Servicing

As 'negative equity' increases home owners are increasingly likely to default on their mortgages — even if they can afford to pay them, according to a recent academic study. Research conducted by Northwestern University and two other colleges found that homeowners who bought more than five years ago are less likely to default. They also found that "young people" are less willing to walk away, a finding they call surprising. "The young are more dependent on the loans market and thus face higher reputation costs from defaulting," they write. When a household that can still afford to pay the mortgage purposely hands in the keys it's called a "strategic default." The study says that "no household" is willing to default if the equity shortfall is less than 10% of the value of the home — but when the underwater position reaches 50% (which has occurred in some markets, notably Florida and Nevada) then 17% of consumers will engage in a strategic default. Researchers Luigi Guiso, Paola Sapienza and Luigi Zingales write that 80% of "people think it is morally wrong to do a strategic default." The authors add that even "amoral people can choose not to default when it is in their narrow economic interests to do so because of the social costs this decision entails."

The nation's housing market might be best served by creating up to 20 housing GSEs, according to a recent report by the Congressional Research Service. The CRS, however, is not promoting one option over another but instead weighs the benefits of several different ideas concerning the future of Fannie Mae and Freddie Mac. CRS notes that 20 housing GSEs could fall under financial stress at the same time but says one way to avoid this is to assign each a specific geographic region or have them "specialize in certain types of housing such as condominiums or multifamily rental housing." Next year the Obama Administration is expected to unveil its proposals on Fannie and Freddie. Since the third quarter of 2007 Fannie has posted net losses of $102 billion, Freddie $63 billion.

Two additional mortgage vulture funds went public this week — both as REITs — but their IPOs failed to catch fire with investors. Colony Financial Inc., Los Angeles, sold 12.5 million shares, raising $250 million. Apollo Commercial Real Estate Finance, New York, sold 10 million shares and raised $200 million. Both are trading in a tight range with somewhat light volume. The two were formed to buy distressed mortgage assets, in this care, commercial-related notes. The deals were originally scheduled to price on Tuesday, but were postponed until later in the week. This past summer PennyMac Mortgage Investment Trust of Pasadena, Calif., went public, raising about $320 million, about half of what it was hoping for. PennyMac invests in, and services troubled residential loans. Sources tell National Mortgage News PennyMac has looked at several portfolios but has only wound up buying a few.

The serious delinquency rate on Freddie Mac guaranteed single-family loans broke the 3% mark in August, the highest reading ever posted by the mortgage giant. In its new monthly summary, the GSE said the percentage of loans 90 days or more past due and in foreclosure hit 3.13% during the month, up 18 basis points from July. In August 2008, the government sponsored enterprise had a 1.11% serious delinquency rate. The huge jump in defaults is driven mainly by Freddie's $172 billion portfolio of guaranteed alt-A loans, which had a 9.44% serious delinquency rate as of June 30. The alt-A portfolio includes $144.8 billion of interest-only loans and $11.6 billion of payment option ARMs. There was good news, though: In August Freddie issued $47.5 billion of MBS, a 7% increase from July. To date, Freddie has issued $411.2 billion of MBS, compared to $356.8 billion during the same period last year. Freddie reported that its purchases of refinanced loans in August totaled $35.6 billion, an increase of 4.3% from July.

House prices could drop by another nine percentage points before prices bottom in the second quarter of 2010 and it might take a full decade before prices climb back to their 2006 peak, according to Moody's Economy.com. Overall house prices will fall by 40% before bottoming next year, Moody's Economy.com economist Celia Chen said. So far, house prices have declined by 31% based on the Standard & Poor's/Case-Shiller house price index. "For many reasons, the rebound will be disproportionately small compared to the decline. It will take more than a decade to complete recovery from the 40% peak-to-trough decline in national house prices," Ms. Chen says in a recent article in Moody's Resi Landscape. In hard-hit states like Florida and California, prices "will only re-gain their pre-bust peak in the early 2030s," the article says.

