by Tanta on 2/29/2008 07:18:00 AM

There has been some concern in our comments and on other blogs about this bit in Fannie Mae's 10-K published Wednesday:

Beginning in November 2007, we decreased the number of optional delinquent loan purchases from our single-family MBS trusts in order to preserve capital in compliance with our regulatory capital requirements. Although this change in practice may affect our cure rates, it has had no effect on our loss mitigation efforts and, based on current market conditions, is not expected to materially affect the “Reserve for guaranty losses.” We continue to purchase delinquent loans from MBS trusts primarily to modify these loans as part of our strategy to mitigate credit losses and in circumstances in which we are required to do so under our single-family MBS trust documents. Because we are continuing our loss mitigation efforts for delinquent loans, with a primary goal of permitting borrowers to avoid foreclosure, we do not intend to defer purchases of delinquent loans until we are required by our MBS trust documents to purchase the delinquent loans from our MBS trusts. Although we have decreased the number of our optional loan purchases, the total number of loans purchased from MBS trusts may increase in the future, which would result in an increase our SOP 03-3 fair value losses. The total number of loans we purchase from MBS trusts is dependent on a number of factors, including management decisions about appropriate loss mitigation efforts, the expected increase in loan delinquencies within our MBS trusts resulting from the current adverse conditions in the housing market and our need to preserve capital to meet our regulatory capital requirements. For example, we recently introduced a new HomeSaver Advance(tm) initiative, which is a loss mitigation tool that we began implementing in the first quarter of 2008. HomeSaver Advance provides qualified borrowers with an unsecured personal loan in an amount equal to all past due payments relating to their mortgage loan, allowing borrowers to cure their payment defaults under mortgage loans without requiring modification of their mortgage loans. By permitting qualified borrowers to cure their payment defaults without requiring that we purchase the loans from the MBS trusts in order to modify the loans, this loss mitigation tool may reduce the number of delinquent mortgage loans that we purchase from MBS trusts in the future and the fair value losses we record in connection with those purchases. The credit environment remains fluid, and the number of loans that we purchase from our MBS trusts will continue to be affected by events and conditions that occur nationally and in regional markets, as well as changes in our business practices to respond to the current adverse market conditions.

This seems to have a bunch of folks concerned that what Fannie Mae is doing is making unsecured loans to borrowers just so that Fannie doesn't have to buy the loan out of the pool and take a fair value write-down. What it says, of course, is that Fannie Mae certainly intends this program, if it is successful, to reduce the number of mortgages that have to be bought out of the MBS, because the point of the program is to avoid having to do a formal modification of mortgage. If that is successful, it should, in fact, reduce the number of loans Fannie buys out of pools for loss-mitigation purposes.

It does not say that the sole intent of the program is to avoid fair-market write-downs on loans bought out of pools. This mention of this program just appears in the part of the 10-K that deals with pooled loan repurchases. I see nothing here that says that the HomeSaver Advance loans do not involve an increase in reserves for guaranty losses or an increase in the fair value of guaranty obligations (see page 54ff for an explanation of how accounting for credit losses, actual and expected, on MBS loans is handled), instead of an FMV adjustment to an owned loan. Perhaps the question came up in the conference call; I didn't listen to it. I would certainly expect that these loans can be expected to result in higher guaranty costs in the future, and should be accounted for accordingly. The point is simply that as the loans remain in the MBS, they do not appear in the category of loans bought out of MBS and therefore requiring an FMV adjustment under the infamous SOP-03. The reduction to income (increase in reserves) would happen elsewhere in the financials, under guaranty costs.

All that may be too geeky for you; if so I congratulate you on being a normal human being. Getting beyond the GAAP issues here, I think people just really want to know what this HomeSaver Advance thingy is. According to Fannie Mae's website,

HomeSaver Advance, an unsecured personal loan, is a new loss mitigation alternative available to approved Fannie Mae servicers for eligible borrowers designed to bring a delinquent loan current without a formal loan modification. It provides funds to cure arrearages of principal, interest, taxes, and insurance (PITI), as well as other advances and fees as listed in the Highlights section below. HomeSaver Advance is documented by a borrower-signed promissory note, payable over 15 years at a fixed rate of 5% with no payments or interest accrual for the first six months.

HomeSaver Advance is designed for qualified borrowers who have fallen behind on their mortgage, but are able to resume timely payments once their loan is brought current by the advance. It helps simplify and streamline the workout process for applicable loans, as it provides an option for earlier resolution of delinquent loans.

HomeSaver Advance Highlights

*Loan amount up to the lesser of $15,000 or 15% of the original UPB for delinquent PITI, escrow advances, and advances for attorney fees and costs and up to 6 months of unpaid HOA fees (12 months, where the HOA fee is paid once per year)
*Advances may not include late charges or other ancillary fees and costs
*The full loan amount is applied directly to arrearage (borrower never receives funds in hand)
*Truth in Lending Statement and unsecured promissory note are executed at time of agreement with borrower
*Note rate at a fixed rate of 5% with 6-month no-interest/no-payment period
*Amortization period of 14.5 years after the conclusion of the 6-month no-interest/no-payment period
*Workout fee paid to servicer is $600
*Fannie Mae will contract with a third party to service HomeSaver Advance promissory notes

The general rules for borrower eligibility:

• The mortgage is delinquent in an amount equal to or greater than two full payments of principal, interest, taxes and insurance;
• The mortgage must be seasoned with a minimum of six monthly payments made since the date of loan closing;
The mortgage may secure a principal residence, second home, or investment property—owner occupancy is not required; and
• The mortgage may generally be any type of loan (i.e., fixed-rate, adjustable-rate, interest-only, bi-weekly or daily simple interest).

HomeSaver Advance does not have a loan-to-value restriction or property valuation requirement.

Borrower Eligibility

Servicers must also ensure their borrower meets the following qualifications:
• The borrower has successfully resolved the reason for delinquency;
• The borrower demonstrates a long -term financial capacity to resume making the payments on the first mortgage loan and all other debts, including any subordinate mortgage loans (verbal confirmation of financial capacity is acceptable);
• The borrower has surplus income to support an additional monthly payment of at least $200 but does not have the ability to cure the arrearage using a repayment plan within a period of not more than nine months;
• The borrower is willing to participate in HomeSaver Advance; and
• The borrower does not currently have an outstanding HomeSaver Advance note; the HomeSaver Advance option may only be used once during the life of the particular first mortgage loan.

Borrowers involved in an active bankruptcy proceeding or who have had the debt previously discharged in a bankruptcy action are not eligible for this loss mitigation option.

So what does all that mean? First, it doesn't mean that this is how Fannie will handle all troubled loan workouts; it is one possibility. The rationale for this kind of thing--which isn't unheard of, by the way, for banks and other portfolio lenders, although it's new as far as I know for Fannie Mae--is that if you have a borrower with a fairly modest past-due amount ($15,000 or less) and you have determined that the cause of the delinquency was short-term and is now fixed (like temporary job loss), you could find that the effort and expense of buying a loan out of a pool and doing a formal modification of mortgage to add this modest amount can cost you almost more than it's worth. An alternative is just to make an unsecured loan for the past-due amount, while leaving the existing loan's terms unchanged.

It's risky, of course, because you aren't securing the make-up loan amount; that means that you can't take that amount out of foreclosure recoveries, and if the borrower declares bankruptcy your make-up loan just gets tossed into the unsecured bucket with the credit cards and such. The idea is that you would only do this if the amount in question were modest enough that it's not worth the expense to secure it. It seems completely obvious to me that it's not always worth rewriting a $200,000 loan to secure another $1,000. Another $15,000? That seems rather high to me as a ceiling for this program. But cost-effectiveness is the idea here.

I would also have tightened up the verification requirements for this deal. I realize that Fannie Mae clearly has some ability to collect from servicers if they misrepresent on the borrower's situation; I am, however, getting more and more jaded by the minute about conducting these things on a rep-and-warranty basis. I'd want written documentation of the borrower's cause of delinquency and financial condition, not verbal.

However, I don't necessarily think this is a terrible idea, with the above caveats in mind. Of course it all depends on how good you are at targeting it to borrowers whom it will truly benefit. (Do remember that these are Fannie Mae loans, not those horrible subprime exploding ARMs and stuff. They aren't perfect, but they're not the worst loans in the bunch to start with.) A couple of our commenters have suggested that it seems like no more than a way to throw away $15,000 on every delinquent loan you have. I don't think it's that bad, so I thought maybe we could go through an example--and it's just an example, not a prediction--of how the math would work in deciding to offer a program like this.

Let's start by assuming we have a pool of 100 loans that are eligible for this treatment. We'll assume the average loan amount is $200,000, the average interest rate is 6.50%, and the loans are all interest only (mostly so I don't have to keep amortizing balances, but also because that gives you a slightly worse case in recovery from future foreclosure, and I'm not trying to build an optimistic scenario). I'll assume that the servicer waives all attorney's fees and there's no HOA looking for money, so all we have to work with is past-due interest payments and escrow account contributions. The average monthly interest payment on these loans is $1083, and we'll say the average monthly escrow payment is $417, since that gives us a nice round $1,500 monthly payment to play with.

If all the borrowers are six months past due--which is a lot--then the unsecured loan amount for each loan would be $9,000. Plus Fannie Mae pays $600 a pop to the servicer for the workout fee, so if we did this on all 100 loans, we'd end up with $900,000 unsecured money at risk on a $20,000,000 pool at a cost of $60,000. You can, if you want, assume that all of these loans are underwater--the math works the same way--but for convenience I will assume that the $200,000 balance represents 100% LTV (the property is valued today at $200,000).

