Archive for December, 2009
Financial institutions that received bailouts through the Troubled Asset Relief Program (TARP) will soon have repaid nearly half of taxpayer funds received, according to a letter from US Treasury Department secretary Timothy Geithner to Speaker Nancy Pelosi (D-Calif.) and Senator Harry Reid (D-Nev.)
In the letter, Geithner extended TARP to Oct. 3, 2010, although he said he does not expect to deploy more than $550bn of the program's $700bn potential.
Geithner said the Treasury expects to recover all but $42bn of the $364bn in TARP funds disbursed in fiscal year 2009. He also expects $175bn of repayments by year-end 2010.
"The combination of the reduced scale of TARP commitments and substantial repayments should allow us to commit significant resources to pay down the federal debt over time and slow its growth rate," he said.
He confirmed TARP is expected to cost taxpayers at least $200bn less than an August projection, as HousingWire previously reported this week.
The Capital Purchase Program, the branch that facilitated most TARP investments in banks, allocated $240bn prior to the Obama Administration's arrival in office, Geithner said. Since January 20, the Treasury committed another $7bn to banks, mostly small institutions.
Geithner added that major US banks subject to "stress tests" earlier this year raised over $110bn in high-quality capital from the private sector. Banks will soon have repaid $116bn of TARP funds, he said.
The Treasury's commitments through TARP in 2010 will be limited to mitigating foreclosure, facilitating small business lending and supporting securitization markets through the Term Asset-Backed Securities Loan Facility (TALF). Geithner said the Treasury will not use remaining TARP funds unless necessary to respond to an immediate economic threat.
Geithner's announcement follows the Congressional Oversight Panel's (COP) December report on TARP (available to download here) concluding weaknesses remain in the financial system despite the program's efforts toward stabilization.
"Although the government’s response to the crisis was at first haphazard and uncertain, it eventually proved decisive enough to stop the panic and restore market confidence," COP said.
But problems remain, with credit remaining tight, bank failures continuing on a weekly basis, foreclosures rising and joblessness escalating. Markets still depend on government support, COP said, as "an implicit government guarantee of major financial institutions…poses a difficult long-term challenge" as the government considers exit strategies.
Write to Diana Golobay.
The Federal Reserve's monetary policy, lender of last resort and supervisory functions are not only deeply interconnected, but essential for the Fed's role in facilitating healthy financial markets, said William Dudley, president and CEO of the New York Federal Reserve.
Dudley drew a lesson from the drawn-out restructuring plans of UK mortgage lender Northern Rock to argue the Fed's roles should not be limited or separated.
His comments, in a speech delivered this week at the Columbia University World Leaders Forum in New York, gave implicit support for government intervention in structured finance when he discussed keeping the federal funds rate target "exceptionally low for an extended period" to alleviate credit constraints and help securitization activity recover.
Dudley urged more effective regulatory structure for the Fed in the execution of its monetary policy, lender of last resort and supervisory functions, which he said are necessary and inseparable.
In order for the Fed to act effectively as lender of last resort, it must have a first-hand understanding of the banks, capital markets and payment and settlement systems, according to Dudley. But in order to fulfill this role safely, the Fed must know its borrowers.
In other words, the Fed needs its monetary policy and supervisory functions in order to fulfill its lender of last resort role. Taking any one of these responsibilities away would make fulfilling the others more difficult.
"One instructive example in this context is the Northern Rock experience in the United Kingdom, where banking supervision and the lender of last resort functions were separated," Dudley said. "Many have concluded that this separation led to coordination problems that delayed intervention and significantly exacerbated the crisis. The experience with Northern Rock is a cautionary lesson about the potential costs of separating banking oversight from the lender of last resort function."
Her Majesty's (HM) Treasury approved a Jan. 1, 2010 date for the restructuring of Northern Rock, which aims to strengthen the firm's capital position and help it return to the mortgage market.
"The Government took action to stabilize the bank two years ago, ensuring in the process that not a single customer of the bank lost any of their savings," said financial services secretary Paul Myners in a statement Tuesday. "Now we can prepare the bank for its restructuring and ensure that it plays its full role in supporting the recovery of the economy."
The plan to restructure includes the splitting of Northern Rock's business into two companies, with the back book of mortgages managed separately from the bank's other business. HM Treasury said this method will facilitate the government's efforts to create a well-functioning mortgage market based on responsible lending practices and a wide range of affordable mortgages.
