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Articles | Best Loan Modifications:
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- Barriers to Reducing Needless Foreclosures
- Relief for Homeowners Is Given to a Relative Few
- Lenders pledge better updates; Firms say they'll give more details on reworked home loans.
- Banks to provide data on mortgages
- Major lenders offer relief for delinquent borrowers
- Lenders to Offer Reprieves To Delinquent Borrowers
- Fed's actions prove calming to rate resets
- Persistence Pays Off When Loan Modification Saves House and Credit
- US SEC backs subprime loan modification accounting
- Home Foreclosures: Crisis Is Only Getting Deeper
- Pimco: Tricky for Fed to fix economy bind
1 - Barriers to Reducing Needless Foreclosures
The Washington Post
April 26, 2008 Saturday
Every Edition
BYLINE:Jack Guttentag
SECTION: FINANCIAL; Pg. G02
Needless foreclosures are happening all around us.
Note that I am using a coldblooded business definition of "needless foreclosure," not a bleeding-heart one. Under my definition, if it costs the holder of the loan more to foreclose on a mortgage than to make it viable, it is a needless foreclosure. I am not counting the human toll exacted by foreclosures, which can be very high.
For example, it can cost the investor who held the mortgage about $40,000 to foreclose on a home. It might have cost only $25,000 to make the mortgage affordable to the borrower through a reduction in the interest rate. Modifying the loan contract in this way would have kept the person in his home and saved the investor money.
Mortgage contracts are modified, at some cost to the investor, to prevent the larger cost of a foreclosure. Loan modifications include adding the unpaid interest to the loan balance, called "interest capitalization," and calculating a new payment. To make the payment more affordable, the term may be lengthened or the interest rate reduced. In cases where the property is worth less than the loan balance, the balance may be reduced.
The problem is that there are major impediments to loan modifications, including:
- Borrower denial. Developing a new loan contract that a distressed borrower can live with requires the full participation of the borrower. But many borrowers in trouble don't contact their servicers and may not respond when contacted.
- Moral hazard. Investors are concerned that if modifications are offered too easily or too early, some borrowers will pretend to need one even though they really don't. This is a major reason investors restrict the discretion of servicers to modify contracts.
- Restrictions on servicers. Third-party servicing in which the firm servicing the loan does not own it is more often the rule than the exception. In the case of loans that have been packaged and sold to investors, it is always the case.
Investors restrict the discretion of servicers to modify loan contracts because their interests are different. Investors want modification only if the alternative is a more costly liquidation or foreclosure. They want to avoid early modifications that would prove unnecessary, and they want to avoid encouraging borrowers to default who might not otherwise. Servicers, in contrast, want to protect their servicing fees, which they receive only from loans in good standing. Their general preference, therefore, is for early intervention.
A common contractual restriction on servicers is that modifications are permitted only for loans in default or for which default is imminent or reasonably foreseeable. Another is that any modification must be in the best interest of the investor. These create potential legal liability for the servicer. To be safe, some servicers limit modifications to loans already in default, which means 90 days delinquent or more.
- Scarcity of staff. Most interactions between mortgage borrowers and servicers are handled by computers and relatively unskilled employees. Borrowers in serious trouble are referred to a smaller number of more skilled and specialized employees. With the onset of the mortgage crisis, servicers were caught short of this critical but costly resource. While they now claim to have expanded their staffs to handle the workflow, a financial disincentive to staff adequately remains.
- Mortgage insurance. On mortgages carrying mortgage insurance that go to foreclosure, investors are protected up to the maximum coverage of the policy, which is usually enough to cover all or most of the loss. This discourages modifications. Why do a modification for $15,000 if the $40,000 cost to foreclose is going to be paid by the mortgage insurer? Even if the insurance coverage falls short of the foreclosure cost, the shortfall has to exceed the modification cost before modification becomes more attractive financially.
- Second mortgages. Many of the borrowers in trouble have two mortgages with different lenders, which complicates matters. The servicer looking to modify the first mortgage must make sure that the borrower can afford both mortgages and that the second mortgage lender does not upset the apple cart by foreclosing. My mail from borrowers in trouble suggests that some servicers are prepared to work with second-mortgage lenders, and some are not.
- Lack of public disclosure. Nothing in connection with modifications is publicly disclosed except what servicers wish to disclose, which invariably is whatever presents them in a favorable light. There is no way for the public to know who is doing a good job and who isn't.
Because of these impediments, modifications are making only a modest dent in the foreclosure problem. Other remedies will be discussed in a future article.
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2 - Relief for Homeowners Is Given to a Relative Few
The New York Times
March 4, 2008 Tuesday
Late Edition - Final
BYLINE: By EDMUND L. ANDREWS
SECTION: Section C; Column 0; Business/Financial Desk; Pg. 7
DATELINE: WASHINGTON
The Bush administration, releasing new data on Monday, said that mortgage companies were showing more willingness to relax the loan terms for subprime borrowers who are in danger of losing their houses.
