Senate. The bill from Representative Robert Aderholt, an Alabama Republican, passed the Senate Sept. 27 by unanimous consent and drew attention this week when Ohio Secretary of State Jennifer Brunner sent out a campaign fund-raising e-mail calling the bill “dangerous” and urging Obama not to sign it.

Banks halt foreclosures

Bank of America is delaying foreclosures in 23 states as it examines whether it rushed the foreclosure process for thousands of homeowners without reading the documents.

The move adds the nation's largest bank to a growing list of mortgage companies whose employees signed documents in foreclosure cases without verifying the information in them.

Bank of America isn't able to estimate how many homeowners' cases will be affected, Dan Frahm, a spokesman for the Charlotte, N.C.-based bank, said Friday. He said the bank plans to resubmit corrected documents within several weeks.

Two other companies, Ally Financial Inc.'s GMAC Mortgage unit and JPMorgan Chase, have halted tens of thousands of foreclosure cases after similar problems became public.

The document problems could cause thousands of homeowners to contest foreclosures that are in the works or have been completed. If the problems turn up at other lenders, a foreclosure crisis that's already likely to drag on for several more years could persist even longer. Analysts caution that most homeowners facing foreclosure are still likely to lose their homes.

State attorneys general, who enforce foreclosure laws, are stepping up pressure on the industry.

On Friday, Connecticut Attorney General Richard Blumenthal asked a state court to freeze all home foreclosures for 60 days. Doing so "should stop a foreclosure steamroller based on defective documents," he said.

And California Attorney General Jerry Brown called on JPMorgan to suspend foreclosures unless it could show it complied with a state consumer protection law. The law requires lenders to contact borrowers at risk of foreclosure to determine whether they qualify for mortgage assistance.

In Florida, the state attorney general is investigating four law firms, two with ties to GMAC, for allegedly providing fraudulent documents in foreclosure cases. The Ohio attorney general asked judges this week to review GMAC foreclosure cases.

Congressional oversight

Senator Durbin considers "cram-down" legislation

Senate Majority Whip Dick Durbin (D-Ill.) is considering amending Wall Street reform legislation to allow something similar to judicial modification of mortgages, a process known informally as "cramdown."

"We are looking at variations on that theme that might achieve that same result [as cramdown would] and I haven't made a final decision on whether we'll offer it on this bill yet," Durbin said on a conference call with reporters Monday. "We are considering some variations on that but they haven't been solidified as of today. I just want to see if the support is there."

A Durbin staffer said Wednesday that if Durbin does in fact offer a cramdown amendment, it will be different from a previous version of cramdown that failed spectacularly last year in a Senate vote after passing the House.

It was after that vote that Durbin famously said of the Senate that banks "frankly own the place."

"And the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill," Durbin said in April 2009. "And they frankly own the place."

Banks lobbied hard to defeat cramdown last year, but Bank of America has had a change of heart, joining Citigroup in giving qualified support. Judicial modification, as Democrats prefer to call it, would give bankruptcy judges unilateral authority to reduce principal amounts owed on mortgages. Homeowner advocates say that the mere threat of cramdown would do a lot to encourage banks to modify mortgages for homeowners who owe more than their homes are worth. Durbin agrees.

"The arguments that I have been making over the past several years about this looming foreclosure crisis unfortunately turned out to be accurate beyond even my description," he said. "We now have millions of homes facing foreclosure in this country and the trend is growing. Had we passed the bankruptcy reform which I asked for several years ago, we could have at least slowed this down in many, many communities and forced renegotiation of mortgages."

HAMP Program - House Fin Services hearing April 14

The witness list and prepared testimony will be posted as soon as they are available.

Second liens - House Fin Services hearing April 13

Witness List & Prepared Testimony:

  • Ms. Barbara Desoer, President, Bank of America Home Loans
  • Mr. Jack Schakett, Credit Loss Mitigation Strategies Executive, Bank of America Home Loans
  • Mr. Sanjiv Das, President and Chief Executive Officer, CitiMortgage, Inc.
  • Mr. Steve Hemperly, Executive Vice President, Citi
  • Ms. Molly Sheehan, Senior Vice President, Housing Policy, JPMorgan Chase Home Lending
  • Mr. David Lowman, Chief Executive Officer, JPMorgan Chase Home Lending
  • Mr. Mike Heid, Co-President, Wells Fargo Home Mortgage
  • Mr. Kevin Moss, Executive Vice President, Wells Fargo Home Equity Group

Frank wants more second lien loan mods

Pressure is growing on U.S. banks to ease terms for distressed homeowners on home-equity loans and other second-lien mortgages.

Rep. Barney Frank, chairman of the House Financial Services Committee, last week sent a letter to the four biggest U.S. banks demanding "immediate steps to write down second mortgages." The Massachusetts Democrat sent the letter to the chief executive officers of Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co. and Wells Fargo & Co. Meanwhile, the Obama administration is preparing to launch long-planned initiatives aimed at addressing these obstacles.

Rep. Frank said banks' reluctance to write down second mortgages is blocking efforts to reduce the first-lien mortgage balances of many borrowers who owe far more on their loans than the current values of their homes. Because such "underwater" borrowers often feel little incentive to keep paying, "homeowners are increasingly deciding to walk away and thus foreclosures continue to mount," he said.

Many second liens have little value because of the plunge in home prices, Rep. Frank wrote, adding: "Yet because accounting rules allow holders of these seconds to carry the loans at artificially high values, many refuse to acknowledge the losses and write down the loans."

A Bank of America spokesman said that bank is "committed to working with all interested parties to develop additional solutions to help homeowners modify first and second mortgages." A J.P. Morgan spokesman declined to comment. Representatives of Citigroup and Wells provided no immediate comment.

Lack of cooperation from holders of second liens also can block short sales, in which the first-lien lender agrees to allow the home to be sold for less than the loan balance due to avoid a foreclosure. If the second-lien holder continues to press its claim against the borrower, the sale can fall through. The ensuing foreclosure is likely to be more costly for all the parties than a short sale would have been.

Under an Obama administration program due to begin in the next few weeks, borrowers who get reduced payments on their first-lien mortgage through the administration's Home Affordable Modification Program automatically would get a break on their second-lien mortgage. Bank of America Corp. already has agreed to take part in this program, and other big lenders are expected to follow suit.

n April, the administration is due to launch financial incentives to encourage alternatives to foreclosure for people who don't qualify for a loan modification. The alternatives include short sales and so-called deeds in lieu of foreclosure, in which the borrower voluntarily gives up title to the home and often gets cash to help with moving expenses.

Under this Home Affordable Foreclosure Alternatives program, holders of second-lien mortgages would be eligible to be paid 3% of the unpaid loan balance, up to a maximum of $3,000, for giving up all claims in the event of a short sale. Unclear is how many second-lien holders would participate.

Most first-lien home loans are held by the government-controlled mortgage companies Fannie Mae and Freddie Mac or by other investors in mortgage securities. By contrast, banks hold most of the seconds and other junior-lien mortgages. About $1.05 trillion of junior-lien home mortgages were outstanding as of Sept. 30, according to the Federal Reserve. Of those, $766.7 billion were held by commercial banks; most of the rest were owned by savings banks and credit unions.

If banks are forced to write down or write off large amounts of those second mortgages, many would suffer major dents in their capital. Laurie Goodman, a senior managing director at mortgage-bond trader Amherst Securities Group LP, said regulators may need to allow banks to recognize losses on second-lien loans over an extended period to avert a disastrous immediate hit to their capital.

One reason banks are reluctant to write off second mortgages is that some may still have value even after a foreclosure. Though the foreclosure wipes out the lien on the home, the consumer still has a legal obligation to repay the second mortgage debt in some cases. If the borrower has no significant assets remaining, banks generally don't bother trying to collect that debt. But they do retain that option and some say they will pursue it in cases where the borrower has significant assets or income, or may later have the ability to repay.

Those Pesky Second Liens, and an update on HAMP Rortybomb, March 25, 2010

H.R. 3195 - National Home Mortgage and Loan Performance Registry

To create a National Home Mortgage and Loan Performance Registry to maintain an inventory of the supply and performance of home mortgage loans in the United States to show market trends and dynamics in the mortgage lending industry and provide detailed information on national mortgage foreclosure rates.


  • Rep Turner, Michael R. [OH-3]
  • Rep Miller, Brad [NC-13]

H.R. 4963 – the Mortgage Servicing Conflict of Interest Elimination Act

Just moments before the House adjourned last week, Reps. Brad Miller (D-NC) and Keith Ellison (D-MN), both Members of the Financial Services Committee, introduced legislation that will eliminate a conflict of interest that may be preventing large mortgage companies from modifying troubled mortgages voluntarily. Many large mortgage companies own second mortgages on the same homes that they service. These secondary mortgages are an investment, creating a conflict of interest. The bill, H.R. 4963 – the Mortgage Servicing Conflict of Interest Elimination Act – would prohibit mortgage servicers from owning debt secured by a home that secures a mortgage that they service.

Two-thirds of all distressed mortgages are now serviced by the four largest banks - Bank of America, Wells Fargo, Chase and Citibank. These banks own about $477 billion in second liens

“Servicers are required to act in the best interests of the investors who own the mortgages. In many, those four banks hold interests in other debt secured by the same home that would be affected by a decision to modify the mortgage or to foreclose, placing the banks’ interests in irreconcilable conflict with the interests of investors,” said Rep. Miller

“The obvious conflict of interest between the investors and servicers may well be a factor in the failure of servicers to modify mortgages voluntarily,” said Rep. Ellison.

The bill gives servicers a reasonable time to divest themselves either of any interests in home mortgages, or the authority to service mortgages. The likely outcome would be that the four biggest banks would “spin off” their mortgage servicing business, which would resolve the conflict of interest between servicer and investors and result in smaller, less complex banks.

House Judiciary hearing Dec 11

Today, the Subcommittee on Commercial and Administrative Law of the House Judiciary Committee held a hearing entitled “Home Foreclosures: Will Voluntary Mortgage Modifications Help Families Save Their Homes? Part II,” in which various witnesses discussed the effectiveness of the government's efforts to prevent additional mortgage foreclosures and encourage modifications of existing loans. Testifying at the hearing were the following witnesses:

  • Adam Levitin, Associate Professor of Law, Georgetown University; Special Counsel to Congressional Oversight Panel for Troubled Asset Relief Program
  • Faith Schwartz, Executive Director, HOPE NOW Alliance
  • Margery Golant, Attorney, Golant & Golant
  • Henry Hildebrand III, Chair, Legislative and Legal Affairs Committee of the National Association of Chapter 13 Trustees (NACTT)

The witnesses expressed the general view that voluntary mortgage modification programs, such as the Home Affordable Modification Program (HAMP), would not be sufficient to alleviate the home foreclosure crisis facing the country. Professor Levitin stated that “HAMP is a failure” since it has produced few permanent modifications, observing that as of October 31, “only 4.69% of HAMP trial modifications converted to permanent after the originally allotted three-month trial period.” He noted various factors that serve to limit HAMP eligibility, including requirements for borrower employment, DTI ratios, and owner occupation of properties. Ms. Golant echoed his sentiments, stating that the various difficulties or obstacles faced in engaging in a voluntary mortgage modification program by borrowers are preventing the abatement of the foreclosure crisis. She applauded the passage of the House bill earlier this year providing for judicial modification of home mortgages.

To make a voluntary mortgage modification program successful, Professor Levitin suggested that the program must address “(1) problems with servicers’ contractual restrictions, capacity and incentives, (2) negative equity, and (3) unemployment.”

Mr. Hildebrand, speaking on behalf of the NACTT, stated that “HAMP is complex, difficult for servicers to administer, confusing to unsophisticated borrowers facing financial problems, and provides neither adequate nor timely relief they so desperately need to restructure their mortgages.” He advocated the use of Chapter 13 of the Bankruptcy Code to facilitate the mortgage modification process, stating that he believed judicial modifications of home mortgages through the existing federal court structure would be “the best way to quickly, fairly and effectively restructure home mortgages facing foreclosure.”

Ms. Schwartz identified a number of improvements that could be made to HAMP, including streamlining HAMP documentation, revising the re-default assumption, establishing a responsive and scalable underwriting exceptions process, facilitating clear communication and training for homeowners, counselors, servicers and advocates on the HAMP process, among others.

House Fin Services hearing Dec 8

Witness List:

  • Ms. Molly Sheehan, Senior Vice President, Chase Home Finance
  • Mr. Jack Schakett, Risk Management Executive, Credit Loss Mitigation Strategies
  • Ms. Julia Gordon, Senior Policy Counsel, Center for Responsible Lending
  • Dr. Anthony B. Sanders, Distinguished Professor of Real Estate Finance, Professor of Finance School of Management, George Mason University
  • Ms. Laurie Goodman, Senior Managing Director, Amherst Securities, LLP
  • Mr. Bruce Marks, Neighborhood Assistance Corporation of America--(Testimony not submitted to date)
  • The Honorable Herbert M. Allison, Jr., Assistant Secretary for Financial Stability, U.S. Department of the Treasury
  • Mr. Michael H. Krimminger, Special Advisor for Policy, Office of the Chairman, Federal Deposit Insurance Corporation
  • Mr. Douglas W. Roeder, Senior Deputy Comptroller Large Bank Supervision, Office of the Comptroller of the Currency

Senate Banking hearing Oct 20

View archive webcast

Majority Statements: Jack Reed statement


===Cong Oversight Panel report November, 2010]

Cong Oversight Panel hearing Sept 24

On Thursday, the Congressional Oversight Panel (“COP”) announced that it will hold a field hearing next Thursday, September 24, 2009, in Philadelphia, Pennsylvania. The purpose of the hearing is to examine the foreclosure mitigation efforts under the Troubled Asset Relief Program.