The announcement of Northern Rock's restructuring date followed HM Treasury's Monday release of updated details on its Asset Protection Scheme (APS), which aims to facilitate the healthy functioning of UK banks, promote lending and protect taxpayers. HM Treasury’s detailed announcements mirror a migration in the US and leading industrial nations toward more transparency in government initiatives and fewer taxpayer-funded bailouts.
Write to Diana Golobay.
More than one quarter of mortgage defaults are strategic — when a borrower chooses to default because the property that secures the loan is worth less than the remaining balance of the mortgage, according to a white paper (available to download here) written by a trio of university scholars.
The decision to strategically default isn’t as simple as the borrower’s ability to make his mortgage payments or the extent of a home’s negative equity. There are moral and social considerations to take into account, Luigi Guiso, Paola Sapienza and Luigi Zingales wrote in “Moral and Social Constraints to Strategic Default on Mortgages.”
The report used an opinion survey to gauge consumer responses to a number of strategic default scenarios. The survey found no household would default if a borrower’s equity shortfall is less than 10% of the value of the house, but 17% of households would default, even if they can afford to pay their mortgage, when the equity shortfall reaches 50% of the value of their house.
But borrowers who said it was immoral to default were 77% less likely to declare their intention to do so, while people who know someone who defaulted are 82% more likely to declare their intention to do so, the study said.
The study cites Zillow.com research that said 22% of households are underwater in the mortgage. But one factor that the study found did not contribute to a borrower’s decision to strategically default is the number of other defaults in the borrower’s ZIP code, but the lessening of social stigmas toward default is a result of a contagion effect as increasingly more borrowers default across the country.
But social and moral factors are not the only considerations. “Assuming that a homeowner will default as soon as his home equity becomes negative is clearly wrong,” the study said. “Negative equity may be a necessary conditions to trigger default, but it is not a sufficient one.”
Instead, the study found, the likelihood of strategic default increases as the level of negative equity increases.
The study is the latest argument is what is becoming an increasingly more important issue to the mortgage industry. Commentary by information and financial services executive Thomas Showalter in the August 2009 edition of HousingWire magazine argues that the more borrowers are inclined to stay in their home even when they are in negative equity. As in the white paper, Showalter believes borrowers strictly in a negative equity position are less likely to default.
He argues that borrowers that are more willing to stick with a mortgage are the ones who are most likely to benefit from a mortgage modification, while borrowers more likely to default will still carry that sentiment, even if the borrower receives a mortgage modification. Showalter said the results raise the question on the effectiveness of mortgage modifications.
It’s hard to track strategic defaults, as borrowers who do make the decision to strategically default are more inclined to act as a truly distressed borrower. An upcoming edition of HousingWire will delve into this topic and explore both sides of the strategic default argument.
Write to Austin Kilgore.
In the latest blow to the global capital and commercial markets, Moody's Investors Service today downgraded all six Dubai government-related issuers.
At this point Dubai's woes are well documented, even though financials anticipated the nonpayment of Dubai World, or at least related entities, for quite some time. Nonetheless, experts interviewed for this piece by HousingWire indicate that troubles in the Emirate are expanding to the shores of Western banking.
"The recent events in Dubai mean that the cost of capital in commercial real estate just went up, not just the cost of commercial restructuring," states James Frischling, CEO NewOak Capital on Dubai developments. "This shows a kink in the armor for many holders of commercial real estate who have adopted the “extend” strategy as a way of managing through the crisis.
He adds: "In my opinion, while CMBS had witnessed significant spread tightening, the events in Dubai will put a spotlight on the risks in that sector and will cool that rally down a bit."
The Dubai government, Dubai World’s principal owner, asked creditors two weeks ago to delay repayments for at least six months while it restructures more than $60bn in debt, including billions from its real estate firm Nakheel.
In the statement on the decision, Moody's analysts say: "This rating action follows recent comments and statements from government officials, which cause us to believe that no meaningful government support should be assumed for any entity that is not directly part of or formally guaranteed by the government."
Dubai's future, by some accounts, seems wrapped up in a bailout from the United Arab Emirates Central Bank in nearby, oil-rich Abu Dhabi, which is probably now re-thinking its own massive cityscape project Abu Dhabi 2030.
The Moody's development is also particulary interesting considering its report less than six months ago on the proposed merger of Emaar Properties and Dubai Holding Commercial Operations Group (DHCOG) into an all-powerful property monolith in the Emirate.
In that article, Martin Kohlhase, an associate analyst in Moody’s Corporate Finance Group based in Dubai, said: “Larger government ownership in Emaar may not be sufficient to mitigate the detrimental impact that the merger would have on the company’s fundamental creditworthiness. Furthermore, ongoing market weakness and the prospects of weaker cash flow over the near to medium term will impact the combined group going forward.”
