by Calculated Risk on 2/26/2010 12:47:00 AM

From Renae Merle at the WaPo: FDIC to test principal reduction for underwater borrowers

The Federal Deposit Insurance Corp. is developing a program to test whether cutting the mortgage balances of distressed borrowers who owe significantly more than their homes are worth is an effective method for saving homeowners from foreclosure.
...
Under the FDIC program, borrowers would be eligible for a reduction in their mortgage balances if they kept up their payments on the mortgage over a long period. ... "We're thinking about it in terms of earned principal forgiveness. If you stay current on your mortgage, you would earn a principal reduction. It would only be for loans significantly underwater," said FDIC Chairman Sheila C. Bair.

The program would ... apply only to loans acquired from a failed bank seized by the FDIC. That would be less than 1 percent of mortgages currently outstanding.
...
Lenders have been reluctant to cut the principal balance owed by distressed borrowers, arguing that it would encourage homeowners to become delinquent even if they can afford their mortgage.

This is a pretty limited program. If principal reduction was offered on a widespread basis, millions of homeowners would probably immediately default.

Also - the FDIC's previous modification efforts - after the seizure of IndyMac - were mostly unsuccessful. It is unlikely this one will do much better.

by Calculated Risk on 2/25/2010 09:30:00 PM

Two informative articles ...

Diana Golobay at HousingWire reports on the Mortgage Bankers Association (MBA) National Mortgage Servicing Conference 2010 in San Diego: Mortgage Servicers Kick Around HAMP Mod Options

... a session called “Loss Mitigation – When HAMP is Not an Option” proved to be extremely popular.
...
The shift away from the government plan marks a shift in the strategy of servicers as 2009 “was all about HAMP” in terms of allocating time and resources, according to Alanna Brown, director of government programs and new initiatives at Fannie Mae National Servicing Organization.
...
Rich Rollins, CEO of Infusion Technologies, said servicers are seeing increasing potential in short sales and leaseback options.

He agreed with a general mentality at the conference that 2010 — and even 2011 — looks to be the “year of the short sale,” which he said gives investors “immediate positive cash flow” as a non-retention strategy.

“HAFA gave [the short sale] credibility,” he told HousingWire.

There is much more in Diana's article.

Note: HAMP stands for the Treasury program: ""Home Affordable Modification Program", HAFA is part of HAMP and stands for "Home Affordable Foreclosure Alternatives" and is for short sales and deed-in-lieu (DIL) transactions.

And apparently the administration is considering more changes to HAMP, from Dawn Kopecki at Bloomberg: Obama May Prohibit Home-Loan Foreclosures Without HAMP Review

The Obama administration may expand efforts to ease the housing crisis by banning all foreclosures on home loans unless they have been screened and rejected by the government’s Home Affordable Modification Program.

The proposal, reviewed by lenders last week on a White House conference call, “prohibits referral to foreclosure until borrower is evaluated and found ineligible for HAMP or reasonable contact efforts have failed,” according to a Treasury Department document outlining the plan.

The only obvious solutions for when current modification efforts fail are: 1) private principal reduction (but not paid for by taxpayers since that would be very unpopular), 2) converting homeowners to renters for some period, and 3) short sales / DIL.

Delaying tactics just drag out the problem ...

by Calculated Risk on 2/25/2010 07:48:00 PM

Earlier I discussed the possible impact of the end of the Fed's MBS (Mortgage Backed Securities) purchases on mortgage rates: Fed MBS Purchases and the Impact on Mortgage Rates. My estimate is that the spread between the Freddie Mac 30 year fixed mortgage rate and the Ten Year Treasury yield will increase by about 35 to 50 bps after March.

Analysts at Amherst Securities wrote today that they "don’t think there will be much of a widening", perhaps less than 25 bps, because some usual investors are under weighted in MBS. They also noted that "the widening may not happen for a number of months" as under weight investors add to their positions.

I also checked the recent residential MBS issuance and compared it to the same month Fed buying. The GSEs issued about $131 billion in residential MBS in December. And according to the NY Fed, net Fed agency MBS purchases were just over $62 billion in December. So the Fed bought about half of the new issuance; private buyers bought the other half.