The COP will hear testimony from the following witnesses:

  • Seth Wheeler, Senior Advisor, U.S. Department of the Treasury
  • Edward L. Golding, Senior Vice President, Economics and Policy, Freddie Mac
  • Eric Schuppenhauer, Senior Vice President and CFO/Program Executive for the Home Affordability and Stability Plan, Fannie Mae
  • Annette M. Rizzo, Judge, Philadelphia Court of Common Pleas and Co-Chair, Philadelphia Mortgage Foreclosure Steering Committee
  • Eileen Fitzgerald, Chief Operating Officer, Neighborworks America
  • Deborah Goldberg, Director, Hurricane Relief Project, National Fair Housing Alliance
  • Irwin Trauss, Supervising Attorney, Consumer Housing Unit, Philadelphia Legal Assistance
  • Paul Willen, Senior Economist and Policy Advisor, Research Department, Federal Reserve Bank of Boston
  • Joe Ohayon, Vice President for Community and Client Relations, Wells Fargo Home Mortgage
  • Bank of America (invited)
  • Saxon Mortgage (invited)

Senate Banking hearing Sept 21

The Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Helping Homeowners Avoid Foreclosure”.

Testifying before the Committee were the following witnesses:

House Financial Services Sept 9, 2009

The Making Home Affordable Program Servicer Performance Report through August 2009.

"A strong housing market is crucial to a sustained economic recovery. It is a driver of stability in our financial markets and a fundamental source of wealth for individual families and communities. The recent crisis in the housing sector has devastated families and communities across the country and is at the center of our financial crisis and economic downturn.

Today, I want to outline the steps that Treasury and the Administration have taken to strengthen the housing sector, help millions of homeowners and lay the foundation for economic recovery and financial stability.

Weakness in the US housing market developed over many years. In advance of the downturn, inadequate regulation of lending and securitization practices, including lax underwriting standards, helped cause widespread over-leveraging in the residential mortgage sector that has contributed to millions of borrowers having mortgage payments they are unable to afford.

The rapid decline in home prices over the past two years has had devastating consequences for homeowners, communities and financial institutions throughout the country. Moreover, rising unemployment and other recessionary pressures have impaired the ability of many otherwise responsible families to stay current on their mortgage payments.

The result is that responsible homeowners across America are grappling with the possibility of foreclosure and displacement. Analysts project that more than 6 million families could face foreclosure over the next three years.

This Administration has acted quickly and aggressively to confront the economic challenges facing our economy and our housing market.

Within weeks of assuming office, President Obama worked with Congress to enact the largest economic recovery plan since World War II.

Within a month of taking office, on February 18, President Obama and Secretary Geithner announced the Making Home Affordable (MHA) Program, a critical element of Treasury's Financial Stability Plan. This program was broadly designed to stabilize the U.S. housing market and offer assistance to millions of homeowners by reducing mortgage payments and preventing avoidable foreclosures.

A key part of the broad housing plan is the Home Affordable Modification Plan – a comprehensive $75 billion program to lower monthly mortgage payments for at risk borrowers, providing modifications on a scale never previously attempted.

The Home Affordable Modification Program supports loan modifications that will provide sustainable, affordable mortgage payments for up to 3 to 4 million borrowers. HAMP offers "pay-for success" incentives to investors, lenders, servicers, and homeowners for successful mortgage modifications.

There are clear signs that the incentives offered under the Home Affordable Modification Program are having a substantial effect.

Over forty-five servicers have signed up for the Home Affordable Modification Program, including the five largest. Between loans covered by these servicers and loans owned or guaranteed by the GSEs, more than 85% of loans in the country are now covered by the program. These participating servicers have extended offers on over 570,000 trial modifications. Over 360,000 trial modifications are already underway. On March 4, just two weeks after the Feb. 18 announcement of MHA, the Administration, worked with the banking regulators, HUD, and the Federal Housing Finance Agency to publish detailed program guidelines for HAMP. These guidelines outlined a standard for the industry to follow in modifying mortgages to make them affordable and sustainable.

On April 28, the Administration announced additional details related to the Second Lien Program which will help to provide a more comprehensive affordability solution for borrowers by addressing their total mortgage debt. In addition, this announcement included provisions to strengthen the HOPE for Homeowners Program, administered by HUD, which provides additional relief for borrowers with mortgage balances greater than the current value of their homes. In August, we released the supplemental directive providing specific implementation guidelines for the Second Lien Program. Second lien servicers covering the majority of second liens in the country have committed to participate in the second lien program.

On May 14, we announced additional details related to the Foreclosure Alternatives Program, which will provide incentives for short sales and deeds-in lieu of foreclosure where borrowers are unable to complete the HAMP modification process. We also announced additional details on Home Price Decline Protection Incentives, designed to provide incentive payments for modifications to partially compensate lenders and investors for home price declines. As of September 1, Home Price Decline Incentive payments will become operational, and begin to be included in NPV calculations, allowing more borrowers in the geographic areas hardest hit by home price declines to obtain modifications.

The Administration's broad housing plan, the Making Home Affordable Plan, also includes broad support for the GSEs to support mortgage refinancing and affordability across the market.

On March 4, the Administration increased its funding commitment to Fannie Mae and Freddie Mac to ensure the strength and security of the mortgage market and to help maintain mortgage affordability generally. To this end, Treasury expanded its commitment to the GSEs under the Preferred Stock Purchase Agreements by $200 billion. The Treasury Department also continues to purchase Fannie Mae and Freddie Mac mortgage-backed securities to promote stability and liquidity in the marketplace.

In addition, the Administration increased refinancing flexibilities for the GSEs, providing more homeowners with an opportunity to refinance to lower monthly payments. As a part of this increased refinancing flexibility, the Administration launched the Home Affordable Refinance Program which expands access to refinancing for families whose homes have lost value.

Many homeowners who made what seemed like conservative financial decisions three, four or five years ago find themselves unable to benefit from the low interest rates available today because the value of their homes has sunk below that of their existing mortgages.

Originally, the Home Affordable Refinancing Program was designed to help homeowners whose existing mortgages were up to 105 percent of their current house value, but it has since been expanded to help those with mortgages up to 125 percent of current value.

Overall, the GSEs have refinanced more than 2.8 million loans since the announcement of the Administration's comprehensive housing plan."

Joint Economic Committee, July 28, 2009

Current Trends in Foreclosures and What More Can Be Done to Prevent Them Hearing webpage July 28, 2009

Archived webcast

Congresswoman Carolyn B. Maloney, Chair of the Joint Economic Committee (JEC) convened a hearing to investigate the ongoing foreclosures for non-prime borrowers in the residential housing market.

The hearing entitled, “Current Trends in Foreclosures and What More Can Be Done to Prevent Them,” took place on Tuesday, July 28, 2009 at 10:00 a.m.

At the request of Chair Maloney, the Government Accountability Office reported on previously undisclosed loan-level data, revealing current trends in the non-prime foreclosure crisis which continues to wreck havoc across the country.

In addition, the Committee reviewed past federal regulatory failures and discuss efforts by the current Administration and Congress to reduce foreclosure rates, direct some of those borrowers into fixed rate FHA loans, and efforts to prevent a similar future crisis.

Opening Statements:

Congresswoman Carolyn B. Maloney, Chair of the JEC (PDF - 129.7 KBs)

Witness Statements:

  • Dr. Joseph Mason, Louisiana Bankers Association, Professor of Finance, LSU (See below)
  • Dr. Susan M. Wachter, Professor Financial Management, The Wharton School (PDF - 79.7 KBs)
  • Dr. William Shear, Director, Financial Markets & Community Investment, GAO (PDF - 208.5 KBs)
  • Mr. Keith Ernst, Director of Research, Center for Responsible Lending (PDF - 59.7 KBs)

Frank more mods or bankruptcy provision

Source: Frank Statement on the Progress of Reducing Foreclosures July 29, 2009

"Financial Services Committee Chairman Barney Frank (D-MA) today welcomed the announcement by Secretaries Geithner and Donovan that the meeting held by their top assistants with representatives of the mortgage servicing industry on July 28th was productive, and that they expect there to be a significant increase in the number of mortgage modifications. But Frank noted that there is great disappointment in both Congress in particular and the country as a whole in the failure of these institutions to do a much better job at modification so far, and he cautioned that if the progress the administration foresees is not soon evident, more drastic legislative measures will be back on the agenda.

“Congress has provided every legislative tool recommended by people in the mortgage industry, and in the administration, that we were told would be helpful in facilitating the modifications we need to diminish the flood of foreclosures which has been so much a part of our national economic problem.

The one measure that did not survive the process was the right of individuals to declare bankruptcy for their personal residences, and while many of us strongly supported this and it passed the House, in the Senate the argument that it would be destructive and was unnecessary to achieve modifications succeeded. But the evidence to date does not bear out that latter point: people in the servicing industry and in the broader financial industry must understand that if this last effort to produce significant modifications fails, the argument for reviving the bankruptcy option will be extremely strong, and I think there is a substantial chance that the outcome will be different.

I can assure all concerned that no legislation which we are asked to pass to facilitate the full return of the lending industry to the role it should be playing in the economy will pass out of the Financial Services Committee unless we see a significant increase in mortgage modifications and foreclosure-avoidance, or the legislation includes a bankruptcy provision for primary residences.”

GAO on mortgage modifications

GAO July 28 testimony on modifying mortgages

Testimony Before the Joint Economic Committee, U.S. Congress, Home Mortgages, Recent Performance of Nonprime Loans Highlights the Potential for Additional Foreclosures, July 28, 2009

Statement of William B. Shear, Director, Financial Markets and Community Investment

GAO July 28 report on modifying mortgages

Source: Subject: Characteristics and Performance of Nonprime Mortgages GAO Report, July 28, 2009

During the first part of this decade, the number of mortgage originations grew rapidly, particularly in the nonprime segment of the mortgage market, which includes subprime and Alt-A loans. 1 In dollar terms, nonprime loans accounted for an increasing share of the overall mortgage market, rising from 12 percent in 2000 to 34 percent in 2006. Over this period, the dollar volume of nonprime mortgages originated annually climbed from $100 billion to $600 billion in the subprime market and from $25 billion to $400 billion in the Alt-A market. 2 However, these market segments contracted sharply in the summer of 2007, partly in response to a dramatic increase in default and foreclosure rates for these mortgages. As we reported in 2007, a loosening of underwriting standards for subprime and Alt-A loans contributed to this increase. As of the first quarter of 2009, approximately 1 in 8 nonprime mortgages were in the foreclosure process. The negative repercussions from nonprime lending practices has prompted greater scrutiny of this market segment, a number of government efforts to modify troubled loans, and proposals to strengthen federal regulation of the mortgage industry.

US Treasury housing market efforts

HUD Secretary to introduce monthly Housing Score Card

U.S Housing and Urban Development (HUD) Secretary Shaun Donovan will hold a reporter's briefing conference call in conjunction with the U.S. Department of the Treasury on Monday, June 21, 2010 at 11: 00 a.m. to introduce a monthly scorecard on the nation's housing market.

The scorecard , will incorporate key housing market indicators and highlight the Administration's unprecedented housing recovery efforts, including borrowers assisted through the Federal Housing Administration (FHA) and the Home Affordable Modification Program (HAMP).

Administration approves plans for $1.5B in ‘Hardest Hit Fund’

State Housing Finance Agencies (HFAs) in Arizona, California, Florida, Michigan, and Nevada can begin to use $1.5 billion in "Hardest Hit Fund" foreclosure-prevention funding under plans approved today by the Obama Administration. This aid will support innovative local initiatives to assist struggling homeowners in those states, as part of the first round of funding available under this new program.

"These states have identified a number of innovative programs that will make a real difference in the lives of many homeowners facing foreclosure," said Treasury Assistant Secretary for Financial Stability Herbert M. Allison, Jr. "While we've made important progress stabilizing the housing market and keeping responsible families in their homes, the Obama Administration will continue to do everything it can to help those who are struggling the most during this difficult time. Today marks an important milestone for delivering relief to homeowners through the Hardest Hit Fund program."

New Administration effort - March, 2010

The Obama administration on Friday will announce broad new initiatives to help troubled homeowners, potentially refinancing several million of them into fresh government-backed mortgages with lower payments.

Another element of the new program is meant to temporarily reduce the payments of borrowers who are unemployed and seeking a job. Additionally, the government will encourage lenders to write down the value of loans held by borrowers in modification programs.

The escalation in aid comes as the administration is under rising pressure from Congress to resolve the foreclosure crisis, which is straining the economy and putting millions of Americans at risk of losing their homes. But the new initiatives could well spur protests among those who have kept up their payments and are not in trouble.

The administration’s earlier efforts to stem foreclosures have largely been directed at borrowers who were experiencing financial hardship. But the biggest new initiative, which is also likely to be the most controversial, will involve the government, through the Federal Housing Administration, refinancing loans for borrowers who simply owe more than their houses are worth.

About 11 million households, or a fifth of those with mortgages, are in this position, known as being underwater. Some of these borrowers refinanced their houses during the boom and took cash out, leaving them vulnerable when prices declined. Others simply had the misfortune to buy at the peak.

