by Calculated Risk on 5/10/2008 02:23:00 PM

A follow up to Tanta's post this morning, from Michael Hiltzik at the LA Times: In mortgage meltdown, ‘walkaway’ homeowners may be suburban myth (hat tip Dagny)

Bankers and housing market analysts are warning of a chilling new trend in the mortgage world: Homeowners voluntarily defaulting on their loans even though they can actually afford to make the payments.
...
At Fannie Mae, the government-chartered company that owns or guarantees billions of dollars in home mortgages, Senior Vice President Marianne Sullivan conceded that there was growing "folklore" about residential walkaways but said that the phenomenon was more likely connected to investors than people who live in their homes, or "owner-occupants."
...
Bruce Marks, CEO of Neighborhood Assistance Corp., a Boston-based nonprofit agency that helps strapped homeowners, says flat out that the notion that legions of borrowers are simply deciding not to pay is an "urban myth" that largely reflects the mortgage industry's desire to blame homeowners, rather than their lenders, for the surge in problem loans.

I nominate Michael Hiltzik honorary UberNerd!

P.S. and kudos to Tanta: Let's Talk about Walking Away

by Tanta on 5/10/2008 10:53:00 AM

In the New York Times, too! I think we're going to have to make Vikas Bajaj an honorary UberNerd.

Millions of Americans are “upside down” on their mortgages — they owe more on their homes than their homes are worth. So far, however, there is little evidence that people who have the means to pay are walking away from their homes as values sink.

The blogosphere is full of tales of homeowners who supposedly are choosing to mail the house keys to their lenders rather than keep their depreciating homes. And yet “jingle mail,” the term for those tinkling packages of keys, appears to be far rarer than many seem to think.

I think this is my favorite part:

Jon Madux, a founder of the site YouWalkAway.com, which helps borrowers leave their homes, said a majority of the site’s clients default because of financial hardships. But in the Southwest and Florida, more of its customers are investors who bought multiple condos or houses and are now not able to find renters or sell for more than they owe.

Speculators always cave in quickly in a declining market, especially when they weren't required to make a down payment and the rents were never realistic. This, we always knew. It does not constitute a "sea change" in borrower behavior, whatever the hoocoodanode crowd wants you to believe.

The interesting question is why this insistence that walk-aways are widespread is being, apparently, pushed by real estate brokers (they and some mortgage brokers seem to be the sources for most of the claims I've read in this regard).

“These markets are driven by psychology,” Mr. Barry [the real estate agent] said. “If people see that the market will continue to decline and they are already in the hole by 50 to 100 grand” they will leave.

Is it just the salesperson's preference for "psychology" as the all-purpose explanation? Classic projection? An attempt to spook the banks into negotiating with borrowers who wouldn't, typically, qualify for a workout? I'd really like to know.

by Tanta on 5/09/2008 07:38:00 AM

Exhibit 1, Floyd Norris, NYT:

Now the mortgage company is warning that it may not be able to pay its bills, and has set out to force those who lent money to it to agree to accept only a fraction of what they are owed. It appears that its lenders have little real choice. If they insist on being paid all that they are owed, they will go to the back of the payment line, with the risk they will get nothing.

The mortgage industry has bitterly opposed legislative proposals that bankrupt homeowners be able to ask judges to reduce the amount they owe. But that is what this company hopes to accomplish through the threat of a bankruptcy filing. The lender in trouble is known as ResCap, short for Residential Capital. It is a subsidiary of GMAC, which was formerly owned by G.M. . . .

Owners of some notes issued by ResCap are being asked to trade them in for new bonds with face values of as little as 80 cents on the dollar. Other holders are being offered the chance to sell back bonds to the company, for as little as 65 cents on the dollar. GMAC has bought back some ResCap bonds in the public market, paying around 50 cents on the dollar. . . .

As part of the package, GMAC would put another $3.5 billion into ResCap. The company says that any current bondholders who reject the exchange offer would have their debt subordinated to the new loan from the GMAC parent, as well as to the new bonds being issued.

Exhibit 2, Ruth Simon, Wall Street Journal:

A major provision of the housing-market legislation passed by the House Thursday is getting a lukewarm reception from the mortgage industry. . . .

[T]rade groups that represent mortgage companies and investors say the provision might not help as many borrowers as some expect. They view the write-down provision as one of several options they might use to assist troubled homeowners. "I don't believe this would be a tool that would be used significantly," said Tom Deutsch, deputy executive director of the American Securitization Forum . . .

David Kittle, chairman-elect of the Mortgage Bankers Association, said at a conference earlier this week that he sees no rush by mortgage bankers to write down loans.

Mortgage companies that choose to participate in the proposed plan would be required to write down the value of a delinquent loan by 15% from the home's current appraised value. Borrowers would have to be at least 60 days late on their mortgage payments to qualify for the program. The bill excludes investors and those who lied about their income on their loan applications.

Mr. Deutsch says that in most cases, investors who hold mortgage-backed securities would be better off with other alternatives, such as temporarily reducing the borrower's interest rate or extending the term of the loan, in part because those leave open the chance that investors will get a larger return if the borrower gets back on track and home prices rebound. Mortgage companies are more likely to participate in the write-down program if they expect home prices to continue to decline steeply, he notes, increasing the chances of larger losses.

Thanks for the tip, NYT Junkie!

by Tanta on 5/07/2008 04:42:00 PM

Just yesterday Fannie Mae mentioned in its Q1 2008 Earnings Release that, as part of its "Keys to Recovery" initiatives, it would offer "a new refinancing option for up-to-date but 'underwater' borrowers with loans owned by Fannie Mae that will allow for refinancing up to 120 percent of a property's current value." That, so far, is all the information I have directly from Fannie Mae on this subject.

Unfortunately it got Dean Baker worked up. I respect Dr. Baker a great deal--he was calling the housing bubble long before it was cool--but I think he's got the wrong end of this:

This is a difficult move to justify from the standpoint of either taxpayers or homeowners.

The basic point is that homeowners will start out in these mortgages hugely underwater. Fannie’s policy means that it is prepared to lend $360,000 on a home that is appraised at $300,000. This gap implies that the homeowner can effectively put $60,000 in their pocket by turning the house back to the bank the day after the loan is issued. If the price drops another 10 percent in a year (prices are currently falling at an annual rate of more than 20 percent in the Case-Shiller 20 City Index), then this homeowner will be $90,000 underwater next May. If a seller would face 6 percent transactions costs, then in this example, walking away would provide a $106,000 premium compared with the option of a short sale.

This gap provides an enormous incentive for homeowners to default on their mortgage. Many homeowners will undoubtedly choose this option rather than make excessive mortgage payments on a house that is worth far less than the mortgage. A high default rate will of course lead to large losses for Fannie Mae and increase the likelihood that it will need a taxpayer bailout.

Fannie’s policy does have the effect of aiding banks that made bad mortgages. The new mortgages will allow these mortgages to be paid off. If matters were left to the market, the banks would almost certainly suffer large losses.

Baker is assuming that Fannie Mae will allow cash-out refinances in this program; although the mention in the earnings release doesn't specify that, I certainly assumed when I read it that we were talking about no-cash out refinances. (Fannie Mae's term for those, by the way, is "limited cash out" refinances. By this they mean that the loan balance can increase, but only to pay closing costs or pay off subordinate liens. That is what the rest of world means by "no cash out"--no cash disbursed to the borrower or to pay off non-mortgage debts.)

Fannie does make it clear that we are talking about Fannie Mae-owned loans. That is significant for two reasons. First, if the loans are upside down, it's already Fannie Mae's problem. To use Baker's example, if the borrower already owes $360,000 on a $300,000 home, the situation isn't made worse by refinancing it into a new loan with a lower payment. For Fannie to purchase a refinance of loans it already owns--presumably at a lower rate or payment, which improves the borrower's position and thus the strength of the loan--is not to take on risk you didn't already have. Second, of course, this isn't bailing out banks or anyone else.

That is why I assumed--and will confirm as soon as I find the Announcement from Fannie Mae--that these are no-cash-out refis. It would, indeed, worsen the risk of an existing underwater loan to let the borrower take more cash out.

