Loan Think

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.

The National Association for the Self-Employed gives a word of warning for owners of small business. They need to know the tax classification for any workers they might have. It is not the choice of the worker on whether they are a W-2 employee or a 1099 independent contractor.

Heather Villa, the creator and chief executive of online bookkeeping service IAC-EZ, New York, created a Q&A dedicated to helping small business owners prepare their 2008 taxes during a severe recession.

If it's late February that means it's time for the 38th annual 'Midwinter Housing Finance Conference' in Park City, where the mortgage industry's 'movers and shakers' gather for three days of skiing and industry gossip. The conference ends on Sunday and the keynote speaker is the nation's top GSE regulator James Lockhart. In attendance is none other then Adam Bass, once the vice chairman of Ameriquest Capital Corp. During the height of the subprime boom ACC controlled one of the nation's more (shall we say) "interesting" subprime lenders, Ameriquest Mortgage. National Mortgage News correspondent Lew Sichelman said he'll be having dinner with Bass at the meeting. It was three years ago that Ameriquest agreed to pay $325 million to the states to settle allegations that its retail loan officers engaged in abusive lending practices. (Critics should keep that in mind when blaming loan brokers for the mortgage mess.) Ameriquest was the brainchild of the late Roland Arnall. The lender's rise and fall is detailed in the book, "Chain of Blame, How Wall Street Caused the Mortgage and Credit Crisis." By the way, Ameriquest used to sell and securitize its subprime loans through Greenwich Capital, which in turn is owned by Royal Bank of Scotland which (now) is 70% owned by the British government. Greenwich now employs some former mortgage traders from Bear Stearns. Funny world we live in…

The large regional bank that is contemplating exiting the warehouse lending arena is National City Corp. of Cleveland. Sources tell us that NatCity likes the business (has for years) but its new owner, PNC Bank of Pittsburgh, isn't so sure. NatCity officials have been told to clam up and PNC isn't saying much about the issue. Early last week one NatCity source close to the matter sounded understandably upset about a possible shutdown. But there appears to be some hope for NatCity and its non-bank customers. One advisor told us this week that because PNC has accepted Troubled Asset Relief Program money it may delay the warehouse shutdown or stay in the game. Officials at Treasury and the Federal Reserve supposedly are aware of the current warehouse crisis - as in a lack of providers - and would not look kindly on PNC/NatCity exiting warehouse. At press time the situation looked a bit cloudy...

If this doesn't revive the housing market in California, then nothing will: California governor Arnold Schwarzenegger signed a billing allowing for new home buyers to receive a maximum tax credit of $10,000. And here's the kicker: buyers can use both the California credit and the new federal tax credit for a total benefit of $18,000. Tax credit means that if a consumer owes Uncle Sam and the state $18,000 their tax bill would be, well, zero. Is this a great country or what?..

KEY ELEMENTS OF THE STIMULUS PLAN FOR MORTGAGE BROKERS TO USE FROM A MARKETING POINT OF VIEW

Now that JPMorgan Chase has decided to exit the warehouse arena the obvious question becomes: who's next? Mortgage advisors tell us that one regional bank that is a fairly large player in the sector is seriously contemplating throwing in the towel on warehouse financing. These are treacherous times for non-depository mortgage bankers. There are hundreds of non-banks still originating loans (mostly Fannie Mae, Freddie Mac and FHA product) but if these firms cannot get financing it could spell the death knell for what was once a thriving part of the residential finance industry. Meanwhile, the Treasury and the Federal Reserve have yet to weigh in on the warehouse issue -- at least not publicly…

Non-depository mortgage lenders are still starved for warehouse credit, according to Scott Stern, president of the Lenders One cooperative. Visiting with National Mortgage News recently Mr. Stern described the situation as a crisis, adding that "If you lose a warehouse line, there is no place to go but out of business." Lender's One, like the Mortgage Bankers Association, favors allowing Fannie Mae and Freddie Mac to become involved in warehouse financing but both the Federal Reserve and Treasury have yet to weigh in on the issue…