Loan Value Group (LVG) launched a new program that creates incentives to borrowers who remain current on their mortgage payments.

LVG provides solutions to lenders and mortgage companies at risk of strategic default. The February issue of HousingWire tells the story of one borrower who strategically defaulted on her mortgage payment, walking away from nearly $200,000 in outstanding mortgage debt.

Through the Responsible Homeowner (RH) Reward program, LVG works with owners of risk to enroll borrowers showing signs of strategic default. LVG evaluates negative equity, income, geography and other factors to determine the risk of an individual borrower and the size of the reward.

Frank Pallotta, managing partner and executive vice president at LVG, told HousingWire that the owner of the risk, whether it be the bank or mortgage insurance company provides the reward based on the LVG evaluation.

“The reward comes from the entity that holds the risk. If there are more than one, they can get together and decide how the reward is broken down based on how much risk each party holds,” Pallotta said.

For example, if a borrower has a $200,000 mortgage and the value dropped to $150,000, a bank using the RH Reward program could give a $25,000 incentive to the borrower if the borrower remains current. How that reward is monetized depends on the borrower.

If the borrower stays current until he or she sells the home, the $25,000 reward goes to the difference between the sales price and what is owed. The borrower pockets the net, Pallotta said.

RH Reward is a possible free-market solution to the negative equity issue. Pallotta said that possible 10% hit to the banks is less costly than modification, short sale or deed-lieu of foreclosure. If the loan stays current long enough, that hit could shrink to as low as 2% as the borrower continues to make payments.

“There is no cost to the borrower whatsoever, yet the homeowner receives the full benefit of the Reward,” said LVG CEO Howard Hubler. “At the same time,” he added, “one of the key selling points of RH Reward is our ability to offer the program to owners of risk in a variable cost, turn-key fashion without burdening their current infrastructure.”

An unnamed US client participated in the roll-out phase of the program; an investor reported to have bought and sold more than $5bn of debt since 2008.

Write to Jon Prior.

Edolphus Towns (D-NY), chairman of the House Committee on Oversight and Government Reform, this month began an investigation of the Home Affordable Modification Program (HAMP) on concerns of the “effectiveness and efficiency” of the program.

The US Treasury Department launched HAMP in March 2009 to allocate capped incentives to borrowers for the modification of loans on the verge of foreclosure. After eight months in the program, the Treasury reported 66,465 permanent loan modifications in December, up from 31,382 permanent modifications in November.

Towns sent a letter to Treasury secretary Timothy Geithner, asking for specific data during the investigation. In the letter, Towns asked for clarity on how the Treasury defined a borrower’s net present value (NPV), why reasons for denial are not revealed and a recommendation for an appeals process.

Towns based the investigation after the committee received complaints that loan servicers were too slow, inconsistent and not communicating with eligible borrowers. It’s not the first time HAMP has come under criticism.

Dean Baker, the co-director of the Center of Economic and Policy Research told HousingWire that HAMP does more harm than good.

“I am not a big fan of HAMP. It clearly is not going to benefit the vast majority of people facing foreclosure, many of whom are too deeply underwater to have a realistic hope of keeping their home,” Baker, told HousingWire. “As it is, I think that the main impact of the HAMP program has been to string people along so that they continue to make payments on an underwater mortgage.”

Baker supports a program similar to the Retaining Occupancy on Foreclosure (ROOF) program initiated in Detroit, where borrowers make a monthly payment to stay in the home after a foreclosure.

“I would much rather see the government adopt a realistic policy that recognizes that most underwater homeowners will lose their home and tries to ameliorate the pain,” Baker said. “My preferred option is right to rent legislation, which would temporarily change the rules on foreclosure to give people facing the loss of their home the right to stay there for a substantial period of time (e.g. 5-10 years) paying the market rent.”

In December, 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 to the House Financial Services Committee. She added that 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.

Scott Norman, vice-president of the Texas Mortgage Bankers Association (TMBA), also said HAMP does not tackle the main problem borrowers are facing.

