Archive for July, 2009
A July securitization report out of Deutsche Bank draws an important link between spiking unemployment, rising delinquencies and plunging home prices.
Deutsche researchers note June's 9.5% unemployment rate is well above the 5.6% level seen a year ago and marks the highest rate since the early 1980s. Much has changed since the '80s, including the extent of the asset-backed securities (ABS) market. As the ABS market expanded, the report notes, performance of consumer-related ABS and national employment trends became inextricably linked.
The report notes that, while mortgage delinquencies and particularly subprime delinequencies began increasing in early 2006 due to factors other than unemployment (loose underwriting standards, fraud, etc.), the deterioration in the labor markets furthered hampered recovery in mortgage credit performance.
Deutsche researchers also found an historic inverse relationship between unemployment and house price declines, in that home prices plunge as unemployment spikes, further indicating employment status and asset value is linked.
The researchers therefore look for relief in the consumer-related ABS market in terms of employment recovery. One of the employment factors, the number of temporary employees on nonfarm payrolls, continues to decline, indicating companies feel increasing confidence in hiring permanent — rather than temporary — workers, according to the Deutsche researchers.
They note the rate of increase in unemployment may soon plateau, while initial claims for jobless benefits have begun to tick down recently.
"Jobless claims have been a reliable leading indicator in the past," the report concludes. "But based on this measure, and assuming the recent decline in jobless claims doesn’t reverse itself, a downturn in the unemployment rate still is likely 6-12 months away."
Write to Diana Golobay.
A fresh report by the Boston Federal Reserve Bank found that servicers showed hesitance to modify mortgages since the foreclosure crisis started in 2007.
Researchers concluded that lenders renegotiated with fewer than 3% of the seriously delinquent borrowers in the report’s sample. Re-default and self-cure risks make renegotiation unattractive to investors, and, as a result, lenders expect to recover more from a foreclosure than a modified loan, according to the report.
If a lender renegotiates with a borrower by reducing the principal balance on the loan, foreclosure can be avoided, which is considered positive for the borrower and the market. But the report explores the key to the appeal of renegotiation: Does it also benefit the lender?
The report finds that it doesn’t, but not because of the hindrance of complex securitization webs. This is surprising given the large losses of foreclosure, but the report cites two risks that make lenders skittish about other alternatives.
More than 30% of delinquent borrowers lift themselves up to current payments without a modification. The report concludes that 30% of the money spent on modification is then wasted on this “self-cured” risk.
The second cost comes from re-default. About 40–50% of all modifications fall back into delinquency within six months, according to the study. For them, foreclosure was simply postponed, the report concludes.
The Boston Fed's report uses data collected by Lender Processing Services (LPS: 16.78 +1.39%), a provider of mortgage processing services. The data set covers 60% of the US mortgage market.
Write to Jon Prior.
Widespread foreclosure freezes that began in late last year and ran through the first quarter of this year appear to have done little to change the outlook for troubled borrowers — and may even have made things worse, for everyone involved.
A report released recently by due diligence and surveillance specialist Clayton Holdings, Inc. highlights the early returns of various moratoria put into place by servicers ahead of the Obama administration's Making Homes Affordable (MHA) modification and refinance programs. A number of the nation's largest servicers had released statements earlier this year announcing their intent to suspend foreclosure sales until details of the program were released, generally until the end of March.
According to Clayton's data, halting foreclosures did little to improve the outlook for most troubled borrowers: of the loans that the firm's analysts estimated would have otherwise had foreclosure sales completed during the "freeze" period, 93% remained in foreclosure or were moved into REO status by April among those servicers that implemented a widespread moratorium on foreclosure activity. In comparison, among servicers that did not implement a large scale freeze on foreclosures, 89% of loans estimated to have progressed to foreclosure sale by the end of March either remained in foreclosure status or had been moved into REO.
The data is featured in Clayton's monthly InFront RMBS report, which provides an early snapshot of RMBS performance data ahead of traditional monthly remittance reports.
The data seem to illustrate just how little freezing foreclosures really helped matters: Among servicers implementing a moratorium, just 7% of borrowers facing imminent foreclosure were "helped," either in the form of repayment plans, modifications, reinstatements, or short sales. That number actually grew to 11% among servicers that did not implement a foreclosure freeze — a result that is clearly at odds with reports in the popular press, which have painted the freezes as a needed step to help troubled borrowers.
