by Tanta on 6/25/2008 08:12:00 AM

As usual, I can't tell if this sounds a little absurd because the complaint is this weak or because all I have to go on is the Gretchen Morgenson Version of the complaint.

The Illinois complaint was derived from 111,000 pages of Countrywide documents and interviews with former employees. It paints a picture of a lending machine that was more concerned with volume of loans than quality.

For example, former employees told Illinois investigators that Countrywide’s pay structure encouraged them to make as many loans as they could; some reduced-documentation loans took as little as 30 minutes to underwrite, the complaint said.

Volume-based compensation structures? There have been volume-based compensation structures in this business since long before Tanta got into it. Does it create perverse incentives? Sure. Do we have to like it? No. Has it operated all these years in plain sight of regulators, investors, and the public? Yes. Is CFC's pay structure all that different from anyone else's? I profoundly doubt it.

And if anyone who has ever underwritten a loan in 30 minutes has to go to jail, the jails will be full indeed. I wonder if they'll let me take my new Kindle. Jesus H. Christ on a Process Re-engineering Consultant Binge, folks, anybody who didn't tell the analysts on the conference calls that they'd got their average underwriting time down to 30 minutes was Nobody back in 2000. Not to mention the AUS side of the business where underwriting had gotten down to 30 seconds.

The lawsuit cited Countrywide documents indicating that almost 60 percent of its borrowers in subprime adjustable rate mortgages requiring minimal payments in the early years, known as hybrid A.R.M.’s, would not have qualified at the full payment rate. Countrywide also acknowledged that almost 25 percent of the borrowers would not have qualified for any other mortgage product that it sold.

It is now grounds for a lawsuit that you have borrowers in your lowest credit quality product who do not qualify for any alternative product? Um. We used to think that if borrowers in your lowest credit quality product could have qualified for an alternative product, you might be guilty of predatory "steering." Now you're also guilty of predatory lending if indeed the borrowers at the bottom of the pile only qualify there? Every lender has borrowers in, say, its FHA product who could not not qualify for any other mortgage product it sells. Are we going to call that a problem? That'd get pretty interesting pretty fast.

Even more surprising, Ms. Madigan said, was her office’s discovery of e-mail messages automatically sent by Countrywide to its borrowers offering complimentary loan reviews one year after they obtained their mortgages from the company.

“Happy Anniversary!” the e-mail messages stated. “Many home values skyrocketed over the past year. That means that you may have thousands of dollars of home equity to borrow from at rates much lower than most credit cards.”

Ms. Madigan said, “I was just struck that on the first anniversary of these people’s loans they would get these e-mails luring them into a refinance, into another unaffordable product to generate more fees and originate more loans.”

Lisa Madigan cannot be such a Pangloss as to be bowled over by the idea that lenders solicit their current loan customers for refinances. She can't.

Nobody has to like any of these business practices. But they have been hiding in plain sight for a long, long time. This ginned-up outraged innocence--all directed at Countrywide, as if everyone else in the industry had never heard of any of this--is truly getting on my nerves.

by Calculated Risk on 6/23/2008 09:30:00 PM

When I first heard of Down-payment Assistance Programs (DAPs), I knew we would see higher default rates on FHA loans. Heck, the IRS has called DAPs a "scam". The FHA has vowed to eliminate DAPs ... and yet, amazingly, the percent of FHA loans using DAPs is still increasing.

DAPs simply will not die.

To understand DAPs in nerdy detail, see Tanta's DAP for UberNerds.

From the WSJ: Government Mortgage Program Fuels Risks

The offers -- including "100% financing" -- are made possible due to down-payment assistance programs run by nonprofit organizations. These programs are funded largely by home builders and also by private homeowners desperate to sell. The seller-funded groups provide enough down-payment money to buyers that they can qualify for a mortgage backed by the Federal Housing Administration, which requires at least a 3% down payment.

These are not real down-payments from disinterested third parties. These programs are designed to have the seller (including home builders) funnel money to the buyer through a "nonprofit" to get around the FHA down-payment requirements. The buyer still has no skin in the game.

The FHA estimates that down payments provided by nonprofit groups account for 34% of all 200,000 loans backed by the FHA so far this year, up from 18% in all of 2003 and less than 2% in 2000. And the agency says that borrowers are two to three times as likely to default on their payments when they receive a down payment from a nonprofit.

D.R. Horton Inc., the nation's largest home builder by volume, is touting "100% financing" for its two- and three-bedroom condominiums near the beach in Maui, Hawaii, which start at $498,000. In the Seattle area, local builder Quadrant Corp. is advertising townhouses that can be purchased with as little as $500 down. "Use your coffee budget to move into a new home," says an online promotion.

Here are some previous posts by Tanta and I about DAPs:

FHA Going After DAP Again? Tanta, June 10, 2008

DAP for UberNerds, Tanta, Oct 19, 2007 **** READ this one for nerdy details! ****

FHA to Ban DAPs, CR, Sept 29, 2007

Housing: IRS Raps DAPs, June 2, 2006

More on Housing, CR, Feb 24, 2005

by Calculated Risk on 6/21/2008 08:07:00 PM

Peter Viles at the LA Times (L.A. Land blog) has the story: Did Bank of America write the Dodd bailout bill?

Update: I don't like the system, but I don't see a scandal here. Bank of America employees have given to almost all candidates, and almost legislation is written by lobbyists.

by Tanta on 6/17/2008 08:31:00 AM

The LA Times has a good piece out this morning on California community banks and their RE/mortgage problems, particularly with construction loans. Among others, there is this:

Security Pacific Bancorp of West L.A. -- which resembles in name only the former L.A.-based banking giant acquired in 1992 by what is now Bank of America Corp. -- has written off millions in dud Inland Empire housing loans. In a recent order, the Federal Deposit Insurance Corp. and state regulators required Security Pacific, with $585 million in assets, to diversify its operations, cut off deadbeat clients and "determine that the lending staff has the expertise necessary to properly supervise construction loans."

Hoocoodanode that you needed expertise to supervise construction loans?

If you are interested, the Security Pacific C&D is here.

by Tanta on 6/13/2008 08:39:00 AM

The Washington Post picks up the brewing controversy over the rather significant mis-match between the foreclosure and loss mitigation statistics reported in the new OCC Mortgage Metrics Report and the Hope Now reports we've been seeing since January. Of course they got seriously scooped on this by Housing Wire, who had this story on Wednesday, but I guess now that it's in the newspapers it's got legs:

John C. Dugan, comptroller of the currency, which oversees national banks, said his agency found "significant limitations with the mortgage performance data reported by other organizations and trade associations."

"Virtually none of the data had been subjected to a rigorous process to check for consistency and completeness -- they were typically responses to surveys that produced aggregate, unverified results from individual firms," Dugan said in a speech in New York on Wednesday. "That lack of loan-level validation raised real questions about the precision of the data, at least for our supervisory purposes."

Dugan said in an interview that he was referring to information provided by groups such as the Mortgage Bankers Association, which reports a foreclosure rate widely cited by regulators and the media. A report by the Office of the Comptroller of the Currency calculated that the rate was higher based on raw data it collected from nine of the country's largest banks.

Dugan's comments also raised questions about the accuracy of the reporting from Hope Now, an alliance of mortgage firms and banks that was formed to help financially troubled holders of subprime mortgages. Leaders of the coalition, which was put together by the Bush administration, contend they have aided more than 1 million homeowners. Those figures were self-reported by lenders in response to the kind of surveys Dugan has faulted. . . .

In an interview yesterday, Dugan tempered the strong language he used in his speech. "It was not intended to be a criticism of what they are doing," he said of MBA and other industry associations. Their figures, he added, "get you in the ballpark . . . but we wanted to have a much more specific level of detail."

Banks and mortgage firms have widely varying definitions for what constitutes a loan modification for a struggling borrower and even define subprime mortgages differently. The lack of standards leave the data open for interpretation or manipulation.

I have already gone on record accusing Hope Now of using "weird numbers," and I hope the OCC eventually comes up with a clean enough database (the OCC database currently has 20% of loans classified for credit quality as "other" because they're missing FICO scores) and better definition of credit quality (currently they're using FICO only, not such things as documentation type or LTV/CLTV) that its numbers can provide a better baseline for measuring loss mit activities. I am also willing to observe that if the OCC is only noticing here in Q2 2008 that big bank databases are sloppy and inconsistent, the OCC certainly should "temper the strong language" a touch.

Ultimately, this is going to come down to new regulatory rules on data reporting and management for supervised institutions, as it should. The industry will whine about regulatory burdens, as it always does, but it will be hard to avoid the conclusion that "voluntary" reporting via the MBA or Hope Now is not producing reliable numbers. It will of course also occur to some of us that the OCC's supervision of these banks over the last several years has apparently been based in part on data that it never until now seemed to realize needed some cleaning up.

by Tanta on 6/11/2008 06:40:00 PM

The OCC has inaugurated a new report, which will be issued quarterly, on mortgage delinquency, loss mitigation, and foreclosure activity drawn from the servicing databases of nine large banks:

The report analyzes data submitted on each of the more than 23 million loans held or serviced by these nine banks from October 2007 through March 2008. The $3.8 trillion portfolio represents 90 percent of mortgages held by national banks and about 40 percent of mortgages overall. The participating national banks are Bank of America, Citibank, First Horizon, HSBC, JPMorgan Chase, National City, USBank, Wachovia, and Wells Fargo.

