by Calculated Risk on 11/11/2009 11:23:00 AM

Last week the FHA released a temporary guidance that relaxed some of the rules for condominiums. From the FHA: Temporary Guidance for Condominium Policy

The Miami Herald has the key points: FHA moves to boost condo market

• Increase from 30 percent to 50 percent the number of units in a project that can be financed with FHA loans. FHA, however, will make exceptions, even allowing up to 100 percent, when buildings meet an additional set of more stringent criteria.

• Require at least 50 percent of units in a complex to be owner-occupied or sold to owners who plan to live in the units. Bank-owned units may be disqualified from the percentage calculation.

• Reduce a presale requirement in new construction to 30 percent, compared with 70 percent for loans from conventional lenders.

This temporary guidance is in effect from December 7, 2009 through December 31, 2010.

by Calculated Risk on 11/04/2009 06:47:00 PM

From Diana Golobay at HousingWire: FHA Delays Yearly Fiscal Report over ‘Accuracy’ of Methodology

A US Department of Housing and Urban Development (HUD) spokeswoman indicated hours before the scheduled release that the report would not be completed in time, and FHA commissioner David Stevens later issued a statement on the cause of the delay.

“FHA asked the independent actuary, IFE [Integrated Financial Engineering], to run additional economic scenario testing above and beyond what was going to be included in the actuarial study to better understand a broader range of risk scenarios,” Stevens said. “Based on these results, we raised questions about the accuracy of IFE’s modeling and IFE therefore advised us that we should not treat the report as final. IFE is now running additional tests to ensure that the final report is accurate.”

Stevens added, “We will only release a report that we are confident is accurate and fully reflects the health of the FHA.”

And from the WaPo: FHA abruptly delays audit of agency's financial health

In September, Stevens said the audit, when released, would show that the agency's cash reserves had dropped below federally mandated levels. ... But while the reserves are at a historic low, the audit predicted that they would rebound to the required level within two to three years largely as a result of the recovery in the housing market ...

On Wednesday, neither the FHA nor the auditing firm would publicly comment about whether the preliminary data are now in question.

But Barry Dennis, president and chief operating officer of the auditing firm, said his office is working as quickly as possible to produce the final report. "In an environment like we're in today, you need to look at a number of different economic scenarios and in the process of doing that, we needed to track down some potential issues," Dennis said.

The concern is that some of the "different economic scenarios" showed the FHA would require a significant taxpayer bailout.

by Calculated Risk on 10/19/2009 05:21:00 PM

Scott Jagow at American Public Media MarketPlace provides an example of a recent FHA insured loan homebuyer: On the flip side...

Denise works three jobs so she can afford her new house. She makes $2470 a month but pays $1328 to service her mortgage. That means 54% of her income goes to the house, leaving her with $285 a week to live on. Doable, but tight. She’s breaking the 30% rule and then some, not to mention she’s still spending out of pocket to renovate the yard, fix the roof and paint.

Apparently 20 year old Denise bought the home for $155,000, and according to the comments, obtained an additional $28,000 on a "203K HUD supplemental loan to renovate the home" for a total of $183,000.

Not exactly up to the new proposed FSA standards of affordability!

Rolfe Winkler has a speech from David Einhorn Einhorn on gold, sovereign default, and more. Here is the pfd of the speech. I don't agree with everything he says, but he is entertaining!

Paul Kiel at Propublica writes: Four Banks in Govt’s ‘Healthy Bank’ Bailout Struggle to Survive.

The government has doled out billions to 687 banks [1] over the past year through a program meant to bolster already “healthy” banks. But an increasing number of those are troubled. Four banks in particular are foundering, including one that has acknowledged its executives cooked its books.

Paul has the details.

by Calculated Risk on 10/17/2009 06:35:00 PM

Just a follow-up to the previous post - here is the HUD Inspector General's report on the FHA single-family lender approval process (ht MrM)

Click on graph for larger image in new window.

This graph from the Inspector General's report shows the number of approved FHA lenders by year. In 2008 there were 3,297 lender applications approved by the FHA, more than triple the number in 2007.

And 2009 is on pace for a similar number of approvals as 2008 (another 3,000+ lenders).

From the report:

Congressional concerns brought about in part by media coverage has raised concerns that former subprime lenders and brokers are obtaining approval to participate in the FHA program and that they will be responsible for FHA insurance of loans to people unlikely to make their payments.

Our audit objective was to determine whether the application process for Title II provided effective controls to ensure approval of only those lenders that complied with FHA requirements ...

And from the results:

Finding 1: FHA's Lender Approval Process Did Not Ensure That Only Eligible Applicants Were Approved

FHA's lender application process was not adequate to ensure that all of its lender approval requirements were met. This condition occurred because FHA control procedures had been enhanced and automated to handle the recent large increase in the number of lenders applying for the FHA program.

by Calculated Risk on 10/17/2009 03:35:00 PM

From the WaPo: FHA Set to Hire Freddie Mac Official

On Friday, the Inspector General of the Department of Housing and Urban Development, which includes FHA, said the agency lacks the ability to ensure that lenders meet its requirements.

The report also said that FHA did not obtain or consider negative information on lenders from other HUD offices, follow up on whether the required fees or documentation were collected, or properly dispose of lender application files containing personally identifiable information.

The AP has more on the report. (I haven't seen the report yet).

No wonder so many FHA lenders have off-the-chart default rates (see: FHA Lenders with High Default Rates).

by Calculated Risk on 10/09/2009 10:11:00 AM

“I don’t think it’s a bad thing that the bad loans occurred. It was an effort to keep prices from falling too fast. That’s a policy.”
Barney Frank, chairman of the House Financial Services Committee on recent FHA lending.

