The mess won't be cleaned up soon, so homeowners -- and buyers -- must address key questions about financing, the housing market and 'underwater' loans.
If 2008 was the year of foreclosures and when "underwater" entered every homeowner's lexicon, 2009 will be the year of refinances and mortgage modifications.
In hindsight, the mortgage mess seemed inevitable: Absurdly loose credit from 2002 to 2007 led to a bubble in house prices, scores of subprime lenders went out of business in 2007 as the risks caught up with them, and the misery spread to homeowners in 2008.
As home prices fell, millions of homeowners discovered that they owed more than their houses were worth. They were unable to refinance and unable to sell. Delinquencies (defined as house payments at least 30 days late) soared.
As the recession matures in 2009, more people are going to fall behind on their mortgage payments. At the same time, the federal government will try to hold down mortgage rates. And house prices will continue to fall. These three factors limit the smart moves you can make in 2009 with your mortgage and equity debt.
Buying a house
House prices have been falling in most places. In declining markets, people have trouble deciding whether to buy a house now or wait for prices to fall further. Instead of getting stuck on the buy-or-wait question, smart consumers consider other questions first:
1. Have we put our financial house in order? Not long ago, the best mortgage deals were offered to borrowers with credit scores of 720 or higher. Nowadays, many lenders' thresholds have risen to 740. The necessity of a higher credit score is just one consequence of the mortgage debacle, and lenders have tightened their requirements in other ways, too.
During the boom years, many applicants merely stated their incomes without having to provide documentation. Those days are gone. Low-documentation and no-documentation loans are rare. Expect to provide paycheck stubs or tax returns, or both, to demonstrate that you earn what you say you earn.
The lender will want to see that your expenses are in line with your income. You might have to provide bank statements to show where the money goes. If a big chunk of your monthly income goes toward debts for credit cards, cars and college, the lender might constrain the amount you may borrow.
2. Have we saved enough for a down payment? During the credit and housing boom, people routinely bought houses with no money down. Piggyback loans were the norm as homeowners avoided mortgage insurance. Now, substantial down payments have made a comeback, and so has mortgage insurance.
A few low-down-payment programs are still available, all courtesy of the federal government. The Department of Veterans Affairs guarantees mortgages with no down payment, and so does the Department of Agriculture's Rural Housing Service. There are restrictions on who is eligible for those loans, where the loans are available and for how much.
More people are eligible for Federal Housing Administration-insured mortgages, which require down payments as low as 3.5%.
Outside those federal loan programs, most lenders require significant down payments. The requirements vary by lender, the type of dwelling and where it is. A few creditworthy people might be able to buy houses with 5% down, but a 10% minimum is more common.
Mortgage insurance companies won't insure loans on Florida condominiums, so lenders require down payments of at least 20%. For jumbo mortgages in California, many lenders require 30% down payments.
On top of that, the lender will want to know how you got the down payment money. Is it from personal savings? Was all or part of the money a gift from family? If some of the money was given to you, the lender will want to make sure you have enough savings and income to handle temporary financial setbacks.
3. Is this the right time in our lives? Homebuyers, especially first-timers, should aim to own for the medium to long term. House prices have room to fall further in many -- if not most -- markets, and it could take years for prices to rebound. In short, it's a bad idea to buy a house with the intention of selling it in two or three years. Doing so could be a money-losing proposition, especially after factoring in the costs of real-estate commissions and taxes.
Refinancing the mortgage
Elements within the housing industry flew a trial balloon in December to gauge public support for using the Treasury to cut mortgage rates to 4.5%. There was one catch: The low rates supposedly would be for purchases, not refinances.
Nevertheless, mortgage rates have dropped to levels not seen since the refinancing boom of 2003. The low rates sparked a refi boomlet in late 2008, but lots of homeowners were frozen out because their homes had lost equity.
About two-thirds of homes have mortgages. Of those, an estimated one-sixth are underwater -- in other words, the owner owes more on the mortgage than the house is worth. These borrowers can't refinance unless they have enough money saved to make up the difference -- and then some, because they need a bit of equity, too.
According to First American CoreLogic, almost one-quarter of mortgages nationwide were in the category of "near negative equity" in October. These loans were not underwater (yet), but the owners had 5% equity or less. Such borrowers might have trouble refinancing because of the paucity of their equity.
The squeeze caused by falling home values will have a relatively big effect on homeowners with good credit who got adjustable-rate mortgages sometime in 2004, 2005 or 2006. These are the people who will have an incentive to refinance out of their ARMs and into fixed-rate mortgages (a process that Quicken Loans chief economist Bob Walters calls "dis-ARMing").
Most prime adjustables during the 2004-06 period were 3/1 and 5/1 ARMs. These loans had introductory rates that lasted for three or five years; after that the rates will be reset annually. Dates of that first rate reset peaked last summer, but about half a million prime borrowers will see their first reset in 2009.
Modifying the mortgage
One of the big questions of 2009 -- politically, economically and financially -- will be: How do we mass-modify mortgages to avoid foreclosures? Coming up with an answer won't be easy.
A mortgage modification is an alteration of the details of the existing home loan. Usually, but not always, a modification is done after the borrower has fallen behind on the payments by 90 days or more. In a modification, the borrower keeps the loan -- in other words, it's not a refinance. Modifications are usually done when the house is worth less than the mortgage balance.
There are several ways to modify a mortgage. Sometimes the term is extended -- for example, a 30-year mortgage is turned into a 40-year loan. In other cases, the rate is reduced. Or interest is charged on only some of the loan balance. Occasionally, in what's called a principal reduction, the lender forgives some of the debt so that the borrower no longer owes more than the house is worth.
Modifications traditionally have been done case by case. But skyrocketing demand for mortgage modifications will require companies to apply rules that apply to large swaths of borrowers. The rules will determine who gets a modification and who doesn't. Controversy will result when deserving people don't qualify for modifications, while some undeserving people do.
When the government took over IndyMac, one of the country's largest mortgage servicers, the Federal Deposit Insurance Corp. set up rules designed to encourage mortgage modifications. Since then, the government has required lenders, such as Citigroup, to adopt the FDIC's mortgage modification rules as a condition for receiving federal aid.
It's too early to know how successful the FDIC's mortgage modification plan will be, but overall, modifications haven't worked all that well. According to the Office of the Comptroller of the Currency, more than half of loans modified in the first three months of 2008 had fallen behind on their payments within six months.
FDIC Chairwoman Sheila Bair questioned the comptroller data, saying it failed to distinguish "sustainable modifications versus cosmetic modifications."
Paying home equity debt
Because of declining home values, lenders became reluctant in 2008 to underwrite new home equity loans and home equity lines of credit. That trend is likely to continue through 2009.
In areas where home prices are falling fastest, lenders have been reducing the limits on home equity lines of credit or canceling them outright. The best advice on home equity debt is the most basic: Keep paying the monthly bills if you can.
By: Bankrate.com
Wednesday, January 21, 2009
Monday, January 12, 2009
Power to Modify Mortgages Sits Well With Judges
Federal bankruptcy judges say they are eager to have the power to restructure mortgages for struggling debtors because it could save hundreds of thousands of homeowners from foreclosure.
Top Senate Democrats are advancing legislation to let bankruptcy-court judges approve new repayment terms on first mortgages for primary residences for homeowners who have sought protection in a Chapter 13 filing. The proposal allowing so-called mortgage cramdowns, in which the principal amount of the loan is reduced, is one of several efforts Democrats are pushing to give homeowners relief as they wrestle with increasing debt levels and plummeting home values.
Reuters
Proposed changes to bankruptcy laws could save thousands of homeowners from foreclosure.
Judges overseeing bankruptcy cases already can approve modifications for credit-card debt and most other kinds of loans, including second-home mortgages. But they haven't been able to modify primary-home mortgages since 1979, when the U.S. bankruptcy code went into effect, said Samuel L. Bufford, a U.S. bankruptcy judge in Los Angeles. Before then, many states allowed judges to do some form of modification, he said.
Allowing a judge to modify loans gets around the problem that many mortgages have been turned into securities and sold to multiple investors. "The bankruptcy system depends on people making deals, but the deal-making piece of it has disappeared when it comes to mortgages because of the way mortgages were sold and packaged," Judge Bufford said. "There's nobody on the lender side to do the deal unless you [get permission] from investors, and that's impossible."
The measure is "a good idea," said Laurel Isicoff, a federal bankruptcy judge in Miami. Financial institutions have gotten help from the government, but the only way to fix the economy is through "a holistic approach" that also "solves the problem of people losing their homes."
Until last week, when Citigroup Inc., one of the nation's largest mortgage lenders, dropped its opposition, the banking industry had long fought modification of first mortgages in bankruptcy, fearing it would encourage more homeowners to file for Chapter 13 and that it would further destabilize the housing market. Representatives of the Mortgage Bankers Association said last week that they were still opposed to cramdowns. But Citigroup's support increases the chances of passing legislation that would allow judges to lower the interest rate, reduce the principal or alter the length of primary mortgages.