But while the data showed an increase in forbearance, it also showed that only a tiny fraction of troubled borrowers are getting either a reduction in their interest rate or in their loan amount.
Of about six million people who have subprime mortgages, about 16.7 percent are behind in their payments and 6.8 percent are in foreclosure. Industry analysts predict that as many as three million subprime mortgages could end up in foreclosure over the next several years.
Hope Now, an industry alliance created last fall in response to the mortgage crisis, reported that almost 150,000 subprime borrowers have received some kind of ''loan modification'' since September and that the number of modifications jumped 16 percent in January, to 45,320 loans.
''I am encouraged that the number of borrowers receiving help is faster than the number entering foreclosure,'' Henry M. Paulson Jr., the Treasury secretary, said in a speech on Monday.
Despite the increased willingness of mortgage companies to give troubled homeowners a break, only a tiny share of the subprime borrowers received any help and more than half of those who did get help received only a ''repayment plan'' to catch up on their missed payments.
When Mr. Paulson and President Bush announced an agreement with lenders in December on a voluntary framework to help homeowners, one idea was to freeze the interest rates for many of the 1.5 million people whose introductory teaser rates were about to expire.
Since then, the danger from abrupt rate increases has receded because short-term interest rates have declined. But analysts recognize that expiring teaser rates are only part of a much broader problem. Many buyers borrowed more than they could afford to repay, often putting no money down.
With housing prices falling, analysts estimate that about 30 percent of all subprime loans written in 2005 and 2006 are for more than the current sales value of the homes that secure them.
According to the data from Hope Now, lenders completed ''loan workouts'' for 638,000 troubled subprime borrowers from July through the end of January. But about two-thirds of the people who received any help were put on repayment plans that simply allowed them to catch up on missed payments and back interest.
In January, as lenders and mortgage-servicing companies began to ramp up efforts to modify loans, about half of the 93,000 workouts for subprime borrowers involved actual modifications.
But while loan modifications can entail reductions in a homeowner's interest rate or in the principal amount, industry executives acknowledged that many and perhaps most of the loan modifications so far simply stretched out the original repayment terms. Such extensions can reduce a borrower's monthly payment, but the interest rate and loan amount remain unchanged and the borrower incurs more interest costs by taking longer to repay.
In an interview, Mr. Paulson, said the big news was that the Federal Reserve's push to reduce interest rates had reduced the payment shock that subprime borrowers were likely to face as their teaser rates expired.
''Many of these borrowers won't have to make any adjustment to their loans,'' he said. ''This low interest-rate environment has made the rate resets less likely to create an affordability problem.''
Mr. Paulson reiterated his opposition to proposals for a government bailout of subprime borrowers, which would also bail out many lenders. But he acknowledged that mortgage lenders and mortgage-servicing companies were not moving as rapidly on loan modifications as he would have liked.
Am I satisfied? No,'' he said. ''Am I surprised? Not really.
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3 - Lenders pledge better updates; Firms say they'll give more details on reworked home loans.
Los Angeles Times
February 8, 2008 Friday
Home Edition
BYLINE: Jonathan Peterson, Times Staff Writer
SECTION: BUSINESS; Business Desk; Part C; Pg. 1
DATELINE: WASHINGTON
Facing pressure from Congress and consumer advocates, lenders are pledging to provide stronger evidence of their progress in reworking costly home loans to prevent borrowers from being foreclosed.
Under a plan endorsed by the White House, lenders have agreed to freeze interest rates on certain troubled mortgages and to guide qualified borrowers into more-affordable loans.
The plan is aimed at averting massive foreclosures as floating-rate loans adjust to higher payments. But since the effort was announced by President Bush in December, there has been scant evidence to determine its effectiveness, critics say.
Statistics released Thursday by an alliance of banks and mortgage lenders provided ammunition for both sides.
The Hope Now coalition said lenders' efforts to stave off foreclosure increased late last year, and more than two-thirds of delinquent sub-prime borrowers got assistance during that period.
Loan companies helped 545,000 borrowers with delinquent sub-prime loans during the second half of 2007, compared with 386,000 in the first half of 2007.
But much remains unanswered. The majority of actions were repayment plans, which typically give borrowers more time to catch up on delinquent payments. Consumer advocates say these may simply put off the day of reckoning for troubled borrowers, who will still face payments they cannot afford.
Hope Now described other actions only as "modifications" without explanation.
The information gap has raised doubts about the White House-backed initiative and sparked legislative proposals that would require lenders -- who usually keep such details confidential -- to tell regulators more about their efforts to help strapped borrowers.
Lenders "say they're doing all these things, they're trying all these modifications," said John Taylor, chief executive of the National Community Reinvestment Coalition. "But you don't really know what they're doing.
"Part of the problem is secrecy from top to bottom of how things work," he added. "It's not in the consumer's interest at all."
With the economic fallout of foreclosures spreading, the administration faces pressure to document more clearly what is going on. Loan firms are also under pressure to help 1.2 million borrowers facing higher rates but who are current in their payments and aren't absentee owners (a test designed to rule out speculators).