Finally, it is specifically limited to performing loans. These are borrowers who are not, generally, eligible for a "workout" because they're not delinquent. But if they have hybrid ARMs coming up on a reset, or fixed rates that are higher than current market rates, this gives them the opportunity to get into a lower rate and payment while other costs--gas, anyone?--are taking more out of their pocketbooks. It isn't clear to me why this would increase any incentive to default, or increase Fannie Mae's losses if the borrowers did subsequently default. The loans are already underwater; even putting them 5% more underwater by rolling in closing costs seems to me, under the circumstances, to be less frightening than letting performing underwater ARMs get to a reset that will be hard for the borrower to bear. Not every borrower who is upside down will default, but every borrower with an unaffordable payment will in the current environment.

So there's a whole lot wrong with a whole lot of pressure to make the GSEs bail out the problems of the mortgage and housing markets, but so far this one sounds to me like Fannie Mae "bailing out" Fannie Mae, and, well, they ought to do that if it makes sense. Fannie Mae certainly does need to get a press release out clarifying the cash-out issue right away, before more nothingburgers get supersized.

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

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

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

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

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

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

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

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

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

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

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

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

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

by Tanta on 5/05/2008 09:02:00 AM

My attention was arrested by this story in today's Washington Post, which is not, actually, about "walk aways" at all. It's about borrowers getting mortgage modifications--that is, borrowers who are in fact making a real effort to stay in their homes. But one borrower's story here actually has more insight about the "walk away" meme, it seems to me, than any story I've read purportedly on that subject.

[The Ramseys] bought their Burtonsville home for $310,000 in June 2005 with two loans. The first, and larger, mortgage had a 6.4 percent interest rate due to increase after three years to as high as 12 percent. The second had a 10.2 percent rate. Their monthly payment was originally $2,000, not including homeowners association fees and taxes.

The rate jumped last summer. Eventually they were paying $3,050 a month. Her salary as a social worker and his as an insurance salesman wouldn't cover it. In July, they stopped paying.

Ramsey called her lender, Houston-based Litton Loan Servicing, but had trouble getting hold of anyone with decision-making authority. The company then scheduled foreclosure proceedings for Dec. 18. She called again to propose a short sale.

"I was willing to do whatever it took so that we didn't lose the house," she said.

Absorb that statement for a minute: in a short sale, you do "lose" your house. Whatever we're talking about here is psychological, not literal.

Litton turned down the short sale bid--it was only $200,000. Eventually the Ramseys got Litton to agree to a modification:

It took several weeks, but Cipollone got both mortgages down to 7 percent, fixed for 30 years. Litton also dropped the balance to $302,000 after the Ramseys contributed $3,000 for a down payment.

"I'm terribly excited," Ramsey said. "I wanted to pack up and leave my house because I want to, not because I'm going to go through a foreclosure situation, but because it's planned."

She doesn't plan on leaving anytime soon, but if she ever does, she said, it will be on her terms.

In a sense, Mrs. Ramsey understands what a foreclosure is much more clearly than people who talk about "walking away" do: a foreclosure is not "giving the house back to the bank." It is being forced to sell your property at public auction in order to satisfy a debt. To the Ramseys, it isn't actually "losing the house" that seems to be the real fear--they were willing, after all, to sell short. It's simply that a short sale "felt" voluntary; it felt like "a plan."

One of the reasons why nobody is really quantifying the "walk away" problem is that, in reality, there is no legal or logical distinction between a "walk away" and a "foreclosure," because they're both foreclosures. The only difference is that the former can be interpreted, psychologically, to mean that the borrower is "leaving my house because I want to," while the latter acknowledges that the sale of the home has been forced.

I'm guessing that we'll have a least a few commenters to this thread asserting that the Ramseys "should have just walked away." Their mortgage payment is back to its original level--around $2000 a month before taxes and insurance--but their mortgage is still seriously underwater and I for one wouldn't bet on how long it will take for its value to climb over the loan amount. Even in that part of Maryland, the Ramseys could probably cut their monthly housing expense in half by renting.

Such calculating advice, however, ignores the fact that to the Ramseys, foreclosure equals defeat, and they're realistic enough to realize that dressing it up in the euphemism of "walking away" doesn't change that. They are, in their own way, just as "ruthless" as the so-called walkers-away: they would, apparently, have been happy to see their lender take a $100,000-plus loss on a short sale to salve their pride. Human nature is like that; I have no real interest in heaping coals on the heads of the Ramseys. I am more interested in the way this story helpfully scrambles some confident assumptions about what motivates borrowers, and what really stigmatizes foreclosure in our current culture.

Servicers keep going on about a "sea change" in borrower attitudes about foreclosure. I just don't see that. I see borrowers whose actions suggest that foreclosure still carries a very powerful stigma, so much so that they are able to convince themselves that "walking away" is actually an "alternative" to foreclosure rather than a synonym for it. The Ramseys rather usefully remind us that "walking away" is not a financial strategy, it's a defense mechanism. If you can tell yourself that you are the one making the plan and executing the options, you avoid having to admit to being forced.

by Tanta on 5/04/2008 06:59:00 AM

The Washington Post finds two fresh victims of the RE bust, condo owners whose mean, nasty condo boards won't let them rent out their units:

. . . said Moss, who also is a real estate agent. . . . said Gozen, a mortgage loan officer.

Surely, if anyone understood the risk in trying to flip units in an owner-occupied project, it'd be these two, no? No.

Gozen:

"My idea was not to be a landlord. My idea was to flip them, but here I am. I am stuck with them," he said.

Gozen is applying for hardship exemptions from both condo boards, arguing that without a renter he will not be able to keep the properties and will be forced into foreclosure or will have to sell at a particularly low price -- either of which would drag down values for the entire building.

"I can only afford to pay their mortgages for a few months, and then I will have to go to foreclosure," he said. "If they would ease up on this until the market gets better, that would be great."

Why is it we can't get reporters to just ask a couple of Econ 101 questions when they interview these people? Like, how much would you rent it for? Would that be enough to cover 2005-era mortgage payments? If so, how does that compare to what the unit would sell for? If not, would the "market rent" you set here also "drag down values for the entire building"? And what's your plan for making up the difference? What's a "particularly" low price, anyway? At the end of it, what's the net difference to your neighbors of turning the thing into a rental project, which lowers values, makes financing for resales hard to get, and uses up the "hardship quota" of allowable rentals, versus establishing a painful but accurate new comp for an owner-occupied sale?

And, finally: do you really expect the short sale-style negotiation tactic--"accommodate me or I default on you"--to go over as well with your neighbors as it does with your servicer? I'm truly curious about that question. At least, in a short sale, the servicer is free of you after taking the loss: from the servicer's side, the deal can't get any worse down the road once you sell. What are you offering your condo board? A guarantee that you'll never skim the rent and end up defaulting anyway? A guarantee from a self-described flipper who doesn't appear to have disclosed intended occupancy quite accurately up-front when he bought the units in the first place? (If they were purchased as officially non-owner-occupied, why were they not rented immediately? Did you try but fail to rent them immediately? What am I missing here?)

I am prepared to have some sympathy for bona-fide owner-occupants who have fallen on unforeseen hard times and must now battle recalcitrant condo boards to be allowed to rent. I rather wish the Post had found one or two. Perhaps I should be more charitable on a Sunday morning, but I'm having a hard time working up sympathy for a couple of industry insiders who bought at the top of the market for speculative purposes and now want the rules re-written in the name of "protecting the neighbors" from a sale at market prices.

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

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

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

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

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

Mortgage Restructuring:

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

Process:

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

Funding:

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

Eligible Mortgages:

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

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

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

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

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

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

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

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

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

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

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

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

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

by Tanta on 4/24/2008 08:46:00 AM

Reuters has the news:

LIVONIA, Michigan (Reuters) - Realtors in many U.S. states say lenders are demanding excessively high prices before allowing distressed borrowers to offload their homes in "short sales," making the housing crisis worse.

In a short sale, a borrower dumps the home at below-market value and the bank forgives the rest of the debt. The borrower's credit rating is hurt but for less time than in a foreclosure. Such sales have been touted by banks as a way out for homeowners unable to pay their mortgages.

Below market, huh? And I thought the idea was they were trying to sell these homes at market, which unfortunately happens to be less than the loan amount. Whatever. My head is still spinning over the banks having "touted" such sales. Was I having a nap when that happened? How come nobody woke me up?

We get one "example":

Borrowers like Judie Quinn echo that, saying their lenders have been uncooperative and have passed up solid offers.

Quinn, 67, is a steel industry sales representative whose home in the Detroit suburb of Belleville had been on sale since August 2005. After back surgery in 2007 left her with large medical bills and out of work for two months, she decided she could not afford the $2,200 monthly mortgage payment.

