Archive for March, 2009
From an analyst at one of the five large U.S. banks still standing, passed to me via Mark Hanson this afternoon:
In a foreclosure auction today, the John Hancock Tower – a marquee building in Boston – traded at $660MM to Normandy Real Estate Partners. That same property was appraised for $1.3BN in 2006 and traded for $935MM in 2003. This is VERY negative for commercial real estate. At face, it looks like even top quality assets are down 50% from their peak, but that forgets the value of the financing that Normandy now gets to assume. There will still be a $640.5MM mortgage on the property at a rate of 5.6%. What is the value of being able to get a 97% LTV loan at 5.6% these days? Let's say you can get a 60% LTV mortgage ($400MM) at 8%, and the other $240MM in mezz financing (which has no chance of getting done in this market) could hypothetically get done at 15.
That combination produces a weighted average financing cost of almost 11%. A 5.6% mortgage at 11% yield is about a 70 $px, which means the value of assuming the existing financing on the Hancock Tower is close to $190MM. The real clearing level for the top commercial property in Boston was only $470MM – down 65% from 2006 levels and down 50% from 2003 levels. If we assume 2008 NOI numbers are still accurate, this would be a 9.5% cap rate adjusted for the financing. Without adjusting for the value of financing, the purchase price of $660MM looks like a 6.7% cap rate and $383/sqft – rich, relative to 1540 Broadway (NY office vs Boston office) recently clearing at ~$400/sqft.
**The main takeaway: property values are down A LOT more than people think, especially when considering the implied value of financing.
Caveat Emptor.** On the brightside for holders of GG9, the #1 loan now has a better sponsor with a lighter debt load. Unfortunately, not every CMBS loan had a 50% LTV to 2006/2007 levels like John Hancock Tower…Severities will be much higher for the majority of 75+% LTV CMBS loans.
(Update 1: adds OTTI discussion)
The anti mark-to-market lobby found a new ally Tuesday morning in House Financial Services Committee chairman Barney Frank (D-MA), who told reporters that he supported rolling back so called 'fair value accounting' standards in certain instances, to allow banks and other financial institutions to recoup previously-marked losses on their trading books. The controversial accounting standard, most commonly embodied by FAS 157, establishes guidelines for how companies should go about coming up with market, or fair, values.
This standard only applies when firms are either required to use market values for a particular instrument — i.e., a bond that is in a trading account — or for which they’ve chosen to use market values. FAS 157 went into effect in November 2007, and critics have charged that it has helped fuel the financial crisis as financial institutions have been forced to write-down the value of some of their assets to market values that some say does not reflect the 'intrinsic' value of an asset.
Supporters, however, argue that fair value accounting standards force greater transparency and help prevent banks and other financial firms from 'gaming' their own trading books. Regardless, so-called 'mark to market' losses total well into the hundred of billions of dollars — reversing the accounting standard, and allowing firms to claw back existing marks, would have the immediate effect of generating equity capital for troubled banks and financial institutions.
According to MarketWatch, Frank "said he would support a procedure for firms to make the case that they have been forced to take losses on assets that they are holding to maturity."
"They ought to be able to go back and say they took that loss on an asset that is being held to maturity and recoup that loss," Frank told a banker who asked him about retroactive losses, according to a separate MarketWatch story.
Excuse me, but what? An "asset that is being held to maturity" is already usually carried on the books at amortized cost, not market value. Only those securities classified as 'available for sale' (AFS) are subject to mark-to-market rules under FAS 157, precisely because they aren't being held to maturity — and are otherwise available for sale, as the moniker directly implies.
Excerpting from Linda Lowell's most recent analysis of the PPIP, which has relevant insight here for fair value accounting and the AFS bucket:
Right now, according to FDIC call report data for Q4 2009, in aggregate, US commercial banks categorize a bit more than 90 percent of their debt securities as available-for-sale (AFS). In the FDIC’s standard large bank cut of the data (511 institutions with assets greater than $1 billion), 93% of their debt securities are classified as AFS.