Therefore, if we had added the $9,000 to the loan amount via a formal modification, we'd have ended up with an LTV of 104.5%. Because we didn't secure the loan, our LTV stays 100%. Remember that since the additional money is unsecured, there is less disincentive for the borrower to sell the property at break-even; the lien can be released without the additional loan amount being paid in cash at the closing table. So from a voluntary prepayment perspective, these loans should perform just like any other once-delinquent loan at 100% LTV.

Let's further assume that our estimated losses on this pool (net of mortgage insurance and including FC expenses), if we foreclosed today instead of doing this workout, are 30%. That means that foreclosing them all right now would cost us $6,000,000. If you assumed that 100% of these loans would be permanently cured and all those borrowers would pay back all of the unsecured as well as secured money, it's obviously a deal to do this.

Of course we won't assume for a moment that these will be 100% successful. Fannie Mae reported in the 10-K that of the loans it has done modifications on that have a 2-year history since the modification was put in place, going back to 2001, 60% were performing or paid in full 24 months later, and 9% had been foreclosed 24 months later (the rest were still on the books but had become delinquent again, just apparently not delinquent enough to mean foreclosure yet). We are going to assume that that is much better performance than our workouts are likely to get, even though, if the program requirements are truly fulfilled, these HomeSaver Advance deals ought to perform better than your average workout (because they're supposed to involve true "temporary" situations and clear financial capacity to carry the payments).

We will assume that after two years, only 20% of our loans are either still cured and paying as agreed, or paid in full including the unsecured amount. We'll assume another 10% of the loans paid in full (the borrower sold the home or refinanced), but the borrower stiffed us on the unsecured amount and we have to write it off.

Of the remaining 70%, we will assume that 50% end up in foreclosure after 12 months, and the other 20% end up in foreclosure after 24 months. We do that because we want to take into account the possible costs of delaying foreclosure. That is always the problem with workout calculations. It's one thing to compare the cost of a workout to the cost of foreclosure today, but if the loan re-defaults, it may end up costing you more, because foreclosure losses next year might well be worse than they are this year. For our example, we'll assume that losses in a foreclosure would be 30% today, 40% in 12 months, or 50% in 24 months. (This is an example, not a prediction, remember. I'm not building in any positive effect of my workout efforts, although logically I should; the more loans I can permanently cure, the better the recovery should be on the ones I do foreclose because it means less REO inventory.)

That gives us 20 loans with no losses except our $600 fee to the servicer or $12,000. The 10 loans that paid in full on the mortgage but stiffed us on the unsecured loans generated a $96,000 loss. The 50 loans we had to foreclose after a year generated a $4,480,000 loss ($200,000 times 50 times 40% plus $9,600 times 50). The 20 loans we had to foreclose after two years generated a $2,192,000 loss ($200,000 times 20 times 50% plus $9,600 times 20). Total losses: $6,780,000, or 34% loss severity after two years instead of 30% loss severity by foreclosing them all today.

I think it's fair to say that it doesn't take much to think we could break even here. For one thing, it's probably not likely that all loans would be six months past due; if you figured only 4 months past due, which is still severely delinquent, you get 33% loss severity after two years (because the unsecured loan amount is smaller). Add 10 loans to the mortgage paid but unsecured loan written off group and take 10 out of the foreclosure after 12 months group, and you've actually got losses at 24 months at 29%, or just slightly better than foreclosing today.

My point is that you have to remember with workout calculations that while delaying foreclosure might increase the severity of loss on the foreclosures, you do save a lot of money on the ones you cure, and that offsets the calculations on an aggregate level. In practical terms, a program like this is just a lot faster and easier than the buy-loan-out-of-pool-modify-mortgage thing, and it's fair to count in the plus column the extent to which that frees up resources to work with the loans that don't qualify for this kind of deal (the ones that you'll have to do a full-blown mod on). Of course, you have to add back the fact that anything that's faster and easier is going to suffer from adverse selection problems--it does tend to be the lazy, cheapskate servicer's first choice of loss mit options even if it shouldn't be.

At the end of it, I think I'd say this isn't a terrible way to handle the workouts for those borrowers who were tight on mortgage affordability but not impossibly over their heads--say originally qualified at 42% DTI--and who therefore ended up several months past due after an incident (cut back on work hours, unforeseen medical expenses, that kind of thing) that would, in a less expensive relative to income housing cost environment, probably have been tolerable. As long as those borrowers are working with the servicer and want to hang onto the home, this gets them over the rough patch without raiding their retirement accounts or borrowing from the local loan shark, and I can get behind the wisdom of that, at least.

I don't think most troubled borrowers are necessarily in that situation--too many, sadly, are really in over their heads. But if you limit the HomeSaver Advance thing to the salvageable borrowers, you salvage those borrowers quickly and fairly cheaply, freeing up your real effort and expense for dealing with the much more troubled cases. So if that's what they're up to, I guess it's OK with me--not like they asked my opinion--but I do hope OFHEO is keeping an eye on this kind of thing for us, and that we all get to see some periodic reporting about how well this initiative is working out.

As far as the cynical view that this is just a way for Fannie Mae to avoid buying mortgages out of MBS? Doesn't everyone want them to limit their portfolio expansion? As long as they're accounting properly for the increased guaranty obligation here, why not leave the loans on the MBS's books?

by Tanta on 2/27/2008 09:06:00 AM

This is what the Financial Times is reporting:

A leading Democratic lawmaker on Tuesday called for $20bn in public funds to be made available to the Federal Housing Administration to purchase and refinance pools of subprime mortgages. . . .

Mr Frank said “we can do it through an existing vehicle rather than a new vehicle”. But the underlying logic of the two proposals is similar.

Mr Frank said that under his plan, the FHA would “buy up packages of mortgages but at a substantial discount”. It would then refinance the loans.

This would require about $20bn up front, but Mr Frank stressed that “the FHA would be repaid” as the loans were refinanced. The ultimate cost of the scheme to US taxpayers, under Congressional scoring practices, would probably be about $3bn to $4bn.

Mr Frank also called for between $5bn and $10bn in loans to the states, which would be used to purchase and refurbish foreclosed homes, and extra funding for counselling services.

Mr Frank said the “lesser efforts” to tackle the mortgage crisis to date “have not been very successful”. The housing crisis was “getting worse not better”.

The externalities involved in foreclosures justified the commitment of public funds. “We are talking about terrible impact on society.”

The main difference between the Frank plan and some of the other proposals circulating is the scale of the intervention envisaged.

Alan Blinder, a professor of economics at Princeton, has called for a new government vehicle modelled on the Home Owners Loan Corporation of the 1930s to borrow between $200bn and $400bn to buy up and restructure distressed loans.

Mark Zandi, chief economist at Moody’s Economy.com told the House financial services committee that it would take about $250bn in upfront funds to purchase all 2m loans expected to end in foreclosure by the end of this decade.

Mr Frank said “reality constrains” and his plan was limited to $20bn for the FHA because of the budget deficit and the need to meet pay-as-you-go spending rules.

So far this morning, my attempts to find more details on the Frank plan have not succeeded. I did, however, find this recently published statement of priorities for the House Committee on Financial Services, of which Frank is the chair:

The Committee on Financial Services urges the congressional budget resolution to prioritize the following critical issues:

(1) Housing Initiative. Over the last six months, the nation has experienced a significant increase in the number of homeowners facing the risk of foreclosure, with estimates of as many as 2.8 million subprime and “Alt A” borrowers facing loss of their homes over the next five years. We have already experienced declining home prices in many areas of the country, and the physical deterioration of certain communities, as a result of waves of vacant homes that were foreclosed or abandoned.

The Financial Services Committee is developing a number of proposals to address these growing problems. Given the urgency to take action, a significant portion of the cost of such proposals will likely be incurred in the current fiscal year. However, there would be some loan activities, FHA administrative costs, and additional housing counseling funding that would be needed over the period of the Budget Resolution.

First, the Committee is working on a proposal to provide refinancing opportunities to save as many as 1 million distressed homeowners from having their homes go into foreclosure. Such a proposal will likely involve using FHA and may involve the federal government purchasing loans. It would be implemented through separate authorizing legislation. Any proposal will require the existing holder to write down the loan to a level that is consistent with the homeowner’s ability to pay, and would exclude investor-owned and second homes. The estimated credit subsidy cost could be as much as $15 billion over the next five years. The Committee is also exploring options to limit federal government exposure and thus reduce costs. We could, for instance, require a limited soft second mortgage to the government that would enhance recoveries resulting from future property sales.

Second, the Committee is working on a proposal to provide as much as $20 billion in the form of grants, loans, or a combination of the two, for purchase of foreclosed or abandoned homes at or below market value. The purpose would be to help stabilize home prices and to begin to reverse the serious physical deterioration of neighborhoods with high numbers of subprime borrowers, defaults, and foreclosures. The structuring of such an initiative as a loan program would help to minimize the cost of the federal government, through net recoveries from the subsequent sale of properties.

Third, a substantial expansion of FHA to help keep homeowners in their home will require the contracting out by FHA for independent expertise for the development of underwriting criteria for refinanced loans and for quality control of the loans as they are being made, as well as increased FHA personnel costs for such activities as loan processing. This will require additional FHA administrative funding in the Budget Resolution for FY 2009 and possibly in subsequent years, in an estimated range of several hundred million dollars a year.

Finally, it is important for Congress to increase funding over FY 2008 levels by at least an additional $200 million a year for federal housing counseling grants. Such grants would increase capacity, in order to ensure that sufficient numbers of borrowers are assisted in implementing these and other initiatives to keep people in their homes.

I still have no particular idea where the "one million distressed homeowners" figure comes from, but we can, I think, conclude that it would be a total number of all FHA-related initiatives, including FHASecure and other kinds of fairly straightforward refinance programs, not just a program that involves FHA purchasing an existing loan in order to refinance it.

