Archive for August, 2009
A Federal Housing Administration (FHA) program for purchase loans on foreclosures or other properties in need of rehabilitation gained in popularity in 2009.
As of June 2009, the volume of new loans covered by the FHA 203(k) Home Rehabilitation Mortgage Insurance Program nearly doubled the amount from all of last year, according to a report Thursday from the Office of the Comptroller of the Currency (OCC).
Congress established the 203(k) loan program in 1978 to help borrowers gain and rehabilitate single-family properties. It allows FHA-insured financing for structures with up to four dwelling units in need of repair, but the owner must occupy the subject property or it can be owned by eligible nonprofits or government agencies.
Usually, borrowers looking to rehabilitate properties must obtain a short-term financing loan to purchase the home, another short-term loan to cover rehabilitation costs and third permanent financing to pay off the first two. The 203(k) loan condenses the rehabilitation financing process by allowing a borrower to take out one loan to cover costs rather than the three separate loans.
“The 203(k) Program is an important tool that can help mitigate a lender’s risk, while at the same time restore some of the nation’s foreclosed properties and help stabilize neighborhoods,” said Comptroller of the Currency John Dugan in a release.
As of June 2009, real estate data provider Realty Trac saw 2m foreclosure houses on the market, according to the OCC's report. And, with many of these foreclosures in need of repair, the report indicates significant room for use of the 203(k) program.
From 1999 to 2005, the amount of 203(k) loans declined, but the volume started to climb in 2006 when approximately 3,000 loans joined the program. In the fiscal year of 2008, the program insured 6,749 loans, doubling from 2007, but the program topped 11,000 as of June 30, 2009.
The volume of 203(k) loans mirrors the growth and fall of the housing bubble. While prices soared in 2005 and 2006, the demand for the program dwindled. After the bubble burst and foreclosure inventories stacked up, the 203(k) once more attracted borrowers. The volume of loans originated under the program is back up to a level unseen since 1999.
“In fiscal years 2008 and 2009, demand for 203(k) loans increased because of limited availability of home equity lines of credit to make property repairs,” the report reads.
In total, the program insures approximately $2.7bn in outstanding loans.
Write to Jon Prior.
The saga around second liens continued on Thursday as regulators issued a letter to financial institutions, aiming to end part of the dispute on conflicts of interest present in modifying first liens on a property also secured by a second lien in a subordinate position.
The Federal Financial Institutions Examination Council sent a letter to Federal Deposit Insurance Corp. (FDIC)-supervised banks, saying they should modify first liens when it's in the best interest of investors and owners, despite any ownership of the second lien by the bank.
"A servicer's decision to modify the first lien mortgage should not be influenced by the modification's potential impact on the subordinate lien loan and vice versa," the FDIC said. "Any ownership interest in the subordinate lien cannot be a consideration."
The council includes of FDIC chairman Sheila Bair, Office of Thrift Supervision acting director John Bowman, Office of the Comptroller of the Currency chairman John Dugan and Board of Governors of the Federal Reserve System member Daniel Tarullo.
The letter said servicers must act on behalf of owners/investors of serviced residential mortgage loans and should modify the first lien mortgage when doing so would produce a greater anticipated recovery than inaction. The council said the servicer should modify the first lien loan "regardless of any potential effect" on the subordinate lien.
The opposite, the letter said, is also necessary — that servicers must modify subordinate liens when it is in the best interest of the owners/investors.
The letter arrives in the midst of discussions between lawmakers, regulators and lenders on how best to address the different investment positions.
Lawmakers in July called for bank regulators to amend the way banks account for subordinate second liens on residential properties in terms of loan loss reserves. They argued banks holding the liens at potentially inflated values — without allowing for greater loss reserves — puts second lien holders on the defense when it comes to modification of first liens.
The FDIC also issued a letter to banks, urging more comprehensive consideration of subordinate liens in calculating for loan loss reserves.
Write to Diana Golobay.
The British housing market is showing signs of stabilization, though monetary policy and master trust performances remain key areas of caution.