Of this aggregated servicing portfolio, about 90% of loans are securitized either through the GSEs or private label issuers. The mix is 62% prime, 9% Alt-A, and 9% subprime, with the remaining 20% "other" being largely loans with insufficient or missing data that does not allow assignment into one of the three categories. The OCC indicates that data scrubbing will continue, and hopefully future reports will have a smaller "other" bucket.

It's a big database, and the OCC has made a real effort to standardize its own definitions, based on reported data elements rather than servicer descriptions, so that the credit and loss mitigation categories are consistent across all nine servicers.

The full report is available here. From the summary:

• The proportion of mortgages in the total portfolio that was current and performing remained relatively constant during the reporting period at approximately 94 percent.
• Serious delinquencies, defined as bankrupt borrowers who are 30 days delinquent and all delinquencies greater than 60 days, increased just one-tenth of a percentage point during the period, from 2.1 percent to about 2.2 percent.
• As in other studies, the report confirms that foreclosures in process are plainly on the rise, with the total number increasing steadily and significantly through the reporting period from 0.9 percent of the portfolio to 1.23 percent. Interestingly, the number of new foreclosures has been quite variable. While one month does not make a trend, new foreclosures in March declined to 45,696, down 21 percent from January’s high and down about 4.5 percent from the start of the reporting period last October.
• The majority of serious delinquencies was concentrated in the highest risk segment – subprime mortgages. Though these mortgages constituted less than 9 percent of the total portfolio, they sustained twice as many delinquencies as either prime or Alt-A
mortgages.
• Consistent with other reports, payment plans predominated, outnumbering loan modifications in March by more than four to one. But loan modifications increased at a much faster rate during the period.
• Although subprime mortgages constituted less than 9 percent of the total portfolio, subprime loss mitigation actions constituted 43 percent of all loss mitigation actions in March.
• The emphasis on loss mitigation for subprime mortgages corresponds to the nationwide focus on this higher risk sector. Total loss mitigation actions exceeded newly initiated foreclosure proceedings by a margin of nearly 2 to 1.

by Tanta on 5/24/2008 06:37:00 AM

This is an update to post below on Rep. Laura Richardson's foreclosure woes.

Gene Maddaus of the Daily Breeze kindly forwarded today's additions to the saga. There are not two, but three homes owned by Richardson in foreclosure. And yes, she appears to have cashed out her primary residence back in 2006 to fund her campaign for State Assembly. So it looks like a pattern.

* * * * * *

I have been watching the story of Representative Linda Laura [Oops! --Ed.] Richardson and her foreclosure woes for a while now, while heretofore hesitating to post on it. For one thing, the original story--a member of Congress losing her expensive second home to foreclosure--had that kind of celebrity car-crash quality to it that I'm not especially interested in for the purposes of this blog. For another thing, posting about anything even tangentially related to politics invites the kind of comments that personally bore me to tears.

All that is still true, but the story has taken such an unfortunate turn that I feel obligated to weigh in on it. Specifically, Rep. Richardson is threatening us:

Rather than shy away from voting on mortgage-related bills, Richardson said her experiences could help her craft legislation to make sure others don't experience what she did. For example, she sees a need to add steps to inform property owners before their property can be sold.

"We have to ensure that lenders and lendees have the tools with proper timing to resolve this," she said.

If Rep. Richardson is going to base legislative proposals on her own experience, then it matters to the rest of us what that experience was. So click the link below if you can stand to hear about it.

* * * * * * * * * *

The story was originally reported in the Sacramento Capitol Weekly, and picked up by the Wall Street Journal, and thence covered by a number of blogs, with the storyline being that Rep. Richardson "walked away" from her home, a second home she purchased in Sacramento after being elected to the State Assembly. The "walk away" part came from a remark made by the real estate investor who purchased the home at the foreclosure auction, not Rep. Richardson or anyone who could be expected to understand her financial situation, but that didn't stop the phrase "walk away" from headlining blog posts.

Rep. Richardson has variously claimed at different times that the house was not in foreclosure, that she had worked out a modification with the lender, and that the lender improperly foreclosed after having agreed to accept her payments. Frankly, unless and until Rep. Richardson gives her lender, Washington Mutual, permission to tell its side of the story--I'm not holding my breath on that--we're unlikely to be able to sort out this mess of claims to my satisfaction, at least. It's possible that WaMu screwed this up--that it accepted payments on a workout plan with the understanding that foreclosure was "on hold" and then sold the property at auction the next week anyway. It's possible that Richardson's version of what went on is muddled, too. Without some more hard information I'm not inclined to assume the servicer did most of the screwing up, if for no other reason that we didn't find out until late yesterday, courtesy of the L.A. Land and Foreclosure Truth blogs, that Richardson's other home--her primary residence--was also in foreclosure proceedings as recently as March of this year, a detail that as far as I can tell Richardson never disclosed in all the previous discussion of the facts surrounding the foreclosure of her second home.

What part of this I am most interested in, right now, is the question of what in the hell exactly Richardson was thinking when she bought the Sacramento home in the first place. Since the story is quite complex, let's get straight on a few details. Richardson was a Long Beach City Council member who was elected to the state legislature in November of 2006. In January of 2007 she purchased a second home in Sacramento, presumably to live in during the Assembly session. In April 2007, the U.S. Congressional Representative from Richardson's district died, and Richardson entered an expensive race for that seat, winning in a special election in August of 2007. By December 2007 the Sacramento home was in default, and it was foreclosed in early May of 2008. The consensus in the published reports seems to be that Richardson spent what money she had on her campaign, not her bills. According to the AP:

Richardson, 46, makes nearly $170,000 as a member of Congress and was paid $113,000 during the eight months she served in the state Assembly in 2007 before her election to Congress. She also received a per diem total of $20,000 from California, according to a financial disclosure form she filed with the House of Representatives clerk.

It seems to me that all this focus on what happened after she bought the Sacramento home--running for the suddenly-available Congressional seat, changing jobs, etc.--is obscuring the issue of the original transaction.

In November of 2006, Richardson already owned a home in Long Beach. As a newly-elected state representative, she would have been required to maintain her principal residence in her district, but she would also have had to make some arrangements for staying in Sacramento during Assembly sessions, given the length of the commute from L.A. County to the state capitol. She seems to have told the AP reporter that "Lawmakers are required to maintain two residences while other people don't have to," which is not exactly the way I'd have put it. Lawmakers are required to maintain one primary residence (which need not be owned) in their district. They are not required to buy a home at the capitol (of California or the U.S.); many legislators do rent. Richardson is a single woman with no children, yet she felt "required" to purchase a 3-bedroom, 1 1/2 bathroom home in what sounds like one of Sacramento's pricier neighborhoods for $535,500, with no downpayment and with $15,000 in closing cost contributions from the property seller. (The NAR median price in Sacramento in the first quarter of 2007 was $365,300.)

I have no idea what loan terms Richardson got for a 100% LTV second home purchase in January 2007, but I'm going to guess that if she got something like a 7.00% interest only loan (without additional mortgage insurance), she got a pretty darn good deal. If she got that good a deal, her monthly interest payment would have been $3123.75. Assuming taxes and insurance of 1.50% of the property value, her total payment would have been $3793.13.

The AP reports that Richardson's salary as a state representative was $113,000 in 2007, and she received $20,000 in per diem payments (which are, of course, intended to offset the additional expense of traveling to and staying in the Capitol during sessions). I assume the per diem is non-taxable, so I'll gross it up to $25,000. That gives me an annual income of $138,000 or a gross monthly income of $11,500.

The total payment on the second home, then, with my sunny assumptions about loan terms, comes to 33% of Richardson's gross income. I have no idea what the payment is for her principal residence in Long Beach. I have no idea what other debt she might have. I am ignoring her congressional race and job changes and all that because at the point she took out this mortgage, that was all in the future and Richardson didn't know that the incumbent would die suddenly and all that. I'm just trying to figure out what went through this woman's mind when she decided it was a wise financial move to spend one-third of her pre-tax income on a second home. (There's no point trying to figure out what went through the lender's mind at the time. There just isn't.)

Now, Richardson has this to say about herself:

"I'm Laura Richardson. I'm an American, I'm a single woman who had four employment changes in less than four months," Richardson told the AP. "I had to figure out just like every other American how I could restructure the obligations that I had with the income I had."

Yeah, well, I'm Tanta, I'm an American, I'm a single woman, and I say you're full of it. You need to show us what your plan for affording this home was before the job changes, girlfriend. You might also tell me why you felt you needed such an expensive second home when you had no money to put down on it or even to pay your own closing costs. As it happens, the Mercury News/AP reported that by June of 2007--five months after purchase--you had a lien filed for unpaid utility bills. You didn't budget for the lights?

But what are we going to get? We're going to get Richardson all fired up in Congress about tinkering with foreclosure notice timing, which is last I knew a question of state, not federal, law, and which has as far as I can see squat to do with why this loan failed.

