The new $6,000 limit Fannie Mae and Freddie Mac mortgage servicers will be allowed to pay out to second-lien holders is on par with some values but well below others.
Morgan Stanley (MS) researchers looked at loans backing Freddie mortgage bonds at between 5% and 6% interest rates originated during the 2005 to 2007 bubble. Candidates for short sales averaged a first loan size of roughly $180,000 and assumed a second lien equal to 20%.
"Our understanding from conversations with market participants is that second liens associated with non- performing first liens trade in the range of 10-15 cents on the dollar," the Morgan Stanley researchers said. "Thus, while it is yet unclear how borrowers will respond, we note that the offer of $6,000 is towards the higher end of the current market."
The $6,000 maximum payout servicers can offer second lien-holders beginning Nov. 1 would return roughly 16.7% of those second-lien values to the lender, roughly where they're trading, according to the Morgan Stanley report. The Federal Housing Finance Agency set the new ceiling Tuesday.
Holders of home equity lines of credit, however, may not take the offers, according to some in the industry.
According to Equifax, average HELOC limits were $105,000 in 2007 but dropped roughly 25% over the following two years. Still, a $6,000 payout could equal less than 10% for some of these larger types of second liens.
The largest banks hold the majority of these loans.
HELOC originations on Fannie and Freddie loans per quarter grew from roughly $25 billion in the middle of 2004 to nearly $40 billion by the end of 2005, according to a recent paper from Federal Reserve scholars.
The Morgan Stanley researchers still do not expect short sales to spike because of the changes. Instead, they anticipate allowing servicers to clear short sales for borrowers still current on their loans to make the largest waves.
"At the margin, this announcement may alter the behavior of borrowers who continue to make payments even though they are in distress," according to the Morgan Stanley report. "Some of these borrowers may look to sell their property especially if they need to relocate for a new job."