Servicing executives that HousingWire spoke with suggested that the real problem is negative equity, or borrowers who have seen the value of their homes drop precipitously in the most troubled housing markets. "Negative equity puts borrowers into a precarious situation," said one servicing executive, who asked to remain anonymous. "Borrowers are over-leveraged, on homes, cars, and everything else, to begin with."
"Halting foreclosures didn't solve for the leverage problem, or magically make equity appear out of nowhere," he said. "So it really ended up digging a deeper grave for many consumers, in the form of further arrearages and potential fees that get added to the mountain of debt that already must be repaid to bring a loan current. And I hate to see it."
Another executive, who runs a loss mitigation department at a subprime servicer and asked to remain anonymous, said his shop has "gotten really, really creative" with many of the solutions offered to troubled borrowers, but in many cases sees borrowers that are simply beyond help. "Say we've got a borrower that went 100 percent on a $500,000 home in California that's now worth $375,000, using even a more vanilla interest-only loan," he said. "This borrower loses their job and comes calling. Even if we forgive some of the debt, we can't solve long-term for a lack of income."
Servicers also note that a troubling trend is emerging, where borrowers are increasingly refusing to consider repayment plans or offers for a loan modification, believing that Obama administration's modification plan guidelines entitle them to a larger payment reduction than what is actually possible. "It's just misinformation on the part of consumers, but it's certainly not helping anyone address the reality of the situation they're in," said one of the servicing executives.
Both servicing executives HW spoke with also stressed that their operations are doing all they can to help troubled borrowers, but suggested that details on the Obama administration's modification plans were slow to arrive, which hampered modification efforts during the moratorium period. Analysts at Clayton noted the same point in their own discussions with servicers, noting that many had said they "were given minimal detail up front, and instead relied on their own loss mitigation and loan modification programs to review loans during the moratorium timeframe."
As a result, and perhaps not surprisingly, 60+ day delinquencies for both subprime and Alt-A mortgages are now at one-year highs, according to Clayton's surveillance data. It's a trend that isn't just painful for consumers: it's a trend that is painful for investors, servicers, and lenders alike, too — all of whom must ultimately bear the cost of carrying a bad loan to some sort of finish line, whatever that finish might eventually look like (and however far away it may be).
Paul Jackson is the editor-in-chief of HousingWire magazine and Housingwire.com.
Low prices and high affordability both urge consumers back to the housing market, according to Realtor.com’s national homeownership survey.
Nearly two-thirds – 65.2% — of potential homebuyers surveyed named increased affordability as a motivator them to purchase a home. Foreclosure bargains in their communities are the motivating factor for 19.6% of potential buyers surveyed.
That belief is substantiated by the National Association of Realtors’ (NAR) Housing Affordability Index, which has increased 29% overall and 19% for first-time homebuyers. Affordability is at its highest point in 28 years, according to the NAR index.
“Value is clearly motivating potential home buyers, and today's new level of affordability is still an under-appreciated reality that needs to be explored,” said Realtor.com president Errol Samuelson in a release. “The variety and quality of homes currently within reach of the average American family is much greater than most people realize. Making credit available to responsible borrowers and building consumer confidence in the economy are now key factors in restoring vitality to the nation's housing market.”
The survey also showed that low prices aren’t making sellers wary of the market. Only 10% of potential sellers said they were holding off putting their home on the market because of lower prices.
In addition, 15.5% of potential buyers said they were motivated to buy soon because they believe prices are as low as they’ll go, despite a report issued earlier this week by PMI Mortgage Insurance Co. that estimated home prices may be lower two years from now in 85% of the country’s metropolitan statistical areas.
A concern over interest rates increasing was the factor an additional 15.5% of Realtors.com's respondents said is motivating them to buy, while the federal government’s $8,000 tax credit for homebuyers is the motivation 14.6% of respondents said they need to get into the housing market.
Write to Austin Kilgore.
Fitch Ratings this week said it expects 2006 through 2008 vintages of commercial mortgage-backed securities (CMBS) to "substantially underperform" earlier vintages.
These vintages are vulnerable to significant performance issues, given their origination at peak market conditions and weaker underwriting standards, the rating agency said in a report this week. The news arrives as the latest indication that the worst of the CMBS fallout is yet to come, as the CMBS market tends to trail behind the residential MBS market in terms of both gains and losses.