Quite honestly, if WaMu did give Richardson some loan modification deal, I'd really like to know what went through the Loss Mit Department's collective and individual minds when they signed off on that. Sure, Richardson's salary went up to $170,000 when she became a member of the U.S. Congress, but what does she need a home in Sacramento for after that? Where's she going to live in Washington, DC? And, well, her principal residence was also in the process of foreclosure at the same time. I suppose I might have offered a short sale or deed-in-lieu here, but a modification? Why would anybody do that? Because she's a Congresswoman?

I'm quite sure Richardson wants to be treated like just a plain old American and not get special treatment. Well, I was kind of hard on a plain old American the other day who wrote a "hardship letter" that didn't pass muster with me. I feel obligated to tell Richardson that she sounds like a real estate speculator who bought a home she obviously couldn't afford, defaulted on it, and now wants WaMu to basically subsidize her Congressional campaign by lowering her mortgage payment or forgiving debt. And that's . . . disgusting. At the risk of sounding like Angelo.

I know some of you are thinking that maybe poor Ms. Richardson got taken advantage of by some fast-talking REALTOR who encouraged her to buy more house than she could afford. According to Pete Viles at L.A. Land,

She likes the Realtors, and they like her. She filed financial disclosure forms with the House Ethics Committee reporting the National Assn. of Realtors flew her to Las Vegas in November to help swear in the new president of the association, Realtor Dick Gaylord of Long Beach.

In suggested remarks* at the NAR gathering, also filed with the House, Richardson's script read: "I might be one of the newest members of Congress but I am not a new member of the REALTOR Party. When I needed help to win a tough primary, REALTORS stood up and backed me even though I was the underdog."

--Real estate industry professionals have given her $39,500 in campaign contributions in the current election cycle, according to Open Secrets.

No wonder she's blaming the lender.

Yes, I Can Stand to Hear About This.

by Calculated Risk on 5/19/2008 05:01:00 PM

From Reuters: U.S. senators say have deal on housing rescue bill

The two top members of the U.S. Senate Banking Committee announced on Monday that they have a deal that will create a multi-billion dollar mortgage rescue fund and a new regulator for Fannie Mae and Freddie Mac.

No specifics yet.

And from the WSJ: New Housing Deal Reached

The committee didn't immediately release details of the agreement and what changes had been made to the bill. The legislation combines the regulatory reforms for government-sponsored enterprises Fannie Mae and Freddie Mac with a proposal to use the Federal Housing Administration to offer up to $300 billion in federal guarantees to help refinance struggling borrowers into new mortgage loans.

by Tanta on 5/18/2008 12:07:00 PM

Gather 'round, children, because Tanta is about to engage in a curiously hard-headed look at an editorial by a famous economist that demands, in every sincere and decent sentence, our kindness and compassion instead. This is blogging at its finest: nobody should get away un-pissed-off about something. And on a Sunday, too.

It's also long blogging at its finest. You knew I'd have to try to figure out how to use the Read More thingy eventually . . .

* * * * * * * *

The editorial in question is by Robert J. Shiller, who is a professor of economics and finance and famous analyst of speculative bubbles. A specialist in behavioral economics, in the application of psychology to understanding financial markets. A co-founder of Case Shiller Weiss, that house price index we talk about a lot. His editorial, "The Scars of Losing a Home," speaks not of lofty academic economic concepts but of human sympathy, of things that are "really important." With references from famous academic psychologists. I haven't taken this kind of a tiger by the tail since I went after Austan Goolsbee last year.

Yes, it was only a year ago that the distinguished Dr. Goolsbee wrote this on the same editorial page:

And do not forget that the vast majority of even subprime borrowers have been making their payments. Indeed, fewer than 15 percent of borrowers in this most risky group have even been delinquent on a payment, much less defaulted.

When contemplating ways to prevent excessive mortgages for the 13 percent of subprime borrowers whose loans go sour, regulators must be careful that they do not wreck the ability of the other 87 percent to obtain mortgages.

For be it ever so humble, there really is no place like home, even if it does come with a balloon payment mortgage.

I actually think Goolsbee's piece was the high-water-mark of the "subprime helps the poor" talking point. You certainly don't hear much about that these days. Less than two months after Dr. Goolsbee's earnest op-ed, we got an interview in the very same NYT with one Bill Dallas, CEO of the famously defunct Ownit Mortgage, effusively testifying to his own burning desire to help out the unfortunate in a way that finally put paid to the respectability of that line ("'I am passionate about the normal person owning a home,' said Mr. Dallas, who is also chairman of the Fox Sports Grill restaurant chain and manages the business interests of the Olsen twins. 'I think owning a home solves all their problems.'") Plus by now we've got some numbers on the 2007 mortgage vintage, the one that Dr. Goolsbee was afraid wasn't going to ever materialize if we tightened up lending standards too much. A year ago we were looking at a 13% subprime ARM delinquency rate. Per Moody's (no link) the Q4 07 subprime ARM delinquencies were running 20.02%. And that is not, you know, "just" another 7%. By now, those delinquent borrowers in Goolsbee's 13% have probably mostly been foreclosed upon and are off the books. The 20% or so who are now delinquent were either part of the 87% that Goolsbee thought were "successful homeowners" last year, or else they're those lucky duckies who bought homes after the publication date of Goolsbee's plea that we not tighten standards too much.

Of course Shiller wasn't exactly spending his time a year ago defending the subprime mortgage industry on the grounds that it put poor and minority people into ever-so-humble homes with balloons attached. I seem to recall him mostly arguing that homebuyers were engaged in a speculative mania. In a June 2007 interview:

Well, human thinking is built around stories, and the story that has sustained the housing boom is that homes are like stocks. Buy one anywhere and it'll go up. It's the easiest way to get rich.

At the time, that kind of statement struck some of us, at least, as not possibly the entire story either, but in any event a useful corrective to the saccharine silliness of the "Ownership Society" and Bill Dallas solving everyone's problems by letting them put Roots in a Community (for only five points in YSP).

So I hope I can be just a tad startled by the New Shiller:

Homeownership is thus an extension of self; if one owns a part of a country, one tends to feel at one with that country. Policy makers around the world have long known that, and hence have supported the growth of homeownership.

MAYBE that’s why President Bush’s “Ownership Society” theme had such resonance in his 2004 re-election campaign. People instinctively understand that homeownership conveys good feelings about belonging in our society, and that such feelings matter enormously, not only to our economic success but also to the pleasure we can take in it.

So it's no longer irrational exuberance or plain old speculating; it's now an instinctive affirmation of some eternal verity of the human psyche? The ultimate patriotism: the definition of self so tied up in ownership of a slice of the motherland that to rent becomes not only psychologically dangerous--these people without selves can't be up to anything good--but politically dangerous as well? Is it possible that Shiller can mean what he is writing here?

If you just scanned the first few paragraphs of Shiller's op-ed you might come away with the impression of a sincere but somewhat hackneyed plea for us all to have a bit of sympathy for the foreclosed among us, foreclosure not in anyone's experience being a walk in the park. Fair enough. It being Sunday in America, I suspect millions of us are being treated to exhortations to take a kinder view of the unfortunate than we often do; we need those exhortations; we are often lacking in sympathy. Hands up all who disagree.

But you keep reading and you find Shiller trying to explain the "trauma" of foreclosure. And that's where this really gets weird:

Now, let’s take the other perspective — and examine some arguments against the stern view. They have to do with the psychological effects of strict enforcement of a mortgage contract, and economists and people in business may need to be reminded of them. After all, too much attention to abstract economic statistics just might make us overlook what is really important.

First, we have to consider that we cannot squarely place the blame for the current mortgage mess on the homeowner. It seems to be shared among mortgage brokers, mortgage originators, appraisers, regulatory agencies, securities ratings agencies, the chairman of the Federal Reserve and the president of the United States (who did not issue any warnings, but instead has consistently extolled the virtues of homeownership).

Because homeowners facing foreclosure must bear the brunt of the pain, they naturally feel indignation when all of these other parties continue to lead comfortable, even affluent lives. Trying to enforce mortgage contracts may thus have a perverse effect: instead of teaching homeowners that they should respect the contracts they sign, it may incline them to take a cynical view of the whole mess.

We need to modify mortgage contracts to keep homeowners from becoming cynical? That's somehow more respectable an idea than the one saying we should throw them out on the street to "teach them a lesson"? If Shiller is serious that all those other parties are "to blame," then why isn't the obvious solution to throw them out on the street? There seems to be an assumption here that nothing can be done to punish those who are "really" to blame, so we're left managing the psyches of those who can be punished. And that's not cynical?

This the point at which Shiller dredges up the most stunningly unfortunate quote from William effing James (1890) to define the "fundamental" psychology of homeownership:

Homeownership is fundamental part of a sense of belonging to a country. The psychologist William James wrote in 1890 that “a man’s Self is the sum total of all that he CAN call his, not only his body and his psychic powers, but his clothes and his house, his wife and children, his ancestors and friends, his reputation and works, his lands and horses, and yacht and bank account.”