"This is not the time to take baby steps," said Sen. Robert Menendez, a New Jersey Democrat, at a recent Senate hearing in which he was one of several lawmakers calling on lenders to demonstrate progress in modifying loans.
Treasury Department officials maintain that lenders and billing companies are working more effectively than ever with borrowers to modify loans, such as freezing interest rates or refinancing.
The Hope Now coalition, which includes companies such as Wells Fargo & Co., SunTrust Banks Inc., Countrywide Financial Corp., JPMorgan Chase & Co. and Litton Loan Servicing, plans monthly reports that supporters predict will show growing progress in combating foreclosures.
"I believe what we're going to see is that a good number of people are going to be helped because they are going to be fast-tracked into a quick modification or refinancing," Treasury Secretary Henry M. Paulson Jr. told a Senate committee this week.
More-detailed data could be released as early as next month, said William A. Longbrake, senior policy advisor for the Financial Services Roundtable, an industry trade group, who also advises Hope Now.
"The answer is unequivocally yes," said Longbrake, when asked if Hope Now would report on such details as documenting the prevalence of "fast-track" loan modifications and interest-rate freezes.
Companies have not balked at providing the information, Longbrake maintained in an interview. Rather, "The data systems were never set up to collect and retain the kind of information that everyone now wants," he said.
Hope Now releases only aggregate data, but the foreclosure crisis has stirred interest in the track records of individual lenders, which generally decline to provide such information to the public.
When contacted by The Times this week, Wells Fargo, GMAC Residential Capital, Option One Mortgage Co. and Bank of America Corp. (which does not make sub-prime loans) declined to provide individual statistics on their efforts to modify troubled mortgages.
An exception was Calabasas-based Countrywide Financial, the nation's largest mortgage lender. Countrywide, which is being acquired by BofA, reported that in December it completed 13,273 loan workout plans -- a 243% increase from 12 months earlier.
Just over 10,000 of the workouts were called loan modifications, the majority of which involved interest-rate freezes or reductions, said Jumana Bauwens, a Countrywide spokeswoman. She did not provide further details of the 10,006 modification plans.
The general lack of data is stirring demands for new disclosure requirements. A bill by Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, would require lenders to inform the Federal Reserve Board of their anti-foreclosure efforts. Last month the California Assembly passed a bill that would impose a similar rule at the state level.
Lacking meaningful disclosure, "it looks like what the industry is doing is playing hide the ball," said California Assemblyman Ted Lieu (D-Torrance), sponsor of the California legislation.
"Maybe that's not what they're doing, but the best way to get rid of that perception is simply to disclose the information. . . . We just want to get the data so we know what's going on."
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4 - Banks to provide data on mortgages; A federal regulator orders nine lenders to give monthly reports on home loans to track market developments.
Los Angeles Times
March 1, 2008 Saturday
Home Edition
BYLINE: From Reuters
SECTION: BUSINESS; Business Desk; Part C; Pg. 2
The U.S. Office of the Comptroller of the Currency said Friday that it was ordering nine big banks that service mortgages to provide monthly data on their home loans. The information, including data going back to October, will provide regulators with a more complete picture of the market and help them better supervise the major banks and the loans they service, Comptroller John Dugan said in a letter to the institutions. The regulator wants data including delinquencies, foreclosures and efforts to modify mortgages.
Three weeks ago, a group of state attorneys general blamed the agency for hampering a study on foreclosures that they said were wreaking havoc on local economies.
The state officials accused the office of advising banks, including JPMorgan Chase & Co. and Wells Fargo & Co., to refuse to cooperate with the study issued Feb. 7.
The State Foreclosure Prevention Working Group, led by Iowa Atty. Gen. Tom Miller, found many servicers were set up to deal with defaults due to job loss or divorce, but not ready to re-underwrite a massive number of loans made under irresponsible terms.
The federal regulator said the banks that will be required to supply the monthly data were: Wells Fargo,
Chase, Bank of America, Citi, Wachovia, National City, HSBC , First Horizon and US Bancorp.
Dugan said the information would be shared with states and also would help the loan modification efforts of the Hope Now alliance of lenders and servicers.
The Office of the Comptroller of the Currency is also planning to collect data on home equity loans this year, he said.
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5 - Major lenders offer relief for delinquent borrowers; The plan would allow a grace period of up to 30 days and would apply to prime and sub-prime loans.
Los Angeles Times
February 13, 2008 Wednesday
Home Edition
BYLINE: Jonathan Peterson, Times Staff Writer
SECTION: BUSINESS; Business Desk; Part C; Pg. 3
DATELINE: WASHINGTON
Amid mounting foreclosures, a group of major lenders Tuesday said they would offer seriously delinquent borrowers a grace period of up to 30 days to establish possible workout plans before finalizing steps to take away their homes.
The initiative, announced by Bush administration officials and the Hope Now industry alliance, is an attempt by lenders to jump-start communications with borrowers who have been out of touch and are heading toward foreclosure. The lenders, including Countrywide Financial Corp. and Bank of America, said they would target their efforts at borrowers who are 90 or more days delinquent.