"I wanted to save my credit rating, so I tried to arrange a short sale," Quinn said at the Livonia, Michigan, office of Linda McGonagle, a Realtor at Quality GMAC Real Estate.

The loan was from Wells Fargo & Co (WFC.N: Quote, Profile, Research) and serviced through an affiliate, America's Servicing Co.

Between April and October 2007, Quinn received four offers, McGonagle said. The first offer of $289,900 -- the asking price was $299,000 -- was rejected by the lender because Quinn was not yet in loan default. "No one at the bank mentioned she had to be in default until after that offer was rejected," she said.

She said the lender ignored the third and best offer of $299,000 long after the bidder had given up. The home went into foreclosure in October.

"The lender was unresponsive and unhelpful, so Judie wasted time and money trying to do the right thing," McGonagle said. "I tell other agents to avoid short sales because you just can't win. This is a commission-based business and if you can't get deals done, you don't get paid," she added.

How much does Judie owe on this house? We didn't get that part. Could the fact that the home had been "on sale" for two years before Judie decided she needed to sell short imply something problematic about Judie's expectations? When did she acquire this property, anyway? And at what exact time yesterday was her Real Estate Professional born? Nobody at the bank mentioned that short sales are widely held to be "work out options" for delinquent loans? That without any indication that the lender would have to foreclose, the lender is not highly motivated to accept a short sale that is "less loss" than the foreclosure that doesn't appear to be on the table? The bank has to mention this?

But I really liked this part:

Some Realtors said banks have an inflated view of what they can expect when home values in many areas have fallen sharply.

"Some lenders harbor unrealistic expectations of what they can get in a down market," said Van Johnson, president of the Georgia Association of Realtors.

He said widespread use by lenders of "broker price opinions" -- quick, inexpensive online property assessment -- resulted in only a "simple best guess."

Andrea Gellar, a Realtor at Sudler Sotheby's in Chicago, said property appraisals there are fair because "appraisers are being called on the carpet to be accurate" after years of inflated evaluations during the property boom.

Banks have inflated ideas of what these houses could sell for. How come? Because they rely on "price opinions" that are prepared by real estate brokers. Like the real estate brokers quoted in the article. Who are now claiming that it's really only the appraisers who have any clue. Because they've been "called on the carpet" and now are afraid to make stuff up.

The solution seems obvious to me: welcome to the carpet, brokers. We expect your next price opinion to be somewhat more sober.

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

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

The report finds:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

by Tanta on 3/27/2008 08:58:00 AM

This morning we have Vikas Bajaj in the NYT reporting on second-lien lenders refusing to go quietly:

Americans owe a staggering $1.1 trillion on home equity loans — and banks are increasingly worried they may not get some of that money back.

To get it, many lenders are taking the extraordinary step of preventing some people from selling their homes or refinancing their mortgages unless they pay off all or part of their home equity loans first. In the past, when home prices were not falling, lenders did not resort to these measures.

Um. This isn't really a very helpful way to put it, you know. In the very concept of the "lien" is the idea that the lender gets to demand payment if you sell the property that is securing the loan, and in the very concept of "refinance" lurks the idea that you pay off the existing loan with the proceeds of the new one. These concepts are not "extraordinary."

What we mean here, I take it, is short sales and short refinances (or subordinations behind a distressed first-lien refinance). If so, we really ought to say that, because "in the past, when home prices were not falling," we didn't have a lot of short sales and short refis, so the occasion for second lienholders to object to them just didn't arise much.

The reason to insist on some clarity here is that I don't think it helps much to build up certain people's sense of entitlement on the matter. Or at least their occasionally fundamental confusion about what rights you give up to a lender when you sign this mortgage thingy.

There is an example in the Times article, of a couple who attempted a short sale which was derailed because the second lienholder wouldn't play nice:

Experts say it is in everyone’s interest to settle these loans, but doing so is not always easy. Consider Randy and Dawn McLain of Phoenix. The couple decided to sell their home after falling behind on their first mortgage from Chase and a home equity line of credit from CitiFinancial last year, after Randy McLain retired because of a back injury. The couple owed $370,000 in total.

After three months, the couple found a buyer willing to pay about $300,000 for their home — a figure representing an 18 percent decline in the value of their home since January 2007, when they took out their home equity credit line. (Single-family home prices in Phoenix have fallen about 18 percent since the summer of 2006, according to the Standard & Poor’s Case-Shiller index.)

CitiFinancial, which was owed $95,500, rejected the offer because it would have paid off the first mortgage in full but would have left it with a mere $1,000, after fees and closing costs, on the credit line. The real estate agents who worked on the sale say that deal is still better than the one the lender would get if the home was foreclosed on and sold at an auction in a few months.

I'm not here to make up details not in evidence in a newspaper story, so bear that in mind. But my attention was caught by that detail about retiring due to an injury. As presented, the story seems to be that the McLains took out a HELOC in January of 2007, and at some point "last year" the borrowers fell behind in payments because of the disability. We aren't told by the Times whether the income troubles led to drawing down the HELOC, and then being unable to keep up payments, or if the HELOC had been drawn to the full $95,000 back in January of 2007, and subsequently the income troubles led to the McLains being unable to keep up the payments.

I bring this up only because the following item caught my eye yesterday (via Mish), from someone who apparently purports to be a source of personal finance advice:

As many readers know, I’m a proponent of keeping an untapped home equity line of credit (HELOC) at my disposal for major emergencies. This isn’t my emergency fund. It’s what I call my catastrophe fund.

I’ve always believed that keeping a HELOC readily available is the best insurance policy and the back-up plan for if / when the emergency fund runs empty. Think about it… being able to tap this money could buy us time in the event of job loss or illness. And time is money. . . .

The HELOC is there strictly as a backup plan. For a catastrophe. Period. End of story. But with that said, I’ve always looked at that line of credit as my money. Money I could access at any time. . . .

So it came as a surprise yesterday when we got the letter from Citibank about our $168,000 line of credit:

We have determined that home values in your area, including your home value, have significantly declined. As a result of this decline, your home’s value no longer supports the current credit limit for your home equity line of credit. Therefore, we are reducing the credit limit for your home equity line of credit, effective March 18, 2008, to $10,000. Our reduction of your credit limit is authorized by your line of credit agreement, federal law and regulatory guidelines.

Reduced to $10,000!? Hello!? Please don’t f-ck with my house in Newport Beach…

Of course, I’m calling them today to dispute it.

I left out the parts about how this writer is such a great credit risk now, and was when she qualified for the HELOC originally. I am merely struck by how unaware she is of the essential problem in her understanding of a HELOC as a kind of disability insurance: she is saying that she qualified for the line of credit as an employed, cash-flush borrower, but plans to use it only if she becomes . . . the kind of borrower who couldn't qualify for a HELOC.

Now, let me say that lenders were fully complicit in this idea; I heard more than a few sales pitches for HELOCs over the boom years based on this "do it just in case you need it" idea. But it was a self-defeating plan then and it is so clearly still one now: how do you get out of problems making your mortgage payment by increasing your mortgage debt--and not coincidentally decreasing your odds of selling your home should you need to?

More to today's point, how do you ask the HELOC lender to advance you money to pay the first lien lender with--I assume that's the idea of using the HELOC to "tide you over" in a bad patch, you're borrowing the first lien mortgage payments from the HELOC lender--knowing you aren't really (currently, at least) in any position to pay it back, and then ask the HELOC lender to let the first lien lender get all the proceeds in a short sale? Don't get me wrong: I fully understand why people hate lenders these days and think they're just getting what they "deserve." I'm just shocked at the naive assumption that they wouldn't fight back a little here.

As I said, I don't really know what the McLains' situation was, since we don't get much detail. But one can understand Citibank's near-total erasure of Ms. Newport Beach's unused HELOC as a sensible precaution on Citi's part, and not simply because home values are falling. Now is probably not a good time for HELOC lenders to be sitting on their duffs waiting for borrowers to run into financial trouble and use those HELOCs as a way to limp along to the point where the HELOC lender gets nothing in a foreclosure.

Of course Ms. Newport Beach believes that her potential use of a HELOC as "insurance" wouldn't be doomed to failure. Nobody ever believes that doubling down is doomed to failure; that's why they do it. But if in fact that's what the McLains did, it doesn't seem to have done anything for them except buy them time to negotiate a short sale that then fell through because CitiFinancial didn't like being the patsy at the table.

by Tanta on 3/20/2008 09:07:00 AM

I suspect this thing in the NYT is going to get a lot of discussion.