Now, that's breath-taking. Horses. Yachts. His wife and his children. Ancestors. The whole late-Victorian wealthy male WASP defining the "Self" (with a capital!) as the wealthy male WASP surveying his extensive possessions, an oddly-assorted list that ranks the family and friends somewhere after the clothes and the house. (Yes, James did that on purpose.) The kind of sentiment that was a caricature of the late-Victorian male even in 1890. And Shiller drags this out in aid of generating sympathy for homeowners? Really? You couldn't find some psychological insight about the emotional relationship of people to their homes that doesn't speak the language of the male ego surveying his domain, sizing himself up against all the other males to see where he ranks?

(James on the psychological effect of losing one's property: " . . . although it is true that a part of our depression at the loss of possessions is due to our feeling that we must now go without certain goods that we expected the possessions to bring in their train, yet in every case there remains, over and above this, a sense of the shrinkage of our personality, a partial conversion of ourselves to nothingness, which is a psychological phenomenon by itself. We are all at once assimilated to the tramps and poor devils whom we so despise, and at the same time removed farther than ever away from the happy sons of earth who lord it over land and sea and men in the full-blown lustihood that wealth and power can give, and before whom, stiffen ourselves as we will by appealing to anti-snobbish first principles, we cannot escape an emotion, open or sneaking, of respect and dread.")

I'm actually, you know, in favor of some sympathy for homeowners, but one thing that does get in the way of that for a lot of us is, well, the rather disgusting shallowness that a lot of them displayed on the way up. There is this whole part of our culture that has sprung into being since 1890 that takes a rather severe view of conspicuous consumption, unbridled materialism, and totally self-defeating use of debt to buy McMansions, if not yachts. We were treated to a fair amount of that kind of thing in the last few years. In fact, we had Dr. Shiller explaining to us last year that a lot of folks just wanted to get rich, quick, in real estate.

It is undeniably true, I assert, that not everyone was a speculatin' spend-thrift maxing out the HELOCs to buy more toys, and that part of our problem today with public opinion is that we extend our (quite proper) disgust for these latter-day Yuppies to the entire class "homeowner." But it is surely an odd way to engage our sympathies for the non-speculator class to speak of it in Jamesian terms as the man whose self is defined by his Stuff, and whose psychological pain is felt most acutely when he recognizes that he is now just like the riff-raff.

It's worse than odd--it's downright reactionary--to then go on to that evocation of homeownership as good citizenship and good citizenship as "feel[ing] at one with [the] country." This puts a rather sinister light on Shiller's earlier insistence that we need to make sure people don't get too "cynical."

I see that Yves at naked capitalism was just as disgusted by Shiller as I am:

Now admittedly, this is not a validated instrument, but a widely used stress scoring test puts loss of spouse as 100 and divorce at 73. Foreclosure is 30, below sex difficulties (39), pregnancy (40), or personal injury (53). Change in residence is 20.

Note that if we as a society were worried about psychological damage, being fired (47) is far worse than foreclosure (30), and if it leads to a change in financial status (38) and/or change to a different line of work (36) those are separate, additive stress factors. Yet policy-makers have no qualms about advocating more open trade even though it produces industry restructurings that produce unemployment that does more psychological damage than foreclosures. As a society, we'll pursue efficiency that first cost blue collar jobs, and now that we've gotten inured to that, white collar ones as well (although Alan Blinder draws the line there).

But efficiency arguments don't apply to housing since we are sentimental about it. And it's that sentimentality that bears examination, since it engendered policies that helped produce this mess.

I would only add that we are about five years too far into a war that has not made a majority of us "feel at one with that country." I think of another really important policy change we could be pursuing right now to shore up everyone's psychological estrangement from their patriotic self-satisfaction. But "efficiency arguments" don't apply to wars, either.

My fellow bleeding heart liberals like Goolsbee found themselves defending the subprime industry in the name of increasing minority homeownership. Now we're treated to the spectacle of Shiller arguing for homeowner bailout legislation in the same terms that Bush used to defend the "Ownership Society." Housing policy, I gather, makes strange bedfellows. It certainly makes strange editorials.

Read on . . . if you dare . . .

by Tanta on 5/06/2008 08:08:00 AM

Wherein voluntary non-binding criteria are established in order to forestall actual regulation. No, really. Saith the WSJ:

Officials have called a six-hour meeting Tuesday with banking officials to discuss adopting a uniform, but voluntary, set of criteria to speed the time it takes qualified borrowers to modify mortgages they can't afford. Officials also want to make the modification process more consistent across institutions. . . .

The new industry guidelines, if adopted, wouldn't be binding and couldn't be enforced by the government. But, if effective, they could help forestall aggressive action from congressional Democrats, who have lashed out at loan servicers for acting too slowly and threatened to push tougher oversight of the banking industry if results don't improve. . . .

One possible industry "best practice" would have lenders acknowledge the receipt of any request for a modification within five days of a request by homeowners. Some struggling homeowners have complained that it takes two months or longer to hear back from lenders. Also, the companies are considering a policy that would direct lenders to notify borrowers of a decision about whether to modify a loan within five days.

Another tricky issue slowing loan modifications has been the conflict between companies that hold the first and second mortgage on the same home. Treasury officials are also trying to broker a truce between these groups that would make it easier for borrowers with two mortgages on one home to modify the terms of their loans. . . .

Loan servicers are also looking for clarification about the role of Fannie Mae and Freddie Mac. The two government-chartered mortgage companies made it easier for lenders to modify the terms of certain qualified loans, such as the interest rate. But they have been stricter about writing down mortgage principals [sic], saying they will generally do so only on a case-by-case basis.

Let's see. Kicking out a form letter within five days to acknowledge the request? That's easy enough; servicing systems are superb at kicking out form letters. What will it say, other than "we got your request"? Until we finally work through this business about "across the board" versus "case by case" processing of these deals, putting a hard and fast timeline on them seems like a problem to me.

If you think there's one consistent mechanical approach that works for any and all loans and borrowers, and you assume that the hold-up is lack of direction from management, then all we need is for the mechanical process to be laid out and the big guys meeting with Treasury to come back to the office and hand out the memos to everyone.

If you think, as I do, that the vast majority of these things have to work on a case-by-case basis, and the hold-up is lack of senior loss mitigation staff who can manage cases all the way through with enough time in their day to take phone calls directly from borrowers in the process, plus the problem of first mortgage loss mit people trying to get somewhere with the second lien people, then we need to be setting "best practice" standards for how and with whom these loss mit departments are staffed at both shops (first lien and second lien).

Furthermore, I really don't see the point of continuing to talk about first mortgage servicers agreeing to do principal write-downs until we have talked more seriously than I have heard heretofore about what junior lien servicers are going to do, exactly, and how they're going to do it. I keep seeing plans--this includes Frank's FHA plan as well as Sheila Bair's "HOP" proposal--that go into great detail about the first lien holder writing down principal but just kinda mention junior liens as an afterthought. Practically speaking, this isn't doing anyone any good: first lien holders can "voluntarily" agree to do just about anything, but if the second lien holders don't agree to modify, subordinate, or charge off and release their liens at the same time in the same time-frame, the whole thing is pointless. But the economics of the two parties are very different: second lien lenders, by and large, don't have big loss mit staffs. You can't afford to on a second lien, not the way the business model of second lien lending was written in the recent past. If you're looking at 100% loss in a foreclosure, but only 110% loss if you spend a lot of time and money negotiating with a first lien lender who ends up pressuring you into charging off the loan anyway, you gain most by doing exactly nothing.

This is not a sympathy trip for second lien lenders; it's a reality trip. Unless this great summit meeting at the Treasury comes up with a public answer to what the second lien lenders are expected to do, and how they're expected to do it, this isn't going to work. Even with Barney Frank issuing none-too-subtle threats:

In a speech to the Mortgage Bankers Association in Boston, House Financial Services Committee Chairman Barney Frank (D., Mass.) warned Monday that if the industry doesn't do more to avert foreclosures, "you're going to see a much tougher set of rules" on mortgage lending emerge from Congress later. He said such changes would be "politically irresistible" if foreclosure problems continue to build up.

by Tanta on 5/01/2008 11:55:00 AM

I think the British term "scheme" might apply, however.

And what, you ask, is HOP? It is the brainchild of the only Federal Deposit Insurance Corporation you happen to have, that's what. Formally, it is the Home Ownership Preservation Loan:

This proposal is designed to result in no cost to the government:

* Borrowers must repay their restructured mortgage and the HOP loan.
* To enter the program, mortgage investors pay Treasury's financing costs and agree to concessions on the underlying mortgage to achieve an affordable payment.
* Treasury would have a super-priority interest -- superior to mortgage investors' interest -- to guarantee repayment. If the borrower defaulted, refinanced or sold the property, Treasury would have a priority recovery for the amount of its loan from any proceeds.
* The government has no continued obligation and the loans are repaid in full.

Mortgage Restructuring:

* Eligible, unaffordable mortgages would be paid down by up to 20 percent and restructured into fully-amortized, fixed rate loans for the balance of the original loan term at the lower balance. New interest rate capped at Freddie Mac 30-year fixed rate.
* Restructured mortgages cannot exceed a debt-to-income ratio for all housing-related expenses greater than 35 percent of the borrower's verified current gross income ('front-end DTI').
* Prepayment penalties, deferred interest, or negative amortization are barred.
* Mortgage investors would pay the first five years of interest due to Treasury on the HOP loans when they enter the program. After 5 years, borrowers would begin repaying the HOP loan at fixed Treasury rates.
* Servicers would agree to periodic special audits by a federal banking agency.