"Our hope is that today's announcement will reach them, and they will reach out immediately for help," said Treasury Secretary Henry M. Paulson Jr. who was joined by Housing and Urban Development Secretary Alphonso Jackson and a Bank of America executive for the announcement.
The lending companies refrained from guaranteeing help to any broad categories of borrowers, pledging instead to consider workout strategies on a case-by-case basis.
"None of these efforts are the silver bullet that will undo the excesses of past years," said Paulson, in a reference to those who bought homes without sufficient income to make payments for the long haul, and to the lenders who gave them mortgages.
The new effort, dubbed Project Lifeline, was instantly derided by consumer advocates as too little too late while it was hailed by a major industry group as a significant step forward in protecting delinquent borrowers from foreclosure. This dispute underscored questions about the type of borrowers headed for foreclosure.
Most such borrowers have not responded to mailings from Hope Now, raising the possibility that a percentage of them are walking away from their loans because their homes have fallen in value and are worth less than the mortgage on the property.
Reaching delinquent borrowers "is the biggest problem we face in avoiding preventable foreclosures," said Floyd Robinson, president of Bank of America's Consumer Real Estate and Insurance Services Group.
Lenders on Tuesday declined to estimate how many borrowers might be helped by the initiative or to generalize on the types of steps that might be taken to ease their debt burdens.
By some estimates, close to 2 million borrowers face the potential loss of their homes in the next two years, in many cases sparked by steep payment hikes that are scheduled to take effect soon. These include borrowers who have fallen on hard times, speculators, victims of deceptive loan pitches and people who simply mismanaged their personal finances.
Robinson urged those who get notices about Project Lifeline to call their loan company within 10 days to make clear that they want to keep the home and are ready to get financial counseling.
"We believe that for some homeowners, that extra time will make the difference to allow them to avoid foreclosure," he said.
Other lending companies taking part in the new effort include Wells Fargo & Co., Washington Mutual Inc., JPMorgan Chase & Co. and Citigroup Inc.
The initiative will apply to all borrowers, including those with prime loans as well as those with sub-prime loans marketed to people with weak credit histories.
Recent efforts by loan companies to contact delinquent borrowers highlight the challenge of starting the dialogue. Just 16% of borrowers responded late last year to mass mailings by Hope Now mortgage-billing companies -- and that was significantly higher than the usual response, lenders said.
Larry Rosenthal, executive director of UC Berkeley's Program on Housing and Urban Policy, pointed Tuesday to three major categories of borrowers who don't respond to mailings: people who have decided to walk away from their debts, those in self-denial about the extent of their problems and people who may already be seeking help with their finances.
"We don't know the relative sizes of these groups," he said.
Maude Hurd, president of the Assn. of Community Organizations for Reform Now, an advocacy group, termed the proposed 30-day pause a "welcomed small step," but said it came far short of needed, long-term modifications to ease people's debt burdens.
"A 30-day stay without significant loan modifications is icing with no cake," she said. "Nothing short of hundreds of thousands of modifications to sub-prime and nontraditional mortgages can prevent the foreclosure crisis from worsening in the coming years."
But a major industry group applauded the announcement as a way to address the problem of rising foreclosures: "This is another way that lenders are stepping up to help keep delinquent borrowers in their homes whenever possible," said Kieran P. Quinn, a certified mortgage banker and chairman of the Mortgage Bankers Assn.
"One of the greatest challenges loan servicers face is convincing distressed borrowers that there is help available. Today's announcement, coupled with the letters that participants will send out, should help encourage delinquent borrowers to reach out to their servicer for help."
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6 - Lenders to Offer Reprieves To Delinquent Borrowers
The Washington Post
February 13, 2008 Wednesday
Regional Edition
BYLINE: Renae Merle; Washington Post Staff Writer
SECTION: FINANCIAL; Pg. D01
The Bush administration and six large mortgage lenders unveiled a plan yesterday to offer some homeowners facing foreclosure 30-day reprieves to work out alternatives.
The program, which will target homeowners who are 90 or more days late on payments, is the industry's latest attempt to untangle the mess caused by years of lax mortgage standards.
These homeowners will receive a letter offering a "pause" in the foreclosure process to try to work out a repayment schedule.
Delinquent borrowers have always had the option of calling their lender for help in advance of a foreclosure. But the foreclosure process typically continued during those talks. Under this plan, there would be a 30-day freeze in the process.
Unlike a government-endorsed rescue effort announced last year, the new program, called Project Lifeline, is not limited to subprime mortgages, home loans given to borrowers with weak credit. It also includes foreclosures triggered by home-equity loans, prime loans and second liens.
Modifications to loans would be made on a case-by-case basis, and not all eligible loans are expected to be salvageable, industry officials said.
Homeowners in bankruptcy protection will not be eligible for the program, which also excludes vacant and investment properties. The offer also will not apply to borrowers whose homes are scheduled for a foreclosure sale within 30 days.