Quick accounting refresher: AFS securities are measured at fair value. A change in fair value does not affect earnings, but gains or losses over amortized cost are accumulated in a component of equity called Other Comprehensive Income (OCI). This running cumulative total is also referred to as unrealized gains or losses. Unrealized losses reduce equity capital and are taken into account by equity investors, BUT they are not included in calculations of regulatory capital.
It's possible that Frank was referring instead to impairment rules, or OTTI (other-than-temporary-impairment), rather than the mark-to-market moniker that MarketWatch seems to have somewhat arbitrarily assigned to his comments. In that case, I'd hope that Frank is aware that the FASB has already proposed a set of changes to the treatment of impairment losses, such that only a portion of impairment representing credit losses would be recognized in earnings. (See "FASB Acts!", Mar. 17).
I think what Frank is referring to here is the theory that suggests market (and, perhaps, even impairment) losses on debt securities reflect a so-called liquidity premium, versus a so-called credit risk premium. In other words, Frank is arguing the same old line that says the value of troubled securities has been pushed down below some 'instrinsic' value, assumed to be greater than current market prices would imply.
But is that really true?
As Linda Lowell points out in her commentary, "No one knows the long term value of these troubled toxic legacy assets, because know one knows where the bottom is because no one knows when the housing stabilizes (and this will be a local phenomenon). This is credit risk, just like a weak balance sheet indicates credit risk even though the company is still servicing its debt."
In plain English: altering how you account for the value of an asset doesn't make a homeowner any more or less likely to pay their mortgage.
Write to Paul Jackson at paul.jackson@housingwire.com.
Defaults on privately insured U.S. mortgages fell nearly 16 percent in February from the month before, but were up 47 percent from one year ago — and figuring out what that really means is next to impossible, given the data.
That's the key takeaway from data released Tuesday morning by the Mortgage Insurance Companies of America, or MICA, which said that 89,722 insured borrowers were 60 or more days in arrears at the end of February, compared to 60,911 one year earlier. February's totals were well below the 106,484 defaults recorded in January, the highest level recorded by the MI trade group.
But making sense of the delinquency data? Good luck. In April 2008, MICA said it saw a sharp increase in reported defaults after a large lender changed how it reported delinquency statistics — the group never identified the lender, largely believed to be Countrywide, nor has the group specified the impact of the reporting change on prior numbers.
In July 2008, Triad Guaranty Corp. [{TGIC]] quit reporting its statistics to MICA after the company went into portfolio run-off, and in December 2008, Radian Group Inc. (RDN: 2.66 +2.70%) — which had not earlier participated in shared reporting of data to MICA — began reporting data on its operations.
Which means, in a nutshell, that a 47 percent increase year-over-year seems to suggest that overall delinquencies are increasing; but by how much is anyone's guess, given reporting changes, additions and losses of reporting entities that all have had a material impact upon reported statistics.
Feburary's cure rate — the number of delinquent loans modified or otherwise put into a workout plan — was 75.5 percent, up sharply from 48 percent in January 2009, but slightly below the 78.7 rate booked in February 2008.
Demand for new mortgage insurance fell slightly between January and Febuary, from 76,130 applications received to 73,109. That total is well below the 152,786 applications received one year earlier. Despite declining applications, primary insurance in force remained mostly flat in Febuary, MICA said.
Write to Paul Jackson at paul.jackson@housingwire.com.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.
At the end of February, 7.46 percent of the Federal Housing Administration's single-family insurance-in-force was "seriously delinquent" — either 90 days delinquent, in foreclosure or bankruptcy. February's rate of serious delinquencies is up considerably from the 6.16 percent seen at the same time last year, the Wall Street Journal first reported Tuesday.
The agency paid claims on 3,951 foreclosures, or 0.08 percent of the FHA's insurance-in-force, in February, according to data provided to HousingWire by an FHA spokesperson, who was quick to point out that some 60 percent of delinquencies cure through the agency's loss mitigation program before reaching the foreclosure process.
