GSE REO Assets Fast Approaching 100,000
Fannie Mae and Freddie Mac are approaching a combined total of 100,000 in real estate-owned assets with Fannie’s book of business at over 60,000 and Freddie at 35,000, according to former FHFA director James Lockhart. “It looks like it’s slowing down a bit but there was on-and-off moratoriums on foreclosures, and there’s no sign that they won’t continue to increase,” Mr. Lockhart said as a featured speaker at the Five Star Default Servicing Conference & Expo in Fort Worth, Tex.
“If we can’t slow down the foreclosure process through these modifications and refinancing plans we are going to continue to see neighborhoods deteriorating and problems in the housing market.”
While HAMP and HARP are getting borrowers into safer mortgages with lower interest rates and lower credit risk, everyone is waiting to see if the loan mods take or if they will redefault quickly.
“Over time we are starting to see some traction with the Home Affordable Modification Program. There are now almost 700,000 trial mod plans offered to borrowers. Over 450,000 are actually in that trial period,” he told the conference. “What happens is the person getting the mortgage modified provides the thorough documentation about their earnings. It does sometimes take a while to get that documentation. Once that’s done, there’s a three-month trial period. You can lower their interest payment to 2% to get to a 31% loan-to-value. Also, you can extend the maturity to 40 years, and you can forebear on principal or even forgive principal. The idea is to get it down to that 31% debt-to-income level.”
“We’re just now starting to see people get out of that trial period, and we’ll start to see some real mods happening again,” he added.
The Home Affordable Refinance Plan is helping those borrowers who are current on their payments and are underwater. “If someone is 105% loan-to-value they could refinance. Two months ago we went up to 125%. Fannie just implemented that and Freddie will on Oct. 1. Hopefully that will also get some people to be able to lower their mortgage payments. If you’re sitting at 6.5% and get down to closer to 5%, that’s a pretty big savings. We encourage people, if they can afford that mortgage payment, to keep making the same payment but have more of it come in to repay principal and get above water quicker.”
The history of modifications has not been good, he said, but the industry has to look at how mods were done a year ago. Based on first-quarter 2008 data, the GSEs lowered the payments by more than 20% on only 3% of modifications done. In total they only lowered monthly payments on 18% of all mods.
“If you are not lowering monthly payments, it’s not surprising you are not getting a lot of good results.”
He did say there was a more dramatic change in the second quarter, which will hopefully help more people stay current. Over 54% of modifications in the second quarter lowered the payments by more than 20%. In total, 82% decreased the payments. “We are seeing a dramatic change in the way modifications are being made, and we are very hopeful that will eliminate recidivism and people will be able to stay more current.”
Unfortunately, there are economic trends that the industry is fighting, including unemployment. “As housing prices start to stabilize and we keep mortgage rates down, we are hopeful we will start to see buyers come back in the mortgage place.”
Looking at the future of the GSEs, with $5.5 trillion of mortgage exposure, he said the industry has to decide what it wants the secondary market to look like.
“Up a until a year and a half ago, it was a successful secondary mortgage market. We allowed them to leverage themselves too much. As a result, we probably gave some people cheaper mortgages than they should have had and now taxpayers are paying for it unfortunately,” he said.
“There needs to be a secondary mortgage market. How we do that is going to be important. We are going to need Fannie and Freddie in some form or another to keep the market going,” he said.