Many of these loans have been bundled together and sold to investors. Under the new program, the investors would have to swallow losses, but would probably be assured of getting more in the long run than if the borrowers went into foreclosure. The F.H.A. would insure the new loans against the risk of default. The borrower would once again have a reason to make payments instead of walking away from a property.

Unemployed to have mortgage payments deferred

The Obama administration plans to overhaul how it is tackling the foreclosure crisis, in part by requiring lenders to temporarily slash or eliminate monthly mortgage payments for many borrowers who are unemployed, senior officials said Thursday.

Banks and other lenders would have to reduce the payments to no more than 31 percent of a borrower's income, which would typically be the amount of unemployment insurance, for three to six months. In some cases, administration officials said, a lender could allow a borrower to skip payments altogether.

The new push, which the White House is scheduled to announce Friday, takes direct aim at the major cause of the current wave of foreclosures: the spike in unemployment. While the initial mortgage crisis that erupted three years ago resulted from millions of risky home loans that went bad, more-recent defaults reflect the country's economic downturn and the inability of jobless borrowers to keep paying.

The administration's new push also seeks to more aggressively help borrowers who owe more on their mortgages than their properties are worth, offering financial incentives for the first time to lenders to cut the loan balances of such distressed homeowners. Those who are still current on their mortgages could get the chance to refinance on better terms into loans backed by the Federal Housing Administration.

Administration releases Jan loan mod report

WASHINGTON - The U.S. Department of the Treasury and the Department of Housing and Urban Development (HUD) today released January data for the Administration's Home Affordable Modification Program (HAMP), demonstrating that the number of homeowners receiving immediate relief and converting to permanent modifications continues to rise. More than 116,000 homeowners now have permanent modifications, nearly doubling the number from December, which also marked record progress. An additional 76,000 permanent modifications have been offered, and are waiting only for the borrower's signature. In total, over 1 million homeowners have started trial modifications and nearly 1.3 million offers for trial modifications have been extended to homeowners.

"With nearly one million homeowners paying less each month and the number of permanent modifications steadily rising, HAMP is doing the job it was designed to do," said Phyllis Caldwell, Chief of Treasury's Homeownership Preservation Office. "Struggling families are receiving payment relief and the housing market is showing signs of stabilization."

Mortgage modifications are one piece of the Administration's broader housing market stabilization plan. Other efforts include support for lower mortgage rates and access to credit, state and local housing agency initiatives, tax credits for homebuyers, neighborhood stabilization and community development programs, and support for mortgage refinancing. After just one year since President Obama announced the Homeownership Affordability and Stability Plan, more than 4 million homeowners have refinanced their mortgages to more affordable levels, interest rates are at record lows, home prices and home sales are rising again and the economy is growing.

According to HUD Senior Advisor for Mortgage Finance William Apgar: "As the number of permanent modifications grows, HUD will continue to work with our Administration partners and utilize our broad network of housing counseling agencies to increase those numbers still further."

HAMP is the most ambitious government program of its kind – reaching far more homeowners than any previous program has ever attempted. Less than a year after its launch, the program is providing significant relief to struggling families. More than 940,000 homeowners currently have reduced monthly mortgage payments with a median savings of more than $500. That is an aggregate savings of more than $2.2 billion.

With nearly 1.3 million trial modifications offered already, the program is on pace to meet its overall program goal of providing 3-4 million homeowners the opportunity to stay in their homes.

The January HAMP report can be found here:

Administration mortgage programs - HAMP

"There’s a key word missing in the below press release on the US Treasury’s Hamp programme:

WASHINGTON - Today, the Obama Administration released the next monthly report for the Making Home Affordable (MHA) loan modification program. As part of an ongoing commitment to transparency, the report includes for the first time state-specific trial modification numbers. With more than 650,000 modifications under way across the country, the program is on track to meet its goals over the next several years.

Have you spotted it?

It’s `trial.’ 650,000 trial loan modifications are under way across the country, up from the circa 490,000 trial mods reported in September.

Under the Home Affordable Loan Plan, the Treasury, in an effort to halt the steady march of US residential foreclosures, pays mortgage lenders and servicers, including the banks, to agree to modify loan terms for homeowners. The lender agrees to reduce monthly payments for the homeowner in a “trial” modification period lasting three months, which is then hopefully made into a permanent payment reduction plan.

The permanent bit is important since the trial mods have the effect of increasing banks’ delinquency rates but decreasing net credit losses. If the trials become permanent, the loans jump out of the delinquency bucket and return to current status. But if they don’t become permanent, the credit-loss-mitigating benefit quickly evaporates. The loans (probably) go into default and the bank simply forecloses on the properties — pushing up their credit losses.

As of September 1, just 1,711 of those 490,000 loan mods had been completed, according to a New York Times article. The apparent fact that so few of the trial mods have become permanent has been one of the prime criticisms of the programme. One of the other criticisms is that redefault rates for Hamp modified-mortgages could well end up being as high as for non-modified loans. The Treasury hasn’t provided much guidance on redefault rates either.

Reportedly the info on permanent mods, if not the redefault rate, is coming.

In the meantime though, here’s a link to the full (October) Hamp Servicer Report and a nice set of maps depicting the geographical dispersion of (trial!) Hamp modifications. [see above for maps]."

"The Obama administration unveiled steps to help state and local housing-finance agencies provide mortgages and rental housing to thousands of low- and moderate-income families, underscoring the expansive role the government has taken to stabilize the U.S. housing market.

State and local housing-finance agencies, or HFAs, play a modest role in the housing market but represent one of the few sources of mortgages for many first-time and low-income home buyers. The federal aid is designed to revive HFAs' lending by shoring up their financing. State agencies sharply curtailed their lending after the credit crunch deepened one year ago.

Tax-exempt bond issuance by HFAs has fallen to $4 billion in 2009 from $10 billion last year and $16 billion in 2007, according to the National Council of State Housing Agencies.

"This initiative is crucial to helping working families maintain access to affordable rental housing and homeownership in tough economic times," Treasury Secretary Timothy Geithner said.

Under the program, the Treasury Department will purchase securities from Fannie Mae and Freddie Mac that are backed by state and local housing-agency bonds. Before using the proceeds of new bonds under that program, the HFAs will have to sell a portion of new debt to private investors in an effort to attract private capital to the market.

The Obama administration may adjust its mortgage-modification program to help lower-income Americans with housing payments deemed affordable under current standards, executives at the two largest loan servicers said.

The change would be meant to boost the amount of borrowers able to qualify, by allowing debt to be reworked for certain homeowners with mortgage bills already below 31 percent of their pretax incomes, Wells Fargo & Co.’s Mary Coffin and Bank of America Corp.’s Barbara Desoer said in interviews this week at a mortgage conference in San Diego. That’s the level loans get restructured to now in the program.

Officials are studying ways “to appropriately expand the universe of those who are eligible to more of those who are in a position of needing government help to get through temporary stress,” Desoer, the head of the Charlotte, North Carolina- based Bank of America’s home-loan unit, said.

The step is one of several under consideration or announced that would refine the $75 billion Home Affordable program in a bid to do more to reduce the 7 million looming foreclosures that Amherst Securities Group analysts say will probably renew home- price declines.

“Certainly there are circumstances where it probably makes sense” to cut payments to “extremely” low levels “but on the other hand, what else is the borrower spending their income on?” said Steven Horne, former director of servicing-risk strategy at Fannie Mae whose Carrollton, Texas-based distressed- loan specialist Wingspan Portfolio Advisors LLC focuses on loan workouts tailored to individuals’ circumstance.

Administration releases new data on MHA mods

A complete list of HAMP activity for all MSAs is available

"Today, the Obama Administration released the latest monthly report for the Making Home Affordable (MHA) loan modification program. As part of an ongoing commitment to transparency, the report includes for the first time the number of modifications that have transitioned from the trial to permanent phase as well as a break-out of the 15 metropolitan areas with the highest program activity. With more than 728,000 modifications under way across the country, the program is on track to meet its goals over the next several years.

Modifications are providing real benefits to homeowners - borrowers in modifications are saving an average of over $550 per month. However, the report shows that servicers have only converted 31,382 modifications to the permanent phase. According to servicer reports, most borrowers in modifications are meeting their responsibilities to make their payments. Servicers need to do their part to help borrowers complete the process and get to the finish line. Top Administration officials met with servicers in Washington DC this week to urge a faster pace in converting borrowers to permanent modifications.

"As this report illustrates, struggling homeowners across the country continue to receive immediate relief in the form of reduced monthly payments and a second chance to stay in their homes," said Chief of Treasury's Homeownership Preservation Office (HPO) Phyllis Caldwell. "Our focus now is on working with servicers, borrowers and organizations to get as many of those eligible homeowners as possible into permanent modifications."

"Our challenge now is to keep the pressure on," said HUD Senior Advisor for Mortgage Finance William Apgar. "HUD approved counselors are working with borrowers to ensure they are doing their part to transition into sustainable permanent modifications and we will ensure that servicers convert as many of those modifications by the end of the year as scheduled as they are scheduled to."

New rules on mortgage transfer disclosure


On August 16, 2010, the Federal Reserve Board ("Board") issued two proposed rules and three final rules governing federal Truth-in-Lending Act ("TILA") requirements for residential mortgage loans. This Client Alert summarizes the Board's final rule that requires a disclosure relating to the acquisition of legal title to a mortgage loan.

Later Client Alerts will address the Board's remaining proposal and final rule.


Section 131(g) of TILA was enacted on May 20, 2009 as Section 404(a) of the Helping Families Save Their Homes Act. Section 131(g) of TILA requires a creditor that is the new owner or assignee of a mortgage loan to provide a written notice to the consumer on the loan within 30 days of the sale, transfer or assignment of the loan. This statute was effective on May 20, 2009.

On November 20, 2009, the Board issued Section 226.39 of Regulation Z as an interim rule to provide guidance relating to compliance with Section 131(g) of TILA.

On August 16, 2010, the Board issued its final rule to implement Section 131(g) of TILA, which is set forth in Section 226.39 of Regulation Z. The final rule tweaks the interim rule and provides some clarifications. The final rule is effective 30 days following its publication in the Federal Register. The mandatory compliance date is January 1, 2011. It is permissible to continue to comply with the interim rule through December 31, 2010.


  • Types of Loans Covered
    • Any consumer credit transaction secured by the consumer's principal dwelling.
    • The dwelling may, but need not, be secured by real property.
    • Both closed-end loans and open-end home equity lines of credit ("HELOCs") are covered.
  • Who Provides the Disclosure
    • The disclosure required by Section 226.39 of Regulation Z must be provided by a person that is a "covered person."
    • Section 131(g) of TILA imposes the disclosure requirement on a "creditor that is the new owner or assignee." However, the term "creditor" is defined elsewhere in TILA and Regulation Z to mean the person to whom the credit obligation is initially payable, which is inconsistent with the concept of a person that is the new owner or assignee. To avoid confusion, Section 226.39 uses the term "covered person" to mean the person that must provide the Section 226.39 disclosure.
    • A "covered person" is one that becomes the owner of an existing loan by acquiring legal title through a purchase, assignment or other transfer.
    • A transferee of a loan is a "covered person" even if the transferor is an affiliate.
    • A servicer of the loan is not a "covered person" if it holds legal title to the loan solely for administrative convenience. This is consistent with the treatment in §131(f) of TILA, relating to the exclusion of a servicer from assignee liability under TILA if it does not become the owner of the loan.
    • A "covered person" excludes a person who acquires only one loan in any 12-month period.
    • A "covered person" excludes a person that acquires only a beneficial interest or a security interest in the loan, or that assumes the credit risk of the loan without taking legal title. An investor that acquires a mortgage-backed security, pass-through certificate, or participation interest, but does not acquire legal title to the underlying loan itself, is not a covered person.
    • In a merger, acquisition, or reorganization, it is necessary to determine if the legal title to the loan has been transferred to a different legal entity. If it has, the new owner is a covered person and must provide the Section 226.39 disclosure. If it has not, there is no need to provide the disclosure.
  • Form of the Disclosure
    • The disclosure must be in writing.
    • Alternatively, the disclosure may be in electronic form and provided in accordance with the E-Signs Act, 15 U.S.C. §7001 et seq. If the disclosure is provided electronically, it will be necessary to comply with the consumer consent requirements contained in §101(c) of the E-Signs Act.
    • The disclosure is subject to the usual TILA clear and conspicuous standard.
  • When the Disclosure Must be Delivered
    • The disclosure must be mailed or delivered to the consumer on or before the 30th calendar day following the "date of transfer" of the loan to the covered person.
    • The covered person has a choice regarding the "date of transfer" of the loan. At its option, the "date of transfer" will be the date of acquisition recognized in the books and records of the acquiring party or the books and records of the transferring party. Nothing in the regulation requires the use of a consistent approach for all of the loans acquired by the covered person.
  • Who Receives the Disclosure
    • The disclosure must be provided to the consumer.
    • If there are two or more consumers, the disclosure must be provided to any consumer who is primarily liable on the loan. This would exclude a person who is only a surety or guarantor on the loan, or an authorized user under a HELOC. See Paragraph 226.5(d)-2 and Paragraph 226.17(d)-2 of the Federal Reserve Commentary to Regulation Z ("Commentary").

The IMF on housing price cycles

Question 1: What are the broad features of house price cycles?

Between 1970 and the mid-1990s, on average across OECD countries, the median upturn in house prices lasted four years and the median real increase in prices over the course of the upturn was 33 percent (see figures).

The median downturn also lasted four years, during which time prices fell 20 percent. These figures are based on work by Igan and Loungani (forthcoming), but estimates by the IMF (2003), Girouard and others (2006), Claessens, Kose, and Terrones (2008), and André (2010) are in the ballpark.