The quote is from David Streitfeld and Louise Story's article in the NY Times: U.S. Mortgage Backer May Need Bailout, Experts Say

The article covers the problems at the FHA, and includes this anecdote:

Like many Americans, Ms. [Bernadine Shimon] has recently been through some rough times. She lost a house to foreclosure, declared bankruptcy, got divorced and is now a single mother, teaching high school English in a Denver suburb.

She wanted a house but no lender would touch her. The Federal Housing Administration was more obliging. With the F.H.A. insuring her mortgage, Ms. Shimon was able to buy a $134,000 fixer-upper in August.
...
Any more than [3.5% down] and Ms. Shimon, 45, would still be a renter. As it was, she cashed in her retirement savings account to come up with the necessary funds. She did not have enough to spare for closing costs, so her mortgage broker arranged a deal where the charges were wrapped into the loan at the cost of a higher interest rate. She cried when the deal was done.

The house was empty and trashed. Slowly, she is trying to bring it back to life. She spent the first few weeks picking up garbage in the backyard.

Is Ms. Shimon a good bet? Even she has no easy answer. Her mortgage payment, $1,100, is half of what she takes home every month. It is not easy to make ends meet. Teachers can get laid off like everyone else.
emphasis added

Maybe Ms. Shimon will make it (I hope so). But according to the article she has no savings, and is spending half her take home income on just the mortgage payment. update

Maybe she can qualify for a loan modification! The HAMP guidelines are for loans not to exceed 31 percent of gross income. Update: It is not clear from the story the percentage of her gross income (the half is take home income). The FHA guidelines are that the payment-to-income ratio not exceed 31%, however, with all of the "compensating factors", it is possible that the FHA is insuring loans that the Obama Administration (through HAMP) has called "unaffordable". (ht TL)

And the NAR thinks Ms. Shimon will spend $10 of thousands of dollars fixing up her home over the next year? That is their argument for extending the "first-time" homebuyer tax credit (for anyone who hasn't owned for three years).

As Frank said, this is "a policy". But is it a good policy?

by Calculated Risk on 10/08/2009 11:34:00 AM

From Bloomberg: FHA Shortfall Seen at $54 Billion May Lead to Bailout (ht Mike in Long Island, Ron at WallStreetPit)

The Federal Housing Administration, which insures mortgages with low down payments, may require a U.S. bailout because of $54 billion more in losses than it can withstand, a former Fannie Mae executive said.

“It appears destined for a taxpayer bailout in the next 24 to 36 months,” consultant Edward Pinto said in testimony prepared for a House committee hearing in Washington today. Pinto was the chief credit officer from 1987 to 1989 for Fannie Mae ...

Pinto makes several points, including:

"FHA is making much larger loans than in the past. Its top dollar limit is $729,500 versus its old top of $362,000 in 2008." This exposes the FHA more to high risk states like California.

"FHA allows up to a 6% seller concessions before requiring an appraisal adjustment." Pinto notes that Fannie Mae found that allowing concessions above 2% before adjustments led to much higher defaults.

High LTV lending is a higher percentage of loans today (23%) than in 2006 (17%). This is due to the large increase in FHA insured loans.

The first-time homebuyer tax credit is being used as a downpayment, and Pinto draws a comparison to the horrible default performance of the DAPs (downpayment assistance program) loans.

"FHA's early warning database indicates loan performance is deteriorating." See pages 6 and 7 of testimony for details. Note: I posted some data before, see FHA Lenders with High Default Rates

There is more in his testimony.

by Calculated Risk on 9/18/2009 08:38:00 AM

From the WaPo: Housing Agency's Cash Reserves Will Drop Below Requirement

The Federal Housing Administration has been hit so hard by the mortgage crisis that for the first time, the agency's cash reserves will drop below the minimum level set by Congress, FHA officials said.

The FHA guaranteed about a quarter of all U.S. home loans made this year, and the reserves are meant as a financial cushion to ensure that the agency can cover unexpected losses.

"It's very serious," FHA Commissioner David H. Stevens said in an interview. "There's nothing more serious that we're addressing right now, outside the housing crisis in general, than this issue."
...
[Stevens] said he is planning to announce Friday several measures that should help the reserves rebound quickly.
...
An independent audit due out this fall will show that the agency's reserves will drop below the 2 percent level as of Oct. 1, the start of the new fiscal year, Stevens said.
...
For one, he will propose that banks and other lenders that do business with the FHA have at least $1 million in capital they can use to repay the agency for losses if they were involved in fraud. Now, they are required only to hold $250,000. Second, he will propose that lenders also take responsibility for any losses due to fraud committed by the mortgage brokers with whom they work.
emphasis added

Here is a table of FHA lenders with 2 year default rates of 15% or more (only lenders with 100+ originations included). There are ten lenders with "perfect" records (100% default), but they only have one or two originations each. Many of these lenders will probably go away with the new rules.

The FHA is banking on a "recovery in the housing market":

The new audit shows that even without any new measures, the reserves will rebound to the required level within two or three years largely as the result of the recovery in the housing market, Stevens said. This calculation is based on projections of future home prices, interest rates and the volume and credit quality of FHA's business.

Yeah, if house prices increase, everything will be OK!

Note: here is a post from a couple of weeks ago: FHA: The Next Bailout?

by Calculated Risk on 9/08/2009 10:22:00 PM

HUD has a great tool to track FHA lender performance: Neighborhood Watch Early Warning System (ht TL)

Although the overall FHA default rate is 4.63%, the following lenders had 2 year default rates of 15% or more (only lenders with 100+ originations included). (Added: these are the two year default rates).