Opponents of the proposed law change, including the Securities Industry and Financial Markets Association, say it would have "serious and negative consequences," including increasing mortgage rates for consumers overall because investors who typically buy the loans might deem new mortgage contracts too risky.
A Chapter 13 filing is a plan in which debtors can retain assets and pay back their debt over three to five years. About two-thirds of Chapter 13 filers have a mortgage, but half of them aren't able to keep paying the mortgage as part of their reorganization, judges and lawyers say.
A. Jay Cristol, a federal bankruptcy judge in Miami, said that changing the bankruptcy law would be beneficial because "after foreclosure, families get broken up and lenders hold on to nonperforming assets that they sell at a loss."
Samuel Schwartz, a Las Vegas bankruptcy lawyer, has a client who is facing foreclosure on her primary residence even though she has been able to modify the loans on her two investment houses. Under the current bankruptcy rules, she was able to "strip away" the second mortgage on one of the investment homes and she "crammed down," or reduced, the principal balances on the first mortgages for both rentals -- reducing her combined loan balances to a total of $355,000 from $590,000.
She was also able to strip away the second mortgage on her primary residence but couldn't modify the first mortgage. That mortgage, Mr. Schwartz said, is more than $100,000 above the current value of the property. Thus, she still may lose her own home. Under the new law, her first mortgage on her home also could be modified.
By: Amir Efrati and Jennifer S. Forsyth of The Wall Street Journal
Top Senate Democrats are advancing legislation to let bankruptcy-court judges approve new repayment terms on first mortgages for primary residences for homeowners who have sought protection in a Chapter 13 filing. The proposal allowing so-called mortgage cramdowns, in which the principal amount of the loan is reduced, is one of several efforts Democrats are pushing to give homeowners relief as they wrestle with increasing debt levels and plummeting home values.
Reuters
Proposed changes to bankruptcy laws could save thousands of homeowners from foreclosure.
Judges overseeing bankruptcy cases already can approve modifications for credit-card debt and most other kinds of loans, including second-home mortgages. But they haven't been able to modify primary-home mortgages since 1979, when the U.S. bankruptcy code went into effect, said Samuel L. Bufford, a U.S. bankruptcy judge in Los Angeles. Before then, many states allowed judges to do some form of modification, he said.
Allowing a judge to modify loans gets around the problem that many mortgages have been turned into securities and sold to multiple investors. "The bankruptcy system depends on people making deals, but the deal-making piece of it has disappeared when it comes to mortgages because of the way mortgages were sold and packaged," Judge Bufford said. "There's nobody on the lender side to do the deal unless you [get permission] from investors, and that's impossible."
The measure is "a good idea," said Laurel Isicoff, a federal bankruptcy judge in Miami. Financial institutions have gotten help from the government, but the only way to fix the economy is through "a holistic approach" that also "solves the problem of people losing their homes."
Until last week, when Citigroup Inc., one of the nation's largest mortgage lenders, dropped its opposition, the banking industry had long fought modification of first mortgages in bankruptcy, fearing it would encourage more homeowners to file for Chapter 13 and that it would further destabilize the housing market. Representatives of the Mortgage Bankers Association said last week that they were still opposed to cramdowns. But Citigroup's support increases the chances of passing legislation that would allow judges to lower the interest rate, reduce the principal or alter the length of primary mortgages.
Opponents of the proposed law change, including the Securities Industry and Financial Markets Association, say it would have "serious and negative consequences," including increasing mortgage rates for consumers overall because investors who typically buy the loans might deem new mortgage contracts too risky.
A Chapter 13 filing is a plan in which debtors can retain assets and pay back their debt over three to five years. About two-thirds of Chapter 13 filers have a mortgage, but half of them aren't able to keep paying the mortgage as part of their reorganization, judges and lawyers say.
A. Jay Cristol, a federal bankruptcy judge in Miami, said that changing the bankruptcy law would be beneficial because "after foreclosure, families get broken up and lenders hold on to nonperforming assets that they sell at a loss."
Samuel Schwartz, a Las Vegas bankruptcy lawyer, has a client who is facing foreclosure on her primary residence even though she has been able to modify the loans on her two investment houses. Under the current bankruptcy rules, she was able to "strip away" the second mortgage on one of the investment homes and she "crammed down," or reduced, the principal balances on the first mortgages for both rentals -- reducing her combined loan balances to a total of $355,000 from $590,000.
She was also able to strip away the second mortgage on her primary residence but couldn't modify the first mortgage. That mortgage, Mr. Schwartz said, is more than $100,000 above the current value of the property. Thus, she still may lose her own home. Under the new law, her first mortgage on her home also could be modified.
By: Amir Efrati and Jennifer S. Forsyth of The Wall Street Journal
Monday, January 5, 2009
Home Ownership Goals Created a House of Cards
Lender guidelines were 'obliterated' in buying frenzy
Government long has promoted home ownership as a means of strengthening communities and building the wealth of its citizens, but the recent housing market collapse has some analysts wondering whether consumers have gotten too much of a good thing.
While federal policies helped tens of thousands of U.S. consumers achieve home ownership during the housing boom, they also opened the door to the widespread use of risky loans, a national credit crunch and a wave of foreclosures.
“Public policy has been used to promote home ownership since the wake of the Great Depression,” said Mark Zandi, chief economist at Moody's Economy.com. “These efforts were overdone this decade during the housing boom and bubble.”
In 2005, the year the San Diego County real estate boom peaked, the home ownership rate in the county was 58.2 percent, according to the U.S. Census Bureau's American Community Survey. By 2007, the rate in the county had fallen to 55.9 percent. That marked a loss of nearly 22,000 owner-occupied residences.
Nationally, the home ownership rate steadily increased from 44 percent to 63 percent between 1940 and 1970, the bureau found. It remained in the mid-60s for more than three decades before rising to 67.3 percent in 2006. In 2007, it declined slightly to 67.2. Zandi expects the rate to continue to slide until it reaches to pre-boom levels.
Veteran lender Bill Dallas, a former board member of the California Mortgage Bankers Association, said government intervention combined with loose loan underwriting standards put many buyers into home loans they couldn't afford. In the buying frenzy that characterized the first half of this decade, guidelines for making sure that borrowers had enough cash in reserve to weather economic storms were “obliterated.”
Adriana Erni, a real estate broker, recently became a renter after losing her University City home to foreclosure. Erni bought her three-bedroom house in 2005, near the height of the surge in prices.
When she and a friend bought the home with an adjustable-rate loan and no money down, she figured they could refinance it before their mortgage payments increased. Instead, she found herself unable to get a new loan when home values dropped. At the same time, her income declined as the real estate market slumped.
Erni sought help from Community HousingWorks, a nonprofit that assists distressed borrowers in negotiating loan modifications. Even with the agency's help, she was unable to stop the foreclosure process. She vacated the home in late November.
Although she feels “crushed and wounded,” Erni hopes to buy another home. For now, she is content to rent.
“You need some time to heal,” she said.
Healing the economy was what U.S. policymakers had in mind when they were looking for ways to boost home ownership in 2001. The nation was in a slump amid the bursting of the dot-com bubble and the Sept. 11 terrorist attacks. To get back on track, then-Federal Reserve Chairman Alan Greenspan decided to lower interest rates.
Home ownership became a key driver of the economy. Federal regulators did not intervene when lenders began using subprime, adjustable-rate mortgages to temporarily reduce mortgage payments, allowing more people to qualify for loans.
Thousands of borrowers became homeowners without regard to their creditworthiness or their ability to cope when adjustable mortgages reset at higher rates. Because such loans carry higher fees, lenders made more money.
Attempts to pass federal legislation against predatory lending to protect borrowers from being placed in unnecessarily costly loans were opposed by the Bush administration and members of Congress. They feared that restrictions on lending would slow the rise of home ownership.
Instead, the housing market heated up as lenders and consumers went on an easy-credit bender. Highly leveraged loan products surfaced that had not been widely used since the Great Depression. At the height of the home-buying frenzy, a running joke in the lending industry was that anyone who could fog a mirror could get a loan.
In mid-2002, President Bush urged lenders to add 5.5 million minority homeowners by the end of the decade. In the years that followed, San Diego County neighborhoods with large minority populations would be hard-hit by foreclosures resulting from risky subprime loans.
Government-sponsored mortgage giants Fannie Mae and Freddie Mac ensured that funds were consistently available to lending institutions. Under pressure from the Bush administration, Fannie Mae and Freddie Mac increased their funding of mortgage loans to lower-income borrowers.
If government and lenders pushed hard for increased home ownership, it was with good intentions, said Dustin Hobbs, spokesman for the California Mortgage Bankers Association.
“You definitely had, for generations, presidents from both parties and congressmen from both sides really pushing home ownership, with Fannie and Freddie and every way they could, and with good reason,” Hobbs said. “It is the best way that individuals acquire wealth. There was a consensus from consumer groups to mortgage bankers to government that more needed to be done to create home ownership.”