These studies also find considerable variation across countries and across time in the duration of upturns and downturns; the figures show the 25th and 75th percentile bands for the duration and amplitude of housing cycles.

Question 2: Are we near the trough of the present housing cycle?

The present housing cycle started in the mid-1990s and early-2000s for most countries.

The median upturn in this most recent cycle lasted over twice as long as those in the past (41 quarters compared to 16 quarters) and was more pronounced, with prices rising nearly three times as much as in the past cycles.

The median ongoing downturn is approaching the halfway mark in terms of duration and amplitude of price declines, which suggests that further corrections could be in the offing. And with prices having risen much more sharply than in earlier upturns, the declines in prices might also eclipse those observed that were in the past.

Banks capital treatment of HAMP modifications

"The federal bank and thrift regulatory agencies today issued a final rule providing that mortgage loans modified under the U.S. Department of the Treasury’s Home Affordable Mortgage Program (HAMP) will generally retain the risk weight appropriate to the mortgage loan prior to modification.

The agencies adopted as final their interim final rule issued on June 30, 2009, with one modification. The final rule clarifies that mortgage loans whose HAMP modifications are in the trial period, and not yet permanent, qualify for the risk-based capital treatment contained in the rule.

The final rule, issued by the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of Thrift Supervision, will take effect 30 days after publication in the Federal Register, which is expected shortly."

Banks gain on hedging servicing revenues

"Wells Fargo & Co. earned almost a third of its pretax quarterly profit by hedging mortgage- servicing rights, producing gains similar to those that have helped some of the biggest U.S. banks offset weaker consumer- lending businesses.

Wells Fargo’s hedges outperformed writedowns it took on the so-called MSRs by $1.5 billion and JPMorgan Chase & Co. came out ahead by $435 million. The two banks, as well as Bank of America Corp. and Citigroup Inc., wrote down MSRs by at least $5 billion in the third quarter as mortgage rates fell by about 0.26 percentage point.

“The earnings level is unsustainable,” Rochdale Securities analyst Richard Bove said yesterday, and cited mortgage servicing as he cut his rating on Wells Fargo to “sell” from “neutral.” Shares of San Francisco-based Wells Fargo dropped 5 percent in New York trading to $28.90, with most of the decline coming after Bove’s report.

Banks’ mortgage units are using gains on mark-to-market adjustments and hedging derivatives to drive earnings as lenders record losses on consumer loans during the worst recession since World War II. Net gains on MSRs and hedges also added $1 billion to Wells Fargo’s earnings in the second quarter and to JPMorgan’s in the first.

The value of the rights depends largely on the expected life of the mortgage, which ends when a borrower pays off the loan, refinances or defaults. When rates drop and more borrowers refinance, MSR values decline. Banks typically hedge the movements using interest-rate swaps and other derivatives.


Wells Fargo wrote down the value of its MSRs by $2.1 billion in the quarter, the result, it said, of model inputs and assumptions. The hedges it used to offset the movement of the servicing rights rose by $3.6 billion, resulting in a pretax gain of $1.5 billion. Wells Fargo reported pretax net income of $4.67 billion and a record $3.24 billion third-quarter after- tax profit.

The net gain was “largely due to hedge-carry income reflecting the current low short-term interest rate environment, which is expected to continue into the fourth quarter,” Wells Fargo said in a statement announcing its earnings.

JPMorgan reported a $1.1 billion writedown of servicing rights, while it earned $1.53 billion on hedges. That helped the New York-based bank’s earnings rise to $3.59 billion from $527 million a year earlier.

‘Inundated’ With Swings

“You are inundated with these swings with the accounting provisions,” Anthony Polini, an analyst at Raymond James Financial Inc., said in an interview. “From a quality of earnings standpoint, you would rather see the growth in net interest income but this is how we bridge the gap. That’s why they are called hedges.”

Bank of America, which posted a $1 billion quarterly loss, wrote down MSRs by $1.83 billion. The Charlotte, North Carolina- based bank didn’t disclose the performance of its hedges. A $1.2 billion decline in mortgage-banking income was driven in part by “weaker MSR hedge performance,” the company said.

The carrying value of Citigroup’s rights fell by $542 million in the quarter. The bank, based in New York, didn’t report how much of the decline stemmed from changes in its valuation models or from the impact of customer payments. Citigroup, which reported a $101 million profit, also didn’t disclose its hedge performance.

56 Percent of Market

The four banks wrote up the value of their MSRs by about $11 billion in the second quarter, according to regulatory filings. Mortgage rates climbed by 0.35 percentage point in that period, according to Freddie Mac.

The four banks control 56 percent of the market for the contracts, according to Inside Mortgage Finance, a Bethesda, Maryland-based newsletter that has covered the industry since 1984. Servicers collect payments from borrowers and pass them on to mortgage lenders or investors, less fees. They also keep records, manage escrow accounts and contact delinquent debtors.

Under U.S. accounting rules in place since 1995, banks should report the value of mortgage-servicing rights on a fair- market basis, or roughly what they would fetch in a sale. A bank must record a loss whenever it sells MSRs for a price below where they’re marked on the books.

Because there’s no active trading in the contracts, there are no reliable prices to gauge whether banks are valuing the rights accurately, analysts said.

Bank of America held the largest amount of MSRs as of Sept. 30, with $17.5 billion. JPMorgan had $13.6 billion, while Wells Fargo owned $14.5 billion and Citigroup $6.2 billion.

Writedowns on mortgage servicing

Source: Writedowns on Mortgage Servicing Make Even JPMorgan Vulnerable Bloomberg, October 12, 2009

"The four biggest U.S. banks by assets may have to take writedowns on $55 billion of mortgage- collection contracts after marking them up by $11 billion in the second quarter, casting a shadow over earnings.

Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. wrote up the value of the contracts, known as mortgage-servicing rights or MSRs, by 26 percent in the quarter as mortgage rates climbed by about 0.35 percentage point. Net gains on the contracts added more than $1 billion to Wells Fargo’s record earnings in the quarter and $1 billion to JPMorgan’s first-quarter profit.

Mortgage rates fell about 0.26 percentage point in the third quarter, according to Freddie Mac, and servicing costs are rising, meaning the four banks, which handle collections on more than $5.9 trillion of U.S. mortgages, may face writedowns.

“We’re very bearish on MSR valuations,” said Paul Miller, a banking analyst at FBR Capital Markets in Arlington, Virginia. “They are overvalued. There are higher costs associated with the servicing, and we’re very concerned about it.”

The four banks control 56 percent of the market for the contracts, according to Inside Mortgage Finance, a Bethesda, Maryland-based newsletter that has covered the industry since 1984. Servicers collect payments from borrowers and pass them on to mortgage lenders or investors, less fees. They also keep records, manage escrow accounts and contact delinquent debtors.

The value of the rights depends largely on the expected life of the mortgage, which ends when a borrower pays off the loan, refinances or defaults. When rates drop and more borrowers refinance, MSR values decline. Banks typically hedge those movements using interest-rate swaps and other derivatives.

Under U.S. accounting rules in place since 1995, banks are supposed to report the value of their mortgage-servicing rights on a fair-market basis, or roughly what they would fetch in a sale. A bank must record a loss whenever it sells MSRs for a price below where they’re marked on the books.

Because there’s no active trading in the contracts, there are no reliable prices to gauge whether banks are valuing the rights accurately, analysts said.

“It’s an accounting game,” said Richard Bove, an analyst at Rochdale Securities Inc. in Lutz, Florida. “The deeper you get into the subject, the more items you find that are impossible to determine, and therefore it becomes a give up. Whatever they want to show, they show.”

JPMorgan reports its third-quarter earnings on Oct. 14. Seven analysts surveyed by Bloomberg expect the bank to post a profit of $2 billion, down 27 percent from the second quarter. Citigroup, which reports the next day, is estimated by eight analysts to post a loss of $2.5 billion after recording a $4.3 billion profit in the second quarter when it sold a controlling stake in its Smith Barney brokerage.

Bank of America’s earnings are expected to drop 95 percent from the second quarter to about $165 million when the lender announces results on Oct. 16, according to the mean estimate of 10 analysts. Eight analysts estimate Wells Fargo will post net income of $2.1 billion on Oct. 21, down 34 percent from its record earnings the previous quarter.

Whether the banks will take losses as a result of any MSR writedowns in the third and fourth quarters depends on the level of their hedging. Bank of America, which lowered the value of its rights last year by $6.7 billion, still added $2 billion to its earnings as hedges outperformed the declines. JPMorgan’s hedges earned $1.5 billion more than the $6.8 billion it took in writedowns on its collection contracts in 2008.

Bank of America holds the largest amount of MSRs, with $18.5 billion as of June 30. JPMorgan had $14.6 billion, while Wells Fargo owned $15.7 billion and Citigroup $6.8 billion.

The four banks don’t own most of the mortgages they service. Wells Fargo handles $270 billion of its own residential mortgages and $1.39 trillion of loans for others, according to company filings. Bank of America services $2.11 trillion of mortgages, $1.70 trillion of them for investors. Citigroup services $770 billion, including $579 billion of loans it doesn’t own. JPMorgan, which handles $1.4 trillion of mortgages, said it services $1.1 trillion of loans for other investors.

Spokesmen for the four banks declined to comment about how the rights are valued. The companies say in regulatory filings that the assets are volatile and marking them requires making assumptions about future conditions.

“The valuation of MSRs can be highly subjective and involve complex judgments by management about matters that are inherently unpredictable,” San Francisco-based Wells Fargo said in its second-quarter regulatory filing.

Wells Fargo wrote up the value of its MSRs by $2.3 billion in the quarter, the result, it said, of model inputs and assumptions. The hedges it used to offset the movement of the servicing rights fell $1.3 billion, resulting in a net gain of $1 billion to its $3.2 billion second-quarter profit.

New York-based JPMorgan, which wrote up its MSRs by $3.83 billion in the quarter, reported a $3.75 billion loss on its hedges, leaving it with an $81 million profit. Bank of America based in Charlotte, North Carolina, gained $3.5 billion on the increase in value of its collection contracts. The bank didn’t disclose the performance of its hedges. Citigroup, which marked up the value of its rights by $1.3 billion, also didn’t disclose its hedges.

“Nobody wants to point out that the emperor has no clothes,” said FBR’s Miller. “They all took massive hedging losses over the last quarter, mainly coming out of May, when rates shot up 150 basis points, and mysteriously MSRs were written up to match those losses.” A basis point is 0.01 percentage point.

Banks say there is no liquid market for the securities, as the volatility of the rights has pushed some smaller firms out of the market and record delinquencies have led others to shun mortgage assets. The banks list the rights as Level 3 assets, an accounting term for securities whose value is unclear, and they rely on internal models to determine their value.

“About 75 percent of residential MSR assets are owned by 10 firms, so when you’ve got that supply-demand dynamic that changes, there’s not going to be a whole lot of trading,” said Daniel Thomas, a managing director in asset sales at Mortgage Industry Advisory Corp. in New York. “When the market is dry like it is as far as trading volume, these guys have a lot of latitude for a Level 3 input valuation.”

Servicing rights provide a steady stream of income. The four banks collected about $4.1 billion from fees in the second quarter. Much of that revenue, about $3.2 billion, was already accounted for in the valuations of the rights.

Servicers face higher costs as delinquencies rose almost 80 percent in the last year and large banks move to implement President Barack Obama’s mortgage-modification program. Home loans 60 days or more past due climbed to 5.3 percent of loans through June 30, up from 4.8 percent on March 31 and 3 percent a year earlier, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said in a Sept. 30 report.

Contacting and working with borrowers who fall behind on their mortgages is time consuming and costly. Loan-servicing employees can handle as few as one-tenth the number of delinquent loans as performing loans, said Steven Horne, the former director of servicing-risk strategy at Fannie Mae who now heads Wingspan Portfolio Advisors LLC, a specialist in distressed-loan collections in Carrollton, Texas.

First Tennessee Bank National Association, a subsidiary of First Horizon National Corp., saw its servicing costs rise to about $80 a year per loan from $60 a loan a year earlier as delinquencies and defaults rose, said David Miller, head of investor relations at the bank.

While higher servicing costs and falling mortgage rates lower the value of the rights, the weak economy can push them higher. Borrowers who owe more than their home is worth or who have lost their jobs are often unable to refinance, tempering the impact of lower rates on prepayments. Banks’ hedges also often benefit from lower rates.

In the U.S., 26 percent of borrowers owe more than their home is worth, said Karen Weaver, global head of securitization research for Deutsche Bank Securities in New York. In parts of California, Florida and Nevada, it’s as high as 75 percent. The U.S. economy has lost about 6.9 million jobs since the recession started in December 2007.

Difficulties in refinancing mortgages during the worst recession since World War II are reflected in banks’ expectations of the life of the servicing rights. The assumed weighted average life of a servicing right tied to a fixed-rate mortgage jumped to 5.11 years as of June 30, Bank of America said in a regulatory filing.

That’s up from 3.26 years at the end of 2008, following a 0.28 percentage point rise in mortgage rates. The assumed weighted average life had fallen from 5.38 years on Sept. 30, 2008, after mortgage rates dropped 0.95 percentage point in the fourth quarter.

A change in prepayment rates that would cause a 0.48 year drop in the weighted-average life of the portfolio would result in an estimated $1.43 billion decline in the value of its servicing rights, the bank said.