Today, the credit rating agency added "the review of DHCOG and Emaar reflects prospects for a prolonged real estate market slump, as well as the evolving nature of both entities as a result of their pending merger."
In a conversation with Khalid Howladar, vice president Middle Eastern & Islamic Finance at Moody's, around one year ago, he mentioned that the financial structure of Dubai had yet to be tested.
That certainly isn't the case any longer.
Write to Jacob Gaffney.
[Update 1: clarifies Krimminger's comments.]
A key federal mortgage workout plan, the Home Affordable Modification Program (HAMP), that allocates incentives to servicers, borrowers and lender/investors is failing to address the issue of second liens, according to expert testimony from regulators to a House Financial Services Committee.
At an ongoing hearing Tuesday, officials told the Committee a clearinghouse might be required to mediate between first and second lien holders until a modification can be agreed upon.
Earlier at the hearing, Laurie Goodman, senior managing director at Amherst Securities, pointed toward the key role negative equity plays in predicting default behavior, saying HAMP's failure to address negative equity meant it was destined to fail. Only principal reductions can make a lasting effect, Goodman said, but financial conflicts of interest keep servicers from reducing principal.
Mortgage servicing firms make money off servicing fees, which are based on the principal amount — a disincentive for reducing principal, Goodman said. Servicers are often owned by large financial institutions that hold second liens. If principal reduction is left up to the banks' discretion, she said, the conflicting financial interests will likely restrict principal reduction, she said.
Michael Krimminger, special advisor for policy at the office of the chairman for the Federal Deposit Insurance Corp. (FDIC), in prepared testimony (available to download here) said "lenders and servicers must be flexible to address new challenges" including deeply underwater loans, which would require greater use of principal forbearance. He said FDIC strongly recommended servicers adopt forbearance programs for unemployed borrowers.
Treasury Department Assistant Secretary for Financial Stability Herbert Allison said the Treasury is pushing a mortgage modification conversion drive to step up the rate of permanent HAMP modifications. The drive emphasizes servicer accountability, Web resources for borrowers and engagement of state, local and community stakeholders, according to his opening testimony (available to download here).
Allison said not all homeowners can afford even 31% of their income — the basic yardstick for measuring affordability — for a HAMP modification. As a result, the Treasury pursued a foreclosure alternative incentive program to stabilize the effect of these circumstances on the housing market.
Douglas Roeder, senior deputy comptroller of large bank supervision at the Office of the Comptroller of the Currency, echoed comptroller John Dugan's call for financial regulators to establish minimum underwriting standards for all mortgages and thereby avoid another foreclosure crisis.
Roeder said in prepared testimony (available to download here) changes in the origination process should focus on requiring financial documents from borrowers to verify income. He also called for "meaningful down payments" to ensure borrowers' maintain "skin in the game," as well as borrower qualification based on the fully indexed rate under the loan structure, rather than the perhaps lower introductory rate.
"We believe that such national standards would significantly improve the confidence in housing markets and help prevent a recurrence of the housing risks we saw over the past few years," he said. "In this regard, it will be critical to implement and enforce such standards uniformly across all lenders, ensuring that the far more lax standards of unregulated mortgage originators are raised to the same level as banks and thrifts."
Write to Diana Golobay.
Ed Bratton joins Plano, Texas-based ViewPoint Bank as president and CEO of ViewPoint Bankers Mortgage.
Bratton brings more than 25 years of mortgage banking experience to the North Texas-based ViewPoint, based north of Dallas. He spent 20 years at Chase Mortgage, most recently serving as regional vice president for Texas and other western states.
“We're pleased to add such an experienced mortgage leader to our team,” said ViewPoint Bank president and CEO Gary Base in a statement. “ViewPoint Bankers Mortgage has steadily gained ground in our extremely competitive market, and we're confident that Ed will capitalize on that growth as he leads our mortgage lending company.”
Bratton is an alumnus of Baylor University and served as president of the Dallas Mortgage Bankers Association
ViewPoint Bankers Mortgage is a wholly owned subsidiary of ViewPoint Bank and has 16 loan origination offices throughout Texas. ViewPoint Bank is a subsidiary of ViewPoint Financial Group (VPFG: 13.72 +0.73%).
Write to Austin Kilgore.
Executives and analysts testified before the House Committee on Financial Services Tuesday outlining the struggles servicers are having converting trial modifications into permanent status under the Home Affordable Modification Program (HAMP).