But critics of the program have said that its comparatively lenient terms — requiring as little as 3.5 percent of the home's value as a down payment, for example — in the wake of the subprime market collapse attracted many borrowers with less-than-ideal credit. The volume of FHA-insured loans as a portion of the total mortgage origination market has increased from 3 percent in Jan. 2007 to 37 percent in Dec. 08, according to a monthly mortgage monitor report released this month by Lender Processing Services Inc. (LPS: 16.78 +1.39%)
Critics say the FHA's delinquency woes have stemmed from an influx of borrowers and not enough agency manpower to handle the volume of new FHA lenders. The program's refinance appeal and "streamlined refinance" process — combined with the Hope for Homeowners program through which the agency has urged troubled borrowers to refinance into FHA loans — also opened the door to a wave of new mortgages borrowers may not be able to afford.
Write to Diana Golobay at diana.golobay@housingwire.com.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.
The combination of vacation- and investment-home sales slipped to 30 percent of all existing- and new-home transactions in 2008, compared to 33 percent in 2007 and a much larger 40 percent in 2005, the peak year for home speculation, according to the National Association of Realtors.
NAR’s 2008 Investment and Vacation Home Buyers Survey released Tuesday reported total vacation-home sales dropped 30.8 percent to 512,000 last year from 740,000 in 2007, while investment-home sales fell 17.2 percent to 1.12 million in 2008 from 1.35 million in 2007.
The second-home market is really driven by the availability of debt, said Daniel Alpert, managing director of Westwood Capital LLC. "Given the absence of mortgage money for primary homes, one can imagine that there's no mortgage money for vacation homes," he told the Boston Globe.
However, for those buyers who did invest in a second home in 2008, more than four out of 10 investment buyers and more than three in 10 vacation-home buyers paid cash for their properties, according to NAR, with large percentages indicating that portfolio diversification was a factor in their purchase decision.
The median price of a vacation home was $150,000 in 2008, down 23.1 percent from $195,000 in 2007. The typical investment property cost $108,000 last year, which is 28.0 percent below the 2007 median of $150,000. “As in the market for primary residences, it appears that many sales of deeply discounted distressed homes are pulling down the median price in the second-home market as well,” said Lawrence Yun, NAR chief economist.
Yun said lifestyle considerations are the single most important factor in the vacation home market. “People are buying weekend homes or recreational property to use themselves or for a family retreat – investment considerations are secondary for most vacation-home buyers with relatively modest interest in renting.”
The typical vacation-home buyer in 2008 was 46 years old, had a median household income of $97,200, and purchased a property that was a median of 316 miles from their primary residence, according to NAR's findings.
Investment-home buyers in 2008 had a median age of 47, earned $85,000, and bought a home that was fairly close to their primary residence – a median distance of 19 miles. When asked about the most important reasons for purchasing an investment home, the majority said to provide rental income.
According to the survey, Eight in 10 second-home buyers consider it a good time to invest in real estate, compared with 71 percent of primary residence buyers. “A steady share of investment-home sales results from buyers taking advantage of deeply discounted prices in many areas, with a smaller portion of new homes in the sales mix,” Yun said.
And he expects that steady share of sales to continue. “While economic factors can affect sales from one year to the next, the fundamental demand from these large population groups will remain,” Yun said. “Given that most people become interested in buying a second home in their 40s, the bulge of population approaching middle age should drive the second-home market over the next decade.”
Interestingly, the size of the second-home market is quite significant in the United States. NAR’s analysis of U.S. Census Bureau data shows there are 8.1 million vacation homes and 40.5 million investment units in the United States, compared with 75.5 million owner-occupied homes.
Write to Kelly Curran at kelly.curran@housingwire.com.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.
Home prices in major metropolitan areas fell at a record pace during January, underscoring a housing market in many key areas of the U.S. that is still stuck in 'price correction' mode. According to the widely-watched Standard & Poor's/Case-Shiller home price indices, prices fell 19.4 percent in 10 key cities during Janaury versus one year earlier, while a 20-city index fell 19.0 percent. Both represent record annual price declines, S&P said in a press statement.