The rating agency expects to take "substantial rating actions" on these recent vintage transactions, but it still sees senior triple-A classes reasonably safe from downgrades due to the present performance expectations.
Commercial mortgages in '06 through '08 CMBS vintages were originated near historic peaks. Fitch notes property values fell from their respective peaks by about 23% to date: by 25% on hotel properties, 27% on retail and 23% on multi-family. Cash flows from these vintages suffer as a result. Fitch estimates income on multi-family has fallen 4% from its peak level and projects a 12% decline in the five-year forecast for multi-family.
Fitch expects 93% of loans in the '06 through '08 vintages are at risk of default; 25% term defaults, 68% maturity defaults and the rest assumed to refinance.
"The very high level of maturity defaults results from assuming that income and value declines continue for the life of the transaction," analysts said in the report. "In Fitch’s view this is a conservative assumption, given the cyclical nature of commercial real estate."
"Predicting the timing and degree of a commercial real estate recovery is speculative," the analysts added.
Write to Diana Golobay.
For a detailed look into the current commercial property crisis, please see our feature in the July issue of HousingWire magazine, available now.
For the first time since 2006, the nation posted positive quarter-over-quarter price returns in Q209, according to the July Home Data Index Report released Thursday by Clear Capital.
Fueled by strong seasonal spring sales in the Midwest, which had a price increase of 5.3% over Q109, the overall US price growth increased by 1.7% in a quarter-over-quarter comparison.
The South also added to the surge, climbing 2% from the previous quarter.
"We are encouraged to see the first quarterly national appreciation in three years," says Clear Capital president Kevin Marshall in the report. "Foreclosure moratoriums, first time home buyer incentives, and investment activity have contributed to this springtime appreciation of home price trends.
Lively seasonal sales also helped Ohio’s three largest cities to top rolling quarter-over-quarter price gains. Cleveland gained 19.6%. Columbus and Cincinnati prices climbed 15.6% and 12.9%, respectively. Las Vegas and Orlando posted the greatest losses at -12.4% and -9.3%.
Farther South from Orlando, the Miami MSA market finds itself in the pack of lowest performing major markets in June. The area had a price decline of 38% for the year, but the speed of its fall is beginning to slow, according to Clear Capital's report.
The data and solutions provider for real estate asset valuation, investment and risk assessment released the report to offer a real-time look at pricing conditions. The July report considers data compiled through June 25.
Write to Jon Prior.
Foreclosures dropped across the country in Q209, according to the U.S. Foreclosure Index from property information specialists ForeclosureS.com.
Foreclosures dropped 11% during Q209 to 205,01. The crowded Northeast region led the way with a 32% fewer families losing their homes than in the previous quarter. Pre-foreclosures – notices of default early in the foreclosure process – fell by 10% from Q109 to 494,078. In the Midwest, 42% fewer notices were given.
June’s 61,573 foreclosures marked a record low for the year. Foreclosures in June shrunk by 13% from May and 14% from 2009’s high in February. June's pre-foreclosures fell by 24% from May and 35% from March’s peak.
“These huge drops — double-digit in many parts of the nation — are a sigh of relief for the economy and housing markets as they bump along toward recovery," said Alexis McGee, president of ForeclosureS.com, in a corporate release. "Despite higher unemployment rates, industry and government stimuli are making a difference.”
Also, as a sign of a recovering market, the total of nationwide foreclosures from January to June 2009 was 3% lower when compared to the same time frame in 2008. The decline isn't dramatic, but 2009 has not seen the increase in new filings that most expected, McGee said in the release.
But the clouds haven’t cleared yet. For example, in the Midwest, Illinois’ numbers reflect its up-to-90-day moratorium, which began in April. June foreclosures are down 45% for the state from the first quarter, but pre-foreclosures spiked 88% from May. When the moratoriums expire, McGee predicts that the foreclosure and pre-foreclosure rates will uptick.
But other markets could cushion the blow. Foreclosed homes in California declined by 26% from last year.
“As the numbers reflect, the recovery is a mixed, up and down process, but there are plenty of positive signals,” McGee said.
Write to Jon Prior.
[Update 1 includes details on the FDIC's legacy loans arm of the PPIP]
The US Treasury Department officially unveiled the Public-Private Investment Program (PPIP), on Wednesday releasing long-awaited details on the program.
