by 04 Mar 2009
Data in partnership with Mid-Week Mortgage Pages Update ? March 4th, 2009 --------------------------------------------------------------------------------------------------------------------- -Mass Modifications - Not good on macro level -105% refinance problems -Understanding 31% Debt-to-Income Ratios as Part of the Plans --------------------------------------------------------------------------------------------------------------------- All of this is very confusing but in a nutshell this is nothing too much more than is already being done by the nation's largest banks/servicers. It does provide a universal template, promotes servicers to be more involved and urges homeowners that are not yet in trouble to come forward, which should increase the number that participate in a modification over the messy process now. If nothing more, for these reasons alone I do not think that the Obama plan is a bad thing. But pretending that this is 'the solution' and putting all the eggs in this basket is a bad thing. Those thinking that the forecast of '8-9 million homeowners' to be helped is ridiculous consider this. At present, there are 5.5 million troubled mortgages of a total of about 55 million with first mortgages. Over five years if the default and foreclosure crisis escalates sharply across all other paper grades -- as it is already doing -- then it is possible that 15-20 million mortgages will have trouble. If a portion of those receive help and another several million come for proactive help, I think 8-9 million is very possible over 5 years. The question remains -- is the "help" enough to set straight the housing market and consumer without mandatory homeowner deleveraging through income-targeted principal balance reductions. At Field Check Group, my research is based upon actual aggregate and lender-specific default data providing clients with early indications of its derivatives -- house price depreciation, foreclosures, additional defaults, and mortgage holder balance sheet trouble. Going forward the research will also be a window into the effectiveness of this program in real-time. We will know first if the program is having any impact on mortgage loan defaults and foreclosures. To date, all that similar programs have done served to kick the can down the road. As a matter of fact, we have preliminary evidence that proactive mortgage modification initiatives promote more loan defaults, as it brings faster finality to the distressed borrower's case. Either they agree to modify or they get a notice-of-default. It is black and white vs the past year and a half as the dysfunctional foreclosure process has become very protracted with borrower trying to game the bank and bank trying to game the borrower and the accountant. With higher paper grades defaulting primarily due to excess-leverage and negative-equity rather than payment adjustments like in Subprime, the new Obama plan is trying to compete with rents. This is because the quickest and most efficient way for a borrower with a $600k mortgage in a $350k home to de-lever, maintain lifestyle and save money is to walk from the home and rent the one down the street for half the price and none of the other expensive 'joys' of homeownership. The success of these programs may depend upon the ignorance and disparity of the homeowners. Do people love their home that much -- or are they that desperate -- that they are willing to commit for life to a mortgage that is 40% above the present value of the home when even after foreclosure the lender can come after them for the balance? Mass Modifications - Not good on macro level -promotes negative-equity, creating zombie homeowners unable to sell, rebuy, refi -borrower typically waives all rights to predatory lending violations on original lender -borrower acknowledges the full debt despite the value of the property -keeps borrowers over-leveraged by focusing on front DTI and not total debt -borrower signs pro-lender full recourse provisions making it so they may not be able to clear the debt even through foreclosure -ineligible for any new Fannie, Freddie or FHA financing - as of Jan 1st borrowers with modified notes are unable for most new financing 1/1/2009 New GSE loan guides for modified borrowers. Any borrower that has had a mod including any of the 'solutions' below is ineligible for new financing. With 60% recidivism rates, it's no wonder. Forgiveness of a portion of principal and/or interest on either the first or second mortgage; Application of a principal curtailment by or on behalf of the investor to simulate principal forgiveness; Conversion of any portion of the original mortgage debt to a ?soft? subordinate mortgage; or Conversion of any portion of the original mortgage debt from secured to unsecured debt 105% refinances problems -very few second mortgage holders will ever subordinate -only for perfect borrowers -banks may not offer it or put on guideline overlays that make it too hard to qualify - many banks won't even do the current Fannie/Freddie streamline loan available -only for GSE loans -will not help CA to any great degree. CA led us into the mess and must lead us out -will come with much higher rates due to loan-level pricing adjustments that could take a present 5.5% rate to 7% prohibiting a refi -many won't qualify due to full-doc being required Understanding 31% Debt-to-Income Ratios as Part of the Plans The old rule of thumb was to "never spend more than 25% of your income on housing". If we would have stuck to that, none of this would have ever happened. Because in past housing busts debt ratios were not even close to as high as in the past seven years, the problem was nowhere near as devastating to the homeowner as now. Remember there are TWO debt-to-income ratios i.e. 28/36. The first is total housing debt to income; the second it total debt including housing to income. All of the plans tout the housing-debt ratio because it is lower and makes the plan sound less risky. But total debt ratios are more important. As a matter of fact when it comes to getting a new mortgage loan the total ratio has always been more important than the housing ratio for obvious reasons. ?All these measures will be used to help homeowners reach an affordable monthly payment, the person said. That monthly housing payment, compared with their income, will be the focus of the program, rather than achieving a target interest rate.? What good is it if a borrower's DTI is brought down to a 31% housing ratio but with their SUV, boat and credit cards they are at 65% total DTI? By allowing up to 50% debt ratios on 'Prime' loans during the bubble years, people had to view their home as their largest investment and not a place to live because most of their after tax income went to it in one way or another. This changed the game. When the home is viewed as an investment and the majority of a homeowner?s monthly outgo is to that massively depreciating asset the best 'investment decision' and quickest way of de-levering and maintaining lifestyle is to walk. Best, Mark Hanson


Should CFPB have more supervision over credit agencies?