"None of these efforts are a silver bullet that will undo the excesses of the past years," said Treasury Secretary Henry M. Paulson Jr. For example, the program won't help borrowers who put down little or no money and who don't want to continue to live in the house, he said.
Countrywide Financial, Bank of America, Citigroup, J.P. Morgan Chase, Washington Mutual and Wells Fargo
are participating in Project Lifeline. They are also members of the Hope Now Alliance, the industry-financed nonprofit group that has been coordinating efforts to reach struggling subprime mortgage borrowers.
"For some homeowners, that extra time will make the difference," said Floyd Robinson, president of consumer real estate at Bank of America.
The plan is a good-faith effort by lenders to reach out to delinquent borrowers, said Alex J. Pollock, a resident fellow at the American Enterprise Institute, a conservative policy research and advocacy group. "It seems to be a quite a reasonable, sensible program to be done along with other things," he said. "There is obviously a lot of thinking going on.".
Critics said the plan is still far short of what is needed to stem the tide of foreclosures, which cost lenders millions of dollars and are expected to increase as subprime borrowers face interest rate increases on adjustable-rate mortgages. The national foreclosure rate rose more than 50 percent last year.
"The industry and the Administration are running to catch up as fast as they can to a problem that is getting broader and deeper by the day, but they seem to be falling further and further behind," Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, said in a statement.
Giving borrowers an extra 30 days is prudent but a common measure, said John Taylor, president of the National Community Reinvestment Coalition.
"A lot of the industry under normal circumstances tries to avoid foreclosure and work with the borrower," he said. "The real problem is that most of these borrowers are in properties that are not worth what the mortgage is. They are locked into a loan they can no longer afford. This program doesn't get at any of that."
He said: "You can give them 60 more days, or 90 days. If there isn't a product that they can be refinanced into that matches their ability to pay, then we're really not going to be helping eight out of 10 people."
The plan will probably assist only a small percentage of the estimated 425,000 homeowners who are 90 days or more delinquent on their loans, said Mark Zandi, chief economist at Moody's Economy.com. These homeowners are already under stress, and lenders would have to be willing to make significant changes, including reducing mortgage balances substantially, he said. "I would be surprised if we're talking more than tens of thousands of homeowners that are helped."
The mortgage industry has been fighting the perception that it is not doing enough to help troubled homeowners, pointing out that the number of loans modified, including freezing and lowering interest rates, has doubled in the past year. During the fourth quarter of last year, lenders modified 141,000 loans, up from 76,000 in the previous three months, according to the Hope Now Alliance.
Those numbers are likely to increase as lenders implement the program announced last year to freeze the interest rates of qualified subprime borrowers, industry officials said yesterday.
But Taylor said the industry has targeted the "low-hanging fruit" for modifications -- "those borrowers who have a strong financial condition, who with slight modifications would be able to continue under their mortgage."
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7 - Fed's actions prove calming to rate resets; Sub-prime home loan payments are going up modestly -- by just 1% on average in March, a study shows.
Los Angeles Times
April 26, 2008 Saturday
Home Edition
BYLINE: E. Scott Reckard, Times Staff Writer
SECTION: BUSINESS; Business Desk; Part C; Pg. 1
The great mortgage reset of 2008 isn't turning out quite as advertised.
Thanks to interest rate cuts by the Federal Reserve, payments on sub-prime loans with expiring "teaser" rates are going up only modestly when the loans start adjusting -- by just 1% on average last month, one study found.
A payment that would have risen by $450 in December is currently going up by no more than $100 and often much less, according to Tom Deutsch, an industry expert who testified recently to a housing panel of Congress.
Last fall, consumer advocates and government officials had raised concerns that increases of several hundred dollars in monthly payments were in store for about 2 million sub-prime loans made to high-risk borrowers at the height of the housing boom.
Defaults and foreclosures are still rising, however -- it's just that the culprit isn't solely the payment shocks once feared.
Instead, industry experts put most of the blame on tumbling housing prices, which have left many borrowers owing more than their homes are worth after making little or no down payment, taking on second mortgages or sucking their equity dry through refinancings.
"Every single borrower with a resetting loan has gotten effectively a mortgage modification in the sense that they are paying significantly less every month than they would have just last December," said Deutsch, deputy executive director of the American Securitization Forum, a trade group for the companies involved in creating mortgage bonds.
Consumer advocates say Deutsch understates the problem of resets. Bruce Marks, chief executive of Neighborhood Assistance Corp. of America, said the troubled borrowers who ask his organization for help often stretched to qualify for start rates of 5% on their loans, not the 7.5% or 8% that the industry says was typical.
That means their loans become unaffordable even if the rate rises just 1.5 percentage points at the first adjustment, as often occurs, Marks said. What's more, he noted, sub-prime adjustable loans are set up so the initial rate can never go down, unlike traditional adjustable-rate loans.
"Payments on sub-prime loans are still going up, just not as much," Marks said.