Not everyone bought into the idea that owning is preferable to renting. Some contrarian economists held that people could build more wealth by renting and investing the money that would have gone into down payments and home maintenance.
They pointed out that home prices fluctuate. People who buy at the peak of a fevered market run the risk of losing wealth during a speculative price bubble.
“What is wrong with renting?” asked economist Christopher Thornberg of Beacon Economics. “I am so tired of hearing that owning a home is the height of being an American.”
While government played a strong role in triggering the current credit crisis, others share the blame, said Alex J. Pollock, a resident fellow at the American Enterprise Institute, a research group in Washington, D.C. Real estate speculators and consumers were eager to take advantage of low interest rates.
One of the first national voices to warn that the rising home ownership rate was based on unsustainable debt was Nicolas P. Retsinas, the head of Harvard University's Joint Center for Housing Studies. Retsinas recalled that the marketing of risky loans to consumers was aggressive.
“At one point, there were 250,000 people working for mortgage brokerages in the U.S.,” he said. “Their compensation was based on transactions. And they were all selling. Were risks understated? Yes.”
Lenders were feeding Wall Street investors' growing appetite for securities backed by subprime loans.
Rob Katz, president of the Del Mar DataTrac software firm in San Diego, recalls meeting with his company president in 1999 when he was a technology officer at a mortgage firm in Northern California. Katz was told that the company was going to begin making loans for 107 percent of a home's value without verifying income. When Katz protested, he was assured that the loans would quickly be sold to mortgage investors, who would take the hit if they failed.
Many lenders have been forced out of business since the end of the housing boom. Most analysts say that chastened financial institutions won't loosen their purse strings and allow another big surge in home ownership.
While he applauds the newfound restraint, Retsinas worries that tight credit will prevent low-and moderate-income households from achieving home ownership, particularly in high-cost markets such as San Diego County.
Although there was much abuse of adjustable subprime loans, they were a home ownership lifeline for many buyers.
“The question going forward is, what is going to replace subprime lending?” Retsinas said. “There are always going to be people who do not make a lot of money. Should they be shut out? I think we can find a way to develop mortgage products that are reasonable, that are transparent, where everyone knows the risks involved. That will be a challenge, because we just shut the spigot tight.”
By Emmet Pierce (Contact) Union-Tribune Staff Writer
Government long has promoted home ownership as a means of strengthening communities and building the wealth of its citizens, but the recent housing market collapse has some analysts wondering whether consumers have gotten too much of a good thing.
While federal policies helped tens of thousands of U.S. consumers achieve home ownership during the housing boom, they also opened the door to the widespread use of risky loans, a national credit crunch and a wave of foreclosures.
“Public policy has been used to promote home ownership since the wake of the Great Depression,” said Mark Zandi, chief economist at Moody's Economy.com. “These efforts were overdone this decade during the housing boom and bubble.”
In 2005, the year the San Diego County real estate boom peaked, the home ownership rate in the county was 58.2 percent, according to the U.S. Census Bureau's American Community Survey. By 2007, the rate in the county had fallen to 55.9 percent. That marked a loss of nearly 22,000 owner-occupied residences.
Nationally, the home ownership rate steadily increased from 44 percent to 63 percent between 1940 and 1970, the bureau found. It remained in the mid-60s for more than three decades before rising to 67.3 percent in 2006. In 2007, it declined slightly to 67.2. Zandi expects the rate to continue to slide until it reaches to pre-boom levels.
Veteran lender Bill Dallas, a former board member of the California Mortgage Bankers Association, said government intervention combined with loose loan underwriting standards put many buyers into home loans they couldn't afford. In the buying frenzy that characterized the first half of this decade, guidelines for making sure that borrowers had enough cash in reserve to weather economic storms were “obliterated.”
Adriana Erni, a real estate broker, recently became a renter after losing her University City home to foreclosure. Erni bought her three-bedroom house in 2005, near the height of the surge in prices.
When she and a friend bought the home with an adjustable-rate loan and no money down, she figured they could refinance it before their mortgage payments increased. Instead, she found herself unable to get a new loan when home values dropped. At the same time, her income declined as the real estate market slumped.
Erni sought help from Community HousingWorks, a nonprofit that assists distressed borrowers in negotiating loan modifications. Even with the agency's help, she was unable to stop the foreclosure process. She vacated the home in late November.
Although she feels “crushed and wounded,” Erni hopes to buy another home. For now, she is content to rent.
“You need some time to heal,” she said.
Healing the economy was what U.S. policymakers had in mind when they were looking for ways to boost home ownership in 2001. The nation was in a slump amid the bursting of the dot-com bubble and the Sept. 11 terrorist attacks. To get back on track, then-Federal Reserve Chairman Alan Greenspan decided to lower interest rates.
Home ownership became a key driver of the economy. Federal regulators did not intervene when lenders began using subprime, adjustable-rate mortgages to temporarily reduce mortgage payments, allowing more people to qualify for loans.
Thousands of borrowers became homeowners without regard to their creditworthiness or their ability to cope when adjustable mortgages reset at higher rates. Because such loans carry higher fees, lenders made more money.
Attempts to pass federal legislation against predatory lending to protect borrowers from being placed in unnecessarily costly loans were opposed by the Bush administration and members of Congress. They feared that restrictions on lending would slow the rise of home ownership.
Instead, the housing market heated up as lenders and consumers went on an easy-credit bender. Highly leveraged loan products surfaced that had not been widely used since the Great Depression. At the height of the home-buying frenzy, a running joke in the lending industry was that anyone who could fog a mirror could get a loan.
In mid-2002, President Bush urged lenders to add 5.5 million minority homeowners by the end of the decade. In the years that followed, San Diego County neighborhoods with large minority populations would be hard-hit by foreclosures resulting from risky subprime loans.
Government-sponsored mortgage giants Fannie Mae and Freddie Mac ensured that funds were consistently available to lending institutions. Under pressure from the Bush administration, Fannie Mae and Freddie Mac increased their funding of mortgage loans to lower-income borrowers.
If government and lenders pushed hard for increased home ownership, it was with good intentions, said Dustin Hobbs, spokesman for the California Mortgage Bankers Association.
“You definitely had, for generations, presidents from both parties and congressmen from both sides really pushing home ownership, with Fannie and Freddie and every way they could, and with good reason,” Hobbs said. “It is the best way that individuals acquire wealth. There was a consensus from consumer groups to mortgage bankers to government that more needed to be done to create home ownership.”
Not everyone bought into the idea that owning is preferable to renting. Some contrarian economists held that people could build more wealth by renting and investing the money that would have gone into down payments and home maintenance.
They pointed out that home prices fluctuate. People who buy at the peak of a fevered market run the risk of losing wealth during a speculative price bubble.
“What is wrong with renting?” asked economist Christopher Thornberg of Beacon Economics. “I am so tired of hearing that owning a home is the height of being an American.”
While government played a strong role in triggering the current credit crisis, others share the blame, said Alex J. Pollock, a resident fellow at the American Enterprise Institute, a research group in Washington, D.C. Real estate speculators and consumers were eager to take advantage of low interest rates.
One of the first national voices to warn that the rising home ownership rate was based on unsustainable debt was Nicolas P. Retsinas, the head of Harvard University's Joint Center for Housing Studies. Retsinas recalled that the marketing of risky loans to consumers was aggressive.
“At one point, there were 250,000 people working for mortgage brokerages in the U.S.,” he said. “Their compensation was based on transactions. And they were all selling. Were risks understated? Yes.”
Lenders were feeding Wall Street investors' growing appetite for securities backed by subprime loans.
Rob Katz, president of the Del Mar DataTrac software firm in San Diego, recalls meeting with his company president in 1999 when he was a technology officer at a mortgage firm in Northern California. Katz was told that the company was going to begin making loans for 107 percent of a home's value without verifying income. When Katz protested, he was assured that the loans would quickly be sold to mortgage investors, who would take the hit if they failed.
Many lenders have been forced out of business since the end of the housing boom. Most analysts say that chastened financial institutions won't loosen their purse strings and allow another big surge in home ownership.
While he applauds the newfound restraint, Retsinas worries that tight credit will prevent low-and moderate-income households from achieving home ownership, particularly in high-cost markets such as San Diego County.
Although there was much abuse of adjustable subprime loans, they were a home ownership lifeline for many buyers.
“The question going forward is, what is going to replace subprime lending?” Retsinas said. “There are always going to be people who do not make a lot of money. Should they be shut out? I think we can find a way to develop mortgage products that are reasonable, that are transparent, where everyone knows the risks involved. That will be a challenge, because we just shut the spigot tight.”
By Emmet Pierce (Contact) Union-Tribune Staff Writer
Monday, December 29, 2008
Mortgage Applications Surge on Falling Rates
Bankers are seeing a wave of mortgage-loan applications triggered by falling interest rates, and are reassigning scores of workers to handle the crush of would-be borrowers.
A large percentage of the applications are for refinancings rather than purchases, and the phenomenon is so new it isn't yet clear how many of the borrowers will actually receive loans. But some bankers say it could be the beginnings of a possible turning point in a battered lending sector and a still-weak housing market.
