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

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

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

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

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

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

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

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

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

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

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

This is also curious:

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

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

by Calculated Risk on 12/27/2007 09:30:00 AM

From Bloomberg: ACA Gives Control to Regulator to Avert Delinquency

ACA Capital Holdings Inc., the bond insurer that lost its investment-grade credit rating last week, agreed to give control to regulators to avert delinquency proceedings.

ACA Financial Guaranty Corp., a unit of ACA Capital, will seek approval from the Maryland Insurance Administration before pledging or assigning assets or paying dividends, the New York- based company said in a filing with the Securities & Exchange Commission yesterday.

by Calculated Risk on 12/26/2007 10:26:00 PM

From Reuters: Fitch may cut ratings on some insured mortgage bonds

Fitch Ratings on Wednesday said it may cut its ratings on certain residential mortgage-backed securities insured by MBIA Inc, Ambac Assurance Corp, FGIC Corporation and Security Capital Assurance.

Fitch said it may cut 87 MBIA-insured mortgage bonds, 64 Ambac-insured bonds, 35 FGIC-insured bonds and 19 SCA-insured bonds.

by Calculated Risk on 12/26/2007 02:21:00 PM

From "Business of the year" to closed in one year ...

From the AZCentral: Now closed, Re/Max was named 'Business of the Year in '06

The major Valley real estate brokerage that closed its offices days before Christmas had been named Business of the Year last year by the Chandler Chamber of Commerce.

Re/Max 2000, based in Gilbert, has closed its 13 offices around the Valley, including two in Chandler.

Owner Robert Kline began the company in 2000, and in September 2006, he said his projected sales for that year were $1.2 billion. At that time, he had 11 offices and 450 employees.

by Calculated Risk on 12/26/2007 02:01:00 PM

The first graph shows real house prices in Los Angeles based on the S&P/Case-Shiller house price index. Nominal prices are adjusted with CPI less shelter from the BLS.

Click on graph for larger image.

After the peak in December 1989, prices in Los Angeles fell 41.4% over about 7 years, in real terms (adjusted for inflation). (Note: using the OFHEO series, real prices declined 34% in LA in the early '90s).

So far, in the current bust, nominal prices have declined almost 9% in LA, and about 12% in real terms.

The second graph aligns, in time, the December 1989 price peak with the October 2006 peak.

The horizontal scale is the number of months before and after the price peak.

In 1990, real prices had declined 9.3% during the first 12 months after the price peak. For the current bust, real prices have declined 12% for the same period.

This suggests that price declines have just started, and that there will be several more years of price declines in the bubble areas.

by Calculated Risk on 12/26/2007 11:13:00 AM

The Case-Shiller data (previous post) shows three cities with year-over-year price increases: Charlotte (4.3% increase), Seattle (3.3%), and Portland, OR (1.9%).

Click on graph for larger image.

This graph shows the Case-Shiller prices for these three cities compared to the Case-Shiller composite 10 price index.

All three cities had less appreciation than the composite, the significant price appreciation started later than other areas, and prices appear to be falling in recent months. It appears that all three cities (and all 20 cities in the Case-Shiller index) will be showing year-over-year price declines by spring 2008.

by Calculated Risk on 12/26/2007 10:04:00 AM

Update: added table of price changes. S&P/Case-Shiller data.

Note that this is the year over year decline (October '06 to October '07) and only for 20 large U.S. metropolitan areas (not the entire U.S.)

From Bloomberg: U.S. Home Prices Fell 6.1% in October, Index Shows

Home prices in 20 U.S. metropolitan areas fell in October by the most in at least six years, a private survey showed today.

Property values fell 6.1 percent from October 2006, more than forecast, after dropping 4.9 percent in September, according to the S&P/Case-Shiller home-price index. The decrease was the biggest since the group started keeping year-over-year records in 2001. The index has fallen every month this year.

City	Year over Year Price Change
Charlotte - NC	4.3%
Seattle - WA	3.3%
Portland - OR	1.9%
Dallas - TX	-0.1%
Atlanta - GA	-0.7%
Denver	-1.8%
Chicago	-3.2%
Boston	-3.6%
New York	-4.1%
Cleveland - OH	-4.5%
Minneapolis- MN	-5.5%
San Francisco	-6.2%
Washington	-7.0%
Los Angeles	-8.8%
Phoenix - AZ	-10.6%
Las Vegas	-10.7%
San Diego	-11.1%
Detroit - MI	-11.2%
Tampa - FL	-11.8%
Miami	-12.4%
Composite-20	-6.1%

by Calculated Risk on 12/25/2007 09:09:00 PM

From the WSJ: Credit Downturn Hits the Malls (hat tip Houston)

The credit crunch ... is creating problems in commercial real estate, driving down prices of office buildings, shopping malls and apartment complexes ...