They took out adjustable-rate mortgages at the peak of the housing bubble to buy homes they would otherwise not be able to afford. Or they refinanced existing mortgages to take cash out. And now, two or three years later, the day of reckoning is here.

These are not lower- and middle-income borrowers, but more affluent consumers with annual incomes of $100,000 or more who are increasingly being ensnared in the home mortgage crisis.

It gets worse from there. A lot worse.

The first step for distressed homeowners, said Rhonda Porter, a certified mortgage planning specialist and broker in Seattle, is to pull out their loan documents and see what they say.

First of all, I really want to know what a "certified mortgage planning specialist" is. As a certified mortgage nonsense detector, I call BS. Second, that's the entire paragraph. Besides not noticing the rather savage irony of all these rich folks who are only now getting around to seeing what the loan documents say--so it's not just those dumb poor folk who do that?--there's no indication of what is supposed to happen next. Is it just me, or is there a hint here that the first thing people should do is check to see if there's some way to sue? At the end of the article is a little story that's likely to piss off plenty of readers:

Mr. Geller said he had heard of just one loan balance reduction won by a borrower.

That borrower, a real estate consultant in California who did not want to be identified because he feared angering his lender, said he used his understanding of state law to negotiate the refinancing. He bought a condominium two years ago for $450,000 and invested another $50,000 for improvements. His ARM had a 5.5 percent initial rate that was soon resetting to 7.25 percent. But his condo is now worth only about $350,000.

His lender agreed to give him a 6 percent fixed-rate mortgage and, he said, to knock $135,000 off the principal.

The agreement came only after he stopped paying his mortgage for two months. “I am very happy and grateful to the lender because what I owe on my condo now is in line with its worth,” he said. “I’m ecstatic.”

A "real estate consultant." (Isn't anyone just a broker anymore?) But what "understanding" of what "state law" did this dude use to get this deal done? Why is the dude "afraid of angering his lender"? He already got his deal . . . ?

Then there is this:

Borrowers should determine if they live in a state with nonrecourse laws. In general, lenders in those states cannot pursue borrowers for money owed. But these laws are complex and change often, so consulting with a lawyer may be necessary, Mr. Geller said. He has compiled a list of nonrecourse states at www.mortgagerelief formula.com/recourse.

I'll go for state foreclosure laws being complex, but changing often? Really? Like, how often? My impression has been that some of our recent troubles stem from the fact that foreclosure laws haven't changed in a lot of places since the Depression. Anyway, I was interested in that list because I have been asked for one several times. The link in the NYT piece is not formatted properly; try this. What you will get is simply a list of states with non-judicial foreclosure processes. Labelled "non-recourse mortgage walkaway states." Is this Geller simply incompetent, not understanding the difference between non-judicial foreclosure and antideficiency statutes? Or is he just trying to jump on the same bandwagon of youwalkaway.com? And how did he get to be a source for an article in the NYT, giving him "credibility" and free publicity?

I suggest spending a few minutes with Mr. Geller's website:

If you can get the lender to approve your short sale, you can walk away pretty much unscathed. You can have good credit. You can even fix any negative reports they may have made about you, reports that say you were late. And you won't face any more of those huge loan payments. You'll be free and clear, baby!

But first you gotta get there. The way to make sure that the lender says yes is to give the lender *exactly* what they need to see . . .

The way to sell your house quickly is to follow the formula I call the Sell Your House in Nine Days system. It is also called the round robin. . . .

The key here is convincing them [the lender] that the short sale price is right. They rely a lot on a broker's price opinion, or BPO. And there is a whole system of ethically and honestly convincing the broker that the selling price is a fair one. If the broker reports that your short sale price is fair, the lender will probably say "yes."

Of course you don't get the "details" of how this works unless you "download the report," and I am not sure my PC is well-enough protected to do that. But after the short sale, we get to Mr. Geller's advice for what to do now that you no longer own a home:

The shocking secret of how to buy without qualifying and without getting on the hook for a loan . . .

Here's the deal you are looking for. If you are in an area with $150,000 houses, find a house where the motivated seller has a $150,000 mortgage. And then buy the property "subject to" the existing mortgage.

It really is that simple. The seller moves out. You settle at the lawyer's office. Nobody tells the lender anything. You start making the payments.

The loan is still in Mr. Seller's name. Is that a problem? No. You are the owner. You have a grant deed on file at the county courthouse in your name. No problem at all.

Anyone can sell their house to someone else as long as they are still the owner, and title will transfer. Even if there are loans still on the house. Doesn't matter.

So in this situation, Mr. Seller signed a deed over to you. You checked the loan balance (punching in Mr. Sellers' loan number into the mortgage company's automated robot phone system) and now you have the keys and you have every right and privilege as the owner that Mr. Seller did.

But look what you did. You have the mortgage interest deduction which lowers your taxes. You own the house, lock stock and barrel. But you never had to get your own loan.

Many sellers will want you to pay off the loan. Of course they will. But they are motivated, remember? So you tell them that you aren't going to do that just yet. When will you? Maybe in a year or three. Maybe in five years. A motivated seller can be convinced to sell to you because they are relieved that someone else is stepping into their shoes. It's human nature to breathe a sigh of relief and let someone else (you) deal with the mortgage.

And it's as simple as that. There are wrinkles to this and things you should know, but it really isn't that hard.

Yes, this is the bucket of scum that the reporter has given credibility to on the pages of the Grey Lady. Is there left an editor who, to paraphrase Jackson Browne, still knows how to cry?

Please do go back and take note that the anecdote of the borrower who scored the $135,000 principal reduction turns out to be a story "Mr. Geller heard of."

by Tanta on 3/14/2008 10:37:00 AM

Barney Frank has released draft details of a new plan for FHA to insure "short refis," or refinances that involve the old lender accepting less than full payoff. I know you mortgage junkies are on the edge of your seats, so here's the dirt.

A draft proposal of the plan is available here. According to Rep. Frank's website, comments and suggestions are being solicited, so consider yourself encouraged to look it over and let Rep. Frank know what you think.

The proposal is to allow FHA to insure up to $300 billion in refinance "Retention Mortgages" in the next two years that involve lender write-downs of principal ("short refis"). In the context of FHA, $150 billion a year is a very large number: it is nearly double FHA's volume for 2006. In the context of loans that are now or will be underwater in the next two years, it's as little as 10% of distressed mortgage loans. (That depends on whose estimates of price declines you use, and also whose estimates of the eligible borrower universe you choose.) So it's either a deluge or a sizable drop in the bucket; take your pick.

How it works:

1. The new mortgage may have an LTV of no more than 90%, and no subordinate financing (all existing subordinate liens must be extinguished). If I am reading the draft correctly (page 4), the new mortgage LTV includes financed allowable closing costs, as well as the special one-time up-front mortgage insurance premium (UFMIP).

2. All loans require a UFMIP of 5.00% of the new loan amount, in addition to an annual mortgage insurance premium (MIP) of 1.50% (which is added to the interest rate) and the "exit premium" (see below). The 5.00% UFMIP is essentially paid by the old lender in the form of principal write-down.

3. The old mortgage lender must therefore accept payoff proceeds (as "payment in full") that allow the new mortgage amount to be 90%. For example: assume an existing $110 loan on a property with a current valuation of $100. The maximum new loan amount is $90. Out of that $90, $4.50 (5.00% of $90) must be paid to HUD for the up-front insurance premium. Assuming 5.00% in allowable closing costs and prepaid items (escrow funding and per-diem interest), another $4.50 is paid at closing of the new loan. There is therefore $81 left to satisfy the old lender, and so the payoff amount is written down to $81. The old lender's loss is $29 ($110 minus $81, or 26%). Any and all prepayment penalties or fees related to prior delinquency or default must be waived (written off) by the old lender.

4. Some kind of principal reduction of an existing first mortgage is required under this loan program in the draft bill; any refinance that could achieve a 90% LTV without principal reduction of the first mortgage would presumably be processed under a standard FHA program, without the additional premia. It appears, then, that if a current loan had both a first and a second mortgage, with the current LTV of the first being 85-90%, the first mortgage could be refinanced into a standard FHA or FHASecure, with the existing second lien extinguished or subordinated. This would be a better deal for borrowers than the Retention Mortgages, since the MIP would be less expensive (5.00% is a giant UFMIP in FHA terms; the current maximum UFMIP is 1.50-2.25%). Loans fall into the Retention Mortgage bucket when necessary write-offs get to the first lien.

