Loan Think

The National Association of Realtors took out a full-page ad in Politico today, imploring Congress not to put a "tax" on homeowners. That tax, of course, would be a cap on the mortgage interest deduction for high income earners. The strange thing about the ad is that it portrays the U.S. housing market as a house of cards. Really. To see the ad turn to page 11 of the newspaper. In the same issue homebuilder Toll Brothers -- whose stock (to the surprise of few) is near its 52-week low -- is advertising brand new Maryland homes for up to $1 million. Hopefully, if members of Congress and their staffers apply for a mortgage they won't get socked with any GSE "adder" fees. Politico publishes on every day that Congress is in session…

So, how's the residential servicing sector holding up? In normal times -- and we're living in anything but normal times -- servicing would be a counter-cyclical play to originations. But the ugly delinquency numbers are making servicing rights less valuable. Don't get me wrong, some companies are living off their servicing revenue provided their portfolios include GSE, FHA and VA product. But one investment banker pointed out to me that escrow earnings are way down, collection costs are eating into profits, and prepayment speeds could rise. He added that, "No one wants to sell servicing right now because the bid price is so bad. It's better to just hold it"…

A REMINDER ABOUT RESPA VIOLATIONS

Each year Mortgage Technology magazine publishes a list of the top 50 service providers in the mortgage technology space. And this year will be no different. In fact, lenders struggling to find every efficiency may find the list even more helpful this year. So, do you belong on our list?

Republicans in Tennessee are none-too-thrilled with the idea of using taxpayer money to bailout delinquent (deadbeat) mortgage customers. The state's GOP is peddling 'Honk If you're paying my mortgage" bumper stickers for $5 a pop or $12 for three. Its website boasts: "Show Your Opposition to the Out-Of-Control Bailout Congress." The Obama White House wants to use $75 billion in taxpayer money to help certain homeowners avoid foreclosure, which doesn't sit well with Tennessee's GOP which is showing how the south, Sir, can still be fiscally conservative. Of course, during the George W. Bush era Republicans in Congress basically rolled over and said, "Thank you Sir. May I have another?" when approving the gargantuan budget deficits of the Bush years, including the current (estimated) $1.75 trillion hole the nation is in for this fiscal year which ends September 30…

In today’s ever-changing mortgage market opportunity identification is critical for short-term survival and long term success. The first step in opportunity identification is having the proper perspective of the market, understanding that there will always be opportunity for those that proactively seek it. Irrespective of how difficult the current economy is consumers still purchase products and services. There are specific needs that need to be filled even in the most challenging times.

How much in housing wealth (as in equity) has been wiped out over the past two years? One-trillion? Two-trillion? Hard to say but it's still probably less than the stock market losses facing those who went long. At press time the Dow Jones Industrial Average was nearing 6800 which means the market is down 50% from its peak of 14,000. At least an empty house can be rented out (okay, maybe not in all markets) but a $1 stock may never recover. Even the great Warren Buffett of Berkshire Hathaway is feeling his oats. The net worth of Berkshire's Class A and B stock lost $11.5 billion last year. In his new annual letter to shareholders Mr. Buffett -- who smartly dumped his holdings in Fannie Mae, Freddie Mac and Countrywide years ago -- offers investors a ray of hope: "Amid this bad news, however, never forget that our country has faced far worse travails in the past"…

Regardless of the recent bailouts. Regardless of the fact that January saw another significant drop in home sales and values Regardless of the loss of nearly all of the warehouse lenders remaining that fund non-depository lending operations.