There are ten lenders with "perfect" records (100% default), but they only have one or two originations each.

And the winner is Mortgage Depot Inc. with a 48.65% default rate!

Note that Countrywide Home Loans Inc. is not Countrywide Bank FSB.

For a full screen version of the table click here.

The table is wide - use scroll bars to see all information!

NOTE: Columns are sortable - click on column header to sore

by Calculated Risk on 9/03/2009 09:25:00 PM

John Burns Consulting sent out a note today titled: FHA Likely To Be The Next Shoe To Drop

"The FHA's aggressive lending programs have continued throughout the housing downturn, causing its market share of the mortgage industry to grow from 2% in 2005 to 23% today. ... The FHA insurance fund, however, is likely running dry. ...

While almost all of the experts believe that Congress would support the FHA if necessary (it's currently self-funded), we wonder if FHA officials will be under pressure to continue tightening their lending policies, which currently allow 96.5% mortgages to people with 600 FICO scores. ... Claims against the insurance fund have climbed, with roughly 7% of all FHA-insured loans now delinquent.

And from the WSJ: Loan Losses Spark Concern Over FHA

The Federal Housing Administration ... is in danger of seeing its reserves fall below the level demanded by Congress, according to government officials, in a development that could raise concerns about whether the agency needs a taxpayer bailout.
...
Resulting FHA losses are offset by premiums paid by borrowers. Federal law says the FHA must maintain, after expected losses, reserves equal to at least 2% of the loans insured by the agency. The ratio last year was around 3%, down from 6.4% in 2007.
...
Officials said as recently as May that they didn't expect to fall below the 2% limit, but home price declines have exceeded those used to model their expected losses. Given the pace of those declines, "there is no way they will make the 2%" if the current study follows last year's methodology, says [Thomas Lawler, an independent housing economist].

Based on the issues at the FHA, the end of the tax credit, and more supply coming on the market, Burns concluded that "housing could see another leg down later this year or early next year":

[W]atch the growing controversy regarding the FHA very carefully. The decisions made to allow the FHA to continue lending will have a huge impact on the housing market, particularly when so few entry-level buyers have a substantial down payment.

by Calculated Risk on 8/04/2009 07:21:00 PM

From HUD: FHA Suspends Taylor, Bean & Whitaker Mortgage Corp. and Proposes to Sanction Two Top Officials

The Federal Housing Administration (FHA) today suspended Taylor, Bean and Whitaker Mortgage Corporation (TBW) of Ocala, Florida, thereby preventing the Company from originating and underwriting new FHA-insured mortgages. The Government National Mortgage Association (Ginnie Mae) is also defaulting and terminating TBW as an issuer in its Mortgage-Backed Securities (MBS) program and is ending TBW's ability to continue to service Ginnie Mae securities. This means that, effective immediately, TBW will not be able to issue Ginnie Mae securities, and Ginnie Mae will take control of TBW's nearly $25 billion Ginnie Mae portfolio.

FHA and Ginnie Mae are imposing these actions because TBW failed to submit a required annual financial report and misrepresented that there were no unresolved issues with its independent auditor even though the auditor ceased its financial examination after discovering certain irregular transactions that raised concerns of fraud. FHA's suspension is also based on TBW's failure to disclose, and its false certifications concealing, that it was the subject of two examinations into its business practices in the past year.

"Today, we suspend one company but there is a very clear message that should be heard throughout the FHA lending world - operate within our standards or we won't do business with you," said HUD Secretary Shaun Donovan.

FHA Commissioner David Stevens said, "TBW failed to provide FHA with financial records that help us to protect the integrity of our insurance fund and our ability to continue a 75-year track record of promoting, preserving and protecting the American Dream. We were also troubled that the Company not only failed to disclose it was a target of a multi-state examination and a separate action by the Commonwealth of Kentucky, but then falsely certified that it had not been sanctioned by any state. FHA won't tolerate irresponsible lending practices."

Taylor Bean is a major FHA lender, from the WSJ:

Taylor Bean was the 12th largest U.S. mortgage lender in the first six months of this year, according to Inside Mortgage Finance, a trade publication. Among originators of FHA loans, Taylor Bean was the third largest in May, with a market share of 4%, according to the publication. Only Bank of America Corp. and Wells Fargo & Co. were larger.

Taylor Bean was raided yesterday along with Colonial Bank by TARP inspectors. There is no indication if these actions are related.

by Calculated Risk on 4/04/2009 04:47:00 PM

Note: Working on comments today - sorry for any inconvenience.

For years I've complained about FHA related seller-funded Down payment Assistance Programs (DAPs). These programs circumvented the FHA down payment requirements by having the seller funnel the "down payment" to the buyer through a "charity" (for a small fee of course). In 2008, low end buyers with no money for a down payment, flocked to these programs with predictable results ...

From Zach Fox at the NC Times: Delinquencies for FHA surpassed those of subprime loans last year

Once considered among the safest loans available, government-insured mortgages issued last year have performed worse than the subprime loans that kicked off the collapse of the nation's housing market, according to data from a research firm.
...
huge level of defaults on loans insured by the Federal Housing Administration, which analysts called "stunning," raise the specter of further market turmoil and more taxpayer funds sent toward fixing the mortgage crisis.

"Frankly, I wouldn't be surprised if you called me up in a year from now and asked, 'What do you think about the FHA bailout?' " said Norm Miller, a professor at University of San Diego's Burnham-Moores Center for Real Estate.