5. When the new loan is originated, HUD gets a second lien that involves no payments or interest. It is designed to recapture an "exit premium" of at least 3.00% of the original mortgage amount, up to as much as 100% of the property appreciation. Upon sale or refinance of the loan, the borrower must pay HUD the greater of 3.00% of the original loan loan amount or a share of appreciation. The appreciation is adjusted for capital improvements (as defined in section 1016 of the IRS code). The shared-appreciation provisions (although not the 3.00% exit premium) phase out after five years, so the amount due is the greater of 3.00% of net proceeds or

100% during the first year
80% during the second year
60% during the third year
40% during the fourth year
20% during the fifth year
0% thereafter

What this appears to mean is that the borrower cannot "cancel" this provision by doing a rate/term refinance of the loan into a conventional mortgage, although it isn't exactly clear to me how the actual calculation works in a refinance. Presumably, a refinance would be treated for calculation purposes like a sale, meaning that the borrower would have to refinance for a high enough loan amount to pay HUD the forgiven principal according to the schedule above.

6. All new mortgages must be fixed rate, and are subject to whatever loan limits are currently in place at the time of refinance. (This draft does not commit to the new higher limits within the two-year period of the program.)

Eligibility for the program is as follows:

7. Owner-occupied principal residences only

8. The borrower must establish lack of capacity to pay existing mortgage or mortgages: the borrower must "certify" that default on existing mortgage has not been "intentional," and must demonstrate that as of March 1, 2008 the borrower's mortgage debt to income ratio on all existing mortgages is greater than 40%.

9. The existing first mortgage must have been originated on or after January 1, 2005 and before July 1, 2007.

10. The mortgage debt ratio must be "meaningfully reduced" from the existing first mortgage. This devil will undoubtedly get worked out in the details of HUD guidelines promulgated to implement this program. It isn't clear to me, for instance, what one would do with an existing interest-only mortgage, which, even with principal reduction, could result in a higher payment, since the new loan must be an amortizing fixed rate loan. The bill clearly requires that the base interest rate on the new loan be a "market rate," but with the 1.50% annual MIP added, the rate on the new loans may be not that far under what a subprime borrower is currently paying. (The draft clearly states that there must be a reduction in debt load in terms of the first mortgage, so elimination of a second lien payment would not "count" here.) The draft mentions that the reduction in payment can come from extending the mortgage term, although I see nothing here specifically authorizing terms on the new mortgage of greater than 35 years (what I believe to be the current limit, although 40 years is in the currently proposed "modernization" bill).

11. Full verification of income is required.

12. The borrower's current FICO, or any prior delinquency of the old loan, is not counted against the borrower in qualifying for the new loan.

13. The new loan may not have a total debt to income (DTI, which includes debt other than the mortgage payment) of more than 40%, if the lender expects immediate endorsement (FHA insurance certification) of the loan. New loans may be made with a DTI of up to 50% or 55%, but in those cases the loan remains uninsured until the first six mortgage payments are made on time. This means that the originating lender holds the default risk on those loans until they have performed for six months.

My thoughts on this so far:

I give points for attempting to balance incentives and protect against abuse. The draft bill does not come right out and limit this explicitly to subprime loans, but in practice it would probably do so, since it limits the program to high-rate existing loans. If the new loan payment has to be an improvement over the old loan payment, and the new loan requires a 1.50% MIP, it would be difficult for a borrower with a prime loan that does not carry private mortgage insurance to be "in the money." Even an existing prime loan with mortgage insurance would probably have a current rate less than the rate offered on these Retention Mortgages. I would still like to see clarification of the maximum loan term allowed here. If the maximum term on the new loan is 40 years, then borrowers with an existing 30-year loan at a relatively lower interest rate may still qualify under the "reduced debt load" guideline.

I hope I am correct about financed closing costs being included in the maximum LTV, since this would have an important impact on preventing "fee loading" on the new originations. That is, the new lender may want to lard the loan up with origination fees, but if those are essentially being paid by the old lender in the form of reduced payoff, then the old lender exerts some counter-pressure on closing costs and fees. (I am simply assuming that eligible borrowers are unlikely to be able to pay their closing costs in cash.) I would like, however, to see an explicit provision in this bill for no premium rate/YSP deals (where the borrower is charged a higher interest rate on the loan, with the "yield spread premium" paid by the wholesaler for the higher-rate loan used to pay closing costs instead of financing them into the loan). It isn't necessarily likely that a premium-rate/YSP deal could work out anyway, given the requirement that the payments on the new loan be lower than the payments on the existing first lien, but it's possible if the rate on the old loan was high enough and market rates in the next two years are low enough. If you remove the possibility of paying closing costs with premium, then you're making the old lender pay them, and that will exert downward pressure on what the new lender will charge. If you don't do that, this can turn into just another fee-extraction opportunity for the slimier mortgage brokers. If HUD allows premium pricing here, it needs to hold the line very firmly on what fees can be charged and put into place strict quality-control measures for making sure that the YSP does not exceed allowable fees.

The shared-appreciation provision seems reasonable enough to me, given that it exempts appreciation due to improvements made by the borrower, which removes a major disincentive of shared-appreciation provisions (the borrower's failure to maintain or improve the property).

I certainly like the idea that lenders wishing to write high-DTI loans have to carry the risk for the first six payments. I suspect we would see, after passage of this, just how much lenders really do believe that high DTIs are sustainable.

As far as HUD's risk, there is certainly always the risk that values will continue to decline, although having 5.00% of the loan amount up front as a loss reserve, in addition to the MIP and the "exit premium," will certainly help. This certainly doesn't seem any riskier to me than HUD's current willingness to insure 97-100% LTV purchase-money loans.

Whether lenders will go for it--or be allowed to go for it--is the real question. The draft bill says that "The Secretary (of HUD) may take such actions as may be necessary and appropriate to facilitate coordination between the holders of the existing senior mortgage and any existing subordinate mortgage to comply with the requirements." It doesn't say what necessary actions might be to force second lien holders to roll over and die--threats? bullying? shunning at cocktail parties?--but that's likely to be a sticking point given current second lien holder behavior. The problem for first lien lenders comes back to the issue of what securitizations do or do not allow. A separate bill is on the table in Congress (Castle-Kanjorski) that gives a legal "safe harbor" to servicers who write down principal on a loan, as long as the net present value of the write-down is greater than the NPV of foreclosing. If that is enacted and clearly applies to short refi payoffs as well as modifications, then it would certainly encourage more servicers of securitized loans to participate.

The final question of how much of that $300 billion could get used in two years is, then, hard to gauge at this point. There are undoubtedly going to be trillions of dollars worth of underwater loans in the next two years, but I'm certainly not convinced that all of them would meet the 40% DTI requirement or, if so, involve borrowers willing to sign that shared-appreciation agreement.

As far as mortgage relief proposals go, this isn't anywhere near as dumb as most. It puts the up-front loss on the existing lender, it is fairly careful to exclude outright speculators, flippers, and abusers, and it limits the outsized-profit potential of the originators of the new loans. It is hardly the dumbest kind of loan FHA insures (see the 97% purchases with "down payment assistance" for the ultimate in dumb). I therefore expect that lenders won't like it much, but perhaps I am just cynical.

by Tanta on 3/11/2008 02:22:00 PM

This is ugly:

Struggling to save their homes from foreclosure, more Americans are raiding their 401(k) retirement accounts to pay their bills — and getting slammed with taxes and penalties in the process, according to retirement plan administrators. . . .

Such hardship withdrawals began rising last year and, by January this year, had exceeded January 2007 levels. During the first month of the year, as the economic slowdown tightened pressure on mortgage holders, hardship withdrawals rose 23% at plans that Merrill Lynch (MER) administers, compared with the same period in 2007, says Kevin Crain, managing director of the Merrill Lynch Retirement Group.

The 401(k) withdrawals are rising mainly because people such as Campbell and her husband want to save their homes. Merrill Lynch found that the primary reason for the rise in hardship withdrawals was to prevent foreclosure or eviction, based on its sampling of applications filed in January.