The S&P data provides evidence of continued broad -based declines in the prices of existing single family homes across the United States, with 13 of the 20 metro areas measured in the monthly Case-Shiller data series showing record rates of annual decline, and 14 reporting declines January 2008.
“Home prices, which peaked in mid-2006, continued their decline in 2009,” said David M. Blitzer, chairman of the Index committee at Standard & Poor’s. “There are very few bright spots that one can see in the data. Most of the nation appears to remain on a downward path, with all of the 20 metro areas reporting annual declines, and nine of the MSA’s falling more than 20 percent in the last year.
Both the 10-city and 20-city composite price indices have been recording monthly price declines for thirty consecutive months, Blitzer added. Average home prices in the U.S. are now at levels last seen in late 2003.
Phoenix led with a report of -5.5 percent during January. Every MSA has had at least five consecutive months of decline, dating back to September 2008. On a marginally positive note, Cleveland, Los Angeles and Las Vegas are reporting a relative improvement in year-over-year returns, in terms of lesser rates of decline than last month’s values. Furthermore, Las Vegas, along with five other metro areas, showed a marginal improvement in monthly returns — albeit still negative.
The three worst performing cities, in terms of annual declines, continue to be from the Sunbelt, each reporting negative returns in excess of 30 percent. Phoenix was down 35.0 percent, Las Vegas declined 32.5 percent and San Francisco fell 32.4 percent. Dallas, Denver and Cleveland faired the best in terms of annual declines, down 4.9 percent, 5.1 percent and 5.2 percent, respectively, S&P said.
Interestingly, the nation's best major metropolitan area — Dallas — has still seen home prices fall 10.8 percent from that market's peak in June 2007. At least Dallas isn't Phoenix: the hard-hit city has seen prices fall 48.5 percent from a June 2006 peak in home prices, S&P said.
Write to Paul Jackson at paul.jackson@housingwire.com.
A story in Monday's New York Times ("Banks Starting to Walk Away on Foreclosures," March 20, 2009) rehashes a concept that's anything but new — vacant properties, and the headaches that go with them. But what's irksome more than anything else in the Times' coverage is the suggestion that vacant properties are "the next phase" of the nation's housing crisis.
Let's start with the premise of this latest example of psuedo-journalism, and the requisite villianization of the lender:
City officials and housing advocates [in South Bend, Ind.] and in cities as varied as Buffalo, Kansas City, Mo., and Jacksonville, Fla., say they are seeing an unsettling development: Banks are quietly declining to take possession of properties at the end of the foreclosure process, most often because the cost of the ordeal — from legal fees to maintenance — exceeds the diminishing value of the real estate.
The so-called bank walkaways rarely mean relief for the property owners, caught unaware months after the fact, and often mean additional financial burdens and bureaucratic headaches. Technically, they still owe on the mortgage, but as a practicality, rarely would a mortgage holder receive any more payments on the loan. The way mortgages are bundled and resold, it can be enormously time-consuming just trying to determine what company holds the loan on a property thought to be in foreclosure.
The Times takes much of the same tack as BusinessWeek did in its own cover story that looked at the exact same issue over one year ago ("Dirty Deeds," Jan. 8, 2008). The Times story here covers very little new ground relative to the problem of vacant properties, but is clearly just as content to paint the problem as one that is the fault of lenders, out to screw the proverbially stainless (and oft-hapless) borrower and/or stick it to local governments.
If only the issue of vacant properties were so simple. In truth, managing vacant properties is a massive headache — for borrowers, for lenders/servicers, for investors, and for municipalities as well. It's been a massive headache for all parties for a very long time, too, in certain locales. The costs can be significant, and a lack of partnership and communication can drive a stake into the heart of entire neighborhoods, especially in economically depressed areas.
A feature article in a recent issue of HousingWire Magazine ("When Nobody's Home," January/Febuary 2009) tackled this issue in far more depth — and I'd like to think with far more balance than anything the business press has been able to do thus far. An excerpt:
While it’s clearly in the best interest of a lender to maintain the condition of its secured collateral, “lenders and servicers face a double-edged sword when securing collateral against damage and depreciation prior to completion of the foreclosure sale,” explains Rob Hicks, vice president of industry relations and risk management for LPS Field Services, Inc. and LPS Asset Management Solutions, Inc. The twin companies provide complementary property management solutions for lenders and servicers nationwide.