First American CoreLogic ... reported this week that 20.7 percent of all FHA loans issued in 2008 were at least 60 days late by 10 months after the origination date. By the same metric, 14.1 percent of subprime loans issued in 2007 were 60 days delinquent.

The main problem with the delinquent FHA loans was low down-payment requirements, said Sam Khater, senior economist for First American CoreLogic.
...
By definition, FHA loans carry little equity. But the risk of failure was increased by the implementation of "down payment assistance" programs implemented by home builders, said Ramsey Su, a San Diego housing analyst.
...
The government has since discontinued the programs.

For more on DAPs, see Tanta's DAP for UberNerds

Journalists: A story that follows the history of DAPs, profiles the "charities" involved, shows the rising defaults associated with DAPs, examines the efforts of the FHA, HUD and the IRS to eliminate DAPs, and investigates the rent seeking activities of the "charities" (contribution to politicians, etc.) would be very interesting. Follow the money - as they say.

by Calculated Risk on 3/30/2009 09:23:00 AM

From the WSJ: Mortgage Defaults, Delinquencies Rise

... A spokesman for the FHA said 7.5% of FHA loans were "seriously delinquent" at the end of February, up from 6.2% a year earlier. Seriously delinquent includes loans that are 90 days or more overdue, in the foreclosure process or in bankruptcy.
...
The FHA's share of the U.S. mortgage market soared to nearly a third of loans originated in last year's fourth quarter from about 2% in 2006 as a whole, according to Inside Mortgage Finance, a trade publication. That is increasing the risk to taxpayers if the FHA's reserves prove inadequate to cover default losses.

by Calculated Risk on 3/08/2009 08:50:00 AM

The Washington Post has an article on Early Payment Defaults (EPD) for Federal Housing Administration (FHA) loans.

From the WaPo: More FHA-Backed Mortgages Go Bad Without a Single Payment

Many borrowers are defaulting as quickly as they take out the loans. In the past year alone, the number of borrowers who failed to make more than a single payment before defaulting on FHA-backed mortgages has nearly tripled, far outpacing the agency's overall growth in new loans, according to a Washington Post analysis of federal data.

Many industry experts attribute the jump in these instant defaults to factors that include the weak economy, lax scrutiny of prospective borrowers and most notably, foul play among unscrupulous lenders looking to make a quick buck.

If a loan "is going into default immediately, it clearly suggests impropriety and fraudulent activity," said Kenneth Donohue, the inspector general of the Department of Housing and Urban Development, which includes the FHA.
...
More than 9,200 of the loans insured by the FHA in the past two years have gone into default after no or only one payment, according to the Post analysis.
...
The agency's share of the mortgage market is up from 2 percent three years ago to nearly a third of the mortgages now made ...

Congress has substantially increased the amount a homeowner can borrow on an FHA loan in pricey areas, thrusting the agency into markets it was previously shut out of, such as California, where plunging home prices have made people more vulnerable to foreclosure. Moreover, lawmakers last year put the FHA in charge of a program created to address the roots of the financial crisis by helping delinquent borrowers refinance into new mortgages.

The authors don't mention the term "Downpayment Assistance Programs" (DAPs), but they do provide an example of a builder writing zero down loans. With DAPs the seller gives the buyer the downpayment through a charity to avoid the FHA rules on downpayments - and DAPs led to significantly higher defaults - and might be a bigger contributor to EPDs than the FHA's "HOPE for Homeowners" refinance plan for borrowers in trouble. I'd like to see a breakdown of EPDs between DAPs, HOPE, and loans made in high priced areas.

by Calculated Risk on 10/29/2008 10:08:00 AM

According to the Census Bureau, 17% of new homes sold in Q3 2008 were financed with FHA loans. This is up from an average of 4% in the 2005 through 2007 period.

This huge percentage increase in FHA loans was partially driven by Downpayment Assistance Programs (DAPs). These programs allowed the seller to provide the buyer with the downpayment by funneling the money through a charity.

DAPs have been eliminated (finally!) as of Oct 1st.

Eliminating DAPs is a positive for the economy and housing. FHA loans using DAPs had significantly higher default rates than when the buyers actually made a down-payment, and DAPs encouraged appraisal fraud.

Although good for housing and the economy in the long term, eliminating DAPs might impact new home sales in the fourth quarter of 2008.

Click on graph for larger image in new window.

This graph shows new home sales by percent financing type. The percent of FHA loans increased dramatically in 2008, and this was probably driven by DAPs.

The second graph shows the same information but by the number of units sold.

Of the 118,000 homes sold in Q3 2008, 20,000 were bought using FHA financing.

This compares to 7,000 FHA financed homes in Q3 2007 out of 181,000 new homes sold.

The number and percent of FHA loans will probably decline in Q4 2008, and this will probably impact about 10% of potential home buyers.

by Calculated Risk on 9/10/2008 09:39:00 AM

Downpayment Assistance Programs (DAPs) are a symbol of the excesses and lack of oversight during the housing bubble. Basically DAPs allow the seller to provide the buyer with the 3% downpayment as a "gift". The FHA has been trying to eliminate these programs for several years - the IRS has called them a "scam" - and one of the provisions in the recent housing bill was to eliminate DAPs for FHA loans.

Some in Congress will not give up. Inman News reports: Congress weighs reprieve for seller-funded gifts (hat tip Jim Klinge)

A last-ditch effort to head off an Oct. 1 ban on the use of seller-funded down-payment assistance with FHA-backed loans is picking up steam as a compromise bill, that would mend rather than end the practice, gains momentum.

HR 6694, which would allow home builders to continue funneling down-payment assistance through nonprofit groups to home buyers using FHA loans, is certain to pass the House of Representatives and has the blessing of the Department of Housing and Urban Development, Rep. Barney Frank, D-Mass., said at a hearing on foreclosures this weekend.