Likewise, in the first month of the year, compared with January 2007, Great-West Retirement Services saw a 20% increase in hardship withdrawals to save a home. And Principal Financial (PFG) reports that in January it received 245 calls from participants who inquired about 401(k) withdrawals to prevent a foreclosure or eviction, up dramatically from 45 similar calls it received in January 2007.

by Tanta on 3/04/2008 09:30:00 AM

She's at it again.

Now, listen: this post isn't about defending actual incidents of fee-gouging. It isn't clear to me that the article in question has its hands on a case of actual fee-gouging. This post is about the idea that while people can write stuff for the NYT that makes no sense and get it published, the rest of us don't have to buy it.

It's a story that makes a claim:

Every home foreclosure is different, of course. But the Wellmans’ case shows the uphill battle facing many troubled borrowers who believe that they are losing their homes for questionable reasons, like onerous fees.

At minimum, I would expect a story about the reason for a foreclosure being onerous fees. I would also expect a story about how hard it is for borrowers to get a day in court ("an uphill battle").

What we got is a jumbled, fragmented narrative, told out of order, which is fashionable in the newspapers these days. I tend to suspect that this is because told in order, with full details, the story doesn't back up the headline. But I am cynical. Perhaps the real reason is that everyone else likes Faulkneresque conventions of narrative dislocation and evocative allusion rather than declarative sentences and Aristotelian unity. Stranger claims have been made before.

Whatever. To aid us old farts, I tried to put together all the actual facts reported in chronological order. This is what I got:

Our borrower, Wellman, built the house himself. He started in 1990 and finished in 1992.

In 1996 Wellman lost his job and got behind on "the mortgage." I don't know when the mortgage was made. I don't know who made it. Between 1996 and today, at some point, the Wellmans have filed BK five times. Have they ever completed one? Beats me.

In 2002, Nat City started foreclosure against the Wellmans. Apparently there was a problem with the assignment of mortgage having been filed subsequent to the FC filing. The judge seems to have slapped Nat City around a little, but did not dismiss the FC filing.

Apparently it got straightened out who owns the loan, because in 2003 the Wellmans signed a "forbearance agreement" with Nat City, the terms of which are undisclosed.

In 2004, Wellman asked a local accountant to look over his loan records, and the accountant said Nat City was off by $38,612. Wellman stopped making payments and got a lawyer.

It went to court, and in 2006 the accountant testified that the charges were improper. Nat City apparently testified that the charges were proper. The judge "found that the Wellmans were bound by the agreement they signed in 2003." It isn't spelled out what that means; I can only assume it means that agreement signed stipulated that the Wellmans would pay these charges that they subsequently objected to. I suspect it also means that the folderol about who really owns the note is no longer an issue, since signing an agreement to repay Nat City would mean the borrowers acknowledged that they owe Nat City. But we don't get that spelled out.

The thing apparently went to an appellate court, who apparently also found in favor of Nat City.

As of today, it appears that Mrs. Wellman has a job and Mr. Wellman is a self-employed inventor.

As of today, Gretchen Morgenson is still worried about the fact that a person testified to something in 2006, and the trial court didn't buy it. I'm wondering how often that happens.

So, anyway. The Wellmans have a history of financial distress going back for more than ten years. They got an accountant to work for them, and they have had a lawyer working for them for free for three years. They got a day in trial court and a day in appellate court. It appears that they have not made any mortgage payments--even regular payments, ignoring those contested fees--since 2004.

What is the obvious conclusion to draw?

Okay, now you can read the appellate decision.

A note to anyone in trouble with a mortgage: if you are asked to sign something, read it. If it stipulates that you have been represented by an attorney, don't sign it unless you are really represented by an attorney. If it has a dollar amount on it you are agreeing to repay, demand an itemization before you sign, not afterwards. If you really aren't sure that the other party to the agreement owns your loan, don't sign it. If it says that foreclosure will commence if you stop paying, it means it.

Best possible thing you can do: see a lawyer.

Worst possible thing you can do: read the New York Times.

by Tanta on 3/03/2008 08:34:00 AM

More credit tightening:

Take Robert Whittaker, a Sykesville, Md., homeowner who sought to refinance a $260,000 first mortgage when 30-year rates fell below 6 percent. Whittaker's interest-only adjustable rate loan was scheduled for a hefty payment reset.

Whittaker, who bought his house four years ago, contacted a mortgage broker who was able to arrange a new $260,000 loan at a fixed rate of 5.5 percent for 30 years. All that was needed was for the lender holding a $70,000 second mortgage on Whittaker's house to agree to a routine request that to keep its second lien "subordinated" to the new first mortgage. That would leave the lender in the second payoff position in a foreclosure.

Whittaker expected no problems: He wasn't seeking to increase his overall debt, his credit scores were solid, Fannie Mae approved the refinance transaction and his appraisal came in at $384,500 -- nearly $55,000 more than his combined mortgage balances.

His broker submitted the request to the second lender, Cleveland-based National City Corp., Feb. 1, expecting quick approval. On Feb. 18, the bank told employees in an internal memo that it was no longer approving requests nationwide for subordinations from second-mortgage customers, such as Whittaker, whose first mortgage was with another firm.

A spokesman for National City, William Eiler, declined to provide the number of loan customers affected and said the bank's reasons were "proprietary." Asked whether blocking customers' ability to refinance could push some of them into foreclosure after payment resets, Eiler said: "We cannot predict that this might occur." The memo, a copy of which was provided to me, acknowledged that the new policy "may not be widely accepted by our customers."

Whittaker's broker, Joseph Liberto, co-owner of Immediate Mortgage Inc. of Ijamsville, Md., called National City's action "outrageous. Here our [federal and state] governments are trying to help people facing big payment increases, and we've got lenders refusing to cooperate -- even when it makes sense for everyone involved."

Nancy Gusman, a real estate lawyer in Prince George's County, Md., outside Washington, D.C., says she is seeing lender roadblocks like Whittaker's every day. "And it's so counterproductive. All the articles you read quote the bank executives saying, 'Contact us. We want to work with you.' Then they turn around and pull stuff like this."

The change at National City illustrates how declining market conditions are affecting borrowers with second liens. Not only are equity credit lines being frozen or reduced, but issues such as subordination stymie borrowers' attempts to refinance.

When property values were soaring during the boom years, requests for subordination were rarely denied if homeowners had decent payment histories. But with prices depreciating in many markets, banks are worried that, even if customers have sterling credit, the bank's security interest in a property may be whittled away.

I'd like to know whether the point of this, for NCC, is to hold out for a pay-down (not necessarily payoff) of that second. (That, frankly, is what I'd be doing if I were National City.) If you assume that the current appraisal is not fantasy, a prime borrower with good credit should be able to get a Fannie Mae cash-out refi at 80% LTV. That would mean the borrower gets a new first lien for $307,600, which pays off the existing $260,000 first lien and leaves $47,600 to pay down the balance of that Nat City second, reducing NCC's exposure from $70,000 to $22,400. In exchange for that, they might be willing to subordinate. Even if this guy could get only a 75% cash-out, that would produce $28,375 to reduce the second lien balance.

Of course the appraisal might be fruitcake on a 1004*, but that's not what this borrower is saying or why all these people are outraged. It would not force this borrower to increase his total indebtedness any, although it would increase the interest rate somewhat on that new first lien, since it's a cash-out instead of a rate/term refi.

If Nat City is really refusing to subordinate in any circumstance, then I would say that's a pretty strange policy. But I really couldn't fault them for trying to negotiate a compromise with this particular borrower, as the details are presented. It means the guy doesn't get his 5.50% rate, but these things happen.

------

*That's insider for "standard appraisal form."

by Tanta on 3/01/2008 01:30:00 PM

Some of you could stand to know in somewhat more detail how repayment plans for delinquent mortgages work. The rest of you are reading this for reasons I am still unable fully to understand, but I have come to accept that Calculated Risk junkies have a tolerance for outright nerdiness that never fails me.

I am still getting emails directing my attention to this post of Mish's from last week, which claims to be "evidence of walking away" based on a set of monthly numbers from a gnarly old (2007) WaMu Alt-A pool:

The chart shows performance by month since July, 2007. Rows 2-6 are delinquencies through REO (Real Estate Owned). In theory, this should work like an assembly line: Mortgages enter 30 days delinquent, the next month that subset goes into 60 days, then 90 days, then foreclosure, then REO. It's a process that takes time.