In many ways, servicers are finding themselves squeezed by both investors and local cities when it comes to timing of property preservation efforts, a sort of damned-if-you-do, damned-if-you-don’t scenario.
For one thing, the failure to preserve collateral exposes the lender or servicer to actions by investors for neglect. And that says nothing of equally swift action against lenders and servicers by local code enforcement departments and/or courts in the form of fines, costly nuisance abatement, liens and/or demolitions. And, of course, there’s also the not-so-little matter of depreciation of collateral that, given the current market conditions, is likely to end up in the lender or servicer's REO inventory, Hicks said.
On the flip side, securing collateral prior to the completion of foreclosure sale exposes the lender or servicer to assertions by code enforcement and court personnel for code violations or nuisance abatement actions. And, of course, there is the threat of class-action lawsuits alleging abusive and/predatory servicing practices; and even allegations of theft and damage to personal property by borrowers that have long since abandoned the property.
“It is not uncommon for homeowners to file fraudulent claims against the servicer, claiming that valuable personal property, such as electronics or artwork, are missing from the property,” said Robert Klein, CEO of Safeguard Properties, a large field services provider. (Because, of course, everyone leaves a prized Rolex and stashed wad of cash equal to three months’ salary behind when they flee their house.)
And that's assuming that the servicer can even make a determination that the property has been abandoned ahead of a foreclosure sale, too — often more of an art than a science, since borrowers in such situations tend to go AWOL on the lender/servicer altogether. Imagine seeing a property in disrepair, and deciding to re-key and winterize the property, only to have the borrower show up and claim that such work was trespassing and a violation of their rights.
If borrowers aren't speaking to their servicer, stories like the one the Times used to kick off its story become all too common:
Mercy James thought she had lost her rental property here to foreclosure. A date for a sheriff’s sale had been set, and notices about the foreclosure process were piling up in her mailbox.
After Ms. James had her tenants move out, vandals hit the home. It is set for demolition, but the title is still in her name.
Ms. James had the tenants move out, and soon her white house at the corner of Thomas and Maple Streets fell into the hands of looters and vandals, and then, into disrepair. Dejected and broke, Ms. James said she salvaged but a lesson from her loss.
So imagine her surprise when the City of South Bend contacted her recently, demanding that she resume maintenance on the property. The sheriff’s sale had been canceled at the last minute, leaving the property title — and a world of trouble — in her name.
This isn't a sob story; it's a common refrain of what happens when a borrower — who still holds title to the property — goes dark on their lender/servicer. There isn't anything in the story that tells if Mercy James had let her servicer know she and her tenants had abandoned the property. I'd wager a guess that the answer here is no, given the outcome in this case.
The Times — and much of the business press that has covered this issue thus far — seems to fail to understand that the borrower's decision to walk away, go AWOL, and let the home fall into the hands of looters and into a state of disrepair, without so much as responding to any correspondence from the servicer, might be the very reason the lender was forced to cancel the sale in the first place. It's entirely possible that this outcome could have been avoided.
There's far more to consider here, including contesting the very notion that servicers tend to walk away from vacant properties, too. “The fact is, as an industry, mortgage servicers spend in excess of $2 billion annually to take care of vacant properties so they don’t become nuisances to neighbors and communities,” Safeguard's Klein told us in a recent feature story inside HousingWire Magazine. “Unfortunately, servicers who are the ‘good guys’ get lumped in with property flippers and Internet investors whose irresponsible practices have been major contributors to urban blight.”
And the ugly truth is that municipalities can be at fault here, too; lost revenues can have a way of driving some obstinate and counterproductive behavior from cities. Consider the following example from the Milwaukee Journal Sentinel last year:
[James Mulligan, an attorney representing banks] said the city’s refusal to negotiate building code violation fees … quashed at least one [property] sale.