Through HAMP, the US Treasury Department provides allocated capped incentives to servicers for the modification of loans on the verge of foreclosure.
For every 100 HAMP trial plans initiated by Chase Home Finance from April to through September, 29 borrowers did not make the required payments and failed to reach a permanent status, according to testimony from Molly Sheehan, senior vice president at Chase Home Finance.
Chase has offered more than 560,000 modifications under HAMP, its own program and programs made available by the government-sponsored enterprises (GSEs), the Federal Housing Administration (FHA) and VA programs. Of these, a little more than 83,000 modifications have become permanent. Under HAMP alone, Chase has converted 4,302 of the 199,033 HAMP trials offered into permanent modifications.
Jack Schakett, credit loss mitigation strategies executive at Bank of America(BAC: 7.29 -0.14%) testified that BofA has roughly 65,000 customers who have made more than three trial modification payments on time. Unfortunately, 50,000 of them, or 76%, have either not submitted all required documents or the ones they have submitted reveal discrepancies that require additional response.
Schakett said BofA has initated 160,000 trial modifications under HAMP. BofA has a potential cap incentive of $967m, according to the latest Troubled Asset Relief Program (TARP) transaction report.
Last week, the Treasury held a meeting with mortgage servicers, applying more pressure on them to convert more HAMP trials into permanency. That same week, the Treasury announced it expects 375,000 permanent modifications by the end of the year.
Each panelist cited missing documentation as the primary reason for the low conversion rate into permanency.
“Frequently, it may be documents they do not have easy access to, for example, supporting death certificate or divorce decree. This is a true origination process. This is really, truly underwriting a new loan, and we are looking at all of the different financial aspects of their situation. So, it is a challenge for borrowers and we’re trying to help them overcome that challenge,” Sheehan said.
Shakett of BofA added: “When they were first setting up HAMP, there was a lot of discussion around whether or not we should require full documentation, partial documentation or no documentation to start the trial modification period.”
Shakett said that there was a consensus to allow for easy access into the program with no documentation requirements and use the trial modification period to gather the documentation.
He said that Bank of America now requires at least two documents to enter the program: the hardship affidavit, which is fundamental to the program, and a form which lets them know that they will be pulling a tax return at some point in the future.
Anthony Sanders, a professor of real estate finance at George Mason University cited three reasons for the slow permanent conversion rate.
According to a Deutsche Bank research report, he said, 25m homes will be in negative equity, making modifications “extremely difficult.” Also, the unemployment rate, while reported at 10% is closer to 17.5% when wage and salary curtailment is included. The third reason, he said was documentation.
“Borrowers may claim that the servicers are making it difficult to obtain documentation, when, in fact, they may just simply be hoping that the permanent modification will be approved without full documentation,” Sanders said.
The Treasury will release its first report on the permanent conversion rate of HAMP trials this week.
Write to Jon Prior.
The Altos Research 10-city index of home listing prices decreased 0.4% from October to November, and prices fell in 25 of the 26 major markets the Mountain View, Calif.-based real estate market research firm tracks.
Average listing price in the 10-city composite decreased from $501,377 in October to $499,267 in November. Miami was the only US market in the study to experience a month-over-month gain in listing price, up 1% from $485,472 in October to 490,197 in November.
San Diego and Salt Lake City experienced the greatest declines, down 3.1% in San Diego to $837,981 and down 2.9% in Salt Lake City to $371,930. In 10 markets, prices fell more than 1%.
Housing inventory declined 2.9% in the 10-city composite and 22 of 26 markets experienced inventory declines. The markets with the greatest declines in inventory were Boston (10%) and San Francisco (9.7%). Markets with increased inventory include San Diego (3.9%), Phoenix (2.9%), New York (2.1%) and Tampa (1.2%).
Every market in the study except San Francisco and San Jose had a median days on market of more than 100 days. The 10-city composite had a median of 154 days in November, down 1.1% from 156 in October.
The median days on market in San Jose was 99, down 4% from 103 in October. In San Francisco the median days on market was 89, but that was a 5.2% increase from October’s median of 85 days. Miami had the longest turnover time at 225 days, but that market also experienced the greatest month-over-month decline, down 7.8% from 244 days in October.
The Altos Research study includes existing single-family homes and does not measure condos, town homes or new construction. For more detailed coverage of Altos Research's index methodology, read the exclusive commentary by Scott Sambuci, Altos Research director of business development in the December edition of HousingWire magazine.
Write to Austin Kilgore.
Home prices increased for the second straight quarter in Freddie Mac’s (FRE: 0.00 N/A) Conventional Mortgage Home Price Index (CMHPI).