“Either because people are underwater, which means it’s unlikely they are going to jump out of that mortgage, or they just aren’t moving around as much, those mortgages are going to last a lot longer, and that would help the valuations,” said Ray Pfeiffer, chairman of the accounting department at Texas Christian University’s Neeley School of Business.

The volatility of the rights and the cost of hedging them have led First Tennessee Bank to cut more than half of its MSR holdings, which included contracts to service about $100 billion of mortgages at its peak in 2008.

“The underlying cash flow of the servicing business is pretty good, the fees relative to the servicing costs are actually fairly attractive,” Miller said. “It’s a very difficult asset to hedge, and that’s one of the things that makes that business, in our mind, less attractive.”

Chase serves itself first in mortgage modifications; MBS bond holders up in ARMs] Financial Times July 27, 2009

Fitch says modification schemes ‘disappointing’

"The results of programmes to modify the terms of home loans for struggling borrowers have thus far been disappointing, according to research from Fitch Ratings.

While the number of home loans receiving modifications has risen in response to government schemes to encourage mortgage servicers to reduce borrowers’ payments, more than half of modified home loans fall back into arrears within months, said the rating agency.

Meanwhile, many borrowers with trial modification plans under the government’s programme are slow to complete documentation requirements or make the trial payments that would allow them to convert to a permanently modified loan.

As of September 2009, approximately 10 per cent of all loans packaged into mortgage bonds – including 25 per cent of all subprime loans in such bonds – have been modified at least once. This is up from 3 per cent and 7 per cent, respectively, a year ago.

However, Fitch estimates that between 65 per cent and 75 per cent of modified home loans default again within 12 months. This figure includes loans that are modified for a second or third time. Around 11 per cent of all modified loans in mortgage bonds have been modified for a second time, Fitch said."

Banks increase the use of "short sales"

"Big US banks including Bank of America, Wells Fargo, JPMorgan Chase and Citigroup are moving to clear their books of troubled mortgages by embracing “short sales”, in which homeowners settle debts by selling their properties for less than the mortgage value.

Short sales are expected to climb sharply this year as home values continue to fall in some parts of the US, leaving many borrowers owing more on their mortgages than their homes are worth.

As moratoriums on mortgage payments and temporary loan modifications expire in coming months, the number of homes entering or in foreclosure is also expected to climb to a record 4.3m, from 3.4m in 2009.

The appeal of short sales for banks is smaller losses. Compared with foresclosures, banks say they lose 20 per cent less in short sales.

After spending most of the past year focusing on largely ineffective loan modification plans, BofA, Wells Fargo, JPMorgan Chase and other large banks said they were ramping up short sales as a means of dealing with the housing crisis.

“If 2009 was the year of the loan modification, 2010 will be the year of the short sale,” said Jim Klinge, a real-estate broker in San Diego, California.

Some of the largest mortgage servicers are scrambling to make the most of this shift. Wells Fargo is holding seminars to teach real-estate brokers how to conduct short sales. Citigroup created a unit to expedite short sales and recently announced a pilot programme that gives homeowners who turn in their deed to the bank - known as a deed-in-lieu transaction - at least $1,000 towards relocation expenses.

BofA has hired additional staff to handle the increased volume, which is running at about double the level of a year ago. “Short sales are growing faster than REOs [real estate owned transactions] and that’s a new development,” said Matt Vernon, a BofA executive recently named to a new position of overseeing short sales.

The moves come as the Obama administration prepares to launch a programme in April that encourages homeowners, lenders and investors to complete short sales by providing up to $3,500 in incentives..."

National mortgage registry standing questioned

"WITH the mortgage bust approaching Year Three, it is increasingly up to the nation’s courts to examine the dubious practices that guided the mania. A ruling that the Kansas Supreme Court issued last month has done precisely that, and it has significant implications for both the mortgage industry and troubled borrowers.

The opinion spotlights a crucial but obscure cog in the nation’s lending machinery: a privately owned loan tracking service known as the Mortgage Electronic Registration System. This registry, created in 1997 to improve profits and efficiency among lenders, eliminates the need to record changes in property ownership in local land records.

Dotting i’s and crossing t’s can be a costly bore, of course. And eliminating the need to record mortgage assignments helped keep the lending machine humming during the boom.

Now, however, this clever setup is coming under fire. Legal experts say the fact that the most recent assault comes out of Kansas, a state not known for radical jurists, makes the ruling even more meaningful.

Here’s some background: For centuries, when a property changed hands, the transaction was submitted to county clerks who recorded it and filed it away. These records ensured that the history of a property’s ownership was complete and that the priority of multiple liens placed on the property — a mortgage and a home equity loan, for example — was accurate.

During the mortgage lending spree, however, home loans changed hands constantly. Those that ended up packaged inside of mortgage pools, for instance, were often involved in a dizzying series of transactions.

To avoid the costs and complexity of tracking all these exchanges, Fannie Mae, Freddie Mac and the mortgage industry set up MERS to record loan assignments electronically. This company didn’t own the mortgages it registered, but it was listed in public records either as a nominee for the actual owner of the note or as the original mortgage holder.

Cost savings to members who joined the registry were meaningful. In 2007, the organization calculated that it had saved the industry $1 billion during the previous decade. Some 60 million loans are registered in the name of MERS.

As long as real estate prices rose, this system ran smoothly. When that trajectory stopped, however, foreclosures brought against delinquent borrowers began flooding the nation’s courts. MERS filed many of them.

“MERS is basically an electronic phone book for mortgages,” said Kevin Byers, an expert on mortgage securities and a principal at Parkside Associates, a consulting firm in Atlanta. “To call this electronic registry a creditor in foreclosure and bankruptcy actions is legal pretzel logic, nothing more than an artifice constructed to save time, money and paperwork.”

The system also led to confusion. When MERS was involved, borrowers who hoped to work out their loans couldn’t identify who they should turn to.

As cases filed by MERS grew, lawyers representing troubled borrowers began questioning how an electronic registry with no ownership claims had the right to evict people. April Charney, a consumer lawyer at Jacksonville Area Legal Aid in Florida, was among the first to argue that MERS, which didn’t own the note or the mortgage, could not move against a borrower.

Initially, judges rejected those arguments and allowed MERS foreclosures to proceed. Recently, however, MERS has begun losing some cases, and the Kansas ruling is a pivotal loss, experts say.

While the matter before the Kansas Supreme Court didn’t involve an action that MERS took against a borrower, the registry’s legal standing is still central to the ruling.

The case involved a borrower named Boyd A. Kesler, who had taken out two mortgages from two different lenders on a property in Ford County, Kan. The first mortgage, for $50,000, was underwritten in 2004 by Landmark National Bank; the second, for $93,100, was issued by the Millennia Mortgage Corporation in 2005, but registered in MERS’s name. It seems to have been transferred to Sovereign Bank, but Ford County records show no such assignment.

In April 2006, Mr. Kesler filed for bankruptcy. That July, Landmark National Bank foreclosed. It did not notify either MERS or Sovereign of the proceedings, and in October, the court overseeing the matter ordered the property sold. It fetched $87,000 and Landmark received what it was owed. Mr. Kesler kept the rest; Sovereign received nothing.

Days later, Sovereign asked the court to rescind the sale, arguing that it had an interest in the property and should have received some of the proceeds. It told the court that it hadn’t been alerted to the deal because its nominee, MERS, wasn’t named in the proceedings.

The court was unsympathetic. In January 2007, it found that Sovereign’s failure to register its interest with the county clerk barred it from asserting rights to the mortgage after the judgment had been entered. The court also said that even though MERS was named as mortgagee on the second loan, it didn’t have an interest in the underlying property.

By letting the sale stand and by rejecting Sovereign’s argument, the lower court, in essence, rejected MERS’s business model.

Although the Kansas court’s ruling applies only to cases in its jurisdiction, foreclosure experts said it could encourage judges elsewhere to question MERS’s standing in their cases.

“It’s as if there is this massive edifice of pretense with respect to how mortgage loans have been recorded all across the country and that edifice is creaking and groaning,” said Christopher L. Peterson, a law professor at the University of Utah. “If courts are willing to say MERS doesn’t have any ownership interest in mortgage loans, that may eventually call into question the priority of liens recorded in MERS’s name, and there are millions and millions of them.”

Bankruptcy judges expunges mortgage

"...One surprising smackdown occurred on Oct. 9 in federal bankruptcy court in the Southern District of New York. Ruling that a lender, PHH Mortgage, hadn’t proved its claim to a delinquent borrower’s home in White Plains, Judge Robert D. Drain wiped out a $461,263 mortgage debt on the property. That’s right: the mortgage debt disappeared, via a court order.

So the ruling may put a new dynamic in play in the foreclosure mess: If the lender can’t come forward with proof of ownership, and judges don’t look kindly on that, then borrowers may have a stronger hand to play in court and, apparently, may even be able to stay in their homes mortgage-free.

The reason that notes have gone missing is the huge mass of mortgage securitizations that occurred during the housing boom. Securitizations allowed for large pools of bank loans to be bundled and sold to legions of investors, but some of the nuts and bolts of the mortgage game — notes, for example — were never adequately tracked or recorded during the boom. In some cases, that means nobody truly knows who owns what.

To be sure, many legal hurdles mean that the initial outcome of the White Plains case may not be repeated elsewhere. Nevertheless, the ruling — by a federal judge, no less — is bound to bring a smile to anyone who has been subjected to rough treatment by a lender. Methinks a few of those people still exist.

More important, the case is an alert to lenders that dubious proof-of-ownership tactics may no longer be accepted practice. They may even be viewed as a fraud on the court.

The United States Trustee, a division of the Justice Department charged with monitoring the nation’s bankruptcy courts, has also taken an interest in the White Plains case. Its representative has attended hearings in the matter, and it has registered with the court as an interested party.

THE case involves a borrower, who declined to be named, living in a home with her daughter and son-in-law. According to court documents, the borrower bought the house in 2001 with a mortgage from Wells Fargo; four and a half years later she refinanced with Mortgage World Bankers Inc.

She fell behind in her payments, and David B. Shaev, a consumer bankruptcy lawyer in Manhattan, filed a Chapter 13 bankruptcy plan on her behalf in late February in an effort to save her home from foreclosure.

A proof of claim to the debt was filed in March by PHH, a company based in Mount Laurel, N.J. The $461,263 that PHH said was owed included $33,545 in arrears.

Mr. Shaev said that when he filed the case, he had simply hoped to persuade PHH to modify his client’s loan. But after months of what he described as foot-dragging by PHH and its lawyers, he asked for proof of PHH’s standing in the case.

“If you want to take someone’s house away, you’d better make sure you have the right to do it,” Mr. Shaev said in an interview last week.

In answer, Mr. Shaev received a letter stating that PHH was the servicer of the loan but that the holder of the note was U.S. Bank, as trustee of a securitization pool. But U.S. Bank was not a party to the action.

Mr. Shaev then asked for proof that U.S. Bank was indeed the holder of the note. All that was provided, however, was an affidavit from Tracy Johnson, a vice president at PHH Mortgage, saying that PHH was the servicer and U.S. Bank the holder.

Among the filings supplied to support Ms. Johnson’s assertion was a copy of the assignment of the mortgage. But this, too, was signed by Ms. Johnson, only this time she was identified as an assistant vice president of MERS, the Mortgage Electronic Registration System. This bank-owned registry eliminates the need to record changes in property ownership in local land records.

Another problem was that the document showed the note was assigned on March 26, 2009, well after the bankruptcy had been filed.

Mr. Shaev’s questions about ownership also led to an admission by PHH that, along the way, it had levied an improper $450 foreclosure fee on the borrower and had overcharged interest by an unstated amount.

John DiCaro, a lawyer representing PHH at the hearing, was in the uncomfortable position of having to explain why there was no documentation of an assignment to U.S. Bank. He did not return a phone call seeking comment last week. Ms. Johnson, who couldn’t be reached for comment, did not attend the hearing.

According to a transcript of the Sept. 29 hearing, Mr. DiCaro said: “In the secondary market, there are many cases where assignment of mortgages, assignment of notes, don’t happen at the time they should. It was standard operating procedure for many years.”

Judge Drain rejected that argument, concluding that what had been presented to the court just did not add up. “I think that I have a more than 50 percent doubt that if the debtor paid this claim, it would be paying the wrong person,” he said. “That’s the problem. And that’s because the claimant has not shown an assignment of a mortgage.”

Mr. Shaev said he was shocked when the judge expunged the mortgage debt.

“We are in uncharted territory,” he said. “Right now I am in bankruptcy court with a house that has no discernible debt on it, yet I have a client with a signed mortgage. We cannot in theory just go out and sell this house because the title company won’t give a clear title on it.”

Among the next steps Mr. Shaev said he would take is to file an amended plan or sue to try to get clear title to the property.

Late last week, PHH appealed the judge’s ruling. But Mr. DiCaro and PHH are in something of a bind. Either they will return to court with a clear claim on the property — including all the transfers and sales that are necessary in the securitization process — or they won’t be able to produce that documentation. If they do produce it, they will then have to explain why they didn’t produce it before.

Oh, what a tangled web these mortgage lenders weave.

OCC's Loss Mitigation Loan-Level Data Collection

This document describes the Loss Mitigation Database file format, the processes Applied Analytics will use to help each contributor create data in this format, and the operational procedures for contributors going forward.

Blackrock head says "wipe out second liens"

"BlackRock Inc. Chairman Laurence Fink said Obama administration programs to help homeowners stave off foreclosure may hinder the recovery of the mortgage market while benefiting banks that own second loans on the properties.

