Archive for December, 2009
[Update 1: adds additional statements from Anthony Sanders.]
A key mortgage modification program facilitated by federal incentives has not only failed to reach the potential envisioned by its founders, but it also has several key flaws that may have destined it for failure from the start, expert witnesses testified to the House Financial Services Committee Tuesday.
Home Affordable Modification Program (HAMP), which allocates capped incentives to servicers, lender/investors and borrowers that participate in modification of mortgages at risk of foreclosure, was a large focus of testimony.
In an ongoing hearing Tuesday, the House lawmakers are hearing from servicers that testify to early signs of success in HAMP, as well as from community and consumer activist groups and real estate industry veterans that point toward HAMP's key flaws and recommend long-term solutions. Amherst Securities' Laurie Goodman, for example, warns critical shortcomings of HAMP include the program's failure to address negative equity and its lack of effort toward principal reductions.
Julia Gordon, senior policy counsel at the Center for Responsible Lending (CRL), summed up ongoing complaints when she said "HAMP has not reached its potential" in opening remarks.
Lenders and investors may not agree to accept modifications, as they take immediate financial hits. But capital issues aren't the only deterrent to pursuing modifications.
In order to facilitate lasting loan modifications, banks must be allowed to gradually write-off losses and the private sector must be allowed to help modifications, according to Anthony Sanders, professor of real estate finance at George Mason University.
"To provide an incentive for financial institutions/investors to sell their distressed mortgage loans to the private markets, the government regulators, including the SEC, should allow financial institutions/investors to amortize the losses for up to 5 years to spread the accounting consequence of a loss over time," Sanders said in prepared remarks (available to download here).
He added: "This would enable the financial institutions/investors to sell distressed assets from their books and free up funds to be invested elsewhere such as loans to small businesses."
But HAMP keeps loans with lenders, holding up capital on the banks' books and preventing the funds from being used for other loans. Sanders recommended helping financial institutions clean up balance sheets rather than imposing judicial interventions into the mortgage market.
Laurie Goodman, senior managing director at Amherst Securities, pointed toward the key role negative equity plays in predicting default behavior.
HAMP is "destined to fail," as it does not address negative equity, Goodman said in opening remarks (available to download here). Federal mortgage programs must include principal reduction and must address the loss allocation among first lien investors and second lien investors to have lasting effect.
"HAMP has three fatal flaws," she said. "First the agent retained to make the modification was a mortgage servicer rather than an originator. This created a significant amount of ramp time as many servicers were not equipped to handle the many functions necessary to underwrite a modification."
Goodman added: "Second, HAMP only considers the first mortgage payment, taxes and insurance. It does not consider the borrower's total financial circumstances. Third, and most importantly, the program does not emphasize the re-equification of the borrower."
She emphasized greater importance on principal reduction — eyed recently by the Federal Deposit Insurance Corp. in lieu of principal forbearance. Goodman says investors will "absolutely" support principal reduction, as foreclosure is costly not only to borrowers, lenders and investors. She suggested banks holding second liens to first write down liens to allow for modifications.
Goodman also urged a revamp of Hope for Homeowners to address second liens and misalignment of interests. More transparency on mortgage workout data is also crucial to the success of any program, she added.
Write to Diana Golobay.
House prices continued to decline in October, falling 0.5% across the US, according to the latest data compiled by default management and residential collateral valuation service provider Integrated Asset Services (IAS).
The Northeast and Midwest census regions both slipped (1.6% and 0.3% respectively) and the South and West regions gained a respective 1.1% and 0.5%.
An approaching deadline for the $8,000 first-time homebuyer tax credit spurred buying activity during the month, before Congress approved an extension of the credit, IAS said.
“I have no doubt that the tax credit persuaded some buyers to make their purchase sooner than they otherwise would have,” said IAS president and CEO Dave McCarthy. “It’s reasonable to think the broader market will reflect that reality at some point down the road.”
House prices look likely to continue their fall if unemployment rises, McCarthy said, leading more financially-stretched borrowers to default and foreclose.
"There is potential for another wave of inventory next year, both from private sellers and banks," he said. “The risk of renewed home price declines remains significant.”
Write to Diana Golobay.
Based on credit performance of 27m consumers, national credit bureau TransUnion projects mortgage delinquencies of 60 or more days to drop nearly 3% by year-end 2010 to 6.39%, from an expected 6.56% at year-end 2009.
Recent years marked a series of "unprecedented" year-on-year increases, TransUnion said, with delinquencies rising in the the 11th straight quarter during Q309.
"Tied directly to anticipated unemployment rates and housing values, the decrease in delinquencies should be gradual," said Ezra Becker, director of consulting and strategy in TransUnion's financial services group, in a statement. "We expect this change to be driven in part through the continued conservative approach lenders are taking to new loan underwriting, as many of the existing mortgages in the market work their way out of the system and off the books of lending institutions."