Even so, without the recent reduction in interest rates, "things would have been worse," said economist Peter Morici of the University of Maryland. "The fact that it is down has made resets easier to swallow and has reduced the level of foreclosures."
Lower short-term interest rates also help certain other adjustable-rate borrowers, including people with home equity lines of credit, which have interest rates at or close to the prime rate. The prime rate, which was 8.25% a year ago, was at 5.25% this week.
Holders of controversial "pay option" mortgages, which allow borrowers to pay so little that the balance rises, also will benefit.
Facing what was shaping up to be the worst wave of foreclosures since the 1930s, the Fed lowered its benchmark rate for short-term loans between banks by 1.25 percentage points in January and by an additional 0.75 of a percentage point March 18.
In response, the index for most sub-prime loans -- a European inter-bank lending rate known as six-month U.S. LIBOR -- fell to 2.4% on March 18, the lowest level in more than three years, a recent Standard & Poor's study noted.
The Federal Reserve cuts were aimed in part at stemming foreclosures and propping up the slumping housing market, which many economists believe has tilted the economy into recession.
But the reduction in interest rates hasn't revived the moribund sub-prime lending market, economist Morici said.
Big investors such as pension funds, burned on mortgage investments, now will buy only those mortgage bonds backed by the safest prime loans or guaranteed by government-sponsored entities. And that, Morici said, has cut off sub-prime lending to potentially worthy borrowers with some credit dings and also loans for self-employed people and others in the "alt-A" loan category between prime and sub-prime.
"That's one reason the housing markets are tanking so badly, especially new-home sales," Morici said.
The Fed also has little control over long-term fixed mortgage interest rates. The average rate on a 30-year fixed-rate mortgage rose to 6.1% after the Fed reduced short-term rates in January because investors feared that the stimulus to the economy might fuel inflation. The rate had moved back down to 5.8% as of Thursday.
Consumer advocates said lower resets were no substitute for the five-year rate freeze that Treasury Secretary Henry M. Paulson Jr. had promoted back in December. Under that plan, many lenders had pledged to leave unchanged the teaser rates for sub-prime borrowers if their payments would become unaffordable because they were rising by 10% or more.
"The important thing for a family getting a [rate freeze] loan modification is that it provides long-term stability," said Kevin Stein, associate director of the California Reinvestment Coalition, who testified last week before the same House subcommittee as Deutsch. "Getting a temporary small increase based on a LIBOR index that can go back up in a few months is not going to do that."
Still, the lower resets are very real for what the industry describes as typical sub-prime borrowers. Their loans might start with an 8% rate for two years, the S&Pstudy noted, then start adjusting twice a year to six-month LIBOR plus 6 percentage points. If LIBOR was 5%, the borrower would pay 11% interest on the loan.
Borrowers who got a loan like that in January 2005 would have paid $734 a month for two years on a $100,000 mortgage, S&P said. The payment would have jumped to $945 a month -- a 29% increase -- in January 2007, when six-month LIBOR was at 5.4%. The borrowers would have been paying even more at that point if not for restrictions on interest-rate increases built into the loan to reduce the payment shocks, S&P noted.
But as of March 18, payment shocks were only about 1%, S&Psaid, compared with 19% at the end of December, before the Fed started cutting rates.
After recent news articles questioned whether banks were properly reporting the interest rates used to calculate LIBOR, it crept back up a bit, to just over 3% last week.
But most sub-prime loans adjust by adding 5.5 or 6 percentage points to the index, meaning adjusted rates would be in the 8.5% to 9% range, not the double digits that had been feared last year when Paulson was promoting a "streamlined modification plan" to freeze the initial interest rates.
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Persistence Pays Off When Loan Modification Saves House and Credit
By Jack Guttentag
Saturday, October 20, 2007; Page G04
A loan modification is a change in the loan contract agreed to by the lender and the borrower. The modifications getting attention now are those designed to reduce the payment burden on borrowers faced with impending interest rate increases that will make monthly payments unaffordable to them. Many are subprime borrowers.
Homeowners faced with this prospect, whether they are delinquent or not, should request a modification.
You are unlikely to get such a change if you don't ask, and you should make the investment required to make the case. The stakes are very high: your house and your credit.
In most cases, the decision on a modification is not made by the firm that owns the loan. It is made by a firm servicing the loan under contract to the owner. The owner could be a single lender, or it could be a group of investors who own pieces of a mortgage-backed security collateralized by a pool of loans.
Whoever owns the loan, the servicing firm is contractually obligated to find the solution to payment problems that will minimize loss to the owner. If the lowest-cost solution is a contract modification, that's great -- everyone involved prefers a modification instead of a foreclosure. But if a foreclosure would generate lower costs for the owner, the decision will be to foreclose. The cost of foreclosure to the borrower does not enter the decision.
Yet the decision is far from cut and dried, and it can be materially affected by whether and how the borrower presents his case. I discussed this issue with Warren Brasch, a lawyer who represents borrowers seeking loan modifications. Our combined observations:
Equity: Perhaps the most important factor affecting the modification decision is the amount of equity the borrower has in the property. If the borrower has enough equity in the property to pay any deferred interest plus foreclosure expenses, foreclosure is almost bound to be the lower-cost solution.