Look at this most recent jump from December, 2007 to January, 2008. Foreclosures increased a whopping 4.92%, yet in December, 2007 the 90 days delinquent bucket was only 3.79% (If every 90 day delinquent loan went to foreclosure, the jump would only have been 3.79%) How could this happen? The evidence suggests that people are walking away 30 days or 60 days delinquent without even waiting for foreclosure.

I'm sorry Mish, but this isn't "evidence of walking away," nor is your theory on foreclosure timelines quite right. I'm not here to beat up on Mish, but as I was the one who got snotty and demanded evidence for the "walking away" story, I suppose I need to explain why this isn't it.

First off, I am going to perform the incredibly tedious act of demanding that we define our terms. Yes, I'm one of those. "Walking away" is hardly a precise term, and it undoubtedly means different things to different people. The claim I am having a problem with has been made in slightly different ways by different people; this is the WSJ's formulation of it (which I think we can call the new "conventional wisdom"):

As home prices plummet, growing numbers of borrowers are winding up owing more on their homes than the homes are worth, raising concerns that a new group of homeowners -- those who can afford to pay their mortgages but have decided not to -- are starting to walk away from their homes. . . . some homeowners in weak markets are concluding that house prices won't recover anytime soon, and therefore they are throwing good money after bad.

Let us understand the elements of this claim. In this sense, the "walking away" group are:

1. Upside down on their mortgages.
2. Fully aware that they are upside down on their mortgages.
3. Fully convinced that this is a long-term problem.
4. Able to make their mortgage payments under existing mortgage terms.
5. Ceasing to pay those mortgages, and making no attempts to postpone or prevent foreclosure by working with the servicer beyond, possibly, requesting (successfully or not) a deed-in-lieu (a/k/a "jingle mail") or short sale.
6. Either occupying the property "rent free" until the sheriff shows up, or simply abandoning the property (presumably renting elsewhere or perhaps buying a cheaper one) to sit vacant until the servicer can foreclose.

This is a strong set of claims. There is no reason to think this set of claims cannot be empirically verified. However, we need to get straight on what might or might not constitute empirical verification.

It is not enough to point to foreclosure rates, vacancy rates, or servicer reports of "no-contact borrowers." You can have a "no-contact borrower" because the borrower is dead, in jail, in the hospital, in another state looking for work, or in the middle of a nervous breakdown caused by financial distress that leads him or her to refuse to answer the phone. You can have servicers with the wrong phone number on their databases, and phone service that has been disconnected. You can have servicers who don't really actually try very hard, and you can have servicers whose collections staff are such unmitigated horse's asses or rank incompetents (I would here include those with limited command of the borrower's spoken language) that borrowers who have had prior contacts with them simply see no point in talking to them any further, and this might be a rational decision. I am not saying that all no-contacts are these cases; I am saying that the fact of a borrower reported as "no contact" is not direct evidence of the walk-away claim. Large numbers of no-contact borrowers being reported may support this claim, or is at least consistent with it, but it doesn't prove it.

Vacancy of the subject property doesn't prove the strong walking away claim, either. It's quite likely many of these vacant properties were speculative purchases. Speculators walk away from mortgages quite frequently in an RE downturn, but that is often because they are speculators: they did not buy this property as a long-term investment, and are therefore entirely unprepared, financially as well as emotionally, to hang onto it. It was and is a huge scandal of the last several years that we made mortgage loans for speculative real estate purchases to people who couldn't possibly ever carry that mortgage payment if the flip didn't flip on schedule. There is something a great deal more than a little odd about including this group in the "people who can afford their mortgage" bucket.

Otherwise, you can quite frequently find that financially-distressed borrowers end up vacating their homes, because they lost their jobs and are looking for or have accepted employment elsewhere, or they are so distressed that they can't even keep the lights on or feed themselves even while skipping the mortgage payment, and have moved in with family or something. Again, I am not making a claim about whether all or most vacated properties fall into this group; I am saying that it happens this way in at least some cases, and therefore while vacant properties may be consistent with "walking away," they are not proof of "walking away" in the strong sense.

Of course it should be clear to everyone that the strong claim involves assertions about the borrower's knowledge and motivations that could only be proven or disproven by interviewing those borrowers. Items 2 and 3 are not verifiable in reference to any source of information other than the contents of the borrowers' own minds. You simply cannot get there from statistics on foreclosures gleaned from remittance reports or property listings. Yet items 2 and 3 are central to the claim being made: you cannot say borrowers are doing the "ruthless put" unless you are saying that they know what the situation is and have done the personal cost/benefit analysis.

Such evidence as we might get for that is likely to be anecdotal. Enough anecdotes, rigorously analyzed and uncontaminated by preconceived notions of the story-teller or reporter are not, in my view, worthless as evidence. I am, however, still waiting for even one that fits all the conditions of the strong claim and provides enough detail about the facts of the case that we can assure ourselves it isn't an after-the-fact interpretation of a series of events. And let me observe that even with a round handful of such unambiguous anecdotes (I have ten fingers, myself, so let's call that ten), you still have some trouble with the "trend" part. There are in the vicinity of 40 million first-lien mortgage loans outstanding in this country at the moment. It is, statistically, almost certain that you could find a dozen ruthless defaults. I suspect you could find a dozen mortgages that are delinquent because the borrower made a donation he couldn't afford to the New Universal Church of Jesus On a UFO. You could probably find at least one loan that was 90 days down but the borrower was saved from foreclosure at the last minute by buying a winning lotto ticket. Trends, folks. Mean bigger numbers that what I've seen thrown around in the anecdote department.

Does the very existence of this YouWalkAway.com website prove that it has a lot of takers? Does the very existence of websites offering to take several hundred of your dollars to provide you with a sure-fire way to avoid paying your income taxes prove that the non-tinfoil-hat crowd is flocking to those sites in startling numbers? Some days I do worry about the conclusions drawn by reporters who don't really hang out on the Internet much.

Any serious investigator would start, not with stories passed around on the Internet, but with servicer logs. It is hard to get your hands on that kind of information, but it's there and serious investigators--hi, Fed guys!--surely ought to be able to work up a project. You really need to look at real case histories, to see if servicers have ever been able to document a case like the one described here in items 1-6. Perhaps a collector made one contact with the borrower, who said he wasn't going to bother to pay the mortgage because he was upside down, so there. (That would be documented in the collector's call log.) Perhaps the servicer had contact with a listing agent or appraiser, who provided this information about the borrower. Perhaps a servicer really did get one of those letters prepared by the YouWalkAway.com clowns.

Even with that, you also need some evidence that these folks are truly not financially distressed. That could come in a number of ways, but I warn you right now that if you look at one of these things and see that the original loan was made on stated income at a DTI of 45% using an interest-only loan and no down payment because the borrower had zero savings at the time, I am going to question your claim that affordability isn't an issue. You will have to prove that the borrower's finances improved since loan closing, as far as I'm concerned. I did not spend a whole mortgage boom arguing that loans like that were evidence that people cannot afford homeownership at current prices, only to roll over for you now and say people who have such loans can afford to carry their debts and just don't feel like it.

So let's get back to Mish's claim. It has to do, basically, with the assertion that a fast foreclosure is indirect evidence of walking away. The claim, I think, is that if large numbers of loans go to a status of foreclosure after only a 30- or 60-day delinquency, that means that the servicer has concluded that the borrower "just walked away" and there is no point to anything other than immediate foreclosure proceedings. (I don't know how else to interpret "without even waiting for foreclosure," since he's looking at loans in a foreclosure status.)

The problem is that this is drawing conclusions without enough information. For starters, we need to distinguish between "days delinquent" and "time." Mish is correct that on the whole, most servicers don't start foreclosure proceedings until a loan is 90 days or more past due. That means, technically, that the "last paid installment date" (LPI) on the servicing system is 89 or more days in the past (depending on the method you use; that part isn't important right now). It does, indeed, take three months to rack up a consecutive 90-day delinquency. It can, however, take a year, if the borrower skips payments that are not made up but does not do so consecutively. That is why the reference point is LPI: servicing systems do not assign payments to the month you mailed them, they assign them to the earliest due date. If you skipped the February payment and then made a payment in March, the payment received in March would be applied to the February 1 due date, moving the LPI from January 1 to February 1, and meaning that you are still "30 days delinquent." If you make the next six consecutive payments on time, but never make up that missing payment, you will be "30 days delinquent" for six months. In some states it is actually possible for a servicer to start foreclosure proceedings against you for being 30-days down for six months. Whether it is likely that a servicer would chose to do that is another matter. In my experience it is more likely that a servicer would initiate foreclosure on an uncured rolling 60 than on an uncured rolling 30.