The expected decline in delinquencies, though relatively slow across the US, will reach double digits in 22 states, with delinquency expected to decline 17.9% in North Dakota, 15% in Minnesota and 14.4% in Oklahoma. A few states are expected to see increases in delinquencies, including Florida (17.3%), Arizona (6.3%), California (0.93%), New York (0.43%) and Virginia (0.37%).
TransUnion expects Florida to bear the highest delinquency rate of 16.9% at year-end 2010, while Nevada will follow closely at 16.1%. North Dakota is expected to finish next year with the lowest delinquency rate of 1.43%, while South Dakota and Nebraska will follow at 2.2% and 2.35%, respectively.
Write to Diana Golobay.
Her Majesty's (HM) Treasury on Monday released updated details on its Asset Protection Scheme (APS), designed to facilitate the healthy functioning of UK banks, promote lending and protect taxpayers.
The UK Treasury's detailed announcement mirrors a migration in the US and leading industrial nations toward more transparency in government initiatives and fewer taxpayer-funded bailouts.
"We have strived throughout our interventions to ensure maximum value for the taxpayer, charging commercial rates for our support for the banks and making supported firms pick up the tab for extra operating costs," said financial services secretary to the Treasury Paul Myners, in a statement.
Monday's updates include the government's agreement (available to download here) with Royal Bank of Scotland (RBS), which in November signed an agreement to participate in the program.
According to Myners, the agreement, revised from an initial deal announced in February, puts taxpayers in an improved position and places more financial responsibility on RBS. The bank not only will pay full operational costs of the Asset Protection Agency (APA), launched to administer the APS, but also take on £18bn (US$29.3bn) more in the first loss position than originally planned — now shouldering £60bn of first loss.
The government will provide a £25.5bn capital injection in installments, and RBS will pay an annual fee of £700m for the first three years under the program, followed by £500m each year for the life of APS.
The APA will verify losses and recoveries on assets covered under the agreement — including residential mortgages, retail loans and corporate lending — and advise HM Treasury on payments to be made under the APS.
As part of Monday's announcement, HM Treasury said Lloyds Banking Group will not participate in APS, but will raise £21bn in capital and pay a fee to the government for implicit protection provided so far.
Write to Diana Golobay.
Auctions conducted by Real Estate Disposition (REDC) on December 5th and 6th facilitated $68.8m of foreclosed property purchases.
The California-based auction house offered homes in both live and online auctions. Auctions in Miami and Orlando generated $14.1m in purchases. Sacramento and Santa Clara auctions produced $11.6m, while auctions in Washington DC and Richmond, Va. generated $5.3m. Online auctions accounted for $37.8m of purchases.
A property in Miami sold for $63,000, 81% below its peak value of $328,700. Another in Ft. Lauderdale, Fla. went for $35,000, a 72% decrease from its previous value of $121,500.
"We're very pleased with the results from the weekend's auctions,” says REDC CEO Jeff Frieden. “Many first-time homeowners and investors walked away with incredible bargains throughout the country. Many people had winning bids on properties that were more than 50% less than the house’s previous high value.”
REDC conducted 312 auctions in 2009, and its total sales reached $2bn. Frieden adds that these purchases boost the economy.
“When a house sits vacant, everyone loses,” Frieden says.
Write to Jon Prior.
The Federal Housing Administration (FHA) on Monday suspended its approval from Baltimore-based Equitable Trust Mortgage Corp. (ETM). The 6-month suspension prevents ETM from originating and underwriting new FHA-insured mortgages.
FHA alleges ETM improperly overcharged 37 borrowers for broker and loan origination fees in excess of that allowed under US Department of Housing and Urban Development (HUD) limits.
FHA said in an e-mailed statement ETM charged both a broker fee and an additional 1% of the mortgage amount in origination fees, exceeding the 1% limit set by HUD. FHA claims ETM charged these unauthorized fees to a "substantially greater" portion of minority borrowers — 68% — than non-minorities.
"It is critical that FHA lenders apply our standards and do not overcharge borrowers," said FHA commissioner David Stevens. "The fact that a disproportionate number of these borrowers were minority families is also troubling."
HUD's Mortgagee Review Board found 21 alleged cases where ETM failed to disclose all origination fees as well as yield spread premiums to mortgage brokers on borrowers' Good Faith Estimates. FHA claims ETM's mortgages bear default rates in excess of the national average.
FHA said HUD's Inspector General is investigating lending practices at ETM, which can appeal its suspension via written request within 30 days.
An ETM spokesperson did not return calls for comment before this story was published.
Write to Diana Golobay.
Single-family house and condo sales in Connecticut rose by double-digit percentages in October from the previous year, according to real estate information provider The Warren Group.