The Bank of England’s Monetary Policy Committee voted to keep the official bank interest rate at 0.5%. While very low, the committee could have reduced it even further to promote lending but deemed it unnecessary.
The committee also voted to increase its commitment to the asset purchasing program with the financing of an additional £50bn (US$83.8bn) in central bank reserves, bringing the new total investment to £175bn.
At the same time, the Royal Institution of Chartered Surveyors (RICS) changed its housing price forecast that home prices will fall 10% in 2009. RICS now believes Q409 prices will be slightly higher than in Q408, but warned slow activity will keep the housing market at low levels.
While still below 2008 levels, UK mortgage lender Halifax reported housing prices increased 1.1% in July.
Moody’s Investors Services also threw its hat in the cautious optimism ring, after conducting a sector review of 13 UK residential mortgage-backed securities (RMBS) master trusts and concluding that while assets are not performing at peak levels, the trusts are “resilient.”
The 13 master trusts are British banks’ repositories for £244bn in prime mortgage assets, about 20% of the UK’s total mortgage debt. A RMBS master trust is tied to large financial institutions and any loses, especially to double and/or triple-A would likely have monumental negative market impact. Two master trusts in particular are expected to deliver the poorest performance: Granite by (now nationalized) Northern Rock and Aire Valley by Bradford & Bingley a specialist lender in the buy-to-rent space.
"If the number of repossessions is in line with that observed in the early 1990s and the loss severities remain at the levels seen so far this year, the result would be a weighted-average loss of 1.24% across the master trust sector," says Jonathan Livingstone, a Moody's analyst and co-author of the report.
Nonetheless the WAL varies significantly from 0.65% for the Gracechurch master trust containing mortgages originated by Barclays to 2.02% for Granite.
"All investment grade notes would require asset losses at twice this level before incurring any loss. Furthermore, increasing Moody's expected loss to early 1990s stress levels would not in itself result in a rating impact on the UK RMBS master trust sector," explains Anthony Parry, a Moody's analyst and co-author of the report.
The recession in the British economy in the early 1990s is often used as a benchmark to model how bad housing may get, just as the United States often refers to conditions during the Great Depression. Moody’s expects foreclosures to decrease the value of the Master Trust sector by 1.24%, but declined to downgrade the trusts from their coveted triple-A status.
Write to Austin Kilgore.
Litton Loan Servicing, the servicing arm of Goldman Sachs, signed an agreement with the US Treasury Department today to become the 40th participant in the Home Affordable Modification Program (HAMP).
HAMP allocates funds from Troubled Asset Relief Program (TARP) to servicers as interest rate subsidies or to distribute to participating lender/investors or borrowers.
In total, the Treasury allocated $21bn in TARP funding caps to the institutions, based on the latest TARP financial report from August 4. The Treasury may adjust individual caps based on actual participation in the program.
Litton did not disclose the amount of funding under its cap before this story was published, but a history of modification efforts indicate a potential for substantial participation.
"Our company has used modifications as the primary method of helping homeowners avoid foreclosure,” says Larry Litton, Jr., Litton’s CEO, in the release.
For the 12 months leading up to the HAMP participation, Litton modified more than 44,000 loans or 10% of their portfolio, Litton said.
“As the details of the federal program emerged, we continued to modify loans, and by adopting this program, we will continue to make every effort to keep homeowners in their homes,” Litton said.
Since March, Litton offered more than 38,000 modifications to homeowners and established an infrastructure to implement the program, according to a corporate release. Currently, the Houston-based company services nearly 370,000 mortgage loans across the country.
Earlier this week, Housing Wire reported that the Association of Community Organizations for Reform Now (ACORN) requested more from HAMP to stop the “hemorrhage” of foreclosures across the country and called for a halt of foreclosure for any HAMP-eligible property.
Write to Jon Prior.
Negative equity and rising unemployment levels are pressuring the performance of US Alt-A residential mortgage-backed securities (RMBS), leading Fitch Ratings to take action on 767 deals.
"Home price declines have resulted in negative home equity for approximately half of the remaining performing borrowers in the 2005-2007 vintages and approximately 10% of the remaining performing borrowers for all transactions prior to 2005," said managing director Vincent Barberio. "Unemployment is up significantly since our last Alt-A rating review, particularly in California where the unemployment rate has jumped from 8% to a record-high of 11.6%."