DAPs encourage appraisal fraud, and lead to higher default rates for FHA loans.

HUD has sought to end the use of seller-funded down-payment assistance with FHA loans outright, claiming the practice artificially inflates home prices and that borrowers who relied on the gifts are more likely to default.

Although FHA loan guarantee programs have always been self-sustaining -- they are funded by premiums paid by borrowers, and not taxpayers -- HUD said the enormous growth in the use of seller-funded gifts and the poor performance of the loans threatens to put the insurance fund in the red.
...
At Saturday's hearing, Merced Mayor Ellie Wooten [a local Realtor] said the down-payment assistance program offered by Nehemiah Corp. of America was "heavily used" in Merced County.

"We are an agricultural community, and (farmworkers) are solid people, but many people don't have bank accounts with the 20 percent down payment," Wooten said. The minimum down payment for FHA guaranteed loans is now 3 percent, and is being raised to 3.5 percent on Oct. 1.

Perhaps this is part of the reason the foreclosure rate is so high in Merced. And what is this comment about a 20% downpayment? The FHA only requires 3.5% as of Oct 1st, and any potential home buyer that can't save (or borrow from friends and family) a small downpayment probably isn't ready to be a homeowner.

by Tanta on 8/16/2008 09:15:00 AM

I am very pleased to offer you this post, which is actually a "Guest Nerd" offering by our regular commenter and expert mort_fin, who works on undisclosed mortgage matters in an undisclosed location and often straightens us out in the comment threads when the conversation gets to technical matters of statistical analysis of mortgages. I helped a little bit with this post (any errors in the tables are mine), but the bulk of this is mort_fin's.

Some important context for the genesis of this: it came about after dear mort_fin, and a number of our other regulars, spent most of a frustrating Saturday afternoon arguing with another commenter about this post on the FHA "DAP" program (the infamous seller-money-laundered-downpayment-assistance-program). We basically came to the conclusion that a lot of people who defend the DAPs are not arguing in good faith about the performance of these loans--they pick out statistics they don't ever define clearly and wield them in misleading ways.

Because things like the FHA DAP are such important public policy questions, it seemed to mort_fin that there was much to be gained by helping non-specialists get a better grip on the various default statistics that are available and what they do (and do not) actually tell you. This is UberNerditude at its finest, and I thank mort_fin for taking the time and effort to help us move the intellectual ball a few yards in the never-ending battle with the DAP shills.

*************

Mort_fin says:

A recent flap in the comments surrounding default rates in FHA, especially with respect to down payment assistance programs, showed how easy it is to misunderstand and abuse mortgage default rates. So I thought I’d take a shot at writing The Fairly Intelligent Person’s Guide to Default Statistics.

The first issue to note is just the words. Default, as Tanta has noted in a previous excellent UberNerd, has a fairly precise legal definition, and a fairly vague usage in the popular and financial press. To a lawyer, if you move and rent out your abode you are probably in default, even if you keep making your mortgage payment every month, since you have violated the clause in the note that says you will occupy the premises. When reading the trade press, delinquency usually means not paying the mortgage, and default might mean that foreclosure proceedings have started, have finished, are being negotiated, etc. You can’t understand the analysis if you don’t read the fine print in the definitions. I’m going to stick with default meaning “foreclosure has happened” for the following examples.

To keep everything clear, and countable on fingers without resorting to toes, let’s say 10 people all get mortgages in a year (a group all getting mortgages at the same time is a “vintage” or a “cohort”). All the initial examples will relate to these 10 people. They are color coded based on their mortgage status. The first thing to notice is that life is complicated, and there are a lot of possible outcomes. Some loans end in foreclosure (default), some are refinanced into another mortgage (which can then end in a variety of ways), some people sell the house and pay off the mortgage, and some people just sit there paying the monthly nut for 10 years or more. And you don’t follow people forever—who knows what happened to any of these folks after 10 years?


In our sample pool of ten loans, each originated in 2000, we have the following outcomes:

• Fred: Purchase mortgage for 1 year, 1 year foreclosure process, foreclosed, becomes renter
• Matilda: Purchase mortgage for 1 year, refinanced mortgage for 2 years, 1 year foreclosure process, foreclosed, becomes renter
• Jose: Purchase mortgage for 3 years, refinanced mortgage for 5 years, sells home, becomes renter
• Rashid: Purchase mortgage for 4 years, foreclosure for 1 year, foreclosed, becomes renter
• Seamus: Purchase mortgage for 4 years, foreclosure process for 2 years (stayed because of a bankruptcy filing), foreclosed, becomes renter
• LuAnne: Purchase mortgage for 4 years, refinanced mortgage for 1 year, refinanced mortgage again for 1 year, foreclosure process for 1 year, foreclosed, becomes renter
• Saty: Purchase mortgage for 2 years, purchases new home
• Mitko: Purchase mortgage for 5 years, refinanced mortgage for 5 years
• Bob: Purchase mortgage for 10 years

This may or may not be a “typical” set of outcomes for any given pool of ten mortgages. But these are all very possible outcomes, and the point of this little exercise is to see clearly just how these possible outcomes are—or are not—reflected in the default statistics we have come to rely on for measuring mortgage performance.

A vintage of loans something like this would get sliced and diced in various ways by analysts. You might see a “lifetime projected default rate” or a “cumulative to date default rate” or a “conditional default rate” or a “foreclosure initiated rate" (also sometimes call the “foreclosure inventory”). None of them is right or wrong, but any of them can be misunderstood or abused.