If the FT has the number right, we're looking at $20 billion for loan purchases. It's hard to calculate how many loans that would be without knowing just what kind of a discount is on the table. If you assumed a 10% discount and an average original loan balance of $200,000, you'd get just over 100,000 loans. At a 50% discount you could buy around 200,000 loans. That's a long way from a goal of one million loans, however you slice it.

On the other hand, there's the potential of several hundred million dollars a year on the table for independent experts who want to write FHA's credit guidelines for them. We knew that was coming.

The sanity level of this kind of plan still depends on why it is we want FHA to buy these loans and then refinance them, as opposed to simply refinancing them. The risk in the buyout, of course, is always that FHA pays too much for the loan; if buyer and seller need to do the full loan-level analysis to calculate the amount of the necessary loan balance to write off before establishing a price, then the practical thing to do at that point is simply a refinance, without FHA ever owning the old loan. If the point is that there isn't time or capacity for current loan holders to do that analysis, then the amount of the discounted price FHA would pay is uncertain at best.

I am also still eager to hear how this proposes to work from the perspective, specifically, of buying loans out of REMIC pools--and that is, presumably, where the problem loans in question are likely to be, not in bank whole loan investment portfolios. REMICs just cannot sell loans at less than par under current rules; without a change to those rules, it seems likely to me that in the process of selling defaulted loans to the government at a discount, the sponsors of these securities are committing themselves to bringing the deals onto their balance sheets, and possibly facing taxation of the trust itself (not just the investors receiving pass-through income). This is one of the several important differences between the current situation and the old HOLC situation in the Depression (where loans were being purchased from banks and were not securitized).

At this point I'm tempted to think it's a lot of additional mess for $20 billion. The Securities Lawyer Full Employment Act probably wasn't what anyone had in mind . . .

by Tanta on 2/21/2008 02:21:00 PM

This is certainly innovative:

The Office of Thrift Supervision is preparing a plan to help mortgage borrowers who owe more than their homes are worth and to discourage them from abandoning those properties, agency officials said yesterday.

Under the regulatory agency's proposal, still in its early stages, these borrowers would refinance into government-insured loans that cover the current value of their homes. The refinancing would pay part of what's owed to the original lender. For the remainder, the lender would get what the plan's backers call a "negative equity certificate." The lender could redeem the certificate if the home is eventually sold at a higher price. . . .

The proposal was briefly mentioned at a regular quarterly news briefing. More details should emerge over coming weeks, Petrasic said. The plan has been extensively analyzed internally and is now being discussed with policymakers and industry officials, he said.

The plan would separate a troubled mortgage into two parts. The first would cover the current fair-market value of the home and would be refinanced by the Federal Housing Administration. The remainder would be issued to the original lender as a certificate.

If the borrower eventually sells the home, the FHA mortgage would be paid off first. Remaining cash would be applied to paying off the value of that certificate. Anything left over would go to the borrower.

If there's not enough profit to pay off the certificate, the original lender would take a loss, which makes this proposal a gamble. However, the plan anticipates that there would be a market where these certificates are traded. That means the lenders could sell them immediately to offset some of the loss or hold them with the hope that they will appreciate, said Jaret Seiberg, an analyst at Stanford Policy Research.

The certificates would likely trade for small amounts, maybe $2 for every $100 in home value, and the amounts would increase as the housing market strengthens, Seiberg said.

But there are still many political and logistical hurdles.

This plan has not been vetted by the White House, Congress or other policymakers. The FHA declined to comment on the specifics except to say it is "regularly looking at new ideas and actively exploring ways to expand the eligible pool of creditworthy borrowers FHA can serve."

Whether investors will embrace the idea depends on many details that aren't resolved, Seiberg said. But it could be a way for lenders to cut their losses. "It beats foreclosure," Seiberg said. "These certificates enable [investors] to share in the upside if the housing market recovers."

For borrowers, avoiding foreclosure means they get to keep their homes and reduce damage to their credit.

"What we tried to do is figure out the best way to create market incentives for all the parties involved," Petrasic said.

That's a real twist on the idea of taking back a lien on a property to recapture any future equity. Apparently, only the FHA mortgage would be a lien against the property, with the certificate being an obligation of FHA? It certainly surprises me that the OTS feels confident it can work out the legal kinks with that quickly enough to make a difference.

by Tanta on 2/17/2008 11:25:00 AM

Mortgage servicers: this is called "reaping what you sow."

Spend decades building ever-larger, more consolidated servicing portfolios through mergers, acquisitions, and bulk purchases. Chase marginal improvements in efficiency with automation, out-sourcing and off-shoring. Wall yourselves and your "platforms" off in centralized compounds far from your customers and their local markets, withdraw behind consumer-proof phone menus, worthless web portals, and untrained "customer service representatives." Keep your performance statistics up with aggressive collection practices; keep your operating costs down with robo-calls and impenetrable scripting. Manage yourself quarter-to-quarter with frequent purchases and sales of loan servicing in rapid succession, confusing and alienating your current and former customers, losing track of payments and account numbers, cancelling automated payment provisions at a keystroke, performing three escrow analyses (with three payment increases) in a single year. Hire a subservicer to do the grunt work, adding another layer of impenetrability and forcing even more "cost-cutting" measures to keep the subservicer profitable. Outsource your default servicing and REO management functions to a third party who talks to your own staff via phone menus and searches for ever more creative ways to extract fees from consumers, since you don't pay much. Encourage an entire cottage industry of hucksters, scammers, and pick-pockets to grow up around you, like fungus, in the name of providing "counseling" or "negotiation" or "foreclosure avoidance" services, assuring that your customers will no longer be able to tell who is legitimate and who isn't. Demonize community-based homeowner-advocacy services until you need to co-opt them to bolster your own absent credibility.

Eventually you find yourself sending pleas to your customers to return your calls disguised as wedding invitations. You have borrowers who choose the lesser evil of losing their homes in silence rather than the greater evil of trying to deal with you. Your response is to use someone else's letterhead. This, you think, will make you look trustworthy. After all, most of us already associate deceptively-packaged mailers with the same fast-talking brokers who got us into these loans we don't understand. But if it worked once, it might work again. What other choice do you have? We installed our own caller ID technology to cope with your endless annoying solicitations and hostile collections department. Goose, gander.

Your biggest fear is that we, the borrowers, will re-brand ourselves as efficient exercisers of put options and make you eat that $50,000 per loan. We will hire consultants. We will use someone else's letterhead. Somewhere in the United States, at this very moment, a borrower is folding up his deed, stuffing it into a fancy engraved wedding-invitation envelope, and writing your address on it. You will be astonished.

by Calculated Risk on 2/12/2008 11:35:00 PM

From Ruth Simon and Tom McGinty at the WSJ: Earlier Subprime Rescue Falters

In the past two months, the 1-888-995-HOPE hotline received roughly 176,000 calls, according to the nonprofit Homeownership Preservation Foundation, which operates the hotline. During that time, hotline counselors recommended a workout for 9,975 borrowers -- and told an additional 4,410 people to "seriously consider selling their home," the group says. Another 12,113 borrowers were referred for in-person counseling and services such as job-placement help.

Nodoby could have known.

by Tanta on 2/12/2008 12:48:00 PM

In the beginning, there was a Plan Hope.

Now, there is a Project: toss out a lifeline to those who just dipped under the waves for the third time.

I just listened to the live webcast of the Treasury Department's big announcement. I spent 40 minutes on this. I feel obligated to blog about it.

Project Lifeline involves servicers sending letters to borrowers--prime, Alt-A, or subprime, we're past pretense on that part--who are very seriously delinquent (90 days or three payments down or more). The letter says that if the borrower contacts the servicer within ten days, agrees to homeowner counseling, and provides sufficient financial documentation that the servicer can consider a case-by-case, deep-analysis style modification of the mortgage terms, the servicer will agree to put the foreclosure process on hold for 30 days while the workout is considered. If the borrower fails to respond to the letter, foreclosure proceeds.

The difference between this and the way the loss mitigation process has always worked is . . . the letter part.

What is implied here is that servicers are, in fact, staffed up to do these time- and labor-intensive modifications that include real examination of the borrower's circumstances, real counseling, and loan changes that are much harder to process than just a teaser freeze. They're just waiting by the phone for borrowers to call. Why am I skeptical about that?

Highlight of the whole thing:

Q to Paulson: "Is the worst over?"

Paulson: "The worst is just beginning."

Lowlight: Alphonso Jackson, whose soporific discourse leads the viewer's mind to abandon the struggle to pick content out of the bromides and focus instead on that oddly expressionless, smooth, unwrinkled, ageless baby face of his. What, you wonder, would it take to make this man look a little troubled? Armageddon?

Anyway, Jackson repeated the claim that over 200,000 (I think he said 228,000) applications for refinance have been received by HUD "since the President announced" the FHASecure plan in October. Once again, this statement implies, but does not exactly say, that all 200,000-odd applications were under the FHASecure program, as opposed to being all refinance applications, including those under standard FHA programs that would have been made anyway. And it says nothing about how many cases actually got endorsed.

(Civilians: FHA isn't a lender, so what it really gets "applications" for is insurance of a loan. It calls these "cases." When it insures a loan, it calls that an "endorsement." You need to know the lingo if you are enterprising enough to go root through HUD reports looking to see how many FHASecure loans actually have been endorsed. Good luck to you if you do: I'm having a hard time finding this information.)

Jackson did say that of the 200,000 and some "applications," "over 5,000" involved original loans that were already in default. I'm guessing that the true FHASecure caseload is about, um, 5,000. Anyone with better data is hereby invited to share. Jackson keeps repeating these numbers--which have been questioned before--and nodoby's calling him on it.

(I'll post a link to the transcript whenever it is available.)

by Tanta on 2/05/2008 10:10:00 AM

I don't know why seeing the Chairman of the FDIC--that'd be the government agency that provides deposit insurance to banks and thrifts--on CNBC arguing with a billionaire investor about what is really in the best interests of billionaire investors is so damned funny, but this is classic teevee.