“I am just very worried,” Fink said yesterday in an interview in New York. “How do we get a vibrant securitization market back when we are doing these things in the short run that are good for the banking system and good for the homeowner but not as good as it should be?”

Fink said policies introduced this year to reduce foreclosures are flawed because they don’t require home-equity loans to be wiped out before the mortgage is modified. Instead, in a break with the intentions of contracts, the second loan’s terms may also be revised, spreading the financial loss among lenders, he said.

At stake is the recovery in the market for securities created from individual loans, including the almost $1.7 trillion in residential-mortgage bonds not backed by the U.S., according to Fink. Federal Reserve Chairman Ben S. Bernanke said in April the securitization market was “until recently” an important source of credit for the U.S. economy.

“This to me is one of the biggest issues facing American capitalism,” Fink said. “There is modification going on protecting our banks, protecting their balance sheets.” With the right types of changes, he added, “the homeowner is better off, America is better off, and you could say the first lien holder is better off.”...

JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and Citigroup Inc., the four largest servicers, own almost $450 billion of home-equity loans, according to Laurie Goodman, an analyst at Amherst Securities Group in New York.

Servicer banks less likely to do principal mods

"After months of playing pretend, the Treasury Department conceded last week that the Home Affordable Modification Program, its plan to aid troubled homeowners by changing the terms of their mortgages, was a dud. The 10-month-old program is going nowhere, the Treasury said, because big institutions charged with implementing it are dragging their feet.

“The banks are not doing a good enough job,” said Michael S. Barr, assistant Treasury secretary for financial institutions, in an article published last Sunday in The New York Times.

After the government spent hundreds of billions of dollars bailing out banks, the Obama administration rolled out the $75 billion loan modification plan to show its support for beleaguered homeowners. But if the proof of the pudding is in the eating, homeowners are going hungry.

A stalled loan modification plan might not be worrisome if the foreclosure crisis were abating. Yet at the end of September, a record 14.4 percent of borrowers were either in foreclosure or delinquent on their mortgages, the Mortgage Bankers Association reported.

It’s time for the government to acknowledge the flaws in its program and create one that might actually succeed. Only then will the supply of homes for sale, and the pressure on prices associated with that overhang, be reduced.

The Treasury program has decided to tackle the delinquent mortgage problem by reducing the interest rate on eligible borrowers’ loans to a level that makes monthly payments affordable. But how it calculates affordability is one of the program’s major flaws — at least that’s the view of Laurie Goodman, senior managing director at Amherst Securities Group and head of mortgage strategy at the firm.

Her research shows, for instance, that 70 percent of modifications involving only interest rate cuts, rather than reductions in the principal borrowers owe, have failed after 12 months. The Treasury program is likely to have similar outcomes.

According to government investigators, the average monthly mortgage payment for a borrower under early plan modifications fell by 34 percent. Assessing for possible success under these terms, Ms. Goodman analyzed past redefault rates on modifications that cut payments by 34 percent. She found that 65 percent of borrowers fell back into delinquency.

The terms of loan modifications also make them especially failure-prone because the government calculates “affordability” (how much mortgage debt a borrower can actually manage) in a highly unusual way — raising serious questions for the housing market over all and for the program’s effectiveness for borrowers.

Moreover, investors in first liens, like pension funds and mutual funds, also get beaten up in this process.

For example, in devising what it considers an affordable mortgage payment, the program doesn’t account for all of a borrower’s debts — the first mortgage, second lien, credit card debt and automobile payments. Instead, it calculates affordability using only the borrower’s first mortgage payment, insurance and property taxes.

As a result, what may look like an affordable mortgage payment under the Treasury plan quickly becomes onerous when other debt is added. While the government may ignore a borrower’s second lien and revolving credit obligations, you can be sure the creditors that extended those loans will not. Redefaults seem a likely result.

Another flaw in the program, Ms. Goodman said, is its failure to consider how much equity, or negative equity for that matter, the borrower has on a property. She said that while many analysts contend that unemployment is the major predictor of mortgage defaults, her research shows that negative equity, when a borrower owes more on the home than it is worth, is actually the driving force.

Ms. Goodman recently compared the experiences of prime mortgage borrowers living in areas with an 8 percent unemployment rate. Those with at least 20 percent equity in their properties were falling two payments behind for the first time at a rate of only 0.22 percent a month. But the same 60-day delinquency rate for those who owed at least 120 percent of the value of their homes was 1.46 percent a month.

“We have kicked the problem down the road through modifications that don’t work,” Ms. Goodman said in an interview last week. “You have to address the second liens and ultimately have some type of principal write-down program so borrowers can re-equify.”

Unfortunately, there is a $442 billion reason that wiping out second liens is not high on the government’s agenda: that is the amount of second mortgages and home equity lines of credit on the balance sheets of Bank of America, Wells Fargo, JPMorgan Chase and Citigroup.

These banks — the very same companies the Treasury is urging to modify loans that they service — have zero interest in writing down second liens they hold because it would mean further damage to their balance sheets.

Say a troubled borrower has a first mortgage owned by a pension fund in a securitization trust and a second lien held by the bank that services the loans. The servicer is happy to modify the first mortgage under the Treasury program because the pension fund holding that loan takes the biggest hit while the second lien is untouched. This hurts the investor who holds the first mortgage and the borrower, who must pay off the second lien, which typically has a significantly higher interest rate.

The result? Yet another conflict of interest enriching financial companies while impoverishing investors and consumers.

AN interesting data point: when banks do own all the mortgages on a property they seem to see the merit in principal reduction modifications. Studying second-quarter government data, the most recent available, Ms. Goodman found that when banks owned the loans, 30.5 percent of modifications reduced principal balances.

When they service someone else’s loan or hold a second lien on the property, they rarely allow principal reductions.

Of course, cries of moral hazard will erupt if borrowers get large cuts in their principal balances. Rightly so. Why should those who took on too much debt to buy too much house get rescued when those who were prudent go unrewarded?

But doing nothing also has hazards, the most obvious being continuing foreclosures, which nobody wants, and further declines in real estate prices that will hurt homeowners as well as investors."

Joe Mason on modifying mortgages

Source: RGE Monitor

"Yesterday’s Washington Post article on mortgage servicer meetings with Administration officials and today’s Wall Street Journal on the same topic both seem to have overlooked yesterday’s Joint Economic Committee hearing on mortgage modification, entitled “Current Trends in Foreclosure and What More Can Be Done to Prevent Them.” The hearing was interesting and informative, albeit sometimes not for the reasons intended.

First, it appears by all indications of both the Administration meeting and the hearing that modification policy will be proceeding with the philosophy of “damn the torpedoes, full speed ahead!” So, even while we are seeing a roughly seventy-five percent one-year redefault rate on modifications – compared to the industry average forty percent two-year redefault rates I cited in my Fall 2007 paper, Mortgage Modification Promises and Pitfalls the Administration appears committed to pushing for more modifications, regardless.

Apologists reason that the modifications of the past were not the “right” modifications. That is, those modifications did not relieve principal balances and reduce payments. But those modifications already removed fees and charges meant to cover the thousands of dollars spent on delinquency management, arrears, and processing incurred to the current state of the loan. So with all those up-front expenses and a seventy-five percent redefault rate – wherein the servicer forecloses anyway – indeed, foreclosure is often cheaper than modification.

The important point is who will pay for the principal balance reductions? The Administration is still largely blind to how some servicers are using the modification push to increase the value of their own junior holdings at the expense of senior bondholders. Hence, there is still little acknowledgement of the need for servicer reporting, not even on par with that required by the GSEs in their third-party arrangements. While there is growing realization that the senior investors that are being exploited are – to a great extent – pension funds, even policymakers that get this still acknowledge that helping “homeowners” right now is far more visible than helping retirees in the future. Besides, the Treasury can always borrow more to fund retirements later.

One last item: it appears that the product restriction elements of the Consumer Product Safety Commission may not have broad support, even among consumer advocates. Many I talked to yesterday advocate rolling consumer protection authority into a single agency to better coordinate existing enforcement, but none seem to advocate the product restriction or certification elements of the proposal. The feeling seems to be that much simpler changes to the degree and timing of disclosure can solve many of the problems in today’s market while respecting consumer choice.

In closing, the text of my prepared oral testimony from yesterday is below. Those remarks are based substantially on my March 2009 paper, Subprime Servicer Reporting Can Do More for Modification than Government Subsidies”.

Oral Testimony of Joseph R. Mason to the Joint Economic Committee

“Current Trends in Foreclosure and What More Can Be Done To Prevent Them.”

Tuesday July 28, 2009, 10:00 A.M., Cannon House Office Building Room 210

Thank you Madam Chair and Committee Members for inviting me to testify today. I’ve submitted a more detailed paper I’d like to ask to be included as part of the record. What follows is a summary of that work.

Recent history is rife with examples of subprime servicer problems and failures, resplendent with detail on best – and worst – practices. The industry has been through profitable highs and predatory lows, over time reacting to increased competition with greater efficiency.

But intensively customer service-based enterprises such as servicing are hard to evaluate quantitatively, so that proving a servicer’s value is difficult even in the best business environment. Unfortunately, today’s is not the best business environment, so proving servicer value has now become crucial to not only servicer survival, but the survival of the market as a whole.

There are seven key reasons why servicers are facing difficulties with today’s borrowers:

  • 1. Modification is Expensive;
  • 2. Arrearages are a Drag on Profits;
  • 3. Mortgage Servicing Rights Values Decline with Defaults;
  • 4. Increased Fees are only a Partial Fix;

I wrote about these in Fall 2007, and they are being addressed in recent Administration proposals like HAMP. But as Congressman Cummings mentioned in his opening remarks,

  • 5. When Servicers are Threatened, Employees (and Expertise) Flee. Reduced servicing staff, particularly with respect to the most talented employees that have other options, will have a demonstrably adverse affect on servicing quality.

…and more importantly…

  • 6. Servicer Bankruptcy Creates Perverse Dynamics. While most securitization documents stipulate a transfer of servicing if pool performance has deteriorated or if the servicer has violated certain covenants, which are expected to generally precede bankruptcy. The problem is that the paucity of performance data makes it difficult for the trustee or the investors to detect servicer difficulties prior to bankruptcy to make the change.
  • 7. Default Management is More Art than Science. While modifications can be a useful loss mitigation technique when appropriate policies and procedures are in place, servicers that are unwilling or unable to report the volume, type, and terms of modifications to securitized investors or regulators may be poorly placed to offer meaningful modifications.

The main drawback with current policy is therefore that the industry can use modification to game the system and investors are wary. In other works, some servicers are taking advantage of both borrowers AND investors. There are four major reasons for investor concern.

  • 1. Aggressive Reaging makes Delinquencies Look Better than they Really Are. Investors know that redefault rates on modified loans are high, so calling the modified loan “current” again immediately is disingenuous at best.
  • 2. Aggressive Representations and Warranties also Skew Reported Performance. At their best, representations and warranties help stabilize pool performance. At their worst, representations and warranties inappropriately subsidize the deal. In practice, it is difficult to decompose the difference between stabilization and subsidization.
  • 3. Reaging and Representations and Warranties are used to Keep Deals off their Trigger Points. Residual holders, nay, servicers, however, continue to push for lowering delinquency levels, no matter how artificially, in order to maintain positive residual and interest-only strip valuations that can keep them from insolvency. Aaa-class investors are therefore at the mercy of servicers who are withholding information on fundamental credit performance in lieu of modification.
  • 4. Private Sector Servicing Reporting does not Capture even the Most Basic Manipulations. Servicers that utilize unlimited modifications or modifications without appropriate controls heighten risk to homeowners and investors.

The State Foreclosure Prevention Working Group’s first Report in February 2008 acknowledged that senior bondholders fear that some servicers, primarily those affiliated with the seller, may have incentives to implement unsustainable repayment plans to depress or defer the recognition of losses in the loan pool in order to allow the release of overcollateralization to the servicer.

Regulators can therefore do a great service to both the industry and borrowers in today’s financial climate by insisting that servicers report adequate information to assess not only the success of major modification initiatives, but also performance overall. The increased investor dependence on third-party servicing that has accompanied securitization necessitates substantial improvements to investor reporting in order to support appropriate administration and, where helpful, modification of consumer loans in both the private and public interest. Without information, even the most highly subsidized modification policies are bound to fail."

Mortgage servicer poor execution under scrutiny

"Experts said the hearing in Phoenix reflected rising frustration by federal bankruptcy judges with mortgage servicers, which process payments for banks and the investors who own large pools of loans. In recent months, judges in Ohio and Pennsylvania have chastened mortgage servicers for failing to process payments properly and for errors in foreclosure filings, among other concerns.

“The judges are seeing more and more of a pattern of indifference to record-keeping and good business practices,” said Robert Lawless, a law professor at the University of Illinois who specializes in bankruptcy law.

One of the biggest complaints by homeowners has been poor communication by mortgage servicers on the status of their applications for loan modifications. In the case of Mrs. Giguere, Wells Fargo decided back in March shortly after she faxed the bank her application that she did not qualify for the Home Affordable Modification Program.

She did not learn of the bank’s decision until Thursday.

“When did you tell the debtors that their loan was no longer being considered for modification?” Judge Haines asked Mr. Ohayon.

“We haven’t. They’ve never been told,” said Mr. Ohayon, adding: “Customer communication is something we’re taking a serious look at, your honor.”"

New rules to clarify cost of mortgages

"Americans have long struggled with the complexities of shopping for home mortgages. Now Uncle Sam is trying to help.