Borrowers "are starting to say, 'Wow, I can get this piece of property at this price, which is a fair amount lower than I could have gotten a year ago,"' said Todd Chamberlain, head of the residential mortgage division at Birmingham, Ala.-based Regions Financial Corp.
The nation's largest mortgage provider, Bank of America Corp., is among the most optimistic. Chief Executive Kenneth Lewis has predicted that housing prices will stabilize by mid-2009. The Charlotte, N.C., bank recently told 300 loan processors in Richmond, Va., and Tampa, Fla., to switch from home-equity loans to mortgages starting Monday. Mortgage applications nearly doubled through the first half of December as compared to the same period in November, said Bank of America spokesman Dan Frahm.
Because of its acquisition this year of California home lender Countrywide Financial Corp., Bank of America was No. 1 in mortgage originations during the third quarter, with $51.5 billion. It also provided $7 billion in home-equity loans during the same period, but those lines of credit aren't as popular now that many U.S. borrowers owe lenders more than their home is worth.
The uptick in potential mortgages may help mitigate government pressure on banks to increase lending after receiving billions in U.S. aid. But it's too early to tie the wave to the larger economy or a potential housing recovery, as the requests are largely refinancings.
How many of the new applications wind up as actual mortgages remains to be seen, and some borrowers may not qualify. Loans may also take longer to process now that lenders are more careful about documentation and appropriate credit standards. Also, some borrowers may pull their applications, thinking rates could still go lower.
"We don't know now what the approval rate will be," said Tom Kelly, a spokesman for J.P. Morgan Chase & Co. The New York lender isn't adding any new employees to deal with the increase in applications, which had doubled prior to the Fed rate cut last week. After the Fed cut, volume went up another 20% to 25%, Mr. Kelly said.
Still, the application frenzy has been one of the first bright spots for banking in months.
Borrowers flocked to take advantage of falling rates following the Federal Reserve's commitment to stabilize the market by purchasing mortgage bonds and possibly Treasury bonds. The moves drove mortgage rates down by roughly three quarters of a percentage point. After this past Tuesday's move by the Fed to cut its benchmark rate to near zero, mortgage rates briefly fell to their lowest level since the 1960s, according to HSH Associates. And rates ended the week with an average 5.17% for a 30-year loan, the lowest average since Freddie Mac began its weekly rate survey in 1971. A year ago the 30-year-loan averaged 6.14%.
Thus far, though, borrowers have been more interested in refinancing existing home mortgages than making new purchases, which are typically less sensitive to interest-rate movements.
Whether Bank of America, which intends to cut 30,000 to 35,000 companywide positions over the next three years, hires new workers to handle the rising mortgage-application volumes "has not been determined," Mr. Frahm added.
In the Southeast, Regions is also shifting employees who process loans from home equity to mortgages. At a Nashville, Tenn.-based processing center, Regions recently added seven workers to a 50-person operation, five of them taken from other areas of the company, one a new hire and one a contract employee. Applications are up almost triple from November, said Regions's Mr. Chamberlain.
In the Midwest, Minneapolis-based U.S. Bancorp also will likely add to its mortgage work force via temporary hires, said Dan Arrigoni, head of the bank's mortgage division.
"We are trying to do all we can to handle the volume," he said, noting that applications for home loans jumped from 11,000 during a 13-day stretch in November to 30,000 during the same period this month.
At Atlanta-based SunTrust Banks Inc., purchase applications rose only "slightly" in December, while refinancing applications more than quadrupled, said spokesman Hugh Suhr.
Home-purchase requests were just 24% of the total application volume so far this month at Bank of America and 25% at Regions. But such requests are still well above their usual levels for this time of year, bankers said.December is "horrible normally," said Mr. Arrigoni. "People are out Christmas shopping. They have everything on their mind but home buying." For people waiting
By Dan Fitzpatrick of The Wall Street Journal/Real Estate
A large percentage of the applications are for refinancings rather than purchases, and the phenomenon is so new it isn't yet clear how many of the borrowers will actually receive loans. But some bankers say it could be the beginnings of a possible turning point in a battered lending sector and a still-weak housing market.
Borrowers "are starting to say, 'Wow, I can get this piece of property at this price, which is a fair amount lower than I could have gotten a year ago,"' said Todd Chamberlain, head of the residential mortgage division at Birmingham, Ala.-based Regions Financial Corp.
The nation's largest mortgage provider, Bank of America Corp., is among the most optimistic. Chief Executive Kenneth Lewis has predicted that housing prices will stabilize by mid-2009. The Charlotte, N.C., bank recently told 300 loan processors in Richmond, Va., and Tampa, Fla., to switch from home-equity loans to mortgages starting Monday. Mortgage applications nearly doubled through the first half of December as compared to the same period in November, said Bank of America spokesman Dan Frahm.
Because of its acquisition this year of California home lender Countrywide Financial Corp., Bank of America was No. 1 in mortgage originations during the third quarter, with $51.5 billion. It also provided $7 billion in home-equity loans during the same period, but those lines of credit aren't as popular now that many U.S. borrowers owe lenders more than their home is worth.
The uptick in potential mortgages may help mitigate government pressure on banks to increase lending after receiving billions in U.S. aid. But it's too early to tie the wave to the larger economy or a potential housing recovery, as the requests are largely refinancings.
How many of the new applications wind up as actual mortgages remains to be seen, and some borrowers may not qualify. Loans may also take longer to process now that lenders are more careful about documentation and appropriate credit standards. Also, some borrowers may pull their applications, thinking rates could still go lower.
"We don't know now what the approval rate will be," said Tom Kelly, a spokesman for J.P. Morgan Chase & Co. The New York lender isn't adding any new employees to deal with the increase in applications, which had doubled prior to the Fed rate cut last week. After the Fed cut, volume went up another 20% to 25%, Mr. Kelly said.
Still, the application frenzy has been one of the first bright spots for banking in months.
Borrowers flocked to take advantage of falling rates following the Federal Reserve's commitment to stabilize the market by purchasing mortgage bonds and possibly Treasury bonds. The moves drove mortgage rates down by roughly three quarters of a percentage point. After this past Tuesday's move by the Fed to cut its benchmark rate to near zero, mortgage rates briefly fell to their lowest level since the 1960s, according to HSH Associates. And rates ended the week with an average 5.17% for a 30-year loan, the lowest average since Freddie Mac began its weekly rate survey in 1971. A year ago the 30-year-loan averaged 6.14%.
Thus far, though, borrowers have been more interested in refinancing existing home mortgages than making new purchases, which are typically less sensitive to interest-rate movements.
Whether Bank of America, which intends to cut 30,000 to 35,000 companywide positions over the next three years, hires new workers to handle the rising mortgage-application volumes "has not been determined," Mr. Frahm added.
In the Southeast, Regions is also shifting employees who process loans from home equity to mortgages. At a Nashville, Tenn.-based processing center, Regions recently added seven workers to a 50-person operation, five of them taken from other areas of the company, one a new hire and one a contract employee. Applications are up almost triple from November, said Regions's Mr. Chamberlain.
In the Midwest, Minneapolis-based U.S. Bancorp also will likely add to its mortgage work force via temporary hires, said Dan Arrigoni, head of the bank's mortgage division.
"We are trying to do all we can to handle the volume," he said, noting that applications for home loans jumped from 11,000 during a 13-day stretch in November to 30,000 during the same period this month.
At Atlanta-based SunTrust Banks Inc., purchase applications rose only "slightly" in December, while refinancing applications more than quadrupled, said spokesman Hugh Suhr.
Home-purchase requests were just 24% of the total application volume so far this month at Bank of America and 25% at Regions. But such requests are still well above their usual levels for this time of year, bankers said.December is "horrible normally," said Mr. Arrigoni. "People are out Christmas shopping. They have everything on their mind but home buying." For people waiting
By Dan Fitzpatrick of The Wall Street Journal/Real Estate
Thursday, December 18, 2008
Streamlined Modification Program (SMP) Now Available to Borrowers
Program Part of Ongoing Effort to Prevent Foreclosures
Fannie Mae today said that the Streamlined Modification Program (SMP) announced by the Federal Housing Finance Agency (FHFA) in November is now available to Fannie Mae servicers and borrowers as an option to help prevent foreclosures. Fannie Mae on December 12, 2008, provided information and guidelines to its servicers regarding the implementation of the SMP.
The SMP is designed to be a streamlined process for modifying the loans of a large number of borrowers who are delinquent in their mortgage payment and may be able to avoid a foreclosure through the program. As FHFA has indicated, SMP was intended to help set standards in the mortgage servicing industry for conducting loan modification programs on a large scale as a foreclosure prevention measure.