The Ross Plan, by the way, appears to involve the taxpayers buying a one-third participation interest in defaulting mortgages. That would mean that a private investor gets one-third of its principal back immediately, while the taxpayers get the right to collect one-third of a payment that isn't being made or one-third of foreclosure recoveries. But the beauty is that we know servicers will work harder to collect payments or maximize recoveries when the government is an investor in the pool, because it always works out that way, doesn't it?

OTOH, it's certainly more efficient than "mortgage food stamps."

Thanks, number2son!

by Tanta on 2/01/2008 01:33:00 PM

FDIC Chair Sheila Bair gave another speech the other day about mortgage loan modifications. Short version: the fact that this isn't all just about subprime 2/28s that can be fixed with a rate freeze has become obvious. The solution has not.

Unfortunately, some borrowers pose even more difficult issues because their debt far exceeds the value of their homes. Servicers have always had to evaluate whether the best option in these cases is foreclosure or some other process, such as a short sale, that results in the loss of the home. There may be no alternative except foreclosure for loans that were made to speculators, under fraudulent circumstances, or to borrowers who have no reasonable ability to repay (even with restructuring). However, in today's market, servicers should carefully consider whether some writedowns of part of the principal balance to the value of the home or forgiveness of arrearages of principal and interest are better options than foreclosure or even short sales in appropriate circumstances. Permitting borrowers with an ability to make reasonable payments to stay in their home would provide greater value to lenders and investors than forcing foreclosures that undercut the value of the property and harm the value of other properties in the neighborhood.

Until recently, strategies involving writing down the value of the loan did not provide a feasible alternative for most borrowers. When lenders restructured loans in this manner, borrowers faced a potential tax liability on the amount of the forgiven debt.

Last month, however, Congress addressed the issue of tax liability for mortgage debt forgiveness in a way that makes long-term workouts involving principal writedowns a reasonable alternative to foreclosure. Such an option might be considered for borrowers having financial difficulty making their payments after their loans reset and where foreclosure is a looming possibility. Congress is to be commended for enhancing the workout options available to borrowers and lenders for negotiating long-term, sustainable restructurings.

Enactment of the Mortgage Forgiveness Debt Relief Act of 2007 provides an additional option for keeping borrowers in their home. This Act recognizes that cash strapped borrowers who are already facing financial difficulty cannot afford a potential tax liability that could hinder their ability to make their modified loan payments. It also provides greater assurance to lenders and servicers that borrowers will be able to perform after their loans are modified and decreasing the principal value will decrease the loan to value ratio, thereby potentially expanding the number of homeowners who could qualify for GSE refinancing. This will allow lenders and servicers to consider forgiving a portion of the principal balance owed to a level a borrower can realistically afford to repay, as long as it produces a net present value that is greater than the anticipated net recovery that would result from a foreclosure. This would require lenders and servicers to ascertain the existence and amount of any second mortgages, and obtain releases from these obligations to the extent appropriate. While this type of modification results in the recognition of a loss by the lender or servicer, it is virtually certain that the amount of the principal write-down will be less than the amount of loss sustained from foreclosure in today's market.

Permanently forgiving part of the principal amount can provide a better financial result for investors than foreclosure by creating long-term, sustainable solutions that will allow borrowers to stay in their homes. This approach also has the added benefit of limiting the overall adverse affect of declining property values on communities.

Let's go through this carefully:

1. It excludes "loans that were made to speculators, under fraudulent circumstances, or to borrowers who have no reasonable ability to repay (even with restructuring)." This suggests that the very first thing any servicer has to do is sufficient rooting around in the file, plus looking at updated documents (a new credit report, new income verification from the borrowers, evidence of occupancy) to eliminate this group. So we aren't talking about "streamlined" mods (such as the "teaser freezer") any longer. Such a process will, necessarily, also identify any borrowers who can afford their current loan, but just don't want to pay it. (You could include them with "speculators," but I'm not entirely sure that's what Bair means by the term). That means that the servicer will have to decide what to do for those borrowers. I am simply pointing out a fact here. In order to exclude those who could not afford even the modified terms, you will identify those who can afford the current terms. I'm afraid this might work out like the old James Bond movie: Now you know. So we have to kill you. That is, now you can be sued by some pissed-off investor. If you didn't do the due diligence first, you could have claimed ignorance, but then you'd get sued for doing a workout that merely postpones (and thus increases the cost of) foreclosure for borrowers who can't afford any terms.

2. "Such an option might be considered for borrowers having financial difficulty making their payments after their loans reset and where foreclosure is a looming possibility." Except for rhetorical effect, it isn't clear why resets have any relevance here. The proposal is paring down principal. If you have to reduce the principal as well as freeze the rate, then the pre-reset payment was obviously not affordable in the first place. I do not understand why Bair is muddying this up with references to payment resets. I am going to assume that the borrower is not required to even have an ARM to be eligible for this kind of workout, let alone be required to be facing imminent rate reset. If we're willing to abandon the "it's just subprime" thing, can we go whole hog and imagine that it's not just ARMs?

3. "It also provides greater assurance to lenders and servicers that borrowers will be able to perform after their loans are modified and decreasing the principal value will decrease the loan to value ratio, thereby potentially expanding the number of homeowners who could qualify for GSE refinancing." I understand the first part of that sentence: if borrowers don't have to pay a big tax bill, they have more money to apply to mortgage payments. I don't understand the second part. Are we trying to modify a loan (retain it at a lower balance) or refinance it (move it onto another lender's books, having accepted less than 100% of the balance in the payoff)? If we are trying to forgive enough principal to make the loan refinance-eligible, then we are practically speaking waiving more than the difference between the loan amount and the current market value of the property (assuming that there aren't many 100% LTV refis out there in declining markets). You are certainly getting very close there to exceeding the cost to the investor of foreclosure. In terms of borrower motivations, I should think that in any state where purchase-money loans are non-recourse (and "troubled debt restructurings" are not considered refinances), your truly ruthless borrower doesn't want a refi. That might kind of adversely select your modified pool.

4. "This will allow lenders and servicers to consider forgiving a portion of the principal balance owed to a level a borrower can realistically afford to repay, as long as it produces a net present value that is greater than the anticipated net recovery that would result from a foreclosure." Actually, I understand the rule to be that the modification has to produce a net present value greater than any other option, including but not limited to foreclosure. We just went through this: if short sale or deed-in-lieu produces a greater recovery to the investor, then the servicer is obligated to pursue it. You can talk all you want about what FCs do to neighborhoods or short sales do to families, but there seems to be some agreement that servicers are obligated to do only what maximizes recoveries to the investor on this loan.

The "rate freeze" thing is actually pretty straightforward compared to a principal reduction. In a rate freeze, you are assuming that you end up getting the full principal balance back, at the lower interest rate, over the remaining term of the loan. You calculate what you lose in reduced interest income over the term of the freeze, compare that to the present value of a foreclosure recovery, and the former is almost always a better deal than the latter. The FC usually wins only if the house is not very far underwater on the one hand and the borrower's repayment ability is so shaky on the other that you simply can't assume the modified loan is fully collectable. But if the modified loan is so shaky that it has to be discounted to less than FC recovery, you really don't have the choice of modifying in the first place.

Doing a principal balance reduction is (traditionally) on the table in two scenarios: one, the delinquent borrower can resume payments (perhaps at a modified interest rate), but can't catch up, so you forgive the past-due amount. There's no magic here to calculating the amount to forgive. You discount the value of the loan by the amount of the principal reduction, compare that to FC recovery, and once again take your lowest loss. As this situation generally involves no more than 3-6 months of past due interest, escrow balance, and fees, the write-off amount is practically quite close to foreclosure expenses, less the RE broker commission and actual court costs. Once again, with any reasonable estimate of collectability (performance of the modified loan), this almost always beats FC unless current LTV is quite low, which it probably isn't.

The second scenario involves going at the problem not from interest rate or LTV but payment: you have a borrower who cannot afford the contractual payment, but you have agreed to some lower payment that the borrower can (verifiably) afford (and has indicated a willingness to pay). In this case you are, in essence, just backing into a new balance (and interest rate and term to maturity, in some combination) that produces the payment you want. How that stacks up against FC recovery is a mere question of how much lower that payment is than the contractual payment, of course. In earlier bouts of economic distress, borrowers were qualified at much more reasonable payments (and higher rates and shorter terms) to start with. In the current environment, we're having much more trouble with these calculations.

Now we're introducing a third scenario: simply reducing the principal balance of the loan to the market value of the property (or somewhat less than that) in order to keep the borrower right-side up or treading water, and thus to prevent default rather than cure it. If you are no longer trying to arrive at the highest payment the borrower can practically make, you are no longer producing calculations of loss that are mostly likely to be a better deal than FC. This is where Bair is implicitly--but not explicitly--asking servicers to use something other than net present value of FC recovery based on current market prices and marketing time estimates of the subject loan. She is asking the servicer to use possible future FC recoveries based on the assumption that all servicers will fail to forgive loan balances (i.e., that FC recoveries on other loans will be worse than they would have been if you foreclose this loan), and collectability estimates on the pared-down loan based on the assumption that all servicers will forgive loan balances (which will reduce FC inventory and stabilize prices, therefore leading to fewer future defaults). Moral hazard, meet tragedy of the commons.