“We certainly support the program, but there are some details that still need to be worked out. For those borrowers who can no longer afford their house payments, I’m concerned they may not see any significant relief unless we see something that reduces their principal balance. But we don’t know what that’s going to cost,” Norman told HousingWire.

But even the Treasury admits that HAMP is not for everyone. Seth Wheeler, senior adviser to the Treasury when speaking at the American Securitization Forum (ASF) in Washington, DC, said the Treasury is shifting its focus away from modifications as HAMP is not always the best solution.

“Short sales, deeds in lieu are other ways to prevent foreclosures to help achieve [housing] stability,” he said. “Modifications are only for a certain subset of distressed homeowners.”

The Treasury will launch the Home Affordable Foreclosure Alternative (HAFA) program in March, to provide incentives for short sales and deeds-in-lieu of foreclosure to borrowers deemed ineligible for HAMP.

Write to Jon Prior.

The Federal Trade Commission proposed a new rule to prohibit third-party mortgage companies from charging upfront fees for foreclosure rescue and modification services.

The FTC brought 28 cases against companies that charge a fee, promising the borrower a modification from the lender. The cases allege these companies never provided the services promised and that they misrepresent their affiliation with the government and other housing assistance programs, including the Home Affordable Modification Program (HAMP).

“Homeowners facing foreclosure or struggling to make mortgage payments shouldn’t have to contend with fraudulent ‘companies’ that don’t provide what they promise,” said FTC chairman Jon Leibowitz in a press statement. “The proposed rule would outlaw up-front fees so companies can’t take the money and run.”

The new FTC rule would also bar the companies from telling borrowers to end communication with their lenders. It would require that the companies notify a potential client of their for-profit status.

“Far too many homeowners have paid up-front fees to bad actors who promised loan modifications but never delivered,” US Treasury Department secretary Timothy Geithner said. “I commend the FTC for proposing a strong set of safeguards to protect consumers from these predatory practices.”

Several states already have similar laws in place, forbidding the upfront fees. Governor Arnold Schwarzenegger signed Senate Bill 94 in October 2009, which banned the fees.

In a story in the November issue of HousingWire, a spokesman for the California attorney general’s office said that complaints of modification fraud increased with the same velocity as foreclosures. In 2007, consumers registered 27 complaints for the year, a number that grew to 163 in 2008. In September 2009 alone, the office heard 158 complaints, totaling nearly 2,000 for the year.

In the story, an FTC spokesman warned borrowers against the fraudulent practice.

“People should avoid any company or individual that requires a fee in advance, guarantees to stop a foreclosure or modify a loan, or advises the homeowner to stop paying the mortgage company,” the spokesman said.

As the first step in the rule-making process, the FTC sought comment on the practices of the for-profit mortgage relief companies in June 2009. A month later, the FTC launched Operation Loan Lies, a coordinated national law enforcement effort to hunt down mortgage modification scams.

The new proposed rule has a 45-day public comment period that ends March 29, 2010.

Write to Jon Prior.

Connecticut Attorney General Richard Blumenthal said his office is stepping up enforcement of national laws that protect renters whose landlords default on rental property loans, leading to a possible foreclosure.

The federal Protecting Tenants At Foreclosure Act of 2009 (PTFA) allows all tenants in a defaulted property to stay in their homes after foreclosure for at least 90 days or until the end of their lease term, whichever is later, the AG’s office said.

Blumenthal says he is issuing cease-and-desist letters to law firms, real estate companies, banks and servicers in order to stop these illegal evictions. The AG received complaints from tenants who were forced out of foreclosed properties after banks began evictions immediately after the foreclosure, despite a federal law that requires a 90-day eviction delay. Even more letters, he added, are on the way.

“Tenants have rights to remain until their lease ends — rights that deserve respect and enforcement,” Blumenthal said at a recent press conference. “We’re warning banks and real estate interests: foreclosure is not excuse for illegal eviction. These cease-and-desist letters send a message to powerful property owners that foreclosure gives them no right to engage in automatic eviction en masse.”

Many times, these tenants may be current on rent, but still get eviction because of the landlord’s dire financial situation. In addition to the hardship this creates for the tenant, Blumenthal’s office said the vacant properties drive down prices and many times become rundown and damaged by vandals.