For the past few months, the sector has been in a state of near-paralysis ... The number of major properties sold is down by half, and many worry that the market will continue to deteriorate as property sales remain slow, prices continue to drop and deals keep falling apart.
...
The CMBS market was the engine that drove the commercial real-estate boom. Over the past few years, the issuance of CMBS allowed banks to get rid of the risk on their books, lend with cheaper rates and looser terms and that made it easy for private-equity firms to do huge real-estate deals.
...
Real-estate investors aren't the only ones feeling the pain. Many big banks issued short-term loans to buyers and planned to sell them off later, much the way they do with loans made to private-equity buyout shops. But the banks have gotten stuck with an estimated $65 billion in fixed- and floating-rate loans on their books, according to J.P. Morgan.

The typical pattern is for CRE to follow residential by about 4 to 7 quarters, so this slowdown is right on schedule. It's important to note that the impact on the economy will come from a slowdown in new CRE construction (non-residential structure investment) and from rising CRE defaults.

The October construction spending report, from the Census Bureau, showed a small decline in private non-residential construction spending, after several years of strong growth.

Click on graph for larger image.

This graph shows private residential and nonresidential construction spending since 1993.

Over the last couple of years, as residential spending has declined, nonresidential has been very strong. However it now appears that nonresidential construction may be slowing. This is just one month of data, and one month does not make a trend, but there is other evidence - like the Fed's Loan Officer Survey - that suggests a slowdown in nonresidential has arrived.

The November construction spending report will be released on Jan 2nd.

by Calculated Risk on 12/25/2007 07:28:00 PM

From Tanta. A Mortgage Pig™ exclusive. (Warning: this is a 2 MB Excel File)

Raindrops Keep Falling on My Pig

Happy Holidays to All!

by Tanta on 12/25/2007 09:27:00 AM

UPDATED BELOW

From Mortgage Pig™.

I suppose this requires some explanation. Many years and versions of Excel ago, I was in some interminable conference call--I believe we were discussing general ledger interface mapping for HUD-1 line items regarding undisbursed escrow items on the FHA 203(k) in the servicing system upload, or perhaps we were watching paint dry--when I experienced one of those evolutionary breakthroughs for which the human race is justly famous. I stopped doodling on my legal pad and started defacing my spreadsheet. In a word, Excel Art was born.

An entire running gag developed, centered on the character of Mortgage Pig and his Adventures. The Pig you see above is a newer version; the old Pig didn't wear lipstick (old pig was developed before we started selling loans to Wall Street). You can, of course, print these images, but outside of the context of viewing them in Excel, they simply become primitive, childlike doodles of no particular resonance. Viewing them as a spreadsheet, on the other hand, makes them profoundly amusing. Really. There's just nothing like sending someone a file named "GL Error Recon 071597" and having a pig pop up when the workbook is opened for a knee-slapping good time. If you're a hopeless Nerd with no particular aesthetic sensibilities.

Our own regular commenter bacon dreamz, who is also accomplished with Word Art, has (woe betide his employer) become adept at Excel Art as well, under my provocation, and has developed a way cool variation, Excel Movies. This involves creating a large number of worksheets with tediously copied and edited images that, when you ctrl-page down rapidly, create crude animation. It takes a very long series of conference calls to produce a really good Excel Movie, but it can be done. Unfortunately they're hard to display on a blog post. You'll have to take my word for it that they're hysterical.

I wanted to give you all a little Christmas present. Those of you who spend large portions of your day on conference calls with a spreadsheet in front of you and have no consciences will, I hope, be inspired to create your own Excel Art, so that a drab, utilitarian, sometimes soul-destroying corporate existence may be enlivened with wit, creativity, and expropriation of exploited labor. For those of you who don't use Excel, I hope Santa brought you a new box of crayons.

Happy Holidays to all of you.

UPDATE: Because you wanted to know what was on sheet 3.