In the first case, you're asking MBS investors to "take one for the team." I have no problem with that idea in theory, but as a practical matter I'd rather ask a cat to quit developing hairballs. The mathematics of "net present value to the trust" means this trust, not somebody else's trust and not some other loan. You can present this as self-interest: the less you FC, the more you are contributing to stable RE prices, but you will run into someone who realizes that if every other servicer of every other pool is forbearing, and therefore reducing REO inventory, I should go ahead and FC now while I can. Hence Bair brings in the perfectly respectable but, in the MBS context, rather alien concern about protecting communities. Of course some clever economist could calculate that "externality" and add it to the NPV calculation for us, but there isn't anything in these PSAs about that. And if you don't think we can't buy our own economists who will come up with a different number, you don't know us very well. (Bair, I think, is used to dealing with federally chartered depositories and the GSEs, who can to a certain extent be bullied into "social responsibility" because of their charters. But if all the lenders in question were owners of a federal charter, we probably wouldn't be having this conversation.)

Without the "externality" adjustment, and without the assumption that we are aiming for the highest payment the borrower can afford short of the contractual payment, you simply have a situation in which loans are going to fail unless and until the servicer forgives sufficient principal to match the liquidation value of the property. (You can try to simply match the "fair market value" of the property instead of the "REO liquidation value," but that assumes that FMV isn't converging on liquidation value and that failure to match REO prices will stop defaults sufficiently.) There is therefore no obvious loss mitigation here, absent the assumption that this will arrest the slide in RE values. If you happen to believe that REO inventory isn't the only downward pressure on prices, you risk having to pare these loans down every quarter until the bubble blows off. That builds enough "re-defaults" into your modification analysis model that any given set of individual loan inputs come up "FC" again.

4. "This would require lenders and servicers to ascertain the existence and amount of any second mortgages, and obtain releases from these obligations to the extent appropriate." Or you could just assume a can-opener. It is really hard to believe that Bair can gallop over this one in one short sentence. All you gotta do is make sure the junior liens are willing to extinguish themselves first, and you're golden.

The reality is that the "magic number" for the loans that are most likely to be facing trouble right now is 80% LTV on the first lien, and something up to 100% or beyond for one or more junior liens. So it is simply a fact that home value declines of 1-20% mean all the hit goes to the junior lien. If you are trying to "arrest" price declines before they get worse than 20%, you are in a situation where you aren't asking the first lien lender to forgive any principal to start with; you're just asking the second lien lender to release its lien for a reduced or no payoff. Given how many of those junior liens are in bank portfolios, it doesn't surprise me that Bair avoids coming right out and saying that banks will have to write off their junior liens before this plan gets any traction. But that's what this means.

Of course a junior lienholder may have no alternative to simply forgiving the entire debt and releasing its lien (since it would probably collect nothing in a foreclosure). But if the value decline isn't "eating into" the first lien yet, why is this a negotiation with the first lien lender? Borrowers should just be calling their junior lienholders asking to have their junior liens forgiven. If the first lien lender has to forgive principal too, then realistically price declines are greater than 20%. (A likely scenario is that the junior lienholder wants to be paid to go away, so the first lien lender is trying to "advance" a couple thousand dollars to the second lien lender in order to get the second lien cleared. That "advance" then gets "forgiven" on the first lien loan, so the effect on a 80/20 deal is that the second lienholder wrote off 18% and the first lien holder wrote off 2% or something like that. If you can get the second lienholder to bother taking a couple grand to go away.)

But at that point, we aren't "staving off" major RE market failure, we're in it. We are certainly in it if we have to forgive all the junior liens and some portion of the senior liens. Either we're far enough down that the end is possibly in sight, or we aren't. At the end of it, Bair's proposal is just a recognition that we have blown through all the "credit enhancement" that first lien lenders thought they had. In order for there to be any "risk-based pricing" on the resulting loans--which are all subprime, now--the Fed will have to keep cutting rates to zero, as far as I can tell. The best case scenario for first-lien lenders (banks or securities) is then a long lean period of years in which you have low-yielding fixed rate loans outstanding that won't go anywhere until amortization (rather than appreciation) builds up some equity. Great. We're all GSEs now.

If you care to know what I think about this as policy, the answer is that I doubt it matters at this point. Really all Bair is saying is that servicers should modify down to the point where it's no longer possible to go further without violating servicing contracts. Who actually disagrees with that? It is quite possible that it isn't any better than doing nothing, but it's possible that there are borrowers for whom it is, and I don't see how it could be worse than doing nothing. So go ahead, everybody. As long as we all go first, there shouldn't be any problems.

However, if Bair thinks this plan will reduce stress on the FDIC, she's crazier than I am by a long shot. When there is no longer "credit enhancement" on these loans, Ms. Bair, you're the credit enhancement.

by Tanta on 1/18/2008 12:15:00 PM

The MBA has a report out on foreclosure and workout data from the third quarter of 2007 (thanks, Clyde!). The data is in tabular form that's a bit unwieldy, but here's part of the summary:

[D]uring the third quarter the approximately 54 thousand loan modifications done and 183 thousand repayment plans put into place exceeded the number of foreclosures started, excluding those cases where the borrower was an investor/speculator, where the borrower could not be located or would not respond to mortgage servicers, and when the borrower failed to perform under a plan or modification already in place.

Of the foreclosure actions started in the third quarter of 2007, 18percent were on properties that were not occupied by the owners, 23 percent were in cases where the borrower did not respond or could not be located, and 29 percent were cases where the borrower defaulted despite already having a repayment plan or loan modification in place. . . . the degree to which invest investor-owned properties drove foreclosures in the third quarter differed widely by state and by loan type. They ranged from a high of 35 percent of prime ARM foreclosures in Montana to a low of 6 percent of prime fixed-rate foreclosures in South Dakota. For the nation, investor loans comprised 18 percent of subprime ARM foreclosures, 28 percent of subprime fixed-rate foreclosures, 18 percent of prime ARM foreclosures and 14 percent of prime fixed-rate foreclosures. Table 6 shows, for example, that while 11 percent of foreclosures on prime ARM and prime fixed-rate loans were on non-owner occupied properties, the percentages for subprime loans were almost double that — 19 percent for subprime ARMs and 20 percent for subprime fixed-rate. In Ohio, a state that has had some of the highest foreclosure rates in the nation, investor owned properties accounted for 21 percent of subprime ARM foreclosures and 34 percent of subprime fixed-rate foreclosures, versus 18 percent of prime ARM and 14 percent of prime fixed-rate foreclosures. Nevada had among the highest investor-owned share of foreclosures, with investors accounting for 36 percent of subprime fixed-rate foreclosures, 18 percent of subprime ARM foreclosures, 24 percent of prime ARM foreclosures and 14 percent of prime fixed-rate foreclosures.

Borrowers who could not be located or who would not respond to repeated attempts by lenders to contact them accounted for 23 percent of all foreclosures in the third quarter, 21 percent of subprime ARM foreclosures, 21 percent of subprime ARM [sic; FRM?] foreclosures, 17 percent of prime ARM foreclosures and 33 percent of prime fixed-rate foreclosures. Thus, as a percent of foreclosures, the inability to get a borrower to respond to a mortgage servicer is a much bigger problem for prime-fixed rate borrowers than for subprime borrowers. Again the results differed widely by state and loan type. The highest was 69 percent for prime fixed-rate foreclosures in Oklahoma versus a low of 7 percent of prime ARM foreclosures in Wisconsin. Table 7 shows that in Ohio and Michigan, 25 and 26 percent respectively of all foreclosures started in those states were for borrowers who would not respond to repeated attempts to contact them or could not be located.

Borrowers who had worked with their lenders and established loan modification or formal repayment plans, and then failed to perform according to those plans, accounted for 29 percent of all foreclosures in the third quarter. The inability of borrowers to meet the terms of their repayment plans or loan modifications accounted for 40 percent of subprime ARM foreclosures, 37 percent of subprime fixed foreclosures, 17 percent of prime ARM foreclosures and 14 percent of prime fixed foreclosures. Table 8 shows that the states of Vermont, North Dakota, New Mexico and Arkansas, with little else in common, had the highest shares of foreclosures due to the inability of borrowers to live up to prior plans.

During the third quarter, mortgage servicers put in place approximately 183 thousand repayment plans and modified the rates or terms on approximately 54 thousand loans. Lenders modified approximately 13 thousand subprime ARM loans, 15 thousand subprime fixed rate loans, 4 thousand prime ARM loans and 21 thousand prime fixed-rate loans. In addition, servicers negotiated formal repayment plans with approximately 91 thousand subprime ARM borrowers, 30 thousand subprime fixed-rate borrowers, 37 thousand prime ARM borrowers and 25 thousand prime fixed-rate borrowers.
During this period the industry did approximately one thousand deed in lieu transactions and nine thousand short sales.

In an effort to put these numbers into context, Tables 9 through 13 also provide a comparison with the repayment plan and loan modification numbers. They show a breakdown of the number of foreclosures started net of those that clearly could not be helped due to reasons already discussed — investor-owned, borrower would not respond or could not be located, or borrower failed to live up to an agreement already in place. As previously discussed, the
percentages were adjusted downward to eliminate double counting for those borrowers who fell into more than one category. Therefore, while an estimated 166 thousand subprime ARM foreclosures were started during the third quarter, only 50 thousand did not fall into one of those three categories. In comparison, about 90 thousand repayment plans were renegotiated and 13 thousand loan modifications were done, for a total of 103 thousand.

Of the net 50 thousand foreclosures, many of these likely occurred due to the traditional reasons for default, loss of job, divorce, illness or excessive debt burden relative to income, not just the impact of rate resets, thus eliminating any possible benefit of a rate freeze.

What jumps out at me:

1. For the purpose of this study, servicers identified "investor-owned" loans as those with a billing address different from the property address. This is a much better measure than the occupancy code the databases carry, since it is based on the declarations made by the borrower at loan closing, and we know how reliable some of those were. There would be no distinction here between a property that was never occupied by the owner and one that was occupied originally but subsequently rented.