Fannie Mae has been working with FHFA and 27 lenders and servicers in the HOPE NOW alliance to implement the SMP. Under the program, borrowers who meet certain eligibility criteria and demonstrate financial hardship may be eligible for a loan modification that reduces their monthly principal and interest payment. The streamlined process allows a borrower to sign a single document at the outset of the workout process that both establishes a new monthly payment during a three-month trial period, and sets forth the modification terms that will take effect if the borrower makes the new payments during the trial period. The program is available to borrowers who have missed at least three monthly payments on their existing mortgages.
"By bringing the collective efforts of FHFA, Treasury, HOPE NOW, Fannie Mae, Freddie Mac and other mortgage industry participants together through the SMP to confront the foreclosure challenge, we'll be able to help more families across America stay in their homes," said Herb Allison, Fannie Mae president and CEO. "Along with other recently announced initiatives by Fannie Mae to reach and help financially troubled borrowers earlier, including our Early Workout program, the SMP is a critical component of our company's foreclosure prevention efforts. These efforts are helping more than 10,000 delinquent borrowers every month get back on track."
Modification Options
Through the SMP, servicers may change the terms of a loan to reduce a borrower's first lien monthly mortgage payment, including taxes, insurance and homeowners association payments, to an amount equal to 38 percent of gross monthly income. The changes in terms may include one or more of the following:
-- Adding the accrued interest, escrow advances and costs to the principal balance of the loan, if allowed by state law;
-- Extending the length of the mortgage loan as appropriate;
-- Reducing the mortgage loan interest rate in increments of 0.125 percent to an interest rate that is not less than 3 percent. If the new rate is set below the market interest rate, after five years it will step up in annual increments to either the original loan interest rate or the market interest rate at the time of the modification, whichever is lower;
-- Forbearing on a portion of the principal, which will require the borrower to make a balloon payment when the loan matures, is paid off, or is refinanced.
Highlights of the SMP's eligibility requirements communicated to servicers include:
-- Conforming conventional and jumbo conforming mortgage loans originated on or before January 1, 2008;
-- Borrowers who are at least three or more payments past due and are not currently in bankruptcy; -- Only one-unit, owner-occupied, primary residences; and -- Current mark-to-market loan-to-value ratio of 90 percent or more.
Servicers will be sending modification solicitation letters beginning this month to thousands of borrowers believed to be eligible for the program. It is critical that eligible borrowers respond to these letters and reach out to their servicers to determine if they can receive SMP assistance. Also, borrowers who don't receive a letter are encouraged to contact their servicer to see if they may be eligible for SMP help. Fannie Mae will be working with servicers to monitor and improve implementation of the program as necessary.
Fannie Mae exists to expand affordable housing and bring global capital to local communities in order to serve the U.S. housing market. Fannie Mae has a federal charter and operates in America's secondary mortgage market to enhance the liquidity of the mortgage market by providing funds to mortgage bankers and other lenders so that they may lend to home buyers. In 2008, we mark our 70th year of service to America's housing market. Our job is to help those who house America.
By: PRESS REALEASE (Source: Fannie Mae)
Fannie Mae today said that the Streamlined Modification Program (SMP) announced by the Federal Housing Finance Agency (FHFA) in November is now available to Fannie Mae servicers and borrowers as an option to help prevent foreclosures. Fannie Mae on December 12, 2008, provided information and guidelines to its servicers regarding the implementation of the SMP.
The SMP is designed to be a streamlined process for modifying the loans of a large number of borrowers who are delinquent in their mortgage payment and may be able to avoid a foreclosure through the program. As FHFA has indicated, SMP was intended to help set standards in the mortgage servicing industry for conducting loan modification programs on a large scale as a foreclosure prevention measure.
Fannie Mae has been working with FHFA and 27 lenders and servicers in the HOPE NOW alliance to implement the SMP. Under the program, borrowers who meet certain eligibility criteria and demonstrate financial hardship may be eligible for a loan modification that reduces their monthly principal and interest payment. The streamlined process allows a borrower to sign a single document at the outset of the workout process that both establishes a new monthly payment during a three-month trial period, and sets forth the modification terms that will take effect if the borrower makes the new payments during the trial period. The program is available to borrowers who have missed at least three monthly payments on their existing mortgages.
"By bringing the collective efforts of FHFA, Treasury, HOPE NOW, Fannie Mae, Freddie Mac and other mortgage industry participants together through the SMP to confront the foreclosure challenge, we'll be able to help more families across America stay in their homes," said Herb Allison, Fannie Mae president and CEO. "Along with other recently announced initiatives by Fannie Mae to reach and help financially troubled borrowers earlier, including our Early Workout program, the SMP is a critical component of our company's foreclosure prevention efforts. These efforts are helping more than 10,000 delinquent borrowers every month get back on track."
Modification Options
Through the SMP, servicers may change the terms of a loan to reduce a borrower's first lien monthly mortgage payment, including taxes, insurance and homeowners association payments, to an amount equal to 38 percent of gross monthly income. The changes in terms may include one or more of the following:
-- Adding the accrued interest, escrow advances and costs to the principal balance of the loan, if allowed by state law;
-- Extending the length of the mortgage loan as appropriate;
-- Reducing the mortgage loan interest rate in increments of 0.125 percent to an interest rate that is not less than 3 percent. If the new rate is set below the market interest rate, after five years it will step up in annual increments to either the original loan interest rate or the market interest rate at the time of the modification, whichever is lower;
-- Forbearing on a portion of the principal, which will require the borrower to make a balloon payment when the loan matures, is paid off, or is refinanced.
Highlights of the SMP's eligibility requirements communicated to servicers include:
-- Conforming conventional and jumbo conforming mortgage loans originated on or before January 1, 2008;
-- Borrowers who are at least three or more payments past due and are not currently in bankruptcy; -- Only one-unit, owner-occupied, primary residences; and -- Current mark-to-market loan-to-value ratio of 90 percent or more.
Servicers will be sending modification solicitation letters beginning this month to thousands of borrowers believed to be eligible for the program. It is critical that eligible borrowers respond to these letters and reach out to their servicers to determine if they can receive SMP assistance. Also, borrowers who don't receive a letter are encouraged to contact their servicer to see if they may be eligible for SMP help. Fannie Mae will be working with servicers to monitor and improve implementation of the program as necessary.
Fannie Mae exists to expand affordable housing and bring global capital to local communities in order to serve the U.S. housing market. Fannie Mae has a federal charter and operates in America's secondary mortgage market to enhance the liquidity of the mortgage market by providing funds to mortgage bankers and other lenders so that they may lend to home buyers. In 2008, we mark our 70th year of service to America's housing market. Our job is to help those who house America.
By: PRESS REALEASE (Source: Fannie Mae)
Thursday, December 11, 2008
"Pay Option" Loans Could Swell Defaults
New wave defaults likely as risky loans reset to sharply higher payments
Some time after Sharren McGarry went to work as a mortgage consultant at Wachovia’s Stuart, Fla., branch in July 2007, she and her colleagues were directed to market a mortgage called the “Pick A Pay” loan. Sales commissions on the product were double the rates for conventional mortgages, and she was required to make sure nearly half the loans she sold were "Pick A Pay," she said.
These “pay option” adjustable-rate mortgages gave borrowers a choice of payments each month. They also carried a feature that came as a nasty surprise to some borrowers, called "negative amortization." If the homeowner opted to pay less than the full monthly amount, the difference was tacked onto the principal. When the loan automatically “recasted” in five or 10 years, the owner would be locked into a new, much higher, set monthly payment.
While McGarry balked at selling these pay-option ARMs, other lenders and mortgage brokers were happy to sell the loans and pocket the higher commissions.
Now, as the housing recession deepens, a coming wave of payment shocks threatens to bring another surge in defaults and foreclosures as these mortgages “recast” to higher monthly payments over the next two years.
“The next wave (of foreclosures) is coming next year and in 2010, and that is primarily due to these pay-option ARMS and the five-year, adjustable-rate hybrid ARMS that are coming up for reset,” said William Longbrake, retired vice chairman of Washington Mutual. The giant Seattle-based bank, which collapsed this year under the weight of its bad mortgage loans, was one of the biggest originators of pay-option ARMs during the lending boom.
The next wave may be even more difficult to handle than the last one.
“It’s going to get tougher to modify loans as these option ARMs come into their resets," Federal Deposit Insurance Corp. Chairwoman Sheila Bair told msnbc.com this week. "Those are more difficult than the subprime and traditional adjustable rates to modify because there is such a huge payment differential when they reset."
Monthly quota: 45 percent
With 16 years of experience in the mortgage business, McGarry didn’t believe the “pay option” loan was a good deal for most of her customers, so she didn’t promote it.
“I looked at it and I thought: I’m 60 years old. If I were in these peoples’ situation 10 years from now, where would I be?” she said. “Do I want to be in a position that 10 years from now I can’t make this higher payment and I’m forced to make this payment and be forced out of my home? So I wouldn’t do it.”
Her job description included a requirement that she meet a monthly quota of Pick A Pay mortgages, something she said wasn’t spelled out when she was hired. Still, she said, she continued to steer her customers to conventional loans, even though her manager “frequently reminded me that my job requirement was that I do 45 percent of my volume in the Pick A Pay loan.”