Start with the “cumulative to date default rate.” (Remember that this counts foreclosures completed, not started.) If these are loans originated in December of 2000, you might ask in 2000 or 2001 “what percent have gone bad?” and the answer would be zero. For most borrowers, it is rare to miss payments in the first year (the fact that it wasn't rare starting about 2 years ago should have been an enormous alarm bell for people), and it takes very roughly a year between the time people stop missing payments and the time they finish foreclosure (timeline varies widely by state). But at the end of the 2002, you have one default, Fred, for a cumulative to date default rate of 10% (1 in 10). At the end of 2003 it’s still 10%, but by the end of 2004 it’s risen to 20% because Matilda has also gone bad. But, wait a minute, Matilda refinanced in 2001, so she never defaulted on a 2000 originated mortgage. I guess it stays at 10%. The “to date” cumulative rate eventually rises to 30% as first Rashid, and then Seamus, go to default.

At the end of 2009 the “to date” is 30%, and assuming that these are 30 year mortgages, we still do not know the “lifetime projected default rate” since Bob is still out there with an active loan. You know that the lifetime cumulative rate will be at least 30% since it can’t go down (well, actually in states with rights of redemption, it theoretically could go down, but those are pretty rare events) and it can’t be more than 40%. If Bob stays good it’s 30% and if he goes bad it’s 40%. Since few people go bad after 10 good years you would probably project a 30% lifetime cumulative default rate for these loans. Matilda and LuAnne don’t count, since they refinanced and are a “success” as far as the original lender is concerned (although they might be failures from the perspective of a policy to promote homeownership). And if you’ve taken comfort in the fact that the “to date” cumulative default rate is zero at the end of 2002 you’re in for an uncomfortable surprise next year.

Note that if you want to assess what these things will cost you from a credit cost perspective, the relevant figure is lifetime cumulative defaults. When you originate the loans (which is the date that matters, since you can’t retroactively up the interest rate or the insurance premium, the horse is out of the barn at that point) all you have are projections. You don’t know what anyone has done, since they just started. After 5 or 6 years you can make a pretty good projection, but it’s far too late at that point. In this business you have two and only two options: highly uncertain knowledge when it’s useful, or very precise knowledge long after it’s useful. That’s why this business is so much fun. And the projections are sensitive not only to the quality of the underwriting (how did Fred manage to get a loan in the first place???) but also to future house prices and unemployment rates, and refinancing opportunities (a rolling loan gathers no loss).

But cumulative defaults aren’t the only, or even the most commonly presented, statistics. The commenter in the aforementioned Haloscan thread was led astray by the Foreclosures Initiated (or Foreclosure Inventory) statistic. This counts how many foreclosures are “in process.” Foreclosure is a process, not an event. The details vary by state, but a common method of judicial foreclosure is the filing of a “notice of default” in which the servicer tells the seriously delinquent borrowers that they are headed to court. This may start the foreclosure clock. Motions and countermotions are filed, court dates are scheduled and postponed, and a date for the sale of the property is set. This is the process that can take, in very rough terms, a year to play out.

In 2001 the foreclosure initiation rate in our example pool would be zero, but in 2002 it would be 11%. Why 11% you ask? Well, one loan (Fred) is in process, and there are 9 loans still active (Matilda refinanced, remember). So 1 out of 9 is 11% (with a little rounding). In 2005 the foreclosure initiation rate is 40%. Only 5 loans are still active, and two of them are in the process of being foreclosed upon.

Note that the foreclosure initiation rate tells you very little about how much of an insurance premium you needed to charge to cover the credit risk, or even whether you had a bunch of good loans or bad loans. This rate depends on the denominator as well as the numerator, and the denominator can change for all sorts of reasons, like borrowers moving and borrowers refinancing, that don’t have any direct bearing on whether these were good loans or bad loans. The inventory rate has its uses, but summarizing credit quality or expected costs isn’t one of them. It is a pretty sensitive number for summarizing current conditions – it tends to rise rapidly when things get bad, and fall back to earth when things get good.

The other commonly cited statistic is the CDR, the Conditional Default Rate. It is “conditional” because it is “conditioned by survival.” The denominator consists of all the loans that have survived until today, neither prepaying in the past nor defaulting in the past. Again, for the first two years, the CDR is zero. In 2002 it is 13% since 8 loans are still alive, and 1 is defaulting. In 2003 and 2004 it is back to zero, and then in 2005 it skyrockets up to 33%, as only 3 loans still survive, and one of them has gone bad. The CDR is useful as an input to complicated cash flow models, but by itself it doesn’t tell you much about credit quality, since, again, it depends on the denominator as much as it does on the numerator, and for older pools of loans the denominator can be pretty small.

Returning to our little pool of ten loans, these are the values we get for these three measures over ten years. (Click on the table to enlarge.) You can see how confused a conversation at any given point in time would be that tossed these numbers around without context:


The big analytical mistake you do not want to make here, of course, is the one Tanta likes to complain about in the work of various apologists for high-risk lending: assuming that if 30% of the loans in a given vintage fail, then 70% of the borrowers were “successful.” Here’s another way of looking at our example pool that contrasts the results of a standard vintage analysis (what happened to the loans that were originated in 2000?) with an actual borrower analysis (what was the mortgage performance of these ten borrowers over ten years?). You get very different numbers:


Now try a more complicated graphic, which looks a lot more like an active portfolio of loans than a static vintage. Imagine that 10 people a year are flowing into your sights as an analyst, and the world looks boringly the same from year to year—each new vintage performs just like the previous one.