2. The vast number of forbearances relative to modifications should give us all pause. As its name implies, forbearance is the servicer's agreement to forbear from foreclosing for a temporary, stipulated period of time, during which the borrower agrees to resume making contractual payments and make up the delinquent payments, generally in an extra monthly installment. While it is possible that a modified loan was not delinquent prior to the modification, all forbearances by definition were previously delinquent. Forbearances are faster and cheaper than modifications; servicing agreements generally give the servicer wide latitude to enter into forbearances. It is quite possible (although this issue is not addressed in the MBA report) that many forbearances are the initial stage of a modification deal: the borrower is in essence put on a "probationary" plan to catch up on payments at a temporarily reduced level, and given a permanent modification only if the borrower performs at the forbearance terms. The precise situation in which a forbearance makes sense--a borrower who occupies and is committed to homeownership and who is experiencing some temporary inability to make payments--is the precise situation in which the "Hope Now" plan makes most sense. It therefore troubles me to see no discussion of whether forbearances are being used as an initial stage of the modification process, or as a cheap, not-well-thought-out substitute that is setting repayment installments too high for borrowers to reach.

3. The data on borrowers not located or not responding merely raises the question of why that is the case. We really need to know more about this borrower group: some will be "demoralized" borrowers who simply cannot cope adequately with their distress; some will be speculators not caught with the billing address check; some will no doubt have been straw borrowers. Some will be ruthless senders of "jingle mail." But without further information, we're not able to say from this data what the best response is to this group.

by Tanta on 1/16/2008 11:25:00 AM

From the Wall Street Journal:

In some cases, servicers are telling borrowers they will take 10 cents on the dollar to settle their claim, says Micheal Thompson, director of the Iowa Mediation Service, which runs a hotline for homeowners in financial distress. In other cases, they are selling these loans at large discounts to third parties, says Kathleen Tillwitz, a senior vice president at DBRS, a ratings agency.

Coming up with a plan that will get borrowers back on track is easiest if both the mortgage and home-equity loan are held by the same party. Countrywide will sometimes "whittle down" the payment on the second mortgage to come up with an amount that the borrower can afford to pay for both mortgages, or even eliminate that payment, Mr. Bailey says. The company doesn't publicize such efforts, he adds, because that might encourage "people not to make their payment and see what happens." In either case, "the borrower still owes the principal," Mr. Bailey says.

Solutions can be harder to come by when the two loans were made by different lenders and are held by different parties. "The people in the first position will say, 'Until you get a deal with the second, why should I make a deal with you?'" says Iowa's Mr. Thompson. Second-mortgage holders are often reluctant to approve a short sale or deed in lieu of foreclosure that could wipe out their claims, he adds.

FirstFed says it encourages borrowers in financial distress to contact the owner of their home-equity loan and sometimes offers to buy out a home-equity loan with no current value for a small sum -- $2,000, for example -- so that the entire mortgage can be restructured.

But the company says such offers are often rejected. "It's not worth their while to take the $2,000" because of the costs associated with evaluating the offer and releasing the borrower from the lien, says Ms. Heimbuch, the company's CEO. "The second forces you into foreclosure."

Scenario A: Expenses $0, Recoveries $0. Scenario B: Expenses $2,000, Recoveries $2,000. Amazingly enough, they're going for A.

Of course, eventually they'll be able to make it up on volume . . .

by Tanta on 1/14/2008 07:58:00 AM

Or, "The Revenge of SFAS 114." Or, possibly, "KPMG Can Has Accountants." Choose your own subtitle.

NEWPORT BEACH, Calif., Jan 14, 2008 /PRNewswire-FirstCall via COMTEX/ -- Downey Financial Corp. announced today changes to previously reported levels of non-performing assets. These changes pertain to non-performing asset levels since June 30, 2007.

Rick McGill, President, commented, "As previously reported, we implemented at the beginning of the third quarter of 2007 a borrower retention program to provide qualified borrowers with a cost effective means to change from an option ARM to a less costly financing alternative. We contacted borrowers whose loans were current and we offered them the opportunity to modify their loans into 5-year hybrid ARMs or ARMs with interest rates that adjust annually but do not permit negative amortization. The interest rates associated with these modifications were the same or no less than those rates afforded new borrowers but they were below the interest rates on the original loans. We initially did not consider these modifications of performing loans to be troubled debt restructurings, as the modification was only made to those borrowers who were current with their loan payments and the new interest rate was no less than those offered new borrowers. KPMG LLP, our independent registered public accounting firm, did not object to this assessment during its third quarter review."

Mr. McGill continued, "During December 2007, KPMG advised us that upon further review of the modification program, it was likely the loan modifications should be recorded as troubled debt restructurings. After reassessing our initial analysis, we determined these modified loans should be accounted for as troubled debt restructurings. This conclusion was reached because in the current interpretation of GAAP, especially in the current housing market, there is a rebuttable presumption that if the interest rate is lowered in a loan modification, the modification is deemed to be a troubled debt restructuring unless the modified loan can be proved to be at a market rate of interest based upon new underwriting, including an updated property valuation, credit report and income analysis. We did not perform these additional steps since borrowers who qualified for our retention program were current and we were trying to streamline the process for qualified borrowers to modify their loans at interest rates no less than that being offered to new borrowers. Inasmuch as we chose not to perform these additional measures, we are now required to make this reporting change and, as such, our non- performing assets will increase from what has been previously reported. While periods prior to the third quarter of 2007 are not impacted by this change, it will result in $99 million of loans being classified as non-performing at September 30, 2007."

Brian Cote, Chief Financial Officer, commented, "As required for all loans classified as troubled debt restructurings, loans modified as part of our borrower retention program must now be placed on non-accrual status but interest income will be recognized when paid. If borrowers perform pursuant to the modified loan terms for six months, the loans will be placed back on accrual status and, while still reported as troubled debt restructurings, they will no longer be classified as non-performing assets because the borrower has demonstrated an ability to perform and the interest rate was no less than those afforded new borrowers at the time of the modification."

Mr. Cote further commented, "We believe that when loans modified under our borrower retention program are current, it is relevant to distinguish them from total non-performing assets because, unlike other loans classified as non-performing assets, these loans are effectively performing at interest rates no less than those afforded new borrowers. Accordingly, when performing troubled debt restructurings are excluded from the revised ratio of non- performing assets to total assets, the revised ratio of all other non- performing assets to total assets is not materially different from that previously reported."

The take-away, for those of you unmoved by financial accounting esoterica: KPMG is now conditioned to bark every time it hears "streamlined process." That's progress.

Now we wait to see who else was using Downey's interpretation of "troubled debt restructurings."

by Tanta on 1/13/2008 10:43:00 AM

And Gretchen Morgenson has real live scientific evidence to prove it:

BUT it is possible to get a feel for what is happening on the ground from a new survey of 2,400 real estate agents sponsored by Inside Mortgage Finance Publications. The survey taps into the outlook of people who see troubled borrowers firsthand, when they try to sell their homes before foreclosure occurs.

For example, agents participating in the survey confirmed what many borrowers say: that loan servicers are downright unresponsive. This is especially true when distressed owners try to sell their homes before being put through the trials of foreclosure. When they sell at a price that is lower than the outstanding mortgage debt, that is known as a short sale.

Asked how servicers could streamline such sales, one said: “Allow you to go directly to the loss mitigation department without having to speak or argue with eight people before they finally give in and transfer you.” Another said: “Respond to offers within five business days — they are killing the market by taking upwards of three months to respond to an offer.”

A third participant said: “Answer their phone, make it easier to talk with the appropriate people, instead of playing Mickey Mouse games. I have never understood why these companies who are owners of a defaulted loan do not make it easier to communicate with agents who are trying to sell these homes.”

Thomas Popick, principal at Geosegment Systems, the designer of the survey and a supplier of data to financial services firms, said its findings show that loan servicers are averse to short sales, even though they may be the best solution for many borrowers, lenders and the overall real estate market.

“In many cases, loan modifications — no matter how generous the terms — only delay foreclosures on properties where the mortgage balance far exceeds the current property value,” he said. Homeowners who try instead to sell “know they cannot afford the property and are trying to do the responsible thing — sell the property to someone else who can afford it.”

Mr. Popick, if they were selling the property to someone else who could "afford it," would we be talkin' short sale here? Do you folks actually listen to yourself talk?

It seems like a good time to discuss short sales in simple, basic terms that everyone can follow without moving their lips. First of all, anybody at any time can sell a home for less than the amount owed on it. There is no law against this. However, the buyer will not get clear title until the lender is either paid in full from other sources that make up for the shortfall, or agrees to "settle for less" and release the lien with less than full payment. So when we talk about "short sales," what we really mean are the ones where the lender is being asked to just take less than a full payoff of the loan while releasing the lien.

Why would any lender accept a short sale? Well, the idea is that a short sale is a form of loss mitigation or workout: the lender (investor) is presented with a choice between a smaller loss in a short sale or a larger loss in foreclosure, so accepting the short sale "mitigates the loss."

The first thing you need, then, is a lender who believes that it would have to foreclose, if it doesn't approve the short sale. Traditionally, you see, short sale offers come up when borrowers are already delinquent, and have probably already been having some contact with the servicer's collection department, and the idea of possible foreclosure isn't coming out of the blue for any party. In cases like this, even a cruddy servicer will probably have already given this borrower a contact in the default servicing department somewhere who, when reached on the phone, will have access to logs of the previous contacts and be able to respond to the idea of a short sale without being unduly startled.

What we seem to have going on, at least in some cases here, are borrowers who are not delinquent, who have attempted to sell the property, who have ended up with no offers except short ones, and whose Relitters therefore dial up the 800 number for the servicer, wanting someone who can make a deal, right now, soup-to-nuts in five days. Strangely enough, they're talking to your basic customer service rep who doesn't make short sale deals. And the CSR doesn't just transfer them to the Loss Mit Squad because, well, the loan isn't delinquent, which the CSR can see just by typing in a loan number and looking at the monitor. Are you likely to get someone saying, "Um, are you sure we're talking about the same customer?" Yes. You are likely to get that. Can you see why?