The PPIP is divided in two major programs — the securities branch and the loan branch — which together aim to clear mortgage-related securities and other toxic assets from banks' balance sheets.
In the "Legacy Securities" program, the Treasury will invest up to $30bn of equity and debt to match contributions by private investors in an effort to buy up so-called "legacy" securities — initially, commercial mortgage-backed and non-agency residential mortgage-backed securities.
Treasury selected nine firms from more than 100 unique applications to act as fund managers for this program. The firms chosen are: AllianceBernstein and its sub-advisors Greenfield Partners and Rialto Capital Management; Angelo, Gordon & Co. and GE Capital Real Estate; BlackRock; Invesco, Marathon Asset Management, Oaktree Capital Management, RLJ Western Asset Management, The TCW Group and Wellington Management.
The Treasury said in a joint statement that these fund managers will have up to 12 weeks to raise at least $500m of capital from private investors, and then the Treasury will match the equity capital. Each fund manager must also invest a minimum $20m of firm capital into the investment fund. Then the fund managers will be able to purchase eligible assets.
The "Legacy Loans" program within the PPIP is designed to facilitate market-priced sales of toxic assets. The Federal Deposit Insurance Corp. would oversee a number of vehicles that would purchase troubled assets from banks or directly from the FDIC. Private investors would invest equity capital through the program and the FDIC in turn would provide a guarantee for debt financing issued by these vehicles.
The FDIC in June acknowledged the postponement of a previously planned pilot sale of assets by open banks as part of the program, but said the program itself would continue. FDIC said it will test the funding mechanism — modeled after that used by the Resolution Trust Corp. — during the summer and plans to solicit bids for the receivership asset sale in July.
Write to Diana Golobay.
Brookefield, Wis.-based Fiserv upgraded its Loan Servicing Platform to comply with the US Treasury Department’s Home Affordable Modification Program (HMP), the company announced Wednesday.
The program sets guidelines for the mortgage industry and may facilitate modifications for as many as 4m troubled homeowners. Fiserv’s software allows servicers to track and study loans to devise the most effective workout strategy.
“Fiserv has been fully engaged with the Treasury and [program administrators Fannie Mae and Freddie Mac] in order to provide all the functionality to meet the program's specific requirements,” Fiserv assistant vice president Greg Fontenot said in a release. “Our continual investment enabled our Loan Servicing Platform to deliver the flexibility and capability required to meet the HMP guideline as soon as it was announced in March.”
The changes are part of a two-year-long overhaul of the Loan Servicing Platform that has focused on enhancing the loan modification and loss mitigation features of the software.
The software can determine whether a borrower is eligible for a HMP modification. It also includes built-in loss mitigation workflow tools and ensures secure electronic delivery of documents and full escrow analysis processing.
Fiserv said future enhancements will include additional deferred principal functionality, increased functionality to gather personal financial information, and an HMP-specific screen to present a full picture of the modified loan.
Write to Austin Kilgore.
Freddie Mac, in its role as administrator of the federal government’s Making Home Affordable program, created a YouTube video advising home owners on the documents needed to effectively negotiate a mortgage modification.
In the two-minute video, Freddie Mac suggests borrowers prepare a variety of documents to make calls with mortgage modification agents more efficient, including:
- Most recent mortgage statement
- Pay stubs or other documents showing household's monthly pre-tax income
- Most recent tax return
- Second loan or home equity line of credit statements
- Account balances and minimum monthly payments on credit cards, car loans, student loans or other debt
- A short, concise description of the financial hardship that is causing – or leading to – a mortgage delinquency
While Freddie’s video isn’t getting as many views as clips from Michael Jackson’s Tuesday afternoon memorial service, more than 500 people have viewed the English version, and the Spanish version has more than 100 views.
It's just one of many approaches the industry is using to reach out to borrowers.
In the August edition of HousingWire, we’ll take a look a different loss mitigation techniques used to reach out to distressed borrowers, most notably, the literally thousands of field reps who physically go to borrowers’ homes to speak with them.
While the technique may seem like the tactics of a loan shark you’d see on "The Sopranos," these days, lenders are focused on customer retention, especially for borrowers whose financial crisis can be resolved with a mortgage modification.
Write to Austin Kilgore.
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