Process:

* Mortgage investors would apply to Treasury for funds and would be responsible for complying with the terms for the HOP loans, restructuring mortgages, and subordinating their interest to Treasury.
* Administratively simple. Eligibility is determined by origination documentation and restructuring is based on verified current income and restructured mortgage payments.

Funding:

* A Treasury public debt offering of $50 billion would be sufficient to fund modifications of approximately 1 million loans that were "unsustainable at origination." Principal and interest costs are fully repaid.

Eligible Mortgages:

Applies only to mortgages for owner-occupied residences that are:

* Unaffordable – defined by front-end DTIs exceeding 40 percent at origination.
* Below the FHA conforming loan limit.
* Originated between January 1, 2003 and June 30, 2007.

The FDIC helpfully gives us an example of a $200,000 2/28 loan with 28 years remaining to maturity at a fully-indexed rate of 8.00%. Using the payment provided for the HOP loan of $235 ($40,000 repaid over 23 years, as the first five years require no payment from the borrower), the assumed interest rate is 4.6% or roughly the yield on the 30-year Treasury bond.

So all the investor would have to do is apply for $40,000 in Treasury funds. I have to assume that the first five years of interest to the Treasury is prepaid by the investor, meaning the actual funding would be $30,800 (4.6% interest for five years of $9,200 subtracted from the funding amount). For a securitized mortgage, this would be an immediate charge to the deal's credit enhancement (presumably a write-down to the overcollateralization or most subordinate bond, possibly a partial claim against a mortgage insurance policy). I find it hard to believe that the Treasury would contemplate having mortgage-backed securities remitting monthly interest to the Treasury for five years. But then, I find a lot hard to believe these days, and the FDIC website doesn't really say.

The interest rate on the loan would be reduced to 5.88% for the remaining 28 years. The difference between the fully-indexed rate of 8% and the modified rate of 5.88%, adjusted for whatever anybody happens to think is a plausible average prepayment speed for a loan like this, would be a reduction to the "excess spread" or overcollateralization of the security.

The servicer would execute a modification of mortgage which would adjust the terms accordingly, and record that modification in a junior position to the mortgage given to the Treasury. So, assuming the value of the property was $200,000 at the time, instead of an "80/20" deal this would be a "20/80" deal. In the case of subsequent sale of the home (or default), the Treasury's $40,000 loan would be satisfied first, before any funds were available to the holder of the $160,000 "second lien." (Presumably, if there were a sale or default within the first five years, a portion of the prepaid interest could be deducted from the payoff of the Treasury's lien.)

If, on the other hand, the loan performed for five years and then the borrower sold the property for, say, $220,000, the Treasury would get $40,000, the investor would be paid the outstanding balance on the $160,000 loan (about $147,000), and the borrower would receive the rest of the proceeds. I don't see any provision for the lender to recover the interest it paid on the Treasury loan ($9,200) at this point. As far as I can tell there is no "equity sharing" arrangement on these loans.

What happens if there is lender-paid or borrower-paid MI on the loan? I have no idea. Possibly the mortgage insurer might agree to pay a partial claim when the loan is modified (to cover the investor's loss of the prepaid interest on the Treasury loan), and then the policy would be modified so that the new insured amount is equal to the reduced loan balance (in exchange for a reduced premium). That would reduce the MI's absolute loss exposure in dollar terms. (Suppose the MI coverage on the loan is 35%; the MI's dollar exposure would be $70,000 on $200,000 but only $56,000 on $160,000.) I really have no idea, although I'm sure that insured loans are a small fraction of the loans the FDIC has in mind here.

More likely they have outstanding second liens, and apparently what's supposed to happen here is that the second lien lender just writes off its entire loan amount and goes away quietly. There is only one rather stark sentence regarding second liens: "Under the proposal, the underlying loan is modified within the mortgage pool and does not worsen the position of subordinate lien holders." I gather that means that the second lien lenders are expected to subordinate their liens behind the old first-lien lender's new second lien, making the second a third. (To release the second lien entirely would surely have to be understood to "worsen" the second lienholder's position here.) There is no discussion of the possibility of using the Treasury loan to pay off or pay down the second lien, only to pay down the first lien. HOP may not worsen the second lienholder's position, but it doesn't improve it any.

In the FDIC example loan, the borrower's housing payment-to-income ratio goes from 50% at the time of modification to 35% for five years, and then increases to 39% for the remainder of the loan. These numbers already have a 1.5% annual income increase built into them. If the borrowers have no other debt, that's certainly affordable. Is it affordable enough that the reduced frequency of default in the next five years or so makes up for the increased severity of loss given default to the investor? A borrower whose HTI was 50% and whose DTI was 60% will be going to an HTI of 35% and a DTI of 45%. With the distinct possibility of further declines in home values, that's still a pretty high-risk loan. I'm guessing we will be able to judge whether investors think so by the extent to which they all line right up to participate in this voluntary program. Of course, servicers will be looking at the total debt-to-income ratio, not just the housing payment.

Bottom line: although it's silly to claim this program will have no cost to the government, it is true that the government's exposure is minimal (administrative expenses; either the Treasury services its own loan or the servicer is being asked to do so for free), assuming that I am correct that the first five years' interest will be prepaid. The losses are taken by the lenders and the borrower pays back the full loan amount, albeit at a reduced interest rate. As far as I can tell, the only party who really gets a "bailout" here is the mortgage insurers. That's the real beauty of this plan, and why I cannot for a moment imagine it's going to work.

If you made the assumption that borrowers are entirely insensitive to their equity position--that it is only a question of making the monthly payment affordable--then you could assume that borrowers would like this program and that it would substantially prevent defaults. If you do assume that equity position matters as well as affordability, then this program doesn't do much, since it doesn't change the total indebtedness--even if second lienholders are charging off their loans, if they aren't releasing their liens that money can still be collected from future sale proceeds. Having those liens still out there is likely to make voluntary sale of the property unlikely for some time to come, given the house price outlook.

And the key is a real reduction in the likelihood of default, since it's clear that in the event of default the lender is worse off under the HOP scheme than it would otherwise have been. We can certainly applaud the FDIC for coming up with a plan that protects the taxpayers' contribution in any scenario, but I'm not sure that MBS servicers (or even portfolio lenders) will see this as a sufficient improvement to the risk of default on these loans to take the bait.

by Tanta on 4/23/2008 10:23:00 AM

The State Foreclosure Prevention Working Group released its second report on loss mitigation efforts yesterday, and frankly it is just as disappointing as the first one. I see our colleague PJ at Housing Wire has already blown his stack over it. Allow me to pile on; someone has to.

The report finds:

Seven out of ten seriously delinquent borrowers are still not on track for any loss mitigation outcome. While the number of borrowers in loss mitigation has increased, it has been matched by an increasing level of delinquent loans. The number of home retention solutions (forbearance, repayment plan, and modification) in process, as compared to the number of seriously-delinquent loans, is unchanged during the four month period. The absolute numbers of loss mitigation efforts and delinquent loans have increased, but the relative percentage between the two has remained the same. [Emphasis in the original.]

This "seven out of ten" statistic comes from measuring all 60+ day ("seriously") delinquent loans against the percentage that have been identified by the servicer as "in process." There is no definition of "in process" in the report; my best guess is that these are loans for which the servicer's loss mit department has made actual contact with a borrower. (That does not mean merely that the servicer has made contact; collections department contacts are not, as far as I know, considered "loss mit contacts.") Even more importantly, the report does not define "closed" in terms of loss mitigation efforts. I cannot tell from this report whether, for example, a loan that has a repayment plan instituted is counted as "closed" when the plan is agreed to, or only when the plan period ends and the loan is either brought current (successful repayment plan) or referred to foreclosure (unsuccessful). If the former is the case, then loans that are still delinquent would fall out of the "loss mit in process" category, but you would hardly say that they are "not on track for any effort." They would simply be part of a delinquent loan pipeline that is not referred to FC, because the repayment plan is still underway. It actually gets worse if "closed" cases for the purpose of this report really mean the latter--loans where the repayment plan ended either successfully or not. Let's go to the further "findings":

Data suggests that loss mitigation departments are severely strained in managing current workload. For example:
a. Almost two-thirds of all loss mitigations efforts started are not completed in the following month. Most loss mitigation efforts do not close quickly. This consistent trend over the last three months suggests that many proposed loss mitigations fail to close, rather than simply take longer than a month to work through the system. Based on anecdotal reports of lost paperwork and busy call centers, we are concerned that servicers overall are not able to manage the sheer numbers of delinquent loans.
b. Seriously delinquent loans are “stacking up” on the way to foreclosure. The primary increases in subprime delinquency rates are occurring in very seriously delinquent loans or in loans starting foreclosure. This suggests that the burgeoning numbers of delinquent loans that do not receive loss mitigation attention are clogging up the system on their way to foreclosure. We fear this will translate to increased levels of vacant foreclosed homes that will further depress property values and increase burdens on government services.