You can call this "Mickey Mouse" all you want, and we all know there's plenty of bureaucratic nonsense all over the corporate world, including but not limited to mortgage servicers. But the first necessary condition for "loss mitigation" is "evidence that loss will occur." Nobody takes the lesser of two evils unless both evils are on the table. If you have never been delinquent on your mortgage, and your financial situation has not changed since the loan was made (you still make what you made then, your non-discretionary expenses are still what they were), and you don't have some other circumstance like a forced job relocation, your servicer isn't exactly being dense by wondering why we're already supposed to be negotiating a short sale.

Every servicer, even the cruddy ones, has a process in place for dealing with this situation. If you "cannot afford the property," as Mr. Popick says, you are going to have to call your servicer and explain that you will very soon default, if you have not missed a payment already. The servicer will request financial information from you--possibly more of it than it asked for when the loan was made, but that's where we are. The servicer will also order an appraisal with an interior and exterior inspection. If you do not allow an appraiser (or broker for a BPO) access to the interior of your home, your case will go directly to the foreclosure department without passing "Go." If you have already listed the property, the servicer will need all the information from you about the listing date and the list price to determine whether your property has been "exposed to the market" adequately.

No servicer will ever, as far as I know, approve a short sale without asking you to pay something--even if it's just a token amount--in cash to offset the lender's loss. That might take the form of signing away your rights to your current escrow balance. It might mean you write an actual check. A large part of the reason that the lender makes you go through the part about sending copies of your bank statements to the Loss Mit people before a short sale is approved involves the lender making sure that you are either really a hardship case, or if not, that it removes some money from your pocket. Short sales are not actually "free puts."

You will absolutely be required to show evidence that the proposed short sale is an arm's length transaction. If the buyer of the property is getting "creative financing" from somebody in order to make the deal work, count on extra time while the servicer of your mortgage exercises its rights to examine the terms of the buyer's financing, even if the servicer of your mortgage isn't providing that financing. If the deal being contemplated involves this nice guy in a suit who came to your door and had you sign over title to your home with a promise that he could arrange a short sale for you for just a modest fee, your servicer is going to object.

If you, the borrower, are a real estate agent and plan on making a commission on the short sale of your own property, the servicer is going to double-object. If the buyer making the short offer is an LLC formed by a principal in another LLC who happens to be, um, you, the servicer will extra-triple-super object. This kind of thing happens--or tries to happen--often enough that investors do in fact demand a lot of details about the proposed transaction to prevent being scammed. Yes, we are aware that they should have been this vigilant when they made your loan to you, but they weren't and here we are. No deals are going to get made, start to finish, in five business days, just to make an RE broker happy.

If you have a second lien on the property with another servicer, you'll be dealing with two sets of negotiations. This will not speed things up any. If you have only one loan, but you originally had mortgage insurance, the MI will be a party to the negotiations as well. The MI takes most or all of the loss here. The MI gets to have an opinion.

Any sales contract you sign will have to have special contingencies in it reserving rights to the mortgage servicer. When the transaction actually closes, you will not be allowed to receive any funds directly. This will mean that the Settlement Statement will have to be sent to your mortgage servicer for review before your buyer gets the keys. It may all strike you as "Mickey Mouse." I can pretty much promise you that if you let that attitude show in your conversations with the servicer, the process will get even longer.

Is it the job of the Loss Mitigation Department to care about clearing your local RE market? No. Is it their job to care about keeping your buyer wiggling on the hook long enough to get papers signed? No. Is a short sale supposed to be a painless alternative to foreclosure for anyone involved? No. There are no painless alternatives. There shouldn't be. There cannot be.

Like anyone else with a functioning brain, I accept the principle of loss mitigation: a smaller loss on a short sale beats a larger loss on a foreclosure. However, I have a little bit of a problem with being told by an RE broker that I'd better hurry up and complete this short sale "before it gets worse." Are you telling me that the current transaction isn't, actually, short enough? In that case, are we transferring this property to "someone who can afford it," or are we just throwing in a "pinch borrower" who will be calling me up in six months with the same story I just heard from the former owner? Just exactly how often does an arm's length market produce a short sale price that is so much better than a foreclosure auction price? Why does it do that? You might want to think about it for a minute.

Real estate agents: you might want to be careful what you wish for. I don't know what all the various servicers will do--or will be forced by circumstances to do--but I know what I do every time someone tells me to hurry up and take a pig in a poke.

*From the CS Monitor:

But Dr. Baen of the University of North Texas is optimistic about their futures. "These people are hustlers, hard workers. They're used to getting on the phone," he says. "They'll end up in insurance, in mutual funds, in retirement planning, and commodities."

And this guy is one of your defenders, my friends on the RE sales side.

by Tanta on 12/29/2007 08:35:00 PM

Thanks to reader Brad, who sent me the link to this Broker Outpost thread. I suggest reading the replies, too.

I got an agreement of sale today from a realtor looking for a prequal on a shortsale , the buyer lives next door , he has a current mortgage for $800,000 on a home he purchase in 2005 with no money down , the home he has under contact is right across the street from his present home , the offer is for $500,000 and it looks like the bank will accept it

The borrower plans to buy it as a primary , once he moves in , they will stop making payments on the $800,000 loan that they have with CW
He qualifies full doc and has a 770 FICO , he figues letting his credit tank is not a big deal when he is lowering his mortgage debt by $300,000 .

I told him the new bank may deny the deal based on occupancy , tried to convince him to go NOO but he does not want the higher rate .

What do you think ? anyone had this scenario yet , I sure it will be happening more and more especially in CA and FL

by Tanta on 12/27/2007 10:00:00 AM

The WSJ (sub only, I'm afraid) had a piece yesterday on a process it never actually names--the "short refi" (related to the "short sale"). What makes these short refis--refinance transactions where the new loan is less than the balance due on the old loan, with the old lender agreeing to call the loan paid in full and write off the difference--so unusual is that the old loans are nasty high-rate subprime loans to old people, and the new loans are reverse mortgages.

The strategy worked recently for Gloria Forts, a 62-year-old retired federal worker in Forest Park, Ga., a suburb of Atlanta. After refinancing her home in August 2006 with a $106,500 mortgage from Fremont Investment & Loan in Brea, Calif., Ms. Forts was facing monthly payments of $950.41. That consumed 70% of her monthly income from Social Security and a pension. Intending to start a new job, she found herself kept at home by diabetes complications and back surgery. In June, she sought help from the Atlanta Legal Aid Society.

There, she found William J. Brennan Jr., a veteran housing attorney who, over the past 18 months, has developed a sophisticated model for settling subprime debts with reverse mortgages. After Ms. Forts received a foreclosure warning in October, Mr. Brennan connected her with Genie McGee, a reverse-mortgage specialist with Financial Freedom Senior Funding Corp., an Irvine, Calif., unit of IndyMac Bancorp Inc. She determined that Ms. Forts would qualify for a reverse mortgage of about $61,000.

Mr. Brennan sent Fremont's loss-mitigation department a letter proposing that the company agree to take that sum and cancel its plans to foreclose on the house. On Dec. 3, the day before the foreclosure sale was supposed to take place, Fremont agreed to the deal and stopped the foreclosure.

Using a reverse mortgage as a foreclosure workout is certainly unusual. I've written about reverse mortgages here if you're not familiar with the beast. They were designed for older borrowers (the minimum age is 62 for all products I know about) who are house-rich but cash-poor. Using them for borrowers who are house-poor, to prevent foreclosure, isn't exactly what they were intended for. And using them to "create" an equity cushion that they can then absorb in deferred interest is quite the innovation. (Of course the "equity" here isn't being "created"; it's being "donated" by the old lender.)

Then again, it isn't every historical moment in which lenders are willing to accept 57 cents on the dollar on a short refi, either. The key to the reverse mortgage is that the maximum loan amounts are much lower, on the whole, than they are for forward mortgages. (Because the amount that can be borrowed is a function of both the value of the home and the age--the likely remaining lifespan--of the borrower, only the very very old can borrow as much with a reverse mortgage as with a forward mortgage.) The WSJ doesn't give the current appraised value of Ms. Forts' property, but I'd guess that the original LTV of the new $61,000 reverse mortgage is not much more than 50% (suggesting that the old $106,500 mortgage, which apparently carried an interest rate of 10% or so, was around 90% of current value). It says a lot about Fremont's estimate of loss severity that they took the money and ran.

Is this a good deal for Ms. Forts? Well, she gets to stay in her house. (She might describe this as getting to "keep" her house, but the way a maximum-balance reverse mortgage to a 62-year-old borrower is likely to work, statistically, what she just did, in effect, was give the deed to IndyMac while reserving a life estate.) She is highly unlikely ever to be able to withdraw cash again from it; at her age and that loan balance, my guess is that compounding interest on the original balance will far outstrip any possible positive appreciation on that property in Ms. Forts' lifetime, and her heirs will simply hand over the deed to the bank.

What I find mildly amusing is that the WSJ reporter almost, but not quite, gets the issue here:

With a reverse mortgage, the bank makes payments to the homeowner instead of the homeowner making payments to a bank. The loan is repaid, with interest, when the borrower sells the house, moves out permanently or dies. The products are complex and have high fees -- typically about 7% of the home's value -- and they make it difficult for homeowners to leave the property to their heirs. But they may be the best option for people who have built up equity in their home and would otherwise lose it.

Actually, a reverse mortgage doesn't make probate any harder than a forward mortgage does. It's not that it's "difficult" to leave the property to the heirs; it's that the loan amount is likely to be equal to or more than the property's value at that point. Notice the odd phrasing of that last sentence: grammatically, "it" probably refers to "equity," but that of course is going to be lost in all cases (except for borrowers unfortunate enough to die prematurely; one hopes that doesn't make the heirs happy). The only thing a reverse mortgage borrower "keeps," in practical terms, is occupancy.