The purchase-only index increased 0.9% from Q209 to Q309, following a 2% increase from Q109 to Q209. The two quarters of increases are equal to about 40% of the declines experienced in Q408 and Q109. For the 12-month period ending in Q309, home sales prices were down 3.9%.
“The home-price gains of the past two quarters reflect improving existing home sales over that period. Sales volume was up 15% between the first and third quarters of this year,” said Frank Nothaft, Freddie Mac vice president and chief economist. “The lowest average fixed-rate mortgage rates in a half- century, lower house prices, incentives to encourage first-time buyers, and loan modification efforts to stem foreclosures have worked together to support sales and reduce the inventory of unsold homes.”
Price gains were broad-based, as seven of nine regions experienced gains during the quarter. All nine regions are up from first quarter prices.
Prices in the New England division (Conn., Mass., Maine, NH, RI and Vt.) declined 0.7% in Q309. The Mountain Division (Ariz. Colo., Idaho, Mont., NM, Nev., Utah and Wyo.) also decreased 0.6% in the same period.
The Pacific Division, which includes Alaska, Calif., Hawaii, Ore. and Wash., experienced the greatest increased in Q309, at 3.9%, but for the last 12 months, prices are still down 6.9%.
The Middle Atlantic States of NJ, NY and Penn. saw a 1.1% increase in Q309 but is still down 2.5% from a year ago.
The South Atlantic Division (DC, Del., Fla., Ga., Md., NC, SC, Va., and WV) increased 0.6% in Q309, but prices are down 5% from a year ago.
The West North Central Division (Iowa, Kan., Minn., Mo., ND, Neb., and SD) increased 0.5%, but is down 1.1% from last year.
In the East South Central Division states of Ala., Ky., Miss., and Tenn., prices increased 0.2% in Q309 and prices are down 1.4% from last year.
The East North Central Division (Ill., Ind., Mich., Ohio and Wis.) rose 0.2% in Q309, but values are still down 2.7% from last year.
The West South Central Division states of Ark., La., Okla. and Texas also eked out a 0.1% increase in Q309, bringing prices equal to their level one year ago.
“Prices are still down relative to their peaks in most markets. For example, as measured by the CMHPI, values in the New England, East North Central and Pacific divisions are at 2004 levels, on average, and the South Atlantic, West North Central, and Mountain states’ home values are at 2005 levels,” Nothaft said.
“In contrast, average values in the West South Central area have tied their previous peak from the third quarter of 2008, while average home values in the Middle Atlantic and East South Central states have reached 2006 and 2007 levels, respectively,” he added.
Write to Austin Kilgore.
Lawmakers, regulators and industry veterans continue to wrap their minds around the 31% debt-to-income ratio targeted in many federal mortgage workout plans. The ideal 31% ratio can be achieved through various methods, including principal reduction or substantial interest rate cuts.
Conflicts of interest arise with either option — servicers on one side unwilling to reduce principal and investors on the other side fearing cashflow restrictions initially and fallout whenever interest rates begin heading back up — which is most likely why workout efforts are slow to get off the ground.
It doesn't necessarily mean the industry is stalling completely on loss mitigation, but nowhere is the misconception that servicers, lenders and investors are out to get disadvantaged borrowers more rampant than, perhaps, among politicians.
At a House Financial Services Committee hearing Tuesday, Neighborhood Assistance Corp. of America (NACA)'s Bruce Marks testified in favor principal reductions at the market's current interest rate. Other witnesses at the hearing argued against a reduction in the interest rate, which would merely put off default.
In the course of reporting on the ongoing hearing, HousingWire grew increasingly aware of the ongoing blame game among the members of the Committee that, from their remarks, seemed unsympathetic of the profoundly complex financial system and the operational conflicts that sometimes make modification of a first lien impossible where the servicer is ultimately owned by the large lender that holds the second lien.
But whether it's a genuine misunderstanding of the technical roadblocks along the way to modification or an outright ignorance of responsibility all levels of the system — consumer, lender, servicer, investor — must take for the fallout seen today, a few comments seemed immediatly worthy of mention.
One particularly interesting exchange between Anthony Sanders, professor of real estate finance at George Mason University, and Rep. Joe Baca (D-CA), played out like this:
In the December issue of HousingWire magazine, we dive into the broad financial support of the mortgage market by the US taxpayer. With the Federal Reserve investing $1.25trn of taxpayer funds in agency mortgage-backed securities (MBS) by the end of Q110, the taxpayer becomes the largest single holder of mortgage-related notes.
Write to Diana Golobay.
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