In June 2008, her manager wrote a “Corrective Action and Counseling” warning, saying she wasn’t meeting the bank’s “expectation of production.” McGarry soon left Wachovia after finding a job with another mortgage company. On June 30, the bank stopped selling mortgages with negative amortization. In October Wachovia, suffering from heavy mortgage-related losses, agreed to be acquired by Wells Fargo.
A spokesman for Wachovia said that generally the bank doesn't comment on internal marketing policies. But he said commissions on Pick A Pay mortgages were higher because the loans were more complicated and required more work to originate. He also noted that when Wachovia's Pick A Pay loans recast, the payment increase is capped for any given year, which helps ease borrowers' burden of meeting a higher payment.
The first wave of home foreclosures that hit in late 2006 and early 2007 followed the resetting of subprime adjustable mortgages with two- and three-year "teaser rates" written during the height of the lending boom earlier in the decade. But pay-option ARMs — which often don't "recast" for five years — have a longer fuse. Unless defused by aggressive public and private foreclosure prevention programs, the bulk of these loans will explode to higher payments in 2009 and 2010.
The scope of the problem was highlighted in September in a study by Fitch Ratings, one of the bond rating agencies that assesses the risk of defaults on mortgage-backed investments. Of the $200 billion in option ARMs outstanding, Fitch estimates that some $29 billion will recast in 2009 and another $67 billion in 2010. That could cause delinquencies on these loans to more than double, Fitch said.
To make matters worse, only 17 percent of option ARMs written from 2004 to 2007 required full documentation. Many of the borrowers who took out these loans also took out a second mortgage, which means they likely have little or no equity in their home, according to the report. That means many could owe more than their house is worth when the loan recasts to unaffordable payments.
Heavy losses from investments backed by pay option ARMs were a major cause of the demise of Wachovia and Washington Mutual, one of the largest originators of option ARMs during the height of the lending bubble. (Washington Mutual was seized by the FDIC in September, which arranged for the sale of its assets to JPMorgan Chase. Wachovia was acquired in October by Wells Fargo, which outbid Citibank after it arranged a deal with the FDIC to acquire Wachovia.)
Since the housing bubble began to deflate in 2006, roughly 3 million homes have been lost to foreclosure. Over the next two years, another 3.6 million are expected to lose their homes, according to Moody’s Economy.com chief economist Mark Zandi.
Many of the most problematic loans — those sold with a two- or three-year low “teaser” rates — have already reset to higher levels. Those resets have been a major force in the first wave of foreclosures, which rose from 953,000 in 2006 to nearly 1.8 million last year and are on track to hit 3.1 million this year, according to First American CoreLogic, which tracks real estate data.
And the pace of foreclosures is still climbing. More than 259,000 U.S. homes received at least one foreclosure-related notice in November, up 28 percent from the same month last year, according to RealtyTrac.
Though the pace dropped slightly from the previous month, there are indications "that this lower activity is simply a temporary lull before another foreclosure storm hits in the coming months," said RealtyTrac CEO James Saccacio.
Mortgage delinquencies — homeowners who have fallen behind but not yet been hit with foreclosure — are also on the rise, according to the latest quarterly survey from the Mortgage Bankers Association. A record one in 10 American households with mortgages was overdue on payments or in foreclosure as of the end of September.
The impact is being felt unevenly across the country. Foreclosures are clustered in states that saw the biggest expansion in lending and home building. In Nevada, one in every 74 homes was hit with a foreclosure filing last month. Arizona saw one in every 149 housing units receive a foreclosure filing, and in Florida it was one in every 157 homes. California, Colorado, Georgia, Michigan, New Jersey, Illinois and Ohio have also been hard hit.
“In the neighborhoods that have concentrations of subprime loans you already have concerns about crashing neighborhoods with too many vacant houses and crime rises,” said Longbrake. “The same thing will be true for these option ARMs. They are concentrated in particular neighborhoods and particular locales around the country."
Developed in the late 1980s, pay-option ARMs were written at first only for borrowers who showed they could afford the full monthly payment. But during the height of the lending boom, underwriting standards were lowered to qualify borrowers who could only afford the minimum payment, according to Longbrake.
College savings made easy
McGarry says she was encouraged to promote the idea that with a Pick A Pay loan the borrower could pay less than the full monthly payment and set aside the difference for savings or investment. The pitch included sales literature comparing two brothers. One took the Pick A Pay loan, made the minimum payment and put money in the bank. The second brother got a conforming loan. Five years later, both brothers needed to pay their children’s college tuition.
“(The brother with the conforming loan) didn’t have the money in the bank,” said McGarry. “And the brother that had the pay-option ARM could go to the bank and withdraw the money and didn’t have to refinance his mortgage. That’s how they sold it.”
McGarry said the sales pitch downplayed the impact of negative amortization. When the loan principal swells to a set threshold — typically between 110 and 125 percent of the original loan amount — the mortgage automatically “recasts” to a higher, set monthly payment that many borrowers would have a hard time keeping up with.
Fitch estimates that the average potential payment increase would be 63 percent, or about $1,053 a month — on top of the current average payment of $1,672.
The impact on the millions of American families losing their homes is devastating. But the foreclosure fallout is being felt around the world. As the U.S. slides deeper into recession, foreclosures are the root cause of a downward spiral that threatens to prolong and widen the economic impact:
-As the pace of foreclosures rises, the glut of homes on the market pushes home prices lower. That erodes home equity for all homeowners, draining consumer spending power and further weakening the economy.
-The overhang of unsold homes also depresses the home building industry, one of the major engines of growth in a healthy economy.
-As home values decline, investors and lenders holding bonds backed by mortgages book steeper losses. Banks holding mortgage-backed investments hoard cash, creating a credit squeeze that acts as a bigger drag on the economy.
-The resulting pullback in consumer and business spending brings more layoffs. Those layoffs put additional homeowners at risk of defaulting on their mortgages, and the cycle repeats.
"Foreclosures are going to mount and the negative self-reinforcing cycle will accelerate," said Zandi. "It's already happening, but it will accelerate in a lot more parts of the country."
As pay-option ARMs put more homeowners under pressure, other forces are combining to increase the risk of mortgage defaults. As of the end of September, the drop in home prices had left roughly one in five borrowers stuck with a mortgage bigger than their house is worth, according to First American CoreLogic. In a normal market, homeowners who suffer a financial setback can tap some of the equity in their home or sell their home and move on.
“That’s a big issue,” said Mark Fleming, First American CoreLogic’s chief economist. “As equity is being destroyed in the housing markets, more and more people are being pushed into a negative equity position. That means that they’re not going to have the option for sale or refinance if they hit hard times."
“Negative equity” is also a major roadblock in negotiations between lenders and homeowners trying to modify their loan terms.
After over a year of debate in Congress, and private efforts by lenders, no one has come up with the solution to the thorniest part of the problem: Who should take the hit for the trillions of dollars of home equity lost since the credit bubble burst?
“(Customers) keep calling and saying ‘With this bailout, this isn’t helping me at all,’” said McGarry, who is now working with clients trying modify or refinance their loans. “It really and truly is not helping them. If their lender will not agree to settle for less than they owe — even though those lenders are on the list of lenders that will work with you — they still are not working with (the borrower).”
It’s a monumental undertaking that was never anticipated when servicers took on the task of managing these mortgage portfolios. These companies are already struggling to keep up with the volume of calls, and defaults are projected to keep rising. They’re also swamped with calls from desperate homeowners who are falling behind on their monthly payments.
“We have never seen anything this large before; we make 5 million phone calls a month to reach out to borrowers,” said Tom Morano, CEO of Residential Capital, the loan servicing unit of GMAC. “The volume of calls that’s coming in is much higher than it has ever been, and everybody is struggling with that.”
Now, as the spiral of falling home prices is exacerbated by rising unemployment, millions of homeowners who were on a solid financial footing when they signed their loan face the prospect of a job loss that would put them at risk of foreclosure. Some servicers say that’s the biggest wild card in projecting how many more Americans will lose their homes.
“The concern I have is if we have an economy where unemployment gets to 8 or 9 percent,” said Morano. “If that happens the amount of delinquencies is going to be staggering.”
With the latest monthly data showing more than half a million jobs were lost in November, some economists now believe the jobless rate could rise from the current 6.7 percent to top 10 percent by the end of next year.
By John W. Schoen MSNBC.com
Some time after Sharren McGarry went to work as a mortgage consultant at Wachovia’s Stuart, Fla., branch in July 2007, she and her colleagues were directed to market a mortgage called the “Pick A Pay” loan. Sales commissions on the product were double the rates for conventional mortgages, and she was required to make sure nearly half the loans she sold were "Pick A Pay," she said.
These “pay option” adjustable-rate mortgages gave borrowers a choice of payments each month. They also carried a feature that came as a nasty surprise to some borrowers, called "negative amortization." If the homeowner opted to pay less than the full monthly amount, the difference was tacked onto the principal. When the loan automatically “recasted” in five or 10 years, the owner would be locked into a new, much higher, set monthly payment.