“Fast-track evictions not only harm tenants, but turn vacant properties into eyesores and even crime havens, diminishing values neighborhood wide,” Blumenthal said. “Tenants should remain in homes as long as possible — potentially providing extra income to the new property owner, and benefiting everyone.”

So far, Blumenthal’s office has issued 30 cease and desist letters to companies that may have engaged in eviction practices that violate PTFA, including 15 bank and mortgage servicers, nine law firms and six real estate companies, notifying the companies of their legal obligations and requesting compliance with the federal law.

“Tenants in foreclosed properties — victims of their landlord’s financial failures — deserve to be treated fairly and lawfully when forced to find a new home,” Blumenthal said. “Law firms, Realtors and lenders have moral and legal obligations to provide fair notice and time for tenants to find alternative housing after foreclosures.”

Write to Austin Kilgore.

The national vacancy rate for “homeowner” housing units remained at 2.7% in Q409, unchanged from Q109, according to the US Department of Commerce.

The rate only slightly wavered from 2.9% at the end of 2008 and 2.6% in Q309. The highest the rate has ever climbed since 1996 was to 2.9% in Q108 and again in Q408.

For rental housing, the vacancy rate dropped to 10.7% in Q409 from 11.1% in the previous quarter but increased from 10.1% in the last quarter of 2008.

For Q409, more vacancies appeared in principal cities, 3.1%, compared to 2.5% in the surrounding suburbs, according to the report. The rate within the city dropped from 3.5% in the fourth quarter of 2008.

More vacancies appeared in the South, 2.9%, edging 2.8% in the Midwest and 2.7% in the West. The Northeast region had a 1.9% vacancy rate. The South also had the highest rental vacancy rate of 13.7% in Q409. The Midwest had a 11.2% rental vacancy rate, followed by the West, 8.9%, and the Northeast, at 7.2%.

To combat vacancies, the US Department of Housing and Urban Development (HUD) recently announced that it would provide financing for owner-occupants looking to purchase real-estate owned (REO) property. Cities like Detroit are taking on the vacancy problem with programs like the Retaining Occupancy on Foreclosure (ROOF) program that allow the previous owners of a foreclosed home to stay for up to three months for a fee.

Write to Jon Prior.

Seth Wheeler, senior adviser to the US Treasury Department, said that one of the main goals of the Obama Administration is to fix the mortgage market in the United States, although federally subsidized modifications may not be appropriate for many borrowers.

Speaking at the American Securitization Forum (ASF) 2010 conference in Washington DC, Wheeler said the focus of the Administration is shifting somewhat away from modifications, as getting borrowers into the Home Affordable Modification Program (HAMP) is not always the best solution.

“Short sales, deeds in lieu are other ways to prevent foreclosures to help achieve [housing] stability,” he said. “Modifications are only for a certain subset of distressed homeowners.”

The Administration’s foreclosure alternative program – the Home Affordable Foreclosure Alternatives program,  or HAFA – will provide incentives to servicers and borrowers that pursue short sales rather than foreclosure. As HousingWire magazine reports, critics of HAFA say it will dull short sale experts’ competitive edge while other sources warn homeowners will still see short sales as the loss of homeownership.

“They can’t keep their home, but they can avoid foreclosure,” explained Colleen Hernandez, CEO of the Homeownership Preservation Foundation (HPF) – a nonprofit that partners with local governments, borrowers and lenders to facilitate foreclosure alternatives and promote homeownership.

“We are seeing middle class unemployed,” Hernandez said, adding the emerging class of struggling homeowners are unused to financial hardship. “They are slow to apply for benefits, slow to pick up a job that pays less, slow to take up the new world order.”

HPF’s services help these borrowers get their arms around total finances as this class tends to be highly indebted with not only credit cards, but also outstanding student loans and car payments. “We help them  prioritize” the wind-down of their obligations, Hernandez added.

“HAMP can not be seen as the only solution,” said Doug Potolsky, a senior vice president at Chase Home Finance. “Chase has aggressive programs that deal with loans that fail HAMP.”