Servicing industry specialists have some pointed questions about the Administration's mortgage rescue plans, as I discovered during a roundtable at the Mortgage Bankers Association's servicing conference here.The excerpt that follows (which will appear in the April edition of Mortgage Servicing News) features Rodney Bechdoldt, vice president, mortgage systems division, at Central Mortgage Co.; Cheryl Lang, president of Integrated Mortgage Solution; James Miller, managing director of operations at The First American Corp.; Rich Rollins, chief executive of REO Sentinel and National Quick Sale; Fred Melgaard, executive vice president at DRI Management Systems; and Elsa Lewis, senior vice president of national sales/REO at Williams & Williams.What do you think about the President's plan? Go to the box below and join the discussion!MSN: What do you think about the President's plan?Cheryl Lang: I think it's a little disappointing. What I heard this morning was, if you are under water 5% or less, you'll get some help. You have to qualify 31% of your income, and these aren't the folks that are really struggling with homeownership. I would like to see more of the people who are struggling with their payments because of layoffs. Those are the folks that really need the help.Jim Miller: One of the things it may do is to bring some consistency. You have the FDIC with a 38% housing ratio. You have the OCC/OTS, they have anywhere from 40-50%. You go to the HOPE Now, they have a different outcome. The GSEs have a net 250. There's no consistency. So the issue is, when you talk about reperformance rates, the government's concern is half of them go delinquent again. But there was no standard for re-underwriting the loan. What you see is, not everyone re-underwrites the loan. The other issue is the delinquent taxes and interest, 43% increase in the last 18 months. A lot of companies will take that into account. You can't just take the delinquent taxes and interest this year and last year and just recast it for 12 months because your payment goes right back up again. There's no set standards. That's why the reperformance rates aren't where they should be.Cheryl Lang: But if we go with full underwriting, where are we going to get the resources? We're talking nine million people.Jim Miller: The cost of servicing has gone through the roof. No technology can keep up with the changes. But if you get information from the government from people's W2s, if you can get that, that would help. We hired FHA underwriters to reunderwrite. This bill will actually will pay you whether you're a subprime lender or a securitizer. You weren't getting reimbursed if you were a securitizer. So that will help offset some costs, about $1000 if you reperform. The only way these mods will reperform is if you re-underwite this. Otherwise if you take a verbal, it's a stated mod like a stated loan.Rich Rollins: If there are significant resource problems currently with the servicers, and if you do have to go back and re-underwrite that many loans, I wonder if there's enough people. There is some technology that can help, but in order to do that and in the compressed time frame you have to do it in, it's very difficult.Jim Miller: There's a lot of people out of work on the origination side that should know how to write loans. If you have good analytics, there's a certain segment that are pretty streamlined. A majority of them, though, about 60%, need to be re-underwritten. The taxes and insurance are a big issue and can't be overlooked. It's a very resource-intensive issue, but unless you do it, it's going to keep perpetuating itself.Rich Rollins: Jim stated the redefault rate is about 55-60%. If this doesn't address those issues then it will be no more successful than any other plan that preceded it. MSN: The amount of $75 billion in the plan, is that enough? What would be enough?Cheryl Lang: I don't think anybody knows. We're making it up as we go along. If it's not enough we'll go back and say "Can we have some more?" I don't think it addresses how we got to where we are. And how we prevent it going forward. We're putting a bandaid on something that has really exacerbated the global economy. And we have not asked, "What went wrong?"MSN: If President Obama is watching, here is a chance to advise him. How can he make the plan better?Jim Miller: One of the things that concerns me is there's a quote in there, "putting pressure on the servicers." Nobody realizes unless you're in this at the grass roots, the servicers have things coming at them in waves. There's no system or technology or policy they can adapt to how fast these changes are. For example, bankruptcy law. The states are making up their own rules. Because there's a perception out there that the banks are the bad guys. Now there's a whole lot of reasons how we got here. But the servicers are under tremendous amounts of pressure. You have consolidation of major banks and underneath that you have at least 15 different systems. And it's changing by the week and your systems can't keep up with it. You have five different government entities that have their own rules with debt ratios. So I would say to the President, have consistent guidelines so everybody can at least execute against it. There are too many different constituencies. There's no consistency. It makes it literally impossible for servicers to rig their systems or improvise. Rodney Bechdoldt: They also have to adhere to the guidelines from the investors contract so they have to go through and seek approval. It's not the servicers' decision on how these modifications are made.MSN: Jim, you mentioned redefault and that's a huge problem. How do you fix that? What modification gives people a good chance of staying in the loan?Fred Melguard: I'm a little surprised everyone's shocked that's the case. That's the way it was in the Eighties. We have the tools. We understand this is a cyclical market. And there art booms and busts. When market-driven originations get to the point where to keep your volumes up that you have to take a little more risk, you ought to be laying off that risk by planning your capacities, start planning for a few more defaults. I didn't see that happening back in '84-'85. That's my disappointment with the industry. Some of the tools were there, some of the signals were there, but we didn't see the capacity. I think we've stumbled into that late in the game, and we'll pay a price.MSN: What's the best way to restructure so we don't have these enormous high redefault rates?Cheryl Lang: I think it goes back to the way we did this years ago. You had to qualify for a loan. Let's go back to the old ratios, underwrite those loans, not to stated underwriting or stated modification, let's go back to the way business should have been done in the first place.Elsa Lewis: One thought that occurred to me when I listened to President Obama yesterday, talking about default at every level. You could see greed, greed, greed and greed. The bottom line is there's not something for nothing. There never has been and there won't be. You can't buy a home with nothing down. Servicers shouldn't ask for a buyer to buy a home with nothing down. I was around in the late '80s and early '90s and I thought we're not going to go through this for a long time again. Different problems, more macroeconomics this time, but, aren't we going to learn the lessons? I don't know.MSN: The plan had some incentives for servicers as well as borrowers. Are those going to help? Is that enough?Rich Rollins: The GSEs have been paying success fees for workouts for a number of years. Not always have those incentive dollars been maximized. It's back to scalability, it's back to lack of resources, and where you put your focus. The thousand a year for three years is a good incentive. There have been incentive plans around for servicers to do workouts to do short sales and they haven't maximized those to date anyway.

Tax reduction expert Murray Bradford claims small business owners may benefit from tax breaks related to business rent paid to a spouse.