Here's the tabular result:


In the first year, foreclosures (cumulative to date, inventory, and CDR) are all zero again. In year 2 the foreclosure rate, cumulative and CDR, are still zero, but the inventory is now 1/19. There are 9 loans still active from the first cohort, and 10 new loans have come into the picture. Of course, new loans are almost never in foreclosure, so letting new loans flow into the picture lowers the foreclosure inventory rate substantially. It is still the case that 30% of loans in each vintage and 50% of borrowers will ultimately go bad, but now the foreclosure inventory is a little over 5%, and the cumulative default rate and CDR are still zero. Go out one more year, and 10 new loans have flowed into the picture. 30 loans have come in, 3 have left via prepayment, and 1 of the remaining 27 is a foreclosure that has happened in that year. So the CDR is now a little under 4% (1 out of 28), and the cumulative claim rate is a little over 3% (1 out of 30). Interpreting the numbers from a dynamic pool of mortgages (loans constantly flowing into the system) is harder than interpreting a static pool (always looking at the same set of loans).

A great real-life example of cumulative (to-date and projected) default rates and CDRs can be found in FHA’s Actuarial studies. Go down to Appendix, and click on Econometric Results in Excel. There are tabs for All_Orig_CumC (All Originations Cumulative Claims – to FHA, a foreclosure is a claim, since they are an insurer, not a mortgage investor) and tabs for All_Orig_ConC for the Conditional Claim Rates. In the cumulative tab, note that FHA projects 15.89% of 2007 originations will ultimately go bad, and this is entirely a projection. For 2000, they project 7.61% will go bad – as these loans are now 7 years old, this is based on actuals of 6.73% having gone bad, and a projection that there will only be a few more foreclosures left to go. On the Conditional Claims rate tab, note that the expectation over the next year is that 0.5% out to 3% of loans are expected to go bad in the next year, depending on how old the loans are (which cohort they are in). It is these annual rates, properly accumulative (you have to adjust the figures so your denominator is always originated loans, not surviving loans), that get you anywhere from 6% to 22% lifetime foreclosure rates, for the good years vs. the bad years. You may want to revisit the HUD site next year to see how projections get revised. These are based on an August 2007 house price forecast. I suspect that has now been rendered inoperative.

The lesson to learn here is to ask questions. 1) What are the definitions in use? 2) Are you looking at a static or a dynamic population? 3) What are you trying to measure? 4) What is happening to the denominator in your ratio?

If you’re trying to ascertain credit costs, failures to date or failures over the past year won’t get you where you want to go. And if you’re trying to ascertain homeownership success, mortgage failures alone won’t give you an answer. Matilda and LuAnne “succeeded” on their first mortgages, but still had a sheriff evict them eventually. Jose and Tania didn’t get foreclosed—the statistics would simply count them as a “voluntary prepayment”—but it’s hard to say that homeownership was a success for them since they ultimately found the cost of owning impossible to maintain and were simply “lucky” enough to sell before they were foreclosed. And even if you’re trying to do an apples to apples comparison—like “Did the CDR for this pool exceed the CDR for that pool?”—it’s important to keep in mind that numerators and denominators can shift because of prepayments, not just defaults. We really don’t know what was motivating the refinances in our pool—lowering interest rates? Taking cash out? We don’t really know whether the refinances improved or worsened the borrower’s actual financial position, but we do know that higher or lower prepayments in a pool can certainly make statistics like CDR “look” more or less frightening.

The unfortunate truth is that mortgage analysts simply do not in any normal circumstances have access to a dataset like the one we have made up for this post. Whether you are looking at a static pool with a single vintage or a dynamic portfolio with multiple vintages, you are tracking loans, not borrowers or properties, and you are tracking “prepayments” of those loans. You simply do not know whether that prepayment was a refinance or a sale of the home; you don’t know what that borrower did after the prepayment. This information simply isn’t in the standard databases. The bottom line about making claims regarding borrower “success” by reference to mortgage default statistics is “you can’t necessarily get there from here.”

Click here for Guest Nerd Special!

by Tanta on 8/05/2008 12:52:00 PM

Now this ought to be a really interesting suit to follow. From the Boston Globe:

In their lawsuit, the Pestanas are seeking damages for their tarnished credit and are trying to reverse their eviction and foreclosure. Their Boston lawyer, Gary Klein, said their eviction has been delayed until late August.

The suit, filed one week ago, indicates the Pestanas would not have gone into foreclosure if they had reached someone at WaMu with authority to resolve their problem.

After the couple missed their August 2007 payment, Mark Pestana, a human resources specialist, and Lori Pestana, a business consultant whose work had slowed, still felt they could get current on their loan. One option might have been dipping into retirement savings, they said.

After reading on WaMu's website that it would assist distressed borrowers with loan modifications, Lori Pestana called and was told they could not qualify until their payments were 50 days late. To become eligible, they stopped paying and applied for help on Oct. 9, 2007.

It kind of sounds like these folks had the ability to make payments, but decided not to do so in order to induce WaMu to modify their loan. This ought to be interesting.

As it happens, the new FHA program authorized by the Foreclosure Prevention Act of 2008 requires borrowers to "provide certification to the Secretary that the mortgagor has not intentionally defaulted on the mortgage or any other debt." It looks like a court may be ruling on what exactly that might mean sooner than we thought.

(Hat tip to A.F.)

by Tanta on 8/04/2008 08:38:00 AM

Via L.A. Land, we are offered this "convincing" criticism of the new housing bill's FHA program, known far and wide (or at least in the text of the bill) as "Hope for Homeowners," by mortgage broker Lou Barnes:

The new housing assistance bill, dismissed here briefly last week, deserves a more thorough hatchet-job.