Just two points to remember: there are private bidders (it is just a matter of price), and the increase to the normal spread might take a few months.

by Calculated Risk on 2/25/2010 04:26:00 PM

A couple of the largest banks on the Unofficial Problem Bank List - in terms of assets - are in Puerto Rico. We haven't seen any bank failures in Puerto Rico yet this cycle, but according to the following report that is about to change ...

From José Carmona and John Marino at caribbeanbusinesspr.com: Feds expected to take action against island banks next month

Federal regulators are likely to begin taking action against troubled island banks sometime next month, government and industry sources told CARIBBEAN BUSINESS.

Since the beginning of the year, the Federal Deposit Insurance Corp. (FDIC) has been beefing up its local ranks, recruiting accountants and auditors, leading to speculation about imminent action during this year’s first quarter.
...
There are three local banks operating under FDIC cease & desist orders—R-G Premier Bank, Eurobank and Westernbank.
...
According to reliable industry sources, one of the three local institutions under cease & desist orders will most likely fall into receivership status under the FDIC due to its inability to raise capital, while the other two will probably survive through consolidation.

As of Q3 2009, Westernbank had $13.4 billion in assets, R-G Premier Bank had $6.4 billion and Eurobank had $2.8 billion in assets.

And from David Johnson at Contrarian Pundit: Tamalpais Bank Update

The bad news has continued for Tamalpais Bank since I broke the story last December that the institution had lent the equivalent of almost all its capital to the highly leveraged, publicly excoriated, and increasingly broke Lembi Group in the middle of the 2008 real estate crash. In January, the Federal Reserve took enforcement action against the parent company, following up on the bank’s cease and desist order from the FDIC last September. And on February 16, the bank announced total losses of $26.2 million for the last quarter and $37.6 million for 2009.

As grim as the news has been, the bank may be in even worse shape than acknowledged in media reports.

... the bank is currently in violation of the terms of the FDIC’s cease and desist order.

And in an update, David points out the bank has just received a "Prompt Corrective Action" giving the bank a March 21st deadline. Tamalpais had about $700 million in assets as of Q3.

by Calculated Risk on 2/25/2010 02:07:00 PM

First, the following graph is from the Atlanta Fed Financial Highlights, and shows the weekly Fed MBS purchases since January 2009:

Click on graph for larger image.

From the Atlanta Fed:

The Fed purchased a net total of $11 billion of agency-backed MBS through the week of February 17. This purchase brings its total purchases up to $1.199 trillion, and by the end of the first quarter of 2010 the Fed will have purchased $1.25 trillion (thus, it is 96% complete).

Freddie Mac report that mortgage rates increased last week. From Freddie Mac: Long-Term Rates Rise to Over 5 Percent for the First Time in Three Weeks

Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®) in which the 30-year fixed-rate mortgage (FRM) averaged 5.05 percent with an average 0.7 point for the week ending February 25, 2010, up from last week when it averaged 4.93 percent. Last year at this time, the 30-year FRM averaged 5.07 percent.
...
“Interest rates for 30-year fixed mortgages followed long-term bond yields higher and rose above 5 percent this week amid a mixed set of economic data reports” said Frank Nothaft, Freddie Mac vice president and chief economist.

And that brings us to this graph from Political Calculations based on some of my posts: Predicting Mortgage Rates and Treasury Yields

Using their calculator and a Ten Year Yield of 3.75%, we would expect the 30 year Freddie Mac fixed mortgage rate to be around 5.62%. Current mortgage rates are lower than expected - as they have been since early in 2009 - and some of the difference from the expected rate is probably due to the Fed's MBS purchases (also prepayment speed is a factor - and also just randomness).

The final graph shows the expected mortgage rates (UPDATE: based on formula in previous graph) with Ten Year Treasury yields on the x-axis, and actual mortgage rates from Freddie Mac (weekly) since the beginning of 2009 on the y-axis.

Note: Y-axis doesn't start at zero to better show the change.

There are many factors in determining the spread between the Ten Year Treasury yield and the 30 year mortgage rates (like the supply of new MBS) - but this graph suggests to me that mortgage rates will rise 35 to 50 bps relative to the Ten Year when the Fed stops buying agency MBS at the end of March.