“We were $1,500 apart on a sale,” Mulligan said. “If the city had forgiven $1,500 in code violations, they would have collected the taxes, and one home would be occupied rather than boarded up.”
What's also missing from much of the Times' latest lender witch-hunt is a look at the myriad of ways local municipalities are actually attempting to work with lenders and servicers to make it easier for them to secure and maintain properties they don't yet possess legal title to (meaning they don't have the legal right to enter and maintain the property).
HousingWire Magazine, for example, recently profiled a unique program being piloted in the city of Chula Vista in Southern California designed to work with lenders who identify vacant properties ahead of foreclosure. And we've also recently discussed a cutting-edge effort involving MERS now put into place to help local municipalities more quickly locate a direct contact for servicers when a property is found to be vacant. None of which you'll find in the Times' coverage (or BusinessWeek's for that matter).
Write to Paul Jackson at paul.jackson@housingwire.com.
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Fitch Ratings said late Friday that the financial picture at Ocwen Financial Corp. (OCN: 13.96 +1.53%) had brightened considerably in recently weeks, as the large independent servicing platform has faced questions over its liquidity in recent months that had put the subprime servicer and technology provider onto negative rating watch.
The rating agency said it will maintain its negative rating watch on the company, but cited "several positive developments" that it said would likely lead to a resolution of the negative watch within the next few months. Much of the concern surrounding Ocwen had been in regards to the servicer's ability to maintain sufficient access to liquidity to fund servicing advances.
Ocwen extended its investment line financed by auction rate securities through June 30, 2009 and repaid approximately half of the balance, Fitch noted; the servicer also renewed, increased, or added advance facilities while reducing advance funding requirements by $216.3 million in 2008. Renewing a credit facility that is set to expire in 30 days successfully would likely be the last positive step needed for Fitch to remove the negative watch and assign a 'stable' rating to the company's credit, Fitch said in a statement.
On March 20, the Federal Reserve also announced an expansion of its Term Asset-Backed Securities Loan Facility (TALF) to include asset-backed securities backed by mortgage servicing advances — the latest attempt by government officials to free up capital among strapped servicing operations being asked to shoulder much of the financial burden of bulk loan modifications and foreclosure moratoria. Read full story.
"Funding challenges aside, Fitch expects operating performance to improve in light of additional third-party servicing opportunities from the public sector," the rating agency said. Ocwen posted a net loss of $3.7 million, or 6 cents per share, in the fourth quarter 2008.
One of the largest opportunities in third-party servicing is tied to mortgage finance giant Freddie Mac (FRE: 0.00 N/A), which said in early February it had selected Ocwen for a pilot program to manage at-risk non-performing mortgages. Under the new pilot, a selected portfolio of higher risk mortgages that are at least 60 days delinquent will be given to a specialty servicer for what the GSE characterized as “intensive attention,” including the use of the streamlined modification program.
Ocwen also announced in mid-December it would spin off its technology and business process outsourcing business line, separating it from its core subprime mortgage servicing operation. Company officials confirmed in December they were targeting Q2 2009 for the spin-off, with current shareholders receiving shares of the new publicly-traded company as part of the transaction.
Write to Paul Jackson at paul.jackson@housingwire.com.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.
Twin housing finance giants Fannie Mae (FNM: 0.00 N/A) and Freddie Mac (FRE: 0.00 N/A), both now effectively under government control via conservatorship, may be taking on yet another expanded role in supporting U.S. mortgage markets, according to a report filed Monday at the Wall Street Journal. The news daily reported that the Federal Housing Finance Agency is considering using the GSEs to backstop the warehouse credit market, vital for so-called independent mortgage bankers that do not collect deposits from consumers to fund their lending activities.
Warehouse lines provide a non-depository lender a credit facility to fund the closing of mortgages; the Mortgage Bankers Association estimated recently in a letter sent to regulators that warehouse credit availability declined 85 percent between 2007 and 2008, to just $20 to $25 billion.