Equity depends on property value, which the borrower is much better positioned to know than the servicer. The borrower knows or can easily find out how many houses in the neighborhood are for sale and what the trend has been in recent sale prices. In a weakening market, it is easy for the lender to overestimate value, and the borrower must prevent that.
Moral hazard: Servicers fear that if they are liberal in granting modifications, borrowers who don't need a modification will seek one anyway. They protect themselves against this by entertaining modification proposals on a case-by-case basis, while placing the burden of proof on the borrower.
Borrowers must accept the burden of proof. In addition to the data on property value, they need to document that they cannot afford the payment increase that is pending, and they must document what they can afford.
To do so, borrowers should calculate their total debt ratio: the sum of mortgage payment, other debt payments, property taxes and homeowner's insurance as a percent of their gross (before tax) income.
This number should be calculated as it stands now and as it would be after the rate adjustment. It should also be calculated to demonstrate what the borrower can afford. On the last, Brasch suggests that a servicer may be willing to accept 45 percent as a reasonable maximum.
Servicing cost: Servicers have an interest in minimizing modifications because they add to costs. They try to keep costs down by computerizing the servicing process to the greatest degree possible and standardizing customer support procedures so that low-paid and easily trained employees can perform them.
Modifications must be handled by a special group who are more highly trained and better-paid, and the increased cost of expanding their number cuts into the bottom line. Hence, there is a tendency to be nonresponsive in the hope that the borrower will go away.
Borrowers have to be persistent. Brasch said: "If a servicer says they will call you back . . . forget about it. You need to call them and call them constantly. They will lose your paperwork, fail to return calls, put you on hold and then hang up. It's what they do. Keep fighting, calling, faxing. This does work!"
In deciding whether a modification would be less costly than a foreclosure, servicers usually ignore an asset possessed by the borrower that could tilt the balance toward modification. This is the right to future appreciation in the value of the borrower's house.
In exchange for a modification that might otherwise be more costly to the owner than a foreclosure, the borrower could pledge a percent of the future appreciation, which could shift the balance to modification. I will discuss that next Saturday.
Jack Guttentag is professor of finance emeritus at the Wharton School of the University of Pennsylvania. He can be contacted through his Web site,http://www.mtgprofessor.com.
Copyright 2007 Jack Guttentag
Distributed by Inman News Features
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US SEC backs subprime loan modification accounting
By John Poirier
WASHINGTON, Jan 9 (Reuters) - The U.S. Securities and Exchange Commission has agreed, for now, to the accounting treatment of an industry-led plan to rescue some troubled homeowners.
The SEC's Office of the Chief Accountant said in a Jan. 8 letter that the agency would not object to the plan but wants more details from banks and others about loan modifications in regulatory filings.
With help from the U.S. Treasury Department, the American Securitization Forum (ASF) trade group last month proposed modifying some mortgages sold to borrowers with poor credit histories.
The initiative could have been viewed as breaking certain accounting rules related to how a mortgage can be modified if it is part of a pool of securities that includes adjustable rate mortgages (ARMs) provided to subprime borrowers.
At issue is whether qualifying special purpose-entities (QSPEs) holding mortgages can retain that status after modifying loans because default is "reasonably foreseeable", under the ASF framework.
"OCA believes that this is an appropriate interim step at this time to address this issue given the complexity and lack of specific guidance on the accounting and disclosure for these types of modifications," wrote SEC Chief Accountant Conrad Hewitt.
"OCA expects registrants to provide sufficient disclosures in filings with the commission regarding the impact that the ASF framework has had on QSPEs that hold subprime ARM loans," Hewitt said.
Those disclosures might include the impact of the ASF plan on loss mitigation strategies, the impact of servicer decisions, the impact on the latest balance sheet, among others.
Hewitt said his division has asked the Financial Accounting Standards Board to complete its study of the rules under "FAS 140" and provide clear guidance on the matter by the end of 2008.
ASF, which represents issuers, investors and servicers, welcomed the SEC guidance. "The SEC has provided extremely useful guidance to help servicers move forward with the implementation of the ASF framework," said ASF deputy executive director Tom Deutsch. (Reporting by John Poirier; Editing by Tim Dobbyn)
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Home Foreclosures: Crisis Is Only Getting Deeper
Posted By:Diana Olick
It's another record in the real estate market, and it’s not a good one. RealtyTrac, the online foreclosure sale site, which has also been tracking foreclosure activity since the beginning of 2005, reports the single largest one-month volume of foreclosure activity it's ever seen.
Again, they've only been doing this for three years, but you get the idea.
Foreclosure activity in April--that's default notices, auction sale notices and bank repossessions (so yes there can be more than one hit on the property, but we look at the total percentage increases) was reported on 243,353 properties. That's a 65% increase from April of 2007.
