Monday Morning Cup of Coffee takes a look at news coming across HousingWire's weekend desk, with more coverage to come on bigger issues.
Loan mods for troubled borrowers are a good thing, right? Not really. A recent paper has found that mortgage modifications significantly increased strategic defaults, meaning they did more harm than good.
That won’t sit too well with homeowners who want or got loan mods – or with the politicians who pushed them – but that’s the big picture findings from Xianghong Li at York University’s department of economics and Xinlei Shelly Zhao, who works for the U.S. Office of the Currency Comptroller and in Kent State University’s department of finance.
Why are they causing more harm than good?
“Some homeowners might intentionally skip mortgage payments that they can afford to be eligible for mortgage modification programs, such as Home Affordable Mortgage Program,” the summary explains. “The loan modification program established as part of the October 2008 Countrywide legal settlement provides a valuable natural experiment for investigation of such strategic behavior.
“We find that the Countrywide modification program not only substantially increases the default rates among borrowers who were current in their loan payments, but also dramatically decreases the cure rate of those already in payment delinquency before the settlement, and the latter venue has been largely overlooked in the literature,” the authors write. “Evidence from our base sample indicates that, by January 2009, modification-induced strategic default is about nine percentage points, on a base default rate of 30%. Further, modification-induced strategic defaults appear to be quite widespread and more severe among more risky loans.”
Speaking of loan performance and distressed loans, Black Knight Financial Services’ mortgage monitor report for February looked at borrowers who could both benefit from and likely qualify for refinancing, and found that — as of the end of February — that population numbered some 7.1 million.
This is down from 7.4 million in September, but up 3 million from this time last year (due to both rising home prices — and therefore equity — and declining interest rates).
“This total is very rate-sensitive, however; if interest rates rise just a half a percentage point, 3 million of these folks will be knocked out of the running,” the report says.
Not included in that group, but from the same analysis: lower credit score borrowers (under 620) are prepaying (refinancing) at the lowest rate seen since Black Knight started tracking prepayment rates in 2000.
The report also looked at residential real estate transactions and found that 2014 had the highest level of traditional sales (and conversely, the lowest level of distressed sales) since 2007 (although the decrease in distressed transactions contributed to an overall drop in volume).
Florida accounted for 26% of all 2014 distressed sales nationwide, and one out of every four sales within the state was distressed (as compared to a rate of just under 13% nationwide).
In addition, Florida has seen the lowest level of year over year home price appreciation among the “bubble states” (Arizona, California and Nevada), and is also seeing higher discounts on those distressed sales than the others.
Florida also has the highest remaining rate of loans 90+ days delinquent or in foreclosure among that group as well, and is ranked fourth in the nation by that metric.
On the investment side, analysts see a positives in the market for agency mortgage bonds.
“The strong new homes sales in February, rising purchase mortgage applications, declining initial jobless claims and an apparent bottoming of the Citi economic surprise index two weeks ago, leads us to believe that most of the downside pressure for rates has been realized and the low end of our anticipated range of 1.9%-2.2% on the 10-year for the coming months will not be materially breached,” says Chris Flanagan of Bank of America/Merrill Lynch, in a client note. “We believe such a range would prove positive for agency MBS, containing prepayment, extension and supply risk. We view the Fed's renewed dovishness as positive, which leaves us overweight on the basis. On the credit side, we look for seasonal strength to be repeated this year.
“We see securitized credit benefitting from benign technicals, relatively high yields and a steadily improving fundamental story from lower unemployment, lower oil and rising real estate prices. We continue to see substantial spread tightening potential in the months ahead, as credit spreads more broadly are expected to establish new post-crisis tights,” he writes.
No banks were closed the week ending April 3, according to the FDIC.