In a market expected to originate as much as $1.8 trillion in new mortgages this year — also based on a recently-updated MBA forecast — mortgage bankers (at least, non-bank mortgage originators) have been pushing for expanded access to credit to fund soaring demand for mortgage refinancings.
According to the Journal, the FHFA is considering a proposal to allow the GSEs to guarantee warehouse debt, and has asked the MBA to put together a detailed proposal on how a GSE guarantee of such credit facilities might work. The MBA and other independent mortgage bankers say a dearth of warehouse credit is allowing mega-banks like Bank of America and Wells Fargo — which have dominated first mortgage production thus far in 2009 — to effectively take market share away from other sources of origination volume; the MBA says this lack of competition is likely to push higher rates to consumers.
It's unclear just how a GSE guarantee of warehouse credit would function, or how the GSEs would fund such an effort; but the Journal suggests that Treasury and Federal Reserve officials have blessed the idea, and the MBA's John Courson told the Journal that he expects the trade group to have a final proposal developed by the end of this week.
Last week, the MBA suggested changing risk-based capital weightings for warehouse lines of credit, including assigning a ratio akin to GSE debt securities for warehouse lines used to fund loans saleable to the GSEs. Currently, warehouse lines are subject to a 100 percent capital weighting; the MBA wants to see that ratio reduced to as little as 20 percent in certain cases, and has argued that the high capital weighting assigned to warehouse lines has made the funding source an easy target to reel in for banks looking to improve their capital positions. See earlier story.
Write to Paul Jackson at paul.jackson@housingwire.com.
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments.
As the number of troubled borrowers continues to grow within the U.S. mortgage market, two trends are becoming amply clear: a focus is emerging on loan modifications, and the housing mess is working its way well into prime credit categories. Both points were underscored by a press statement Monday morning from HOPE NOW, a private sector alliance of mortgage servicers, non-profit counselors, and investors.
The group touted a 9 percent month to month increase in the total number of loan modifications during February, from 123,409 in January to 133,836 in February; but that increase was offset by a 11.3 percent decline in repayment plans. The result was that February's total "workout plans" — repayment plans and loan modifications — were down slightly in February to 244,474 from January's 248,175.
But the volumes of workout plans — likely to easily top 700,000 during the first quarter of this year — speaks as much about the increase in the number of troubled borrowers as it does of servicer's ability to manage an influx of such borrowers as effectively as possible.
Foreclosure sales soared in February, HOPE NOW reported — reaching 87,346, compared to 68,114 in January, as various foreclosure moratoria wore off and servicers restarted their proverbial engines. The pace of foreclosures in the first two months of 2009 suggest a 52 percent increase in foreclosures is likely to be seen in the first quarter of this year compared to 2008's totals.
Almost all of that increase is being driven in the prime credit sector, which saw foreclosures jump from 30,413 in January 2009 to 55,530 in February — in fact, February's prime foreclosure totals were almost equal to the 60,699 prime foreclosure sales reported by HOPE NOW for the entire first quarter of 2008. During the same time frame, subprime foreclosure sales have steadily decreased.
And despite the increases in raw numbers, troubled prime borrowers remain far less likely to see their loans modified, a trend HousingWire first identified months ago. During February, 39.7 percent of loan workouts for prime borrowers were loan modifications; in contrast, 66.5 percent of subprime loan workouts were loan modifications. Servicers do appear to be focusing on the disparity, however — the prime loan modification percentage for February represents the highest monthly modification-as-a-percentage-of-workouts ratio since HOPE NOW first began reporting data in July 2007.
“Currently 5.5 percent of the total mortgage market is 60 days or more delinquent,” HOPE NOW's executive director Faith Schwartz said. “Because of this, HOPE NOW members are working hard to help the administration implement its recently-announced foreclosure prevention initiative as well as working on additional ways we can be more efficient in helping at-risk homeowners.”
If the data is any indication, an increasing focus on the prime credit sector is likely to be the servicing sector's next big move, and the focus of future HOPE NOW press statements covering loss mitigation efforts by the industry.
Write to Paul Jackson at paul.jackson@housingwire.com.