Single-family house sales rose 11.5% over October 2008, while condo sales rose 10.2% during the same period — the first year-on-year increase in monthly sales in more than three years.
Middlesex, Windham and Fairfield counties experienced the largest increases in house sales activity during the month, The Warren Group found. Sales rose 46.7%, 23.8% and 19.4% respectively in the counties.
Prices remain depressed below year-ago levels, despite the uptick in sales volume. The median price for single-family homes slipped 4.4% in October to $239,000, while the median price for condos dipped 5.3% to $180,000.
Write to Diana Golobay.
Despite recent reports that the hotel and resort sectors of the commercial mortgage work are suffering declining occupancy rates and rising delinquencies, a $166m timeshare mortgage securitization issuance from Starwood Vacation Ownership Portfolio Services entered the syndicate market this week.
Starwood issued the securitization, which is 17% overcollateralized, on December 1. It's part of the largest weekly supply of new issuance in weeks, according to an asset-backed securities (ABS) research by Deutsche Bank Securities.
The issuance comes as hotel property values and occupancy rates are on the decline, according to recent commentary by Fitch Ratings. Consumer demand for timeshares is also low, Fitch noted, and the sector’s experienced noticeable deterioration in delinquency and default performance.
But the Starwood issuance — Starwood (SVO) Timeshare Mortgage Corp 2009-B — indicates not all investors are bearish on the resort industry.
Investment banks lined up for the vacation ownership interest-backed notes, pooling funds as part of a syndicate deal. The deal, expected to close this week, attracted Credit Suisse Securities, JP Morgan Securities, Barclays Capital, Deutsche Bank Securities and RBS Securities.
Credit-rating agency Standard & Poor's gave the deal a single-A preliminary rating.
Write to Diana Golobay.
The US Treasury Department is looking to offload its remaining investment in Capital One Finance (COF: 46.05 +0.96%), initially made through the $700bn Troubled Asset Relief Program (TARP).
A report on the TARP due this week will reveal the program will cost as much as $200bn less than previously projected, according to one of HousingWire's sources familiar with the Administration's plans. Because of the narrowed expense projection, the US deficit should also be reduced.
Initial projections put the cost of the financial stabilization efforts at more than $500bn, which factored into the President's budget in February. Of that projection, $300bn was expected directly from TARP, and another $250bn was included in the budget to cover needed resources beyond TARP's $700bn.
Because of these estimates, TARP was projected to add $341bn to add to the deficit, as of a review in August.
But HousingWire's source said revised projections — not final until the Administration's new budget is published in February — will put the TARP-related deficit at least $200bn lower than the August projection. These improvements are the result of both lower spending than the planned $700bn and higher returns on investments than anticipated, according to the source. TARP repayments are also driving the improvement, and could reach $175bn by year-end, the source said.
The news comes as Bank of America (BAC: 7.29 -0.14%) joins a handful of firms that either repaid TARP funds or are in plans to repay. BofA's planned TARP repayment would bring total repayments to $116bn, Treasury secretary Tim Geithner told Bloomberg last week.
But the Treasury is unwinding its investments in financial firms in other ways than voluntary TARP repayments.
The Treasury on Friday priced a secondary public offering of more than 12.6m warrants to purchase common stock of Capital One at $11.75 per warrant.
The Treasury expects about $146.5m in proceeds from the offering, which would provide an additional return on taxpayer funds beyond the dividend payments received on the related preferred stock.
The warrants will list on the New York Stock Exchange under "COF WS", in an offering expected to close by December 9. Deutsche Bank Securities acts as the sole book-running manager on the offering.
Write to Diana Golobay.
Delinquency rates among most commercial and multifamily investor groups rose in Q309, according to the latest delinquency report by the Mortgage Bankers Association (MBA).
“Commercial and multifamily mortgages continued to feel stress in the face of the weakened economy,” said Jamie Woodwell, MBA vice president of commercial real estate research, in a statement Monday.
“The deterioration in commercial and multifamily loan performance is generally in line with what is being seen in other parts of the economy, with loans backed by commercial properties continuing to perform far better than construction and development loans.”
The rate of 30-plus-day delinquencies of loans among commercial mortgage-backed securities (CMBS) rose 17bps to 4.06% in the quarter. The 60-plus-day delinquency rate on loans held in life company portfolios rose 8bps to 0.23%.
Loans held or insured by mortgage giant Fannie Mae (FNM: 0.00 N/A) worsened 11bps to 0.62% delinquent by 60 or more days. Freddie Mac (FRE: 0.00 N/A) loans looked slightly better, remaining unchanged this quarter at 0.11% delinquent by 90 or more days.
The 90-plus day delinquent/non-accrual rate of loans held by Federal Deposit Insurance Corp. (FDIC)-insured banks and thrifts worsened by 51bps to 3.43% in the quarter.
Write to Diana Golobay.