Federal rules that take effect Friday require mortgage lenders and brokers to give consumers better estimates of the barrage of costs they incur when taking out home loans. The new rules mandate a standard three-page Good Faith Estimate that urges consumers to shop around for the best loan and helps them compare lenders' offerings.

The rules, announced by the Department of Housing and Urban Development in November 2008, are an update of the Real Estate Settlement Procedures Act, a 1974 law known as Respa. Though the changes come too late to help the millions of Americans who made poor loan choices during the housing boom, "it's going to be a help," said Jack Guttentag, a retired Wharton School finance professor who operates a mortgage advice Web site

One difficulty of shopping for mortgages is that the lender with the lowest rates often isn't offering the best deal. High fees can wipe out the benefits of low rates, and little-noticed features such as prepayment penalties can burn borrowers. Even for savvy consumers, it is hard to compare different combinations of rates, "points" (paid in exchange for a lower rate), fees and other terms. Lenders often sprinkle in lots of confusing charges, such as processing and messenger fees. Dickering over the smaller fees could distract borrowers from the bigger picture of total costs.

To address those problems, the new estimate form requires lenders to wrap all the fees they control into one "origination charge." Mr. Guttentag recommends that borrowers focus on two items as they shop: the interest rate and the "adjusted origination charge," which includes any points paid to lower the rate.

Good Faith Estimates have been around for decades, but there was no standard format. Under the new rules, lenders and mortgage brokers will be required to give consumers the estimate forms within three days of receiving a loan application.

Lenders aren't allowed to increase the origination fee from the estimate. Some other charges not included in the origination fee, such as title services and recording charges, can increase by as much as a combined 10% from the estimate. Estimates for other charges, such as homeowner's insurance and other services provided by third parties selected by the borrower, aren't subject to such limits.

Title insurance typically is the largest fee, and the new forms let consumers know they don't have to accept the insurer suggested by the lender. Mr. Guttentag says title insurance can be "vastly overpriced" and consumers should take the time to shop for it.

HUD has estimated that the revised requirements will save $700 for the typical consumer, partly because of the greater ability to shop intelligently..."

Fees may deter loan alteration

This week, the Obama administration summoned mortgage company executives to Washington to demand they move faster to lower payments for homeowners sliding toward foreclosure. Treasury officials called on the companies to hire and train more people quickly to field applications for relief.

But industry insiders and legal experts say the limited capacity of mortgage companies is not the primary factor impeding the government’s $75 billion program to prevent foreclosures. Instead, it is that many mortgage companies are reluctant to give strapped homeowners a break because the companies collect lucrative fees on delinquent loans.

Even when borrowers stop paying, mortgage companies that service the loans collect fees out of the proceeds when homes are ultimately sold in foreclosure. So the longer borrowers remain delinquent, the greater the opportunities for these mortgage companies to extract revenue — fees for insurance, appraisals, title searches and legal services.

“It frustrates me when I see the government looking to the servicer for the solution, because it will never ever happen,” said Margery Golant, a Florida lawyer who defends homeowners against foreclosure and who worked in the law department of a major mortgage company, Ocwen Financial. “I don’t think they’re motivated to do modifications at all. They keep hitting the loan all the way through for junk fees. It’s a license to do whatever they want.”

Rich Miller, a governance project manager at Countrywide Financial and Bank of America before he left in January, said Bank of America had been reluctant to modify loans, which hurt the bottom line. The company has been waiting and hoping the economy will improve and delinquent customers will resume making payments, he said.

“That’s the short-term strategy,” said Mr. Miller, who oversaw training programs at Countrywide, which was bought by Bank of America. He now works as an industry consultant.

Bank of America disputed that characterization. “To think that somehow or other we would jeopardize investor relationships and customer relationships for the very small incremental income we would receive by delaying seems ludicrous,” said Robert V. James, the bank’s senior vice president for mortgage operations and insurance. “It’s not the right thing to do.”

Mortgage companies, some of which are affiliated with the nation’s largest banks, are paid to manage pools of loans owned by investors. The companies typically collect a percentage of the value of the loans they service. They extract their share regardless of whether borrowers are current on their payments. Indeed, their percentage often increases on delinquent loans.

Legal experts say the opportunities for additional revenue in delinquency are considerable, confronting mortgage companies with a conflict between their own financial interest in collecting fees and their responsibility to recoup money for investors who own most mortgages.

“The rules by which servicers are reimbursed for expenses may provide a perverse incentive to foreclose rather than modify,” concluded a recent paper published by the Federal Reserve Bank of Boston.

Under the Obama administration’s foreclosure program, a servicer that modifies a loan for a homeowner collects $1,000 from the government, followed by $1,000 a year for each of the next three years. A senior Treasury adviser, Seth Wheeler, said these payments amounted to “meaningful incentives to servicers to help overcome the challenges and competing demands they face in considering and completing loan modifications.” He added that mortgage companies “are contractually obligated to the terms of this program, which require them to offer modifications to qualified borrowers.”

But experts say the administration’s incentives are often outweighed by the benefits of collecting fees from delinquency, and then more fees through the sale of homes in foreclosure.

“If they do a loan modification, they get a few shekels from the government,” said David Dickey, who led a mortgage sales team at Countrywide and Bank of America, leaving in March to start his own mortgage advisory firm, National Home Loan Advocates. By contrast, he said, the road to foreclosure is lined with fees, especially if it is prolonged. “There’s all sorts of things behind the scenes,” he said.

When borrowers fall behind, mortgage companies typically collect late fees reaching 6 percent of the monthly payments.

“For many subprime servicers, late fees alone constitute a significant fraction of their total income and profit,” said Diane E. Thompson, a lawyer for the National Consumer Law Center, in testimony to the Senate Banking Committee this month. “Servicers thus have an incentive to push homeowners into late payments and keep them there: if the loan pays late, the servicer is more likely to profit.”

She cited Ocwen Financial, which reported that nearly 12 percent of its income in 2007 came from fees to borrowers.

Paul A. Koches, Ocwen’s general counsel, said: “We’d prefer that to be zero. The costs associated with our delinquent loans are in every instance in excess of the late fees.”

Common mortgage modifications

Most common loan modification options are listed below:

  • lowering the mortgage interest rate
  • reducing the principal balance
  • fixing adjustable interest rates within the mortgage
  • increasing the loan term throughout the mortgage
  • forgiveness of payment defaults and fees
  • or any combination of the above

The moral suasion of strategic defaults

John Courson, president and C.E.O. of the Mortgage Bankers Association, recently told The Wall Street Journal that homeowners who default on their mortgages should think about the “message” they will send to “their family and their kids and their friends.” Courson was implying that homeowners — record numbers of whom continue to default — have a responsibility to make good. He wasn’t referring to the people who have no choice, who can’t afford their payments. He was speaking about the rising number of folks who are voluntarily choosing not to pay.

Such voluntary defaults are a new phenomenon. Time was, Americans would do anything to pay their mortgage — forgo a new car or a vacation, even put a younger family member to work. But the housing collapse left 10.7 million families owing more than their homes are worth. So some of them are making a calculated decision to hang onto their money and let their homes go. Is this irresponsible?

Businesses — in particular Wall Street banks — make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral — perhaps because no one assumed it was moral to begin with. But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials. Former Treasury Secretary Henry M. Paulson Jr. declared that “any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator — and one who is not honoring his obligation.” (Paulson presumably was not so censorious of speculation during his 32-year career at Goldman Sachs.)

The moral suasion has continued under President Obama, who has urged that homeowners follow the “responsible” course. Indeed, HUD-approved housing counselors are supposed to counsel people against foreclosure. In many cases, this means counseling people to throw away money. Brent White, a University of Arizona law professor, notes that a family who bought a three-bedroom home in Salinas, Calif., at the market top in 2006, with no down payment (then a common-enough occurrence), could theoretically have to wait 60 years to recover their equity. On the other hand, if they walked, they could rent a similar house for a pittance of their monthly mortgage.

There are two reasons why so-called strategic defaults have been considered antisocial and perhaps amoral. One is that foreclosures depress the neighborhood and drive down prices. But in a market society, since when are people responsible for the economic effects of their actions? Every oil speculator helps to drive up gasoline prices. Every hedge fund that speculated against a bank by purchasing credit-default swaps on its bonds signaled skepticism about the bank’s creditworthiness and helped to make it more costly for the bank to borrow, and thus to issue loans. We are all economic pinballs, insensibly colliding for better or worse.

The other reason is that default (supposedly) debases the character of the borrower. Once, perhaps, when bankers held onto mortgages for 30 years, they occupied a moral high ground. These days, lenders typically unload mortgages within days (or minutes). And not just in mortgage finance, but in virtually every realm of our transaction-obsessed society, the message is that enduring relationships count for less than the value put on assets for sale.

Think of private-equity firms that close a factory — essentially deciding that the company is worth more dead than alive. Or the New York Yankees and their World Series M.V.P. Hideki Matsui, who parted company as soon as the cheering stopped. Or money-losing hedge-fund managers: rather than try to earn back their investors’ lost capital, they start new funds so they can rake in fresh incentives. Sam Zell, a billionaire, let the Tribune Company, which he had previously acquired, file for bankruptcy. Indeed, the owners of any company that defaults on bonds and chooses to let the company fail rather than invest more capital in it are practicing “strategic default.” Banks signal their complicity with this ethos when they send new credit cards to people who failed to stay current on old ones.

Mortgage holders do sign a promissory note, which is a promise to pay. But the contract explicitly details the penalty for nonpayment — surrender of the property. The borrower isn’t escaping the consequences; he is suffering them.

In some states, lenders also have recourse to the borrowers’ unmortgaged assets, like their car and savings accounts. A study by the Federal Reserve Bank of Richmond found that defaults are lower in such states, apparently because lenders threaten the borrowers with judgments against their assets. But actual lawsuits are rare.

And given that nearly a quarter of mortgages are underwater, and that 10 percent of mortgages are delinquent, White, of the University of Arizona, is surprised that more people haven’t walked. He thinks the desire to avoid shame is a factor, as are overblown fears of harm to credit ratings. Probably, mortgagees also labor under a delusion that their homes will quickly return to value. White has argued that the government should stop perpetuating default “scare stories” and, indeed, should encourage borrowers to default when it’s in their economic interest. This would correct a prevailing imbalance: homeowners operate under a “powerful moral constraint” while lenders are busily trying to maximize profits. More important, it might get the system unstuck. If lenders feared an avalanche of strategic defaults, they would have an incentive to renegotiate loan terms. In theory, this could produce a wave of loan modifications — the very goal the Treasury has been pursuing to end the crisis.

No one says defaulting on a contract is pretty or that, in a perfectly functioning society, defaults would be the rule. But to put the onus for restraint on ordinary homeowners seems rather strange. If the Mortgage Bankers Association is against defaults, its members, presumably the experts in such matters, might take better care not to lend people more than their homes are worth.

More homeowners walk away

"...New research suggests that when a home’s value falls below 75 percent of the amount owed on the mortgage, the owner starts to think hard about walking away, even if he or she has the money to keep paying.

In a situation without precedent in the modern era, millions of Americans are in this bleak position. Whether, or how, to help them is one of the biggest questions the Obama administration confronts as it seeks a housing policy that would contribute to the economic recovery.

“We haven’t yet found a way of dealing with this that would, we think, be practical on a large scale,” the assistant Treasury secretary for financial stability, Herbert M. Allison Jr., said in a recent briefing.

The number of Americans who owed more than their homes were worth was virtually nil when the real estate collapse began in mid-2006, but by the third quarter of 2009, an estimated 4.5 million homeowners had reached the critical threshold, with their home’s value dropping below 75 percent of the mortgage balance.

They are stretched, aggrieved and restless. With figures released last week showing that the real estate market was stalling again, their numbers are now projected to climb to a peak of 5.1 million by June — about 10 percent of all Americans with mortgages.

“We’re now at the point of maximum vulnerability,” said Sam Khater, a senior economist with First American CoreLogic, the firm that conducted the recent research. “People’s emotional attachment to their property is melting into the air.”

Suggestions that people would be wise to renege on their home loans are at least a couple of years old, but they are turning into a full-throated barrage. Bloggers were quick to note recently that landlords of an 11,000-unit residential complex in Manhattan showed no hesitation, or shame, in walking away from their deeply underwater investment.

“Since the beginning of December, I’ve advised 60 people to walk away,” said Steve Walsh, a mortgage broker in Scottsdale, Ariz. “Everyone has lost hope. They don’t qualify for modifications, and being on the hamster wheel of paying for a property that is not worth it gets so old.”

Mr. Walsh is taking his own advice, recently defaulting on a rental property he owns. “The sun will come up tomorrow,” he said..."

Source: ‘Underwater’ Mortgages to Hit 48%, Deutsche Bank Says Bloomberg, August 6, 2009

"Almost half of U.S. homeowners with a mortgage are likely to owe more than their properties are worth before the housing recession ends, Deutsche Bank AG said.

The percentage of “underwater” loans may rise to 48 percent, or 25 million homes, as prices drop through the first quarter of 2011, Karen Weaver and Ying Shen, analysts in New York at Deutsche Bank, wrote in a report today.

As of March 31, the share of homes mortgaged for more than their value was 26 percent, or about 14 million properties, according to Deutsche Bank. Further deterioration will depress consumer spending and boost defaults by borrowers who face unemployment, divorce, disability or other financial challenges, the securitization analysts said.

“Borrowers may also ‘ruthlessly’ or strategically default even without such life events,” they wrote.