This is also curious:

The transaction illustrates one of the biggest challenges in getting lenders to accept payouts from reverse mortgages: taking less money than the house may be worth.

My sense is that the WSJ reporter just can't really wrap her mind around the reality of the mortgage and housing markets today. This business of "taking less money than the house may be worth" (as opposed to "taking less than the loan amount") may just be sloppy phraseology, but I think it's kind of sypmtomatic of how hard it really is for some folks to shed the assumptions of the Boom. Short refis are going on all around us, not just with reverse mortgages: a lot of the loans going into FHASecure, for instance, are short (by the amount of some or all of a second lien, often, but in some cases even the first lien payoff is short). I'm surprised that you still have to say this out loud to people, but what "the house is worth" is no longer a particularly relevant concern for a lot of people. The issue is what you owe, and as long as there are places in the world where expected loss severity to lenders can be in the neighborhood of 47% of the loan amount, you probably owe too much.

by Tanta on 12/11/2007 11:08:00 AM

There have been some questions about what this means (thanks, Ramsey, for bringing it to my attention):

MCLEAN, Va., Dec. 10 /PRNewswire-FirstCall/ -- Freddie Mac (NYSE: FRE - News) announced today that the company will generally purchase mortgages that are 120 days or more delinquent from pools underlying Mortgage Participation Certificates ("PCs") when:

-- the mortgages have been modified;
-- a foreclosure sale occurs;
-- the mortgages are delinquent for 24 months;
or
-- the cost of guarantee payments to security holders, including advances
of interest at the security coupon rate, exceeds the cost of holding
the nonperforming loans in its mortgage portfolio.

Freddie Mac had generally purchased mortgages from PC pools shortly after they reach 120 days delinquency. From time to time, the company reevaluates its delinquent loan purchase practices and alters them if circumstances warrant.

Freddie Mac believes that the historical practice of purchasing loans from PC pools at 120 days does not reflect the pattern of recovery for most delinquent loans, which more often cure or prepay rather than result in foreclosure. Allowing the loans to remain in PC pools will provide a presentation of its financial results that better reflects Freddie Mac's expectations for future credit losses. Taking this action will also have the effect of reducing the company's capital costs. The expected reduction in capital costs will be partially offset by, but is expected to outweigh, greater expenses associated with delinquent loans.

Attentive readers Calculated Risk addicts will remember the big tizzy last month over Fannie Mae's presentation of its credit loss ratio, and the confusion-party in the press that it engendered. As you recall, the issue was that Fannie Mae had been exercising its option (not obligation) to buy delinquent loans out of its MBS in order to pursue workout efforts with them. Because that requires the MBS to be paid off at par, but the accounting rules require Fannie to take these loans to their portfolio at the lower of cost (par) or fair market value, and since "fair market value" right now for a delinquent loan, even one you think can be cured (made reperforming with a workout), is terrible, doing this means that Fannie booked big write-downs at the time. Fannie then backed some, but not all, of that write-down out of its credit loss ratio on the portfolio, to distinguish between true foreclosure-related charge-offs and these fair value adjustments, and uproar ensued, with Fortune's Peter Eavis implying that they were cooking the books and hiding losses.

It appears to me that Freddie Mac has decided it doesn't want to go there. It is therefore doing what, presumably, Peter Eavis wants it to do: leave the delinquent loans in the MBS pools unless and until that becomes more expensive than taking them out.

The accounting here is rather complex (which won't stop some people from having a cow over it, but I can't help that). The somewhat simplified view is this: the GSEs guarantee timely payment of principal and interest to MBS investors. They do not guarantee that investors will earn interest forever, but only as long as principal is invested. If a loan payment is not made by the borrower, either the GSE or the servicer (depending on the contract) has to advance scheduled principal and interest payments to the MBS until such time as the loan catches up (the borrower makes up the past due payments) or is foreclosed and liquidated.

The GSEs collect guarantee fees from seller/servicers (it works like servicing fees: it comes off the monthly interest payment). They also collect some other lump-sum fees when pools are settled. This is revenue to the GSEs, with a corresponding liability (to make the advances, with the risk that the advances will not be reimbursed completely at liquidation of the loan).

Therefore, when there are deliquent loans in an MBS, and the servicer is not obligated to advance for them, the GSE has a choice: it can buy the loan out of the MBS, put it into the GSE's own portfolio, and take any and all losses directly as any other investor would (and also any income). Or, it can leave the loan in the pool, while advancing the scheduled P&I to the pool investors. Only in some specific cases is the GSE obligated to take out a loan: when mortgages are modified, when the foreclosure sale occurs, or when the loan has been delinquent for 24 months or more. In other situations, it comes down to the question of which is cost-effective for the GSE: to leave it there and continue to advance, or to take it out with portfolio capital and do the fair value write-down.

Do note that if Fannie Mae had adopted this policy that Freddie has just announced--basically, that buying the loan out of the MBS will be the last rather than the first resort--it would not have shown big fair value write-downs, those would not have affected the credit loss ratio, and a big dust-up would not have occurred. There would still have been an effect on the financials, but just in a different place: in advances (coming out of G-fees received). So you either have expense (P&I advanced to bondholders) or you have expense (capital used to buy out the loans).

Insofar as everyone has been all worked up about the GSEs' capital ratios, this should be good news: they are levering investors' capital to carry delinquent loans until they can be cured (or liquidated). Insofar as investors want principal back faster, it's maybe not good news. But you can't really have it both ways.

I think it is important to understand that the GSEs are supposed to cover guarantee costs out of g-fees, not with portfolio purchases. You might have noticed that both Fannie and Freddie are increasing the g-fees and postsettlement/loan level pricing adjustments they charge seller/servicers. So they are beefing up the funds they have to cover MBS losses with. Nothing guarantees that will be enough; I don't think anybody knows right now what will be enough. But for what it's worth, I don't see this as "playing games" with capital requirements. I guess we'll have to see what Fortune Magazine thinks.

by Tanta on 12/10/2007 12:06:00 PM

Tom Petruno in the LAT gets it:

Some analysts said the risk of borrowers returning for more forbearance could be intensified by a provision in the program that calls for fast-tracking hundreds of thousands of loans for a rate freeze, as opposed to undertaking a detailed and time-consuming study of the borrowers' finances.

"To decide if a modification is beneficial," analysts at brokerage Deutsche Bank Securities wrote in a note to clients Friday, a mortgage servicer needs to assess the borrower "with the same degree of care as a new borrower walking through the door."

Determining eligibility for a rate freeze based on just a few criteria, as the Bush plan proposes, "is to repeat the same type of underwriting shortcuts that got us here," the analysts wrote, referring to the no-questions-asked frenzy of 2005 and 2006 that gave home loans to almost anyone who could fog a mirror.

But the administration and its financial industry allies said the crumbling housing market dictated the need for speed in addressing the problem many borrowers are facing in holding on to their homes.

"The standard loan-by-loan evaluation process that is current industry practice would not be able to handle the volume of work that will be required," Treasury Secretary Henry M. Paulson Jr. said Thursday in announcing the program.

That is the issue and has always been the issue. But then Paulson wasn't in much of a position to lecture servicers about doing things right the first time and displaying a "degree of care":

As President Bush announced the modification plan, The Wall Street Journal reported that the SIV fund likely would be half of the $100 billion originally envisioned, apparently because some SIVs did not want to participate.

The loan modification agreement, meanwhile, came together in a relative rush. Sources said that discussions on it did not begin until after Thanksgiving, and that the first meeting on it was not until Nov. 29. Details of the plan were still being worked out until moments before the announcement Thursday afternoon.

Indeed, federal regulators appeared to have been kept in the dark about many of the plan's details. That proved awkward at a House Financial Services Committee hearing on loan modifications Thursday morning. Chairman Barney Frank challenged bank regulators on the plan, who acknowledged it was still in flux.

A Treasury spokeswoman did not return calls seeking comment. [American Banker, registration required]

I don't know that I've ever really seen this much homework eaten by this many dogs before. I guess the good news is that the dogs aren't going to starve.

Of course, if you ask Paul Krugman, he'll tell you that it's not so much that the dog ate the homework; it's that we're grading on the Bush Curve:

By Bush administration standards, Henry Paulson, the Treasury secretary, is a good guy. He isn’t conspicuously incompetent; and he isn’t trying to mislead us into war, justify torture or protect corrupt contractors.

There's a masterpiece of damning with faint praise.

So putting together some sloppy plan to let sloppy servicers slop along with sloppy modifications is probably the best we could have hoped for. At least no one is (yet) suggesting that we load the nonperforming loans up in CIA planes and fly them to secret detention centers in the dead of night for a few torture sessions. What a relief. I doubt we could have found the original loan file to put it on the plane . . .

But fear not: having gotten permission to do sloppy mods, we're sure that lenders are done asking for permission to do more sloppy stuff, right? Wrong. According to Mortage News Daily (sub required):

To deal with a large volume of loan modifications, the Mortgage Bankers Association is asking the Financial Accounting Standards Board for relief from its rules for evaluating credit impairment on hundreds of thousands of subprime adjustable-rate mortgages. The MBA has endorsed President Bush's plan to freeze the resets on subprime ARMs. However, its members maintain that they don't have the systems capacity to evaluate loan impairment under Financial Accounting Standard No. 114 on a loan-by-loan basis and would like to use FAS 5 instead. "FAS 5 provides for a cost-effective approach to accurately measuring probable credit losses on large volumes of loans, which is consistent with the objective of a loan modification, which is to reduce the prospect of future credit losses," the MBA says in a letter to FASB.

I guess we're supposed to be grateful that they're asking first.