Clearly, he said, other solutions are necessary as, in his department, HAMP is not particularly successful. Nearly one-third of Chase HAMP trial modifications result in no repayment, and only 20% ever reach permanent modification status, Potolsky said.

HAMP servicers completed a total 66,465 permanent modifications through December, according to the latest Treasury report.

“HAMP is not perfect, but improving. I think as a servicer we have to work on building our own [modification] program.” In terms of trying to follow the administrations directive to fix mortgage markets, Potolsky added that option ARM mortgages are particularly challenging to modify.

Other panelists at ASF this week feel a heavy reliance on HAMP could even result in a second housing dip. The warning comes after a special inspector on the Treasury’s asset-relief efforts recently warned of a government-induced second housing bubble.

Another challenge facing the administration, according to ASF director Tom Deutsch, is the 30% of US borrowers that are underwater and facing strategic defaults. And this is perhaps the biggest challenge facing the market.

Laurie Goodman, a managing director of Amherst Securities – and a vocal critic of HAMP for its failure to address negative equity – responded to Deutsch: “If you have negative equity, you are very, very likely to default.”

Goodman added: “Negative equity is the single most driver of defaults.”

Negative equity may be just one of the predictors of borrower mentality leading to strategic default, an issue HousingWire studies in-depth in the February magazine issue.

Nancy Mueller Handal, managing director of structured fiance at MetLife, also said at ASF that solving the issue of shadow inventory – homes at danger of default, which Goodman’s team recently estimated to range around 7m units – will require a viable non-agency refinancing program in order to prevent the home again reaching default status in two to five years. Under this program, the private market for the mortgage-backed securities (MBS) could re-open, providing need liquidity into the market.

Write to Jacob Gaffney.

Diana Golobay contributed to this report.

The US Department of Housing and Urban Development (HUD) budget proposal for 2011 dipped 5% below the budget in 2010 to $41.6bn after raising annual Federal Housing Administration (FHA) insurance premiums by 50 bps to 2.25% earlier this month.

“We announced a set of changes in FHA underwriting and risk management and a range of other areas,” said HUD secretary Shaun Donovan in a conference call for the press. “One of those was raising the upfront premium by 50bps. But at the same time we said we thought it was a better long-term strategy to increase the annual premium, however we are currently at the maximum annual allowed by Congress.”

He added that HUD looked into the budget for flexibility to increase the annual premium and decrease the upfront premium. As far as raising that minimum, Stevens said HUD is pursuing legislation to do so, but there are no plans for differential mortgage pricing based on credit scores. HUD projects $6.9bn in profits will be made through the FHA and Ginnie Mae loan insurance programs in 2011, bolstered by the increase in insurance premiums.

“We think that would be a better way to not only serve the housing market but also to raise revenue for FHA,” Donovan said. “We have already raised premiums on the upfront side. That is bringing increased receipts to FHA even before the 2011 budget goes into effect, and we will be looking to legislation to be able to adjust them.”

HUD also requested $350m to launch the Transforming Rental Assistance (TRA), a new initiative to preserve 300,000 units of public housing and increase the efficiency of operation. The 13 separate rental assistance programs that already exist under HUD should streamline under the new program.

“After a year of progress, we no longer confront an economy or a Department in crisis,” said Secretary Donovan. “But much work remains, in much changed fiscal circumstances. Now that the economic crisis has begun to recede, President Obama has committed to reducing the federal deficit. HUD’s fiscal year 2011 budget reflects that fiscal discipline.”

HUD also cut funding for a number of programs, including the public housing capital fund, HOME Investment Partnerships, Native American Housing Block Grants (NAHBG), the 202 Supportive Housing Program for the Elderly, and the Section 811 Supportive Housing Program for Persons with Disabilities.

In another regulatory shift, President Obama’s 2011 budget proposal included a new focus under the Troubled Asset Relief Program (TARP) away from the large financial institutions and toward foreclosure prevention. To help bring down unemployment numbers, $30bn of TARP money will shift to help community and smaller banks extend lines of credit to local businesses.

Write to Jon Prior.