Seven markets in states with the fastest appreciation during the five-year housing boom -- including Fort Lauderdale and Miami, Florida; Merced and Modesto, California; and Las Vegas -- may find 90 percent of borrowers underwater, according to the report.

The share of borrowers owing more than 125 percent of their property’s value will increase to 28 percent from 13 percent, according to Weaver and Shen.

Home prices will decline another 14 percent on average, the analysts wrote."

Negative equity not a factor for re-defaults

Source: Negative Equity Not A Factor In Re-Defaults ZeroHedge, August 24, 2009

"Recent approaches by the Obama administration for mortgage mods in Prime and Alt-A have sought to appease negative equity perceptions (and reality) of borrowers, with the end result being a substantial push for loan mods, as HOPE targets a 3-4 million loan mod total over the duration of the program (which is substantially behind schedule as only 230,000 mods so far have been enacted). Yet empirical data indicate that negative equity is an irrelevant issue in examining the behavior of re-defaulters.

Some findings by Credit Sights (presented via Research Recap) indicate that negative equity, whether tangible or not, has moderate if any impact on redefault rates, with subprime re-delinquency hitting 40% while prime and Alt-A at approximately 30%."

Foreclosures expected to peak in 2010

Source: Foreclosures expected to peak at end of 2010 The, August 20, 2009

"The housing market continues to threaten signs of an economic recovery, with new data released on Thursday showing an all-time high of Americans falling behind on loan payments and the rate of home foreclosures unlikely to peak until late in 2010.

Lawmakers have been working for more than a year to reduce foreclosures and steady the housing market. But new efforts by the Obama administration to spur loan modifications are still getting under way, with most observers expecting foreclosure rates to continue rising.

Jay Brinkmann, chief economist at the Mortgage Bankers Association (MBA), said on Thursday that he expects the foreclosure problem to crest at the "end of next year" if unemployment numbers peak in the middle of 2010.

"Our forecast is that jobless rates will peak in the middle of next year, and we'll expect delinquencies to peak then and foreclosures to peak after," Brinkmann said.

The share of loans that are one or more payment overdue or are in the process of foreclosure rose to 13.2 percent of all loans in the country, according to data released by the MBA. That is an all-time high in the association's survey. The percentage of loans 90 days or more past due and those in foreclosure also reached record highs."

Mortgage REITs IPOs meet tepid reception

"Real estate investors trying to leverage initial public offerings to buy distressed commercial property debt are using a flawed strategy, said James Corl, a managing director at New York-based Siguler Guff & Co.

“Generally speaking, floating a bond portfolio as a public company is simply not a sustainable business model,” said Corl, whose firm manages $9 billion. “Bonds don’t grow; they are a fixed-income investment.”

Corl spoke in an interview this week before New York-based Ladder Capital Realty Finance Inc., formed to buy commercial mortgages as default rates rise, canceled its IPO. The company was set to follow Apollo Commercial Real Estate Finance Inc. and Colony Financial Inc. into the public markets, with Ladder seeking $400 million. Both Apollo and Colony cut their offerings by half last month and are now trading below their listing price.

Another mortgage buyer organized as a real estate investment trust, Foursquare Capital Corp., last week also postponed its initial share sale.

Some mortgage REITs struggle to generate consistent revenue and earnings growth, according to both Corl and Ritson Ferguson, chief investment officer of Radnor, Pennsylvania-based ING Clarion Real Estate Securities, which manages about $12 billion.

Real estate investments trusts that buy mortgages often borrow too much when their borrowing costs are low compared with what they can earn on loans, then find their profits eroded as short-term rates rise relative to long-term rates, Corl and Ferguson said.

Since May, at least 13 investors and money managers, including Barry Sternlicht, the founder and chief executive officer of Starwood Capital Group LLC, have filed to raise money through public offerings of mortgage REITs. The companies aim to capitalize on forecasts that banks will unload commercial and residential property loans at distressed prices.

“There is an opportunity as a lender in the market right now,” said Ferguson. “As of yet, we haven’t necessarily found the right combination of management skill, alignment and pricing that’s been compelling to us.”

Apollo Commercial Real Estate and Colony Financial have both fallen in New York trading since going public.

Apollo Commercial, a New York-based REIT set up by Leon Black’s Apollo Management LP, cut its stock sale to 10 million shares from 20 million and expected net proceeds of $198 million. Colony Financial, a Los Angeles-based REIT created by Thomas Barrack’s Colony Capital LLC, reduced its offering to 12.5 million shares from 25 million and raised $250 million.

“The tepid response is due to multiple concerns,” said Ferguson. He called the companies “blind pools with no existing investments; as such, they aren’t worth the issue price at the time of offer and so really won’t go up until the money is put to work.”

Commercial mortgage forbearance urged by Fed

"They are here! US commercial real estate loan workouts!

And they’ve already garnered their fair share of criticism. To start with though, here’s the basic idea from the FDIC and the Fed:

The regulators have found that prudent CRE loan workouts are often in the best interest of the financial institution and the borrower. Examiners are expected to take a balanced approach in assessing the adequacy of an institution’s risk management practices for loan workout activity. Financial institutions that implement prudent CRE loan workout arrangements after performing a comprehensive review of a borrower’s financial condition will not be subject to criticism for engaging in these efforts even if the restructured loans have weaknesses that result in adverse credit classification. In addition, renewed or restructured loans to borrowers who have the ability to repay their debts according to reasonable modified terms will not be subject to adverse classification solely because the value of the underlying collateral has declined to an amount that is less than the loan balance.

Which means banks will not have to classify restructured loans (to the Troubled Debt Restructured [TDR] or `substandard’, `doubtful’, etc. categories) if the value of the underlying property has fallen to less than the loan balance. The idea, as the Wall Street Journal notes, is to target loans that are coming due but perhaps can’t be refinanced because the value of the property has fallen below the loan amount. In many of those instances, the properties are still generating enough rental income to pay debt service.

So for example, if a $15m loan on an office building valued at $20m becomes a $15m loan on an office building valued at $13.1m, but the borrower hasn’t been delinquent and stable rental income is expected, then the lender can internally grade the loan a `pass’, maintain it on an accrual basis and not report it as TDR. Everything is relatively fine.

If, however, future declines in rental income are expected or the borrower has been sporadically delinquent or whatever — the loan might still be classified as substandard or TDR.

Whether you think rental incomes and property values are likely to recover or continue declining then, will really dictate what you think of these kinds of loan workouts. For sure, they are a way of giving banks some time, allowing them to restructure loans and hold onto them until values recover. If commercial property values and rents do pick-up then it will have been a gamble which worked. If, however, rental incomes and values continue to decline then they really are just a procrastinating tactic — merely allowing banks to delay the inevitable.

Australian proposal on mortgage rate setting


  • 1.1 The Banking Amendment (Keeping Banks Accountable) Bill 2009 seeks to amend the Banking Act 1959. It aims to encourage banks to set mortgage interest rates in line with movements in official interest rates (defined as the Reserve Bank's overnight cash rate).
  • 1.2 The mechanism by which this is done is that if a bank moves interest rates contrary to movements in official interest rates, it must explain to the treasurer why it is doing so. If the treasurer considers that the bank's action (or inaction) is 'contrary to the public interest', and the bank persists, then the treasurer may revoke the guarantee applying to the bank's deposits under the Financial Claims Scheme.

Conduct of the inquiry

  • 1.3 On 12 August 2009, the Senate referred the Banking Amendment (Keeping Banks Accountable) Bill 2009 to the Economics Legislation Committee for inquiry and report by 24 November 2009.
  • 1.4 The committee advertised the inquiry on its website and in a national newspaper. A number of organisations, commentators, academics and stakeholders were also invited to make submissions to the inquiry.
  • 1.5 The committee received 7 submissions. These are listed in Appendix 1. A public hearing was held in Melbourne on 5 October 2009. The witnesses appearing are listed in Appendix 2. The committee thanks those who participated in the inquiry.

Outline of the report

  • 1.6 The issue of whether it is reasonable to expect banks to move (and only move) their home loan interest rates in line with movements in the official cash rate is discussed in Chapter 2. Whether the bill represents an appropriate response is discussed in Chapter 3, which concludes that the bill should not be passed.

Australian housing market stability vs the US market

IN MOST countries, home ownership is regarded as a good thing. It caters to the need, which most people feel, to have a place they can call their own. Typically, it provides a source of stability and security for families when they are raising children, and to people in retirement. It provides the means by which many people accumulate the majority of such wealth as they have. For some, it provides the financial base from which a small business can be built. Arguably, home ownership also provides broader social benefits such as stable communities in which people feel they have a tangible stake, and to which they are willing to contribute.

For these reasons, government policies aimed at increasing home ownership - such as direct grants to home buyers, and more favourable tax treatment of owner-occupied housing than other assets - have long enjoyed widespread support.

Yet it's possible to have too much of a good thing. The contrasting fortunes of home owners in Australia and the United States over the past few years, and the ensuing consequences of the divergent trends in the Australian and American residential property markets for their broader economies, suggest that there can be dangers in seeking to push home ownership too far.

In the US, successive administrations over the past 25 years have consciously sought to increase home ownership rates among low income-earners generally, and more specifically among minority groups where home ownership rates have typically been below those for the white population at all income levels.

One of the means adopted during the Clinton administration to this end was to use the Community Reinvestment Act to require banks and other mortgage lenders to be innovative and flexible in helping households that lack cash to buy a home or make the payments - that is, to loosen their lending requirements.

Another was to add an affordable housing mission to the charters of the government-sponsored mortgage agencies, Fannie Mae and Freddie Mac, which were required by 2007 to show that 55 per cent of their mortgage purchases were loans to low and moderate-income borrowers, of which 25 per cent were to be loans to low and very low-income borrowers. Fulfilling this mandate required Fannie Mae and Freddie Mac to purchase a growing volume of mortgages that did not conform to their traditional requirements.

These undoubtedly well-intended measures prompted a more general lowering of lending standards, as private sector mortgage underwriters came up with innovative products that allowed borrowers to take out larger loans with lower initial payments in an environment of unusually low interest rates, while Wall Street and European investment banks came up with new ways of distributing securities based on these products to a wider investor market.

Not surprisingly, these products proved extraordinarily attractive to borrowers, many of whom hoped to refinance on to more traditional fixed-rate loans after a year or two of rising house prices had allowed them to build the required equity; and they were attractive to mortgage brokers who, in the US, are not required to have the same regard to the capacity of borrowers to repay as is the case under Australian laws. Therefore, by the middle years of this decade, nearly half the mortgages being taken out in the US were non-prime (what in Australia would be called non-conforming, low-doc or no-doc loans).

This lowering of mortgage-lending standards contributed to an increase in the home ownership rate in the US from just under 65 per cent in 1994 to a peak of 69 per cent two years later. And this is why the Bush administration and the Federal Reserve saw these developments as a good thing. In 2002, President Bush set a target of 5.5 million more home owners, including 1 million more minority home owners, by 2010, and nominated high down payments as the biggest single barrier towards achieving that goal. Alan Greenspan told a congressional committee that the benefits of broadened home ownership were 'worth the risk' associated with the loosening of mortgage-lending terms.

Unfortunately, many of those enticed into home ownership by these innovations were unable to maintain their financial commitments once the initial interest rate discounts that many of them featured had expired, or as interest rates began rising and home prices began falling. The cascade of mortgage defaults helped precipitate the global financial crisis; and, incidentally, the US home ownership rate has since fallen back to below 67.5 per cent.

Here in Australia, by contrast, the home ownership rate has remained remarkably stable at about 70 per cent since the early 1960s, despite the substantial declines in interest rates since the early 1990s, the entry of new players into the mortgage market, and the billions of dollars thrown by governments at first home buyers (in the form of cash grants and stamp duty concessions). All of these have, in effect, been capitalised into the prices of existing dwellings, while doing nothing to increase home ownership.

In fact, research by Sydney University's Judy Yates shows that, between the 1996 and 2006 censuses, home ownership rates fell in every age bracket except the over 65s; the only reason that the overall home ownership rate didn't decline during this period was because of an increase in the proportion of the population in the age brackets (45 and over) where home ownership rates are above average.

However, this also meant that few Australians were enticed into taking out mortgages they subsequently found themselves unable to service. The Reserve Bank's latest Financial Stability Report, released last week, showed that only 25,000 mortgages were 90 days or more in arrears.

Japan bank minister recommends repayment halt

"Japan’s new banking minister said his plan to freeze the repayment of bank loans to help debt-burdened individuals and small companies would be a positive for the banks, even as investors have fled financial stocks.

Shizuka Kamei, the 72-year-old head of a tiny coalition partner of Japan’s new ruling party, also told reporters that investor concern about the plan was a sign of “weakness”.

A veteran politician and outspoken critic of U.S.-style capitalism, Kamei took office this week as financial services minister following the ousting of the long-ruling Liberal Democratic Party.

But his plan to give cash-strapped borrowers a three-year grace period when they would not have to repay the principal on a loan or mortgage has rattled investors.

“To think that we would cause trouble for banks by helping their customers, that’s just strange. This is also good for banks,” Kamei told a group of reporters in his office in Tokyo on Friday.

The Tokyo share market’s banking sector index is down about 3 percent since Kamei was named as the next financial services minister.

“That just goes to show the weakness of the financial sector,” Kamei said when asked about the market’s reaction.

“If the financial world gets scared at the talk of a moratorium, that shows how frail Japan’s financial sector is.”

Kamei has said that he wants to introduce a bill for the repayment moratorium next month. He has yet to decide on a means of enforcing it, among other details, he said on Friday."


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