The unemployment figures and increasing negative equity positions pressure the roll rates of performing borrowers into delinquency status despite the increased seasoning of the loans, Fitch said. Servicers so far modified 2% of Alt-A borrowers that are now listed as 'current.' The performance of Alt-A modifications so far indicates a re-default rate of more than 50% 12 months past modification.
The Fitch-rated Alt-A transactions consist of 64% fixed-rate loans, 30% hybrid-ARM adjustable-rate mortgages (ARMs) and 6% option-ARM loans. The ratings agency said it now expects losses of 1% of the original pool balance on pre-2005 vintages, 8% on 2005 vintages and 18% and 26% on 2006 and 2007 vintages.
Write to Diana Golobay.
Aided by housing affordability, mortgage rates took a slide across the board for the week ending August 6, according to mortgage giant Freddie Mac (FRE: 0.00 N/A).
The average rate for 30-year fixed-rate mortgage (FRM) registered at 5.22% with an average 0.6 point, dropping from last week when it averaged 5.25% and 6.52% from last year. The 15-year FRM this week averaged 4.63% with a 0.6 point, declining from 4.69% a week ago and 6.10% from the same week last year.
The Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 4.73% with 0.6 point, slipping from 4.75% last week and 6.05% last year. One-year Treasury-indexed ARMs averaged 4.78% with 0.5 point, a drop from last week’s average of 4.80% and 5.22% this week a year ago.
“Better-than-expected economic reports helped to keep mortgage rates low this week,” said Frank Nothaft, Freddie Mac vice president and chief economist, in the weekly report.
A separate survey from Bankrate.com showed that mortgage rates made modest increases from last week.
The benchmark 30-year FRM rose to 5.65% from 5.59% four weeks ago but remained submerged from 6.74% last year. The 15-year FRM average rate jumped to 4.97%, and the rates for five-year ARMs grew to 5.03%.
Write to Jon Prior.
[UPDATE 1: clarifies loan loss reserves, claims]
MBIA’s (MBI: 12.18 +1.50%) Q209 profit of $894.7m ($4.30 per share) is down 47% from its year-ago period profit of $1.7bn.
But the Armonk, NY-based monoline hasn’t written any new business during the first half of the year and the quarter’s recorded profits came in large part from decreases to its loan loss reserves MBIA was able to make after absolving itself of an estimated $1.1bn in obligations from defaulted second-lien mortgages it said should have never been securitized to begin with.
MBIA conducted a forensic review of more than 23,000 delinquent and defaulted second-lien mortgages contained in 24 insured residential mortgage-backed securities (RMBS) and found they “breached the representations and warranties in the related insured RMBS securitization,” MBIA said in its Q209 report.
As a result, MBIA said the sellers and servicers are contractually obligated to repurchase the loans at a cost equal to the outstanding principal plus accrued interest or replace them in the securities with eligible mortgages.
The repurchase and/or replacement of the mortgages is under way, and MBIA said the total recovered could be less if servicers are able to successfully challenge the claims in court. Moving forward, MBIA will continue to review mortgages and expects more are subject to repurchase.
MBIA paid out $644.6m in claims during Q209, mostly for second-lien mortgages. It also incurred $353.7m in losses on insured second-lien mortgages.
The new losses highlight continued troubles for second-lien mortgages. President and chief financial officer Chuck Chaplin said MBIA expects to continue to pay out claims on insured RMBS, but that the company has the resources to cover the payments.
Chaplin added the firm has “laid the groundwork” to begin writing new business, specifically municipal bond insurance.
Earlier this week, the Federal Deposit Insurance Corporation called on banks to beef up loan-loss reserves for second-lien mortgages.
Lenders and regulators aren’t seeing eye-to-eye on the value of second-lien mortgages, now that so many homeowners are underwater on their mortgages. Lawmakers say some junior-lien holders, who believe their loans still hold value, are resisting efforts to modify the loans, slowing down the modification efforts of first-lien lenders.