If the expectation is that loss mit cases would reasonably "close" in the month after they were "started," then it sounds as if in fact "closed" refers to the date an agreement was put in place, not the date of final resolution. If that is true, then one could expect closure to occur by the following month. However, that has to mean that there is a pipeline of "closed" but not yet "cured" loans out there, which makes hash of that claim that 7 of 10 are "not on track."

Furthermore, although this summary finding refers to loss mit efforts that are "started," in the remaining detail areas of this report I see no numbers that look clearly like "starts" to me. The tabular data all measures loss mit "in process," not "started." Again, "starts" can be usefully defined only if "completions" can be usefully defined; if there are thousands of loans on repayment plans or forbearance periods that have not yet finished or expired, and they are not counted as "closed," then the "in process" data would include workouts started many months previously that are still underway.

As far as seriously delinquent loans "stacking up," I simply note that nowhere does this report ever address things like a servicer's bankruptcy pipeline. How many delinquent loans are under a BK stay? Once the stay is in place, the servicer can neither initiate foreclosure nor unilaterally offer workouts without court approval; for that reason, all servicers I am familiar with handle those loans in a bankruptcy department that is separate from the loss mitigation group. If, in fact, these servicers reporting here are including BK loans in the loss mit pipeline, I for one would like to know that.

This is the part of the report that sent PJ over the edge:

New approaches are needed to prevent millions of unnecessary foreclosures. Without a substantial increase in loss mitigation staffing and resources, we do not believe that outreach and unsupervised case-by-case loan work-outs, as used by servicers now, will prevent a significant number of unnecessary foreclosures.

That phrase "unnecessary foreclosures" is not simply tendentious in the extreme; it totally misses the whole point of "loss mitigation." Unless you grant that foreclosure can at least in theory be "less loss" to an investor than a workout option--as the converse can be true--then you do not understand that "loss mit" is the process of deciding which action is less expensive to the investor and pursuing it. In such a context no foreclosure is "unnecessary"; it is simply the better or the worse choice in dealing with a severely delinquent loan.

But in the same breath, the report asserts that "case by case" analysis of each loan is a problem. How can anything other than a case by case analysis determine whether a foreclosure is "necessary" or not? Besides the fact, as PJ notes, that the Working Group is entirely ignoring fraudulent loans, what about those loans where the loss mit people discover, after reasonably diligent efforts of analysis, that there's just no way the borrower can afford modified loan terms that remain less expensive to the investor than foreclosure? Or that the borrower is not cooperating in good faith with the servicer? You do not have to assume that all servicers are expending the correct level of diligence to be able to see that they need to, if we are to determine whether foreclosure is necessary or not. This report simply assumes, prima facie, that foreclosures are unnecessary, and then advocates that servicers slap together "New Hope" style one-size-fits-all quickie workouts in order to decrease the "backlog." Dear heavens above, a subcommittee of a conference of state regulators is on record encouraging servicers to cynically reduce their delinquent loan backlogs by just inking some "standard" modification or repayment agreement with the borrower, and call it "closed" after that?

I am not a knee-jerk defender of the mortgage servicing industry by any measure. These are the last people I would encourage to behave any worse than they already do. But even I am troubled by the gross naivete about delinquent loan servicing implied by this report:

Loss mitigation proposals do not close for a variety of reasons; one reason is the level of paperwork required to close a loan modification. Servicers have told us that borrowers simply do not return the required documentation to complete the modification, and borrowers and counselors have reported that servicers lose paperwork they have sent in to the servicer. Regardless of where the problem arises, it appears that the level of paperwork required is a barrier to preventing unnecessary foreclosures.

I am willing to believe that servicers do lose or misplace paperwork, although I'd really like someone to look into these claims rather than just engaging in he said-she said. On the other hand, this is default servicing we're talking about. I mean, the phrase "the check is in the mail" is a culture-wide joke of long lineage; you don't have to have ever worked for a servicer to know that people claim to have sent stuff they never in fact sent all the time. People are given explicit instructions to send things via trackable mail to the Loss Mit department, and they send them via regular mail to the payment address (which is usually just a lockbox, often located ten states away from the loss mit people). And sometimes borrowers do return only some of the paperwork, somehow "forgetting" the items like tax returns, pay stubs, or bank statements requested by the servicer to assure that the borrower qualifies for the deal offered. You know. I am not "blaming the borrower" here; I am pointing out that different stories between servicer and borrower are just like different stories between the two parties to a divorce: it is not wise to take only one version at face value without checking out the other, if for no other reason than this is a situation in which people are not exactly at their best, emotionally, psychologically, or indeed morally. That is a fact of life in default mortgage servicing. Any group affiliated with a state regulator who seems to want to pretend that this is not a fact is not, frankly, competent.

Beyond that, to conclude that "paperwork is the barrier" should strike fear in the hearts of everyone. It isn't just investors and servicers who are put at risk when we decide--you know this is coming--to just skip the part about executing formal agreements and start servicing these loans to "informal" relaxation of terms. It's the borrowers who are at risk as well. I've heard enough lately to last my lifetime about borrowers in FC and BK courts objecting to servicers unable or unwilling to produce the exact mortgage note executed by the borrower, which determines not just "standing" for the servicer, but the exact terms of the indebtedness. What defense does a borrower have if he or she is foreclosed against after failure to perform under an undocumented, unsigned agreement? What defense does the servicer have if it cannot prove failure to perform? What god-awful horrible mess are the courts going to inherit down the road a ways if we just dismiss formal agreements as "barriers" that servicers should dispense with?

The lesson of the "stated" disaster--stated income, stated assets, stated appraised values, oral "promises" of loan originators rather than clear written disclosures, the whole cluster of practices that removed the "barrier" of "paperwork"--is apparently still lost on the Working Group. We started this by being "efficient" about the documentation and casual about the borrower's own statements; we aren't going to get out of it that way. This report just reeks of political grandstanding. I'm sure I know at least one journalist who will love it.

by Tanta on 4/20/2008 08:31:00 AM

Like anyone else with even a modest dash of common sense, I am not sure I really want to wade into the issues Yves raises in this post. But having been personally wished on the inoffensive British--who have as far as I know done me and mine no particular harm since at least 1812, if you don't count LIBOR and Diana--as a final rhetorical fillip, I feel as if I were already in one of the pitfalls, so there's limited upside to trying too hard to avoid them.

Yves is, of course, talking about Wall Street. Even now, after the last several years of more than usually unholy more than usual alliance between the mortgage industry and the investment banks, it is still true that only ever a small slice of mortgage industry people have any direct contact with the Street and its culture. Some of those who do take to it immediately, rather like those suddenly exuberant freshmen at a large and urban campus, who shake off the persona of small-town straight-A valedictorian and throw themselves into the libertine ways of the university--beer! everywhere you look!--without looking either backwards or forwards all that carefully. Others cringe in horror and are only too grateful to return to their quieter Main Street offices, where the unglamorous but reassuring touch of the files and hum of the worker-bees steadies a mind reeling from too many bright young aggressive deal-makers flicking their laser pointers at too many garish hockey-stick-laden PowerPoint slides.

The other 90% of the industry never left Main Street to begin with, and hears these snippets of gossip and bullet-point about how we're now writing loans to "Wall Street standards" with bemusement and amusement in roughly equal measure. Depending on the sense and sensibility of local management, by and large most of the rank and file roundly ignore such things and get on with their days. Except for the very young, all corporate workers have lived through enough management fads and buzz-word fashions to know that this, too, shall pass.

"They're not going to re-engineer us, are they?" asks my administrative assistant, leafing through the pile of stuff I've tipped out of my briefcase on return from the latest secondary marketing conference.

"No, I don't think so this time," I mutter, staring at 283 unread email messages. "But if they do, I've still got all the stuff from last time in the lower left drawer of my credenza. If it's not worth doing, it's certainly not worth not plagiarizing."

I shall posit that it has simply been a different trajectory for women in the mortgage business, and retail banking generally, than it has been for our sisters on Wall Street. Not only have there been more of us on Main Street; we did not, by and large, enter this business to "pursue careers." Most of us of a certain age simply "got jobs" in an industry that has always needed a lot of pink collars. Generalizations are of course rightfully fearful things, but I am inclined to think there's a reason why so many laid-off mortgage middle managers are heading for nursing and teaching, and it has nothing to do with especially "nurturing" personalities or gender identities. We have always been of that pink-collar sisterhood, even as some of us broke a bit past the top of its salary band and even found our well-coiffed hair flattened against the glass ceiling.

That is, indeed, why so many of us have been held in such contempt--open or camouflaged--by the senior managerial class and those wannabees who adopt its favored postures. I have never entered a mortgage operation--a bank or a mortgage banking firm--as employee, client, or consultant, without encountering manifestations of that "taint" carried by those who know, fully and in detail, how the sausage is actually made. Precisely because, whatever their current job is, the tainted ones used to make sausage.