It’s centerpiece is a $300-billion FHA loan guarantee (not money) to refinance under-water home “owners.” Consider a Bubble-Zone victim who bought a $200,000 home five years ago, made a 5% down payment and got a 5-year interest-only ARM for $190,000. The home has fallen 25% in value to $150,000. She has made interest-only payments since, and her $190,000 loan is entering amortization reset.

Her rate is not bad, 5.50% even after adjustment. However, her payment will jump from $871 to a killing $1,167. To her rescue, the bill’s “Hope for Homeowners.” In the land of unfortunate acronyms, gotta call it HoHo.

HoHo provides for a write-down of the mortgage to 90% of current market value, to $135,000, plus a 3% refinance fee to the FHA, $139,000 total. HoHo further provides a 1.5% annual surcharge; added to 6.50% current market equals 8%, amortized for 30 years is $1,020 per month. Better by a little, possibly affordable, equity negligible, pride failing. Then there’s HoHo’s anti-equity kicker: when the place appreciates in value (how many years ahead?), and she either refinances off the 8% or sells, HoHo will take half of any appreciation. I bet HoHo won’t split costs.

While she considers HoHo humiliation, a new renter moves into the house next door, identical, rent $700. Millions of people just like her are now condemned as “Walkaways.” Professionals, fiddle with local examples; I think this one is mainstream.

First of all, I really need to know how many "Bubble-Zones" there are in which prices have fallen 25% from 2003 levels. Let's just pretend the Bubble Zone in question is LA. According to Case-Schiller, "low-end" prices have fallen 36.5% from their peak, which appears to have been about Q3 2006. But even this current price is more than the CS price level as of mid-2003. If you want to talk about "mainstream" examples, I suspect that your "mainstream" 2003 buyer who never refinanced is still above water in most places.

Why would anyone pick a 2003 borrower who actually made a downpayment to make this case? I dunno. Why would anyone be so obsessed with "pride" and "humiliation" in this context? I dunno. A homeowner who cannot carry the monthly mortgage payment unless it's at 2003-era ARM start rates with interest only is a homebuyer with a problem, regardless of current property value. Possibly such a borrower might work something out with her servicer to extend the IO period or something. Possibly such a borrower should just sell now at break-even or better (at least in nominal terms) instead of "walking away" and trashing her credit rating. I dunno. But I also dunno why anyone would think the fact that such a borrower is an implausible candidate for the Hope for Homeowners program is a valid criticism of Hope for Homeowners. HoHum.

by Tanta on 8/02/2008 09:01:00 AM

It took approximately twelve minutes for some of the bigger economic illiterates in Congress to sponsor a bill to reauthorize FHA DAPs--a form of money-laundering in which property sellers can inflate their sales prices by funneling money to a "non profit" which then "gifts" the funds to the buyer of the property.

Not content merely to pander to the most naive of their constituents by lining first-time homebuyers up to face foreclosure at three times the rate of those who don't get these generous "gifts," the sponsors of this bill, Representatives Al Green (TX-09), Gary Miller (CA-42), Maxine Waters (CA-35), and Christopher Shays (CT-4), would also like to redefine the very nature of the FHA mortgage insurance program, so that insurance premiums paid by those borrowers who do not default are not used to cover the losses on those who do default. Presumably, the funds to cover the losses on those borrowers who do not make their payments would come from the premiums that people who do not make their payments are not paying. Here's the draft bill:

Section 2133 of the FHA Modernization Act of 2008 is amended by adding at the end the following new subsection:

(c) AUTHORIZATION FOR RISK-BASED PRICING.—
(1) AUTHORITY. —Notwithstanding subsections (a) and (b), the Secretary of Housing and Urban Development may implement a risk-based premium product for borrowers with lower credit or FICO scores, to facilitate the availability of insurance for mortgages for such borrowers, through the establishment and collection of adequate premiums to cover the risks of such loans.

(2) REFUND OF PREMIUMS. —The Secretary shall provide for a refund of a portion or all of the higher premiums paid at the time of insurance by borrowers with lower credit or FICO scores as a result of risk-based pricing pursuant to this subsection, except that such refund shall be limited to only borrowers with a history of at least a specified number of years of on-time mortgage payments. Such refund shall be made upon payment in full of the obligation of the mortgage.

Apparently, it's not good enough for Congress that any borrower who makes two years or so worth of on-time mortgage payments (and, um, isn't upside down) can qualify for a streamlined standard FHA refinance that would lower the monthly insurance premium to the level of a "good credit" borrower. Now we have to reimburse those borrowers for the higher premiums they paid during the term of the original loan.

This is certainly a curious view of what "insurance" is. Apparently the sponsors of this bill think of mortgage insurance premiums as a kind of escrow: what you pay in is "dedicated" to covering only your own potential default, and if you don't default you get it back. Of course, there's no provision here for requiring deficiency judgments against borrowers who do default, in the highly likely event that the premiums those borrowers paid from inception to default isn't enough to cover FHA's loss. So you know who's going to pay for that.

But don't let me give you the impression the bill proposes no safeguards against risk: the bill requires that these DAP programs offer optional "homebuyer counseling" to all borrowers prior to closing, and it requires that if the borrower opts for counseling, the DAP must provide that counseling. If the borrower blows you off, you just close the loan. I suppose it is obvious to Congress that a borrower who declines counseling knows what he or she is doing. Now that I think about it, though, a borrower who scorns being counseled by the seller's money launderer is probably smarter than a box of rocks.

Perhaps the FDIC could ignore bloggers for a while and just keep its eyes on Congress.

(Thanks, Chad!)