Alright, so what about all the reports that borrowers are being helped, and all those programs to find and refi borrowers, and what about the word from some other sources that foreclosure numbers are actually dipping?
Well here's a disconcerting answer: Apparently the system, that is whatever court or clerk or local bureaucratic office is stuck with recording all this stuff, is stressed. In Ohio, for example, I'm being told that it can take two to six months to get your filings in the system.
"In states like Michigan, we're hearing from some of the trustees who actually do the foreclosures that the lenders have asked them to slow down because they don't want to process any more into a market that won't absorb the properties back through sales" says Rick Sharga of RealtyTrac.
In Florida, a St. Lucie County court actually added a night shift to handle the massive backlog of foreclosure filings. The clerk of the courts was quoted as saying the caseload has become, “just horrendous.” The court used to handle about forty filings per month.
In January they were tracking 715 foreclosure filings. Some are reporting lower numbers because the numbers simply can't get into the system.
The folks at RealtyTrac, and granted these folks list foreclosed properties for a fee, say they don't believe we'll see the numbers start to slow until the second quarter of 2009. May and June of this year, according to banking estimates, are supposed to be the peak of adjustable rate mortgage resets from subprime loans initiated in 2006.
Lower interest rates on Libor (one of the most common of benchmark interest rate indexes used to make adjustments to adjustable rate mortgages) and other indices that correlate to ARM loans could help, as could continued efforts from FHA and lenders. But the sheer volume, it appears will remain high for now.
All those foreclosed homes on the market will continue to push inventories up and push prices down in neighborhoods across the country.
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Pimco: Tricky for Fed to fix economy bind
By Jennifer Ablan and John Parry
NEW YORK (Reuters) - Bond fund leader Pimco's Mohamed El-Erian on Wednesday said the Federal Reserve's monetary policy may not help the economy to escape a severe recession caused by falling home values and rapidly rising consumer prices.
The co-head of the world's largest bond fund company said U.S. policy-makers "do not have good policy tools to deal with the destabilizing combination of asset price deflation and goods inflation."
El-Erian added that the Fed is "particularly challenged" because of its dual mandate that calls for maintaining solid employment and low inflation.
"This comes at a time when regulators are trying to play catch-up with a financial system that has morphed into something that does not fit neatly into existing frameworks and mindsets," El-Erian wrote to clients after Pimco's quarterly economic forum at its Newport Beach, California headquarters.
On Wednesday, lawmakers listened to former Fed Chairman Paul Volcker discuss what role the U.S. central bank could now play.
"The Federal Reserve ought to be the principal financial regulator. Because of its independence, it is in a better position to resist the political pressures of regulation," former Volcker told lawmakers. But he warned that the central bank is not currently in a position to take on that role.
Policy-makers can, however, tackle inflation: Despite a tamer-than-expected U.S. April consumer price index released on Wednesday, many bond market participants are still concerned that rising food and energy-fueled inflation may push yields steeply higher and force the Fed to start hiking interest rates as soon as the end of this year.
"Inflationary pressures will continue to increase over the secular horizon," said El-Erian, who helps oversee $750 billion in assets. As commodity prices continue to rise because of higher demand accompanied by higher wages in emerging economies, "especially from the perspective of the U.S., look for inflation to become more sensitive to foreign factors," he wrote.
That is not only issue facing the U.S. economy.
The 10-month-old credit crisis, which has already forced banks to write off hundreds of billions of dollars for bad investments in riskier assets and recapitalize balance sheets, will now force households and consumers to scale back and save, he expects.
"The world has been going through a sequential secular recapitalization process," over more than a decade, he wrote.
This happened during the Asian, Russian and Latin American financial market crises between 1997 and 2002, in the United States with troubles at Enron and WorldCom in 2002-2003 acting as catalysts and now with banks.
"The U.S. household will inevitably be the next part of this process in the period ahead," he said, characterizing consumers as being overwhelmed by "debt exhaustion."
The major concern El-Erian has is that consumers have yet to recapitalize their balance sheet notwithstanding mounting pressure from sluggish employment, high energy and food prices, less ample access to credit and, most importantly, a housing price correction "that is still far from complete."
"The longer the delay out of Washington, D.C., in implementing fiscal measures to stabilize the housing sector, the greater the risk that the higher collateral damage on Main Street will induce a politically driven regulatory over-reaction with unpredictable economic outcomes," he added.
El-Erian also said the Fed's move to let securities firms borrow directly through its discount window will likely evolve into a permanent facility.
Investment banks, forced to unwind years of huge leverage, will seek ways to secure a deposit base that can reduce their cost of funding, including through merger and acquisition, El-Erian added. "This process of deleveraging and, if done properly, de-risking will have a number of implications for investors," El-Erian said.
"And by creating an initial vacuum in the more highly leveraged space vacated by investment banks, it will entice new entrants, some of which will come from the current generation of private equity and hedge funds."
Pimco's forum included its economic consultant, former Fed Chairman Alan Greenspan, as a participant.
(Reporting by Jennifer Ablan and John Parry; Editing by Jonathan Oatis)
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