It is also important to bear in mind that "foreclosure" is a process, not a discrete event in time, in this context. The reports you see like the one Mish captures from Bloomberg are based on servicer remittance reports to the security trust, and what is reported in the "FC" bucket is loans for which the foreclosure process has been started. The "start" in this particular context (reporting to the investor) is the day the servicer turns the file over to its foreclosure counsel or a public trustee (for non-judicial power-of-sale foreclosures). As a general rule, this step occurs after a whole lot of other nasty things have already happened, such as the borrower getting a "breach letter" that "accelerates" the mortgage (demands all sums due and payable). The exact sequence of events is different in different states; the point for purposes of reading remittance data is that the loan goes into a status of "FC" when this legal process commences, and it stays in that status for as long as it takes to get to the day the property is sold on the courthouse steps. (After that, the loan either goes away--it is liquidated via application of proceeds from the purchase of the property by a third party, or it becomes REO. These days nearly all loans become REO. They stay REO until someone buys the property from the servicer, at which point the loan goes away.)

It is therefore typical that loans can stay in FC status for months--even years in the uglier cases--and that loans can go in and out of that status. If a borrower sells the home, brings the loan current, or agrees to some workout plan after the file was referred to the legal people, then the loan can be taken out of FC status and put back to plain old seriously delinquent of the relevant number of days or current, depending on the circumstances. "Loans in Foreclosure" is a pipeline, not a report of final dispositions of loans. Final dispositions would be reported in some category like "foreclosures completed for period x," and you don't get that on remittance data displayed on Bloomberg. This is why, over time, that "FC" bucket starts to pile up. In the current environment we have FC starts seriously outpacing FC completions, so month-to-month the FC pipeline gets bigger. (Same goes with "REO": if you are completing FCs faster than you're selling the REO, the inventory piles up and you see the REO category getting larger every month.) Someday we'll get to the point where we're closing cases faster than opening them, and those numbers will begin to shrink.

The really important thing here is that we do know that servicers are busy offering some sort of workouts. We know from the MBA that most of them, at the moment, don't seem to be permanent modifications; they're repayment plans or forbearance. Often, a repayment plan is a precursor to modification: the servicer agrees to permanently modify the mortgage only if the borrower successfully completes a repayment plan first, so the two categories aren't mutually exclusive.

I refuse to take responsibility for the way other people throw terms around, but I will take responsibility for my own terms. A repayment plan is an agreement to allow the borrower to resume making regular payments and make up past-due payments on an installment basis for a limited period of time. The resumed payments might temporarily be at a lower rate, which would be appropriate if the servicer is offering the plan prior to a permanent modification; this servicer wants to see you make three to six or nine payments at the reduced interest rate before permanently modifying the mortgage terms. In other cases the resumed payments are at the original contractual terms.

A forbearance is a short-term agreement to let you make no payments, or less than the contractual payments, as long as you bring the account current by the end of the forbearance period. This is, for instance, the one we might see with a borrower who has a documented hardship and a real sale pending: it gets the collections people off the borrower's case while waiting for the sale to settle. Or the borrower is temporarily disabled but will go back to work once the stitches come out. It is not the most widely available kind of workout by any means. In most data sources, forbearances are lumped in with repayment plans, as they are in the MBA data, but it's important to know that the number of true forbearance arrangements is small; almost all temporary workouts are repayment plans.

That matters because the terms of the temporary plan will affect how the loan's delinquency status is reported. Imagine a loan that goes 90 days down (three consecutive payments missed), and then is given a 90-day forbearance agreement some time in the month preceding the 90th day of delinquency. That means that the servicer will report that loan for the next three months as 90, 120, and 150-days down until the expiration of the forbearance; at that point either the borrower brings the account current or foreclosure is initiated. This is why you would see loans reported as 90+ days down but not in FC status.

Take the same situation (a borrower three payments behind) who is given a nine-month repayment plan. Typically, this borrower would be required to 1) bring current all outstanding fees immediately, 2) make scheduled payments each month, on time, for the next nine months, plus 3) make a payment equal to one-ninth of the past-due payments each month for nine months. For the next nine months this loan would be reported as 90, 90, 60, 60, 60, 30, 30, 30, current. (One-ninth of the past due amount or one-third of a payment accumulates in a suspense account until you have enough to apply a whole payment, which advances that LPI another month.)

This kind of thing complicates the assumption that Mish is operating under about the "normal" movement of loans to successive delinquency statuses. The picture is further complicated because nobody I know of ever offers a borrower who is 90 days or more down any forbearance or repayment plan without forcing the borrower to sign an agreement, usually called a "stipulation," that says that the servicer is suspending, not dismissing, foreclosure proceedings, and that allows the servicer to restart the FC process at the original point of suspension if the borrower defaults on the repayment plan. In other words, the "clock" does not restart at zero, requiring another three months (or whatever is required in a state) before FC can be refiled; the "clock" resumes at wherever we were when the repayment plan was signed. Honestly, folks. Servicers can be stupid, but they've never been that stupid.

So take our repayment plan borrower, and assume he only makes it for six months in his plan and then misses a payment again: his loan goes from 90 to 60 to 30 to FC, because missing a repayment plan installment "puts him back" to where he was in the foreclosure process.

If you have a servicer who is doing a lot of repayment plans, and the MBA data suggests we have that, then you're going to see a lot of delinquency statuses going "in reverse," and you're also going to see, unfortunately, a lot of loans going from 30-days or 60-days down straight to FC, because the MBA data tells us that 29% of all FCs in the third quarter of 2007 happened after a repayment plan failed. That nasty fact may tell us something about the wisdom or practicality of these repayment plans. It may tell us that borrower financial distress just keeps increasing. It may tell us that borrowers get demoralized long before they're done with the repayment plan and just give up. It may tell us that some borrowers entered the repayment plan in less than complete good faith. We'd need more evidence to decide that. But the last thing it tells us is that borrowers are "just walking away" with no attempt to save their homes.

Reading and analyzing real-time remittance reports is a complicated matter that can lead you down the wrong path if you aren't well-versed in how it all works. I fault no one, certainly not Mish, for not being an expert in remittance analysis. It is only recently that this became something non-experts were interested in, after all. (For most of my years in this business I'd have called you a liar if you'd said the day would come when huge numbers of civilians would avidly read websites that post long treatises on boring technical mortgage-related crap when they were not forced to. I'd have been wrong.)

To return to the MBA report:

During the third quarter [2007], 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.

Plus this one reporter found this one guy who said, "I don't think that house is going to recover in value any time soon . . . I'd just be throwing the money away."

Even if only 20% of all those repayment plans and modifications were appropriately done only for borrowers with a commitment to keeping the house, not just tossed out like candy to someone who only wants to delay the sheriff's sale, Dr. Data says that "being dragged kicking and screaming" borrowers are outnumbering reported cases of "walking away" borrowers. I've read about more cases of borrowers bitterly contesting foreclosures (with more or decidedly less heart-wrenching situations) than I have borrowers who just don't care whether the lender takes the house or not.

I do not claim that "just walking away" isn't increasing; I don't have enough facts one way or the other. I remain convinced, however, that it's pretty damned convenient for the mortgage industry to convince you that these folks can afford their loans and are not even trying to get caught up. Blaming it on borrower ruthlessness deflects attention from lender ruthlessness, like the ruthlessness of making loans to people who cannot display any particular evidence that they can afford the payments. I simply refuse to play into their hands here.

I certainly agree that the industry is scared to death that "just walking away" will become fashionable. But that's a slightly different matter. We are having more than enough troubles with borrowers who simply cannot afford to keep making house payments and can't sell. It will surely be Armageddon if the better-heeled among us just walk off. On the other hand, these people with money are going to have to live somewhere, and if they're walking away in order to rent from struggling investors or buy REO, then while they're passing the losses onto the lenders, they're not so clearly contributing to further price drops. It's possible to imagine--just as an exercise--that the whole thing stabilizes only when the moneyed walk-aways make it stabilize, at the expense of lenders and investors as bagholders. My guess is that's the kind of ending the industry didn't have in mind. But you can easily imagine that the industry is sounding the alarm about "walk-aways" because they're rather desperate to show their lawmakers and their regulators and their monetary policymakers that they're the "real" victims here.