Write to Austin Kilgore.
Market speculation on a move by the administration to ultimately wind down the government-sponsored enterprises (GSEs) within the next 18 months picked up this week, with Moody's Investors Service indicating a positive outlook for bondholders under government support of the GSEs.
But according to a Barclays Capital analyst, Ajay Rajadhyaksha, a winding down of the GSEs would upset the agency mortgage-backed securities (MBS) market.
"[I]f the GSEs are spun off, the portfolio certainly goes into payoff mode," Rajadhyaksha wrote in a research note Thursday.
Additionally, a quick winding down would see the GSEs cleaning the delinquency pipeline by buying out delinquent loans, which would then land in a federally-backed entity. This restructuring would invariably disrupt the agency MBS market, he said.
If privatization occurs with the GSEs' investment portfolios, the debt would lose government backing, "an unthinkable proposition," according to Rajadhyaksha. The existing guarantee book, which is already facing massive losses to come, would likely stay with the government in such a scenario.
"By default, the only business that can be privatized is new guarantee business," Rajadhyaksha said. "But agency MBS buyers, especially in foreign countries, are likely to be unhappy about the prospect of new agency MBS that is not backed by the US government. While we are not sure that the administration is thinking of a mortgage world without government backing, the mere possibility should make some MBS investors nervous.
Write to Diana Golobay.
Disclaimer: The author held no relevant investments at the time this story was published.
Denver-region home sales for June spiked from May, but activity remains at the lowest level for a June in at least 11 years.
For the Denver-Aurora metro area, 4,562 new and resale homes and condos closed escrow, an uptick of 31.5% from May but down 10.5% from a year ago, according to a report from MDA DataQuick, a firm that tracks real estate trends across the country. It’s the lowest June total since DataQuick’s began tracking statistics in the Denver region.
The only category that posted an annual gain were resales and condos, which rose 6.5% from a year ago.
The median price paid for all new and resale homes and condos climbed to $210,000, the highest level since $215,000 in August 2008. It’s a jump by 6.1% from May but down by 4.5% from a year ago. At its peak in June 2006, the median sales price in Denver registered at $247,569.
Government-insured FHA loans, an attractive form of financing used by first-time home buyers, made up 47.5% of all June activity. Absentee buyers, who are usually investors or second-home buyers who have their property tax records sent to another address, bought 19.6% of all homes last month.
Write to Jon Prior.
House prices across the US increased 5% over the previous quarter.
All regions saw quarterly gains as of July, with the Midwest soaring 11.2%, the South rising 5.3%, the Northeast posting a 2.4% increase and the West gaining 1.1%, according to Clear Capital.
The real estate asset valuation, investment and risk assessment provider tracks price changes on a rolling quarter basis, which it says reduces multi-month lag time for investors, buyers and servicers looking for accurate data. Company president Kevin Marshall acknowledged the emerging argument in the industry over whether the rising trends show signs of green shoots or seasonality.
“People do buy and sell more homes in the summer, and as a result prices do increase during this season," he said.
“As with any housing recovery," he added, "small pockets of neighborhoods and specific price tiers are leading the way and posting gains. As individual markets turn, it’s very easy to under price REO listings when you don’t have the most recent, geographically relevant data. Everyone working to get us out of this downturn needs to be very aware of this.”
Regionally, the West gained on improved interest in its high REO saturated markets. This saturation "typically increases the volatility of these markets" and may keep the gap between the lowest performing region, the West, and the South's high performance, Clear Capital said.
More than half of the highest performing local markets doubled their quarterly gains from last month's report. Clear Capital said the gains reflect improving market demand, allowing banks to receive a higher sales price for REO properties, which represent up to 60% of all sales in some regions.
Several Ohio markets led the nation in terms of quarterly gains on a local basis. The metropolitan statistical area (MSA) including Cleveland saw a 46% quarterly gain in prices, even though the REO properties accounted for 41.1% of sales.
The Las Vegas-Paradise MSA posted the worst performance on a quarterly basis, dropping 9.1% in the last quarter as REO saturated 66.9% of its sales.
Write to Diana Golobay.