While McGarry balked at selling these pay-option ARMs, other lenders and mortgage brokers were happy to sell the loans and pocket the higher commissions.
Now, as the housing recession deepens, a coming wave of payment shocks threatens to bring another surge in defaults and foreclosures as these mortgages “recast” to higher monthly payments over the next two years.
“The next wave (of foreclosures) is coming next year and in 2010, and that is primarily due to these pay-option ARMS and the five-year, adjustable-rate hybrid ARMS that are coming up for reset,” said William Longbrake, retired vice chairman of Washington Mutual. The giant Seattle-based bank, which collapsed this year under the weight of its bad mortgage loans, was one of the biggest originators of pay-option ARMs during the lending boom.
The next wave may be even more difficult to handle than the last one.
“It’s going to get tougher to modify loans as these option ARMs come into their resets," Federal Deposit Insurance Corp. Chairwoman Sheila Bair told msnbc.com this week. "Those are more difficult than the subprime and traditional adjustable rates to modify because there is such a huge payment differential when they reset."
Monthly quota: 45 percent
With 16 years of experience in the mortgage business, McGarry didn’t believe the “pay option” loan was a good deal for most of her customers, so she didn’t promote it.
“I looked at it and I thought: I’m 60 years old. If I were in these peoples’ situation 10 years from now, where would I be?” she said. “Do I want to be in a position that 10 years from now I can’t make this higher payment and I’m forced to make this payment and be forced out of my home? So I wouldn’t do it.”
Her job description included a requirement that she meet a monthly quota of Pick A Pay mortgages, something she said wasn’t spelled out when she was hired. Still, she said, she continued to steer her customers to conventional loans, even though her manager “frequently reminded me that my job requirement was that I do 45 percent of my volume in the Pick A Pay loan.”
In June 2008, her manager wrote a “Corrective Action and Counseling” warning, saying she wasn’t meeting the bank’s “expectation of production.” McGarry soon left Wachovia after finding a job with another mortgage company. On June 30, the bank stopped selling mortgages with negative amortization. In October Wachovia, suffering from heavy mortgage-related losses, agreed to be acquired by Wells Fargo.
A spokesman for Wachovia said that generally the bank doesn't comment on internal marketing policies. But he said commissions on Pick A Pay mortgages were higher because the loans were more complicated and required more work to originate. He also noted that when Wachovia's Pick A Pay loans recast, the payment increase is capped for any given year, which helps ease borrowers' burden of meeting a higher payment.
The first wave of home foreclosures that hit in late 2006 and early 2007 followed the resetting of subprime adjustable mortgages with two- and three-year "teaser rates" written during the height of the lending boom earlier in the decade. But pay-option ARMs — which often don't "recast" for five years — have a longer fuse. Unless defused by aggressive public and private foreclosure prevention programs, the bulk of these loans will explode to higher payments in 2009 and 2010.
The scope of the problem was highlighted in September in a study by Fitch Ratings, one of the bond rating agencies that assesses the risk of defaults on mortgage-backed investments. Of the $200 billion in option ARMs outstanding, Fitch estimates that some $29 billion will recast in 2009 and another $67 billion in 2010. That could cause delinquencies on these loans to more than double, Fitch said.
To make matters worse, only 17 percent of option ARMs written from 2004 to 2007 required full documentation. Many of the borrowers who took out these loans also took out a second mortgage, which means they likely have little or no equity in their home, according to the report. That means many could owe more than their house is worth when the loan recasts to unaffordable payments.
Heavy losses from investments backed by pay option ARMs were a major cause of the demise of Wachovia and Washington Mutual, one of the largest originators of option ARMs during the height of the lending bubble. (Washington Mutual was seized by the FDIC in September, which arranged for the sale of its assets to JPMorgan Chase. Wachovia was acquired in October by Wells Fargo, which outbid Citibank after it arranged a deal with the FDIC to acquire Wachovia.)
Since the housing bubble began to deflate in 2006, roughly 3 million homes have been lost to foreclosure. Over the next two years, another 3.6 million are expected to lose their homes, according to Moody’s Economy.com chief economist Mark Zandi.
Many of the most problematic loans — those sold with a two- or three-year low “teaser” rates — have already reset to higher levels. Those resets have been a major force in the first wave of foreclosures, which rose from 953,000 in 2006 to nearly 1.8 million last year and are on track to hit 3.1 million this year, according to First American CoreLogic, which tracks real estate data.
And the pace of foreclosures is still climbing. More than 259,000 U.S. homes received at least one foreclosure-related notice in November, up 28 percent from the same month last year, according to RealtyTrac.
Though the pace dropped slightly from the previous month, there are indications "that this lower activity is simply a temporary lull before another foreclosure storm hits in the coming months," said RealtyTrac CEO James Saccacio.
Mortgage delinquencies — homeowners who have fallen behind but not yet been hit with foreclosure — are also on the rise, according to the latest quarterly survey from the Mortgage Bankers Association. A record one in 10 American households with mortgages was overdue on payments or in foreclosure as of the end of September.
The impact is being felt unevenly across the country. Foreclosures are clustered in states that saw the biggest expansion in lending and home building. In Nevada, one in every 74 homes was hit with a foreclosure filing last month. Arizona saw one in every 149 housing units receive a foreclosure filing, and in Florida it was one in every 157 homes. California, Colorado, Georgia, Michigan, New Jersey, Illinois and Ohio have also been hard hit.
“In the neighborhoods that have concentrations of subprime loans you already have concerns about crashing neighborhoods with too many vacant houses and crime rises,” said Longbrake. “The same thing will be true for these option ARMs. They are concentrated in particular neighborhoods and particular locales around the country."
Developed in the late 1980s, pay-option ARMs were written at first only for borrowers who showed they could afford the full monthly payment. But during the height of the lending boom, underwriting standards were lowered to qualify borrowers who could only afford the minimum payment, according to Longbrake.
College savings made easy
McGarry says she was encouraged to promote the idea that with a Pick A Pay loan the borrower could pay less than the full monthly payment and set aside the difference for savings or investment. The pitch included sales literature comparing two brothers. One took the Pick A Pay loan, made the minimum payment and put money in the bank. The second brother got a conforming loan. Five years later, both brothers needed to pay their children’s college tuition.
“(The brother with the conforming loan) didn’t have the money in the bank,” said McGarry. “And the brother that had the pay-option ARM could go to the bank and withdraw the money and didn’t have to refinance his mortgage. That’s how they sold it.”
McGarry said the sales pitch downplayed the impact of negative amortization. When the loan principal swells to a set threshold — typically between 110 and 125 percent of the original loan amount — the mortgage automatically “recasts” to a higher, set monthly payment that many borrowers would have a hard time keeping up with.
Fitch estimates that the average potential payment increase would be 63 percent, or about $1,053 a month — on top of the current average payment of $1,672.
The impact on the millions of American families losing their homes is devastating. But the foreclosure fallout is being felt around the world. As the U.S. slides deeper into recession, foreclosures are the root cause of a downward spiral that threatens to prolong and widen the economic impact:
-As the pace of foreclosures rises, the glut of homes on the market pushes home prices lower. That erodes home equity for all homeowners, draining consumer spending power and further weakening the economy.
-The overhang of unsold homes also depresses the home building industry, one of the major engines of growth in a healthy economy.
-As home values decline, investors and lenders holding bonds backed by mortgages book steeper losses. Banks holding mortgage-backed investments hoard cash, creating a credit squeeze that acts as a bigger drag on the economy.
-The resulting pullback in consumer and business spending brings more layoffs. Those layoffs put additional homeowners at risk of defaulting on their mortgages, and the cycle repeats.
"Foreclosures are going to mount and the negative self-reinforcing cycle will accelerate," said Zandi. "It's already happening, but it will accelerate in a lot more parts of the country."
As pay-option ARMs put more homeowners under pressure, other forces are combining to increase the risk of mortgage defaults. As of the end of September, the drop in home prices had left roughly one in five borrowers stuck with a mortgage bigger than their house is worth, according to First American CoreLogic. In a normal market, homeowners who suffer a financial setback can tap some of the equity in their home or sell their home and move on.
“That’s a big issue,” said Mark Fleming, First American CoreLogic’s chief economist. “As equity is being destroyed in the housing markets, more and more people are being pushed into a negative equity position. That means that they’re not going to have the option for sale or refinance if they hit hard times."
“Negative equity” is also a major roadblock in negotiations between lenders and homeowners trying to modify their loan terms.
After over a year of debate in Congress, and private efforts by lenders, no one has come up with the solution to the thorniest part of the problem: Who should take the hit for the trillions of dollars of home equity lost since the credit bubble burst?
“(Customers) keep calling and saying ‘With this bailout, this isn’t helping me at all,’” said McGarry, who is now working with clients trying modify or refinance their loans. “It really and truly is not helping them. If their lender will not agree to settle for less than they owe — even though those lenders are on the list of lenders that will work with you — they still are not working with (the borrower).”