I am, in fact, one of the very few women I know in this industry who was hired directly into a "professional" position (writer of policies and procedures) based almost solely on academic credentials. At that first job of mine, the underwriting manager was a woman--who had started years and years ago as an underwriter trainee. The production manager was a woman--curiously enough, also one with a humanities degree--who had begun as a lowly FHA loan originator twenty years before. The female loan sale and pricing manager had started on the teller line, as had the female servicing manager.

They were--I became--the accidental managers of the business. Having one as a production manager was rare then and is still rare now: if you took all the women managers in the mortgage business and separated out the ones in processing, underwriting, closing, post-closing review, and servicing, you wouldn't have many left. Some women have certainly risen to the heights of senior management, but nearly all of them did so with responsibility for the "back office" functions out of which they arose. Back office functions that are, crucially, cost centers, not profit centers.

In an industry that has always--to its own detriment--most empowered those who "bring in the bacon," this has generally functioned to severely curtail the power these women can exercise in the corporate culture. They know how to do things; they get things done; their orientation is nearly always "conservative": they limit the risks, double-check the entries, enforce the rules. They often have the largest staffs, while also having the largest number of low-paid, less-educated people who are first in line for any layoffs going. They are "costs"; they get "cut."

To a mind trained to a certain traditional gender stereotype--and we have our share of those, alas--female mortgage managers are the gatherers and domesticators, and males are the hunters and risk-takers. It is no wonder that a culture that does not value such things as raising reasonably well-behaved children as an accomplishment does not value the risk-limiters much. It is the rhythm of these meetings, and has been for a long time:

He: My branch generated $45MM in gross revenues this quarter!

She: Well, my underwriters tried to stop you.

To return to Yves' suggestion, there's certainly a lot to be said for regulators recruiting from this pool of women mortgage managers. We know where the bodies are buried. We know how they got to be buried. We know how they died. We've got the reports in our lower-left desk drawer.

The thing is, I see two sides of this. Certainly a passel of middle-aged women who earned their stripes managing mortgage back-offices would be more effective, probably by an order of magnitude, than the pool of examiners the regulatory agencies mostly currently have. Quite possibly they might feel sufficiently vindicated at this point--we did, you know, tell you where this was heading while you were busy not listening--to exercise their new regulatory empowerment with sufficient hard-headedness to overcome both senior management and political-appointee resistance. But that's the other side of this: senior management at the banks and political appointees at the agencies aren't known for hanging their heads, admitting their faults, and going along meekly with the house-cleaning.

I don't know that women are going to be able to fix that; men are going to have to demand more of--and give less to--the hunters and risk-takers. My own personal experience suggests that while there's a certain passing pleasure in being able to say "I told you so," no one is less welcome in the meetings than those of us who told you so--and who took the damned minutes to prove it, too.

It does leave me with a lingering sense that now that the party is over, we are casting about for house-cleaners in the usual place that domestic help is found. That is not, of course, what Yves is saying at all; it is merely the context in which the other edge of the sword cuts. For it is surely not young women just entering the business we want here--of course we want them for other things, but we're not just looking for women, we're looking for women veterans. I profoundly doubt that the few on Main Street who have achieved senior management status will want to leave for a job as a bank regulator if they can hang on to the job they have. You're talking about middle-aged women just below the executive ranks, here. Should there be some real effort to recruit us to the ranks of regulators, how do we prevent regulatory work from becoming yet another pink-collar cost-center?

by Tanta on 4/13/2008 08:50:00 AM

A long piece from the Washington Post, which I recommend reading in its entirety.

In late 2006, as economists warned of an imminent housing market collapse, housing Secretary Alphonso Jackson repeatedly insisted that the mounting wave of mortgage failures was a short-term "correction."

He pushed for legislation that would make it easier for federally backed lenders to make mortgage loans to risky borrowers who put less money down. He issued a rule that was criticized by law enforcement authorities because it could increase the difficulty of detecting and proving mortgage fraud.

As Jackson leaves office this week, much of the attention on his tenure has been focused on investigations into whether his agency directed housing contracts to his friends and political allies. But critics say an equally significant legacy of his four years as the nation's top housing officer was gross inattention to the looming housing crisis. . . .

In speeches, he urged loosening some rules to spur more home buying and borrowing. "I'm convinced this spring we will see the market again begin to soar," Jackson said in a June 2007 speech at the National Press Club to kick off what HUD dubbed "National Homeownership Month." He also told the audience that he had no specific laws to recommend to prevent a repeat of the lending abuses that caused the mortgage crisis.

"When Congress calls up and asks us, we'll give them advice," he said. "You have 534 massive egos up there, so unless they ask you, you don't volunteer anything."

HUD spokesperson D.J. Nordquist defended Jackson's record in pushing for more flexibility in government-backed loans. "Secretary Jackson is a big believer in the U.S. housing market and won't apologize for saying so," Nordquist said. . . .

I once opined that it would take Armageddon to get Jackson's attention. It turns out I was wrong; all it took was a shrimp buffet.

by Calculated Risk on 4/09/2008 04:13:00 PM

Luke Mullins at the U.S. News & World Report interviews FDIC chairwoman Sheila Bair today: FDIC Chief Calls for a Housing Rescue

Bair believes the Bush / Paulson voluntary approach to loan modifications is insufficient, and that government intervention is needed. Here is her justification:

Q: Why does the foreclosure problem warrant government intervention?

Bair: I am increasingly concerned about the foreclosure rate and the potential for a downward spiral, where we have too much inventory, additional foreclosures adding to inventory, which forces home prices down, meaning fewer people can refinance—leading to more foreclosures and more downward pressure on home prices. If this downward spiral takes hold, there could be much broader ramifications for the economy as a whole. So I think we need to come to grips with the need for government intervention. It's not politically popular. We just need to be honest with people that we have a significant problem here and that additional measures are going to have to be taken. And yes, it may cost money.

by Tanta on 4/09/2008 11:07:00 AM

The Center for Responsible Lending released a fascinating paper yesterday, "Steered Wrong: Brokers, Borrowers, and Subprime Loans." Using a nationwide database of prime and subprime loans, both retail and brokered, originated in the 2004-2006 period, the authors "paired" retail and brokered loan transactions with similar risk characteristics (such as FICO, LTV, DTI, and loan amount, among others), to compare interest costs over a one-year, four-year, and life of loan (30-year) horizon. The results are no doubt stunning as well as surprising to a certain reliably-stunned-and-surprised contingent of the regulatory and securitization enclaves:

We find significant differences between broker and lender pricing on home loans, primarily on mortgages originated for borrowers with weaker credit histories. During the first year of the loan, borrowers with credit profiles in the subprime range pay statistically more for brokered loans than they would have if they had obtained their loan directly from a lender. Over a four-year period, a typical subprime borrower pays over $5,000 more, and over the 30-year life of the loan, the cost gap grows to almost $36,000. . . .

Significant disparities exist between broker and lender pricing. After matching loans on objective factors that affect interest rates, the analysis reveals that interest payments were significantly higher on broker-originated mortgages in the majority of risk categories we examined. Disparities are greatest for subprime borrowers. For people with weaker credit, brokers consistently charged higher interest rates than retail lenders. A typical subprime borrower was slated to pay $5,222 more during the first four years of a $166,000 mortgage compared to a similar borrower who received a loan directly from a lender. Over thirty years, this borrower would pay $35,874 more in interest payments, equivalent to an interest rate approximately 1.3 percentage points higher than a similar borrower with a retail loan.

Cost disparities grow greater after initial years. For subprime borrowers, significant disparities are apparent even during the first year of the loan. However, because so many subprime mortgages come with short-term introductory rates that rise substantially when they adjust, the cost disparities become more pronounced after the first four years of a loan. Prime borrowers generally do not pay more for brokered loans. In general, people with higher credit scores—those who received prime loans—did not pay higher interest on broker-originated loans. In fact, some borrowers with very high credit scores who received loans from brokers achieved modest savings, although long-term savings were largely limited to fixed-rate loans.

The study zeroes in on two basic "market mechanisms" in play: the fact that borrowers with weaker credit are less informed about competitive rates and less able to analyze the often complex products they are offered than prime borrowers, and that brokers are more inclined to raise "profit margins" on low-volume business (subprime) and maintain thinner margins on high-volume business (prime). What I find most refreshing about the approach is that it mostly dismisses the issue of "better disclosures" as a regulatory side-track. That's a long-time hobbyhorse of mine, too.

Given the prevalence of brokers in today’s market and their impact on the ability of borrowers to build and maintain home equity, we propose specific policy recommendations below.

First, yield spread premiums and prepayment penalties should be banned on subprime mortgages.

Second, lenders should be more accountable for the actions of mortgage brokers originating loans in their names and investors should share responsibility. Third, mortgage brokers should have a
fiduciary responsibility to the borrowers they serve. . . . Notably, our proposals do not focus on increased disclosures. While improved disclosures and increased financial literacy are laudable goals, the magnitude of the problems identified in this paper indicate the need for a direct and immediate response. Moreover, experience and findings from behavioral economics as well as findings related to limited financial literacy among consumers suggest that improved disclosures are likely to have limited effect, at best.

I strongly recommend the entire paper to those of you with an interest in the matter. I want to suggest something that the authors of this paper do not suggest, but which I think cries out for further study.