It’s a monumental undertaking that was never anticipated when servicers took on the task of managing these mortgage portfolios. These companies are already struggling to keep up with the volume of calls, and defaults are projected to keep rising. They’re also swamped with calls from desperate homeowners who are falling behind on their monthly payments.
“We have never seen anything this large before; we make 5 million phone calls a month to reach out to borrowers,” said Tom Morano, CEO of Residential Capital, the loan servicing unit of GMAC. “The volume of calls that’s coming in is much higher than it has ever been, and everybody is struggling with that.”
Now, as the spiral of falling home prices is exacerbated by rising unemployment, millions of homeowners who were on a solid financial footing when they signed their loan face the prospect of a job loss that would put them at risk of foreclosure. Some servicers say that’s the biggest wild card in projecting how many more Americans will lose their homes.
“The concern I have is if we have an economy where unemployment gets to 8 or 9 percent,” said Morano. “If that happens the amount of delinquencies is going to be staggering.”
With the latest monthly data showing more than half a million jobs were lost in November, some economists now believe the jobless rate could rise from the current 6.7 percent to top 10 percent by the end of next year.
By John W. Schoen MSNBC.com
Tuesday, December 9, 2008
The Million-Dollar-Home Dream goes POOF!
If you paid seven figures, it probably isn't worth that anymore; for buyers, $500,000 is the new $1 million.
Half a million dollars is, by almost any standard, a lot of money. But during the past few years, when credit was easy and regulations were loose, for many Americans it didn't seem like all that much.
That's because they were able to borrow huge amounts of money to buy new homes, often with little or nothing down. And while most homes sold in the United States, even at the height of the housing bubble, were $500,000 or less, rising prices in many major cities and affluent suburbs around the country pushed the cost of a three-bedroom home into seven figures or more.
But the gap between $500,000 and $1 million is more than monetary. It is also psychological. And during the recent boom years, Americans became reckless consumers, buying cars, houses, clothes and much more that they couldn't really afford. The dream of a $1 million home, once so distant, became tantalizingly reachable.
Now that has all changed. While certain pockets, such as Manhattan, San Francisco and Boston, remain high, real-estate prices around the country have fallen dramatically. The downside to this, of course, is that many people now owe more money on their home than their home is worth. The upside is that valuations are much more realistic — and affordable.
Pain is spreading
That's because homes priced at half a million — and higher — are now also beginning to shrink in value. Initially, the properties hit hard by the subprime crisis were lower-priced dwellings more often than not bought by people with poor credit. But now, as too many people are experiencing, the pain is spreading even to people with good credit and higher incomes.
Until recently, sellers in wealthy neighborhoods were somewhat protected from the subprime credit crisis and were still drawing buyers with high salaries, good credit scores and a cushion of savings. But the problems worsened after global financial-services giant Lehman Brothers collapsed on Sept. 15. Credit markets froze, corporate giants laid off thousands of highly paid workers, and the stocks that padded the portfolios of the wealthy plummeted.
Even once seemingly impervious markets such as New York City, Florida and California, which had attracted well-heeled international buyers looking to take advantage of a weak dollar, began to struggle as the global economic slowdown washed over Europe, Asia and even the Middle East.
Asking prices for luxury homes nationwide have fallen 5.4% since Jan. 4, and such homes now stay on the market for 148 days, compared with 125 days at the beginning of the year, according to The Institute for Luxury Home Marketing's Luxury Market Report, which tracked prices through Nov. 7. The data — compiled by Altos Research — look at prices in the top 10 wealthiest ZIP codes in 30 large metro areas around the country.
Watching and waiting
"The entry level of the upper tier — the $500,000 price point and up — has been softening for a while," said Laurie Moore-Moore, founder and CEO of the Institute for Luxury Home Marketing, a Dallas-based group that trains high-end agents. "What we've also seen in the last month is huge uncertainty at the very top of the market. People want to know where are we headed, how serious [the downturn] is going to be, and what is the duration. There are enough questions that even at the top of the market, people are waiting and watching."
BusinessWeek.com put together a sampling of homes selling for about $500,000 in 17 of the most affluent communities across the nation. A few years ago, those homes would have likely commanded much higher prices.
Art Tassaro, a real-estate agent with Friedberg Properties in the wealthy New York suburb of Cresskill, N.J., said buyers have all but disappeared in the past few months. Sellers who want their home to move quickly need to be aggressive about pricing. One method is to average the three lowest sales prices in a given neighborhood during the past year and then discount that price by an additional 5%, he said.
"If it was bad before, it's worse now," he said.
Of course, if you’re buying …
Grim times for sellers can be full of opportunity for buyers, especially those with cash, Tassaro said.
John Marcell, president of Better Mortgage Brokers in Upland, Calif., said sellers are discounting prices significantly in order to make a sale. Most sales are so-called short sales, where the lender agrees to accept less than the outstanding loan amount to avoid a foreclosure.
High-end homes are just sitting on the market in his area, he said. Entry-level homes now make up the market's strongest segment, because first-time purchasers can take advantage of low prices without having to worry about unloading their existing homes, he said.
"The only sales of million-dollar homes are foreclosures," Marcell said.
By Prashant Gopal, BusinessWeek.com
Half a million dollars is, by almost any standard, a lot of money. But during the past few years, when credit was easy and regulations were loose, for many Americans it didn't seem like all that much.
That's because they were able to borrow huge amounts of money to buy new homes, often with little or nothing down. And while most homes sold in the United States, even at the height of the housing bubble, were $500,000 or less, rising prices in many major cities and affluent suburbs around the country pushed the cost of a three-bedroom home into seven figures or more.
But the gap between $500,000 and $1 million is more than monetary. It is also psychological. And during the recent boom years, Americans became reckless consumers, buying cars, houses, clothes and much more that they couldn't really afford. The dream of a $1 million home, once so distant, became tantalizingly reachable.
Now that has all changed. While certain pockets, such as Manhattan, San Francisco and Boston, remain high, real-estate prices around the country have fallen dramatically. The downside to this, of course, is that many people now owe more money on their home than their home is worth. The upside is that valuations are much more realistic — and affordable.
Pain is spreading
That's because homes priced at half a million — and higher — are now also beginning to shrink in value. Initially, the properties hit hard by the subprime crisis were lower-priced dwellings more often than not bought by people with poor credit. But now, as too many people are experiencing, the pain is spreading even to people with good credit and higher incomes.
Until recently, sellers in wealthy neighborhoods were somewhat protected from the subprime credit crisis and were still drawing buyers with high salaries, good credit scores and a cushion of savings. But the problems worsened after global financial-services giant Lehman Brothers collapsed on Sept. 15. Credit markets froze, corporate giants laid off thousands of highly paid workers, and the stocks that padded the portfolios of the wealthy plummeted.
Even once seemingly impervious markets such as New York City, Florida and California, which had attracted well-heeled international buyers looking to take advantage of a weak dollar, began to struggle as the global economic slowdown washed over Europe, Asia and even the Middle East.
Asking prices for luxury homes nationwide have fallen 5.4% since Jan. 4, and such homes now stay on the market for 148 days, compared with 125 days at the beginning of the year, according to The Institute for Luxury Home Marketing's Luxury Market Report, which tracked prices through Nov. 7. The data — compiled by Altos Research — look at prices in the top 10 wealthiest ZIP codes in 30 large metro areas around the country.
Watching and waiting
"The entry level of the upper tier — the $500,000 price point and up — has been softening for a while," said Laurie Moore-Moore, founder and CEO of the Institute for Luxury Home Marketing, a Dallas-based group that trains high-end agents. "What we've also seen in the last month is huge uncertainty at the very top of the market. People want to know where are we headed, how serious [the downturn] is going to be, and what is the duration. There are enough questions that even at the top of the market, people are waiting and watching."
BusinessWeek.com put together a sampling of homes selling for about $500,000 in 17 of the most affluent communities across the nation. A few years ago, those homes would have likely commanded much higher prices.
Art Tassaro, a real-estate agent with Friedberg Properties in the wealthy New York suburb of Cresskill, N.J., said buyers have all but disappeared in the past few months. Sellers who want their home to move quickly need to be aggressive about pricing. One method is to average the three lowest sales prices in a given neighborhood during the past year and then discount that price by an additional 5%, he said.
"If it was bad before, it's worse now," he said.
Of course, if you’re buying …
Grim times for sellers can be full of opportunity for buyers, especially those with cash, Tassaro said.
John Marcell, president of Better Mortgage Brokers in Upland, Calif., said sellers are discounting prices significantly in order to make a sale. Most sales are so-called short sales, where the lender agrees to accept less than the outstanding loan amount to avoid a foreclosure.
High-end homes are just sitting on the market in his area, he said. Entry-level homes now make up the market's strongest segment, because first-time purchasers can take advantage of low prices without having to worry about unloading their existing homes, he said.
"The only sales of million-dollar homes are foreclosures," Marcell said.
By Prashant Gopal, BusinessWeek.com
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