The CRL paper does comment on the possible causes for retail lenders' pricing practices in regard to subprime loans:

People with weaker credit scores naturally pay more for mortgages than people with strong scores. However, it is very difficult for borrowers with weaker credit or less experience in financial matters to know precisely how much more is appropriate, especially since, unlike prime rates, subprime rates are not generally publicly available. In addition, subprime loans tend to be much more complex than the fixed-rate mortgages that have long dominated the prime market, making their costs more difficult for borrowers to compare. Accordingly, we hypothesize that brokers have been able to take advantage of this situation by
emphasizing maximum revenues per loan for subprime borrowers. While retail lenders are probably not immune from these dynamics, we believe the effects on the costs of retail loans are less pronounced due to more regulation, better internal controls, and concerns about reputational risk.

Depository retail loan pricing has been subject to "fair lending" as well as safety and soundness examination--not just regulation--for quite some time. What I doubt most consumers and observers realize is that since at least the early 90s, retail lenders used loan origination systems that "integrated" the lender's rate sheet and the loan application; the "rate sheet" is simply a printed version of rates and prices calculated by the system based on imported market price data, established tables of profit margins by branch, and "rules" or calculations that adjust rates for lock periods, "buy up" or "buy down" rates by calculating premium or discount prices for higher or lower rates, and apply various loan-level adjustments to rates or prices for individual loan characteristics. Importantly for our present purposes, these systems "know" when a loan is priced above or below the required rate sheet price--this is known as an "overage" or "underage," meaning that the price or points of the loan are more less than the required price. Not only do they "know" this, they also store this information, which can then be pulled into reports and analyzed for frequency, patterns, and possible discriminatory practices. There just aren't many "rogue loan officers" in a retail environment in which all loans must be "priced" with the computer, and in which a pattern of "overages" will result in a report on someone's desk sooner rather than later.

A practice that developed, formally or informally, in the 90s was often called the "point bank" or "price bank." Individual originators or branches were basically allowed to charge overage or underage on individual loans, as long as the monthly or quarterly pipeline "balanced" to zero or thereabouts. An overage or two (or three . . .) could be "banked" and used in essence to subsidize a concession or two on other loans.

Point banks, in my view, were complete disasters. A whole lot of lenders found--sometimes with the assistance of their examiners--that the concessions were being offered to, precisely, those "best customers" who could shop around or negotiate or quite possibly were just part of the loan officer's social or business network. (They were frequently RE agents, builders, or other mortgage market participants the loan officers wanted to "reward"). Meanwhile, the overages that paid for those concessions were being charged to the least informed borrowers with the weakest "bargaining position": weak credit borrowers, first time homebuyers, and small-balance loans (the latter of which don't pay handsome commissions in dollars, but are just as much work for a loan officer as a larger loan).

In other words, weaker and less informed (and possibly more financially prudent) borrowers were "subsidizing" the rates offered to the strongest, best informed, and quite possibly most debt-heavy borrowers. Insofar as the largest loans were most likely to get a concession, and the smallest loans most likely to be charged overage, it generally required several small loans with overage to each single large loan with a concession to make the "point bank" balance. It does not take long for this pattern to appear on the reports. There was a time, at least, when it didn't take long for regulators to issue some threats regarding this behavior. Retail originators basically lost interest in the "point bank" idea as corporate policy.

I bring all this up because brokers often argue--at least in the comment section of this blog, they do--that they offer highly competitive rates on prime business, indeed, often better rates than a retail lender would offer the same customer. The CRL study backs this up to a limited extent:

[B]orrowers with higher credit scores pay virtually no additional interest and occasionally pay modestly less interest when they receive their loan from a broker versus a retail lender, and borrowers with lower credit scores pay more interest. What’s more, the figures illustrate that the additional interest paid in brokered loans increases dramatically as credit scores decline. The figures also help clarify that the results vary considerably between loans that would be considered prime and those that are subprime.

In essence, retail lenders charge slightly more for prime loans than brokers, and much less for subprime loans. (Note that this analysis is precisely attempting to control for individual risk factors by pairing comparable loans; the difference cannot therefore be due solely to brokers originating the lowest-quality end of the subprime spectrum more frequently than retail lenders.)

My suggestion is that we ask whether brokered mortgage lending is, in practice, running on the old "point bank" model that retail lenders largely abandoned, in which "strong" borrowers are basically subsidized by "weak borrowers." The defenders of "risk based pricing" have always argued that loan-level pricing adjustments are fundamentally fair, because "average" pricing would mean that the highest-quality borrowers were paying more to "subsidize" lowest-quality borrowers. Yet here we have a study that weeds out the "risk-based pricing effect," and that shows that in fact in brokered business the weakest borrowers seem to be paying more than their fair share of risk, with the savings passed through to those borrowers who can demand competitive rates, whether that is because of their credit profile or simply their social profile.

The CRL study touches on the question of the "brokered loan premium," which also needs further analysis and study, in my view:

Finally, we note that part of the explanation for higher rates could arguably arise as a consequence of expectations for worse loan performance among brokered loans. In other words, under this explanation, lenders who expect worse loan performance on brokered loans charge higher baseline rates to “price in” the added risk associated with a loan originated by a broker. Alexander et al offer an analysis of subprime loans consistent with this theory, but end up with a net effect of just half a percentage point.37 Moreover, they do not distinguish whether this increase is associated primarily with increased default risk (which they do detect) or yield spread premiums. Even if the entire amount were attributable to increased default risk, the reported half percentage point difference would be less than half of the 1.3 effective percentage point difference we report here. Moreover, since we control for the vast majority of risk factors, we believe our analysis already directly controls for much of this concern. In addition, to the extent that broker-origination itself is the risk factor that may cause higher delinquencies we question whether the risk factor could be related to the very additional expenses we identify here. In addition, Jackson and Burlingame do explicitly isolate yield spread premiums to identify differences.38 Consequently, the differences they report between brokered and retail pricing have their origin with the broker and cannot be the result of higher prices built in by a lender to account for anticipated worse loan performance.

This is a profoundly important question begging for sophisticated empirical work and analysis, since it gets to the very heart of the matter from a consumer standpoint. If there is such a thing as "brokered transaction risk" that is logically and analytically separate from "borrower default risk," that is to say that there is something about the brokered loan transaction or broker business model that results in higher defaults or (more likely) increased prepayments from churning that eat into lender profitability on loans, all other things being equal in terms of the underlying loan characteristics. The idea of a "brokered loan premium," then, would signal that wholesalers are pricing this in by charging higher rates/prices to brokered loans than to retail loans across all credit categories/loan types.

This immediately raises some troubling questions: If there is a "brokered loan premium," are consumers aware that they are paying higher credit costs by using a broker? If there isn't a "brokered loan premium," then the pricing differentials identified must be due solely to brokers' practices, not the wholesaler's policies. Do consumers understand, then, that by using brokers they are quite possibly subject to pricing practices that differ substantially, at least on the aggregate, from retail pricing practices?

We need to bear in mind that even twenty years ago, there were relatively few nationwide lenders, there was no internet, and there were substantial pockets of the country in which there simply wasn't an easily-accessed depository retail lender who offered a wide array of mortgage product, and specifically subprime credit. Brokers filled the market need in those areas by being able to access out-of-state or niche lenders on the borrowers' behalf. In such an environment, paying a "brokered loan premium" hardly seemed unfair to consumers.

Yet we are long since past such an environment, in my view. Insofar as a "brokered loan premium" exists in areas already saturated by Megabank branches on every corner offering mortgage credit all the way down the spectrum from prime to subprime, and insofar as the internet offers consumers access to direct lenders anywhere at any time, it is distressing to think that borrowers are still paying a premium for the services of an intermediary. This is particularly troubling given that consolidation in the wholesaler business means, in many markets, that brokers are all relying on the same dozen or so mega-lender rate sheets; I see little evidence that brokers are still able to find "inefficiencies" in the delivery of mortgage credit to underserved areas, or seek out small niche lenders to make them available to borrowers who could not otherwise find them--not when the big wholesalers are all offering "niche" products.

No doubt a lot of people will be troubled by the implication I am making that more than a few "good" borrowers got better rates than they probably should have, courtesy of those "bad" borrowers who paid not only their own "risk premium" but part of someone else's, as well. But I am more and more convinced that this has occurred at least in those markets that saw the explosive growth of subprime originations in the period in question. We are clearly seeing higher rates and prices paid by prime borrowers now, in the throes of the credit crunch, than we have in the past. A certain segment of the market (and nearly all the media) wishes to see this as an "overreaction" to "subprime problems," meaning that those most excellent borrowers are "paying too much" and that prices should return to "normal" once everyone realizes that the world hasn't ended. I have my doubts about that.

If, in fact, "normal" prime or "super prime" pricing for the last several years was subsidized by an unprecedented growth in subprime originations--for which there is certainly evidence of some "steering" of decent-quality loans into those high-rate subprime products--then "normal" pricing won't be back if we lose some 20% of the applicants who can be made to keep pricing "competitive" for those who know how to and can "compete." It seems to me, at least, that further research and analysis of this question is time much better spent than, say, tinkering with new disclosure forms.