Mortgage servicers participating in the Obama Administration's loan modification program will soon be ranked on their response times and other indicators of service quality. Treasury assistant secretary Herbert Allison told a Senate panel that servicers have placed homeowners into nearly 400,000 trial modifications. However, Treasury, like members of Congress, continues to receive complaints about servicers. "Homeowners are not receiving responses from banks as fast as they would like," he said. "To provide additional impetus for them to improve their service quality," Mr. Allison said Treasury would publish reports soon on the service quality of each bank. Meanwhile, Treasury and the servicers are working on streamlining the documentation that homeowners have to provide servicers to qualify for a modification. Mr. Allison noted that Treasury and other administration officials would be meeting the servicers in early October to discuss documentation and other efforts to improve the Home Affordable Modification Program. The Treasury official also told the Senate Banking Committee that the first public-private investment partnership transaction would close at the end of this month. Mr. Allison did not provide any specifics, except to say that it involves that sale of non-agency residential and commercial MBS.

Loans are entering delinquency and/or foreclosure at a rapid rate, but are exiting at a very slow rate and this will delay a recovery in the housing market, according to analysts at Amherst Securities Group. There are currently 7 million mortgages that are delinquent or in foreclosure according to a Sept. 23 Amherst Mortgage Insight report. "That housing overhang is the single largest impediment to a recovery in the housing market," the ASG analysts said. While the housing market has seen some signs of bottoming, they expect the impact of this "huge shadow inventory" will increase the percentage of distressed and REO sales going forward. The National Association of Realtors reported that distressed sales comprised 31% of existing home sales in August. The ASG analysts don't expect loan modifications will constrict the delinquency/foreclosure pipeline. They contend modifications don't address "negative equity — the single most important determinant of default." Under their most optimistic scenario, only 16% or 1 million loans will be cured. That still leaves 6 million housing units that have to be liquidated.

Thousands of property owners are receiving delinquency notices because their county real estate taxes were never paid out by the now-defunct Taylor, Bean & Whitaker, Ocala, Fla., which once serviced almost $80 billion in home mortgages. According to a report in the St. Petersburg Times, this "nightmare" for consumers is playing out throughout Illinois and other states where property taxes were due in full this month. In Illinois, Will County Treasurer Pat McGuire is responsible for collecting taxes on 1,746 parcels that were escrowed by the non-bank servicer. Only 398 of them, all serviced by Bank of America's mortgage department, made the Sept. 1 deadline, the newspaper reported. (The government transferred TBW's Ginnie Mae servicing to BoA.) All the rest were shipped delinquency notices last week. TBW's escrow problem centers on accounts the company had with Colonial Bank, which failed this summer and was seized by the Federal Deposit Insurance Corp. (Colonial was TBW's warehouse lender.) Customers reported both insurance and taxes not being paid out of escrow. The FDIC — working as Colonial Bank's receiver — and TBW's bankruptcy counsel are working on a bankruptcy court plan to resolve control of the escrow accounts.

A study by the National Consumer Law Center has found that programs in 14 states requiring either pre-foreclosure mediation or conferences with troubled homeowners have done little to ease the foreclosure crisis, largely because the programs impose no significant obligation on servicers. If no requirements are placed upon servicers, the report said, it is unlikely that mediation that will lead to fewer foreclosures. Many of the 25 foreclosure mediation programs reviewed for the study lack mandatory rules and fail to impose sanctions for noncompliance with what minimal rules exist, the study said. It also faulted the programs because they do not require servicers to provide information substantiating a right to foreclose and do not mandate analyses of loan modification alternatives. And it said many programs set such "unreasonable procedural barriers" that large numbers of homeowners were restricted from participating. "Under most of the existing foreclosure mediation programs, servicers have all the discretion and homeowners have little or no power," said the study's author, NCLC staff attorney Geoffrey Walsh. "If the programs continue to demand little or no accountability from servicers, they will likely go the way of federal efforts to control foreclosures that have failed as a result of relying on voluntary compliance by the lending industry." The National Consumer Law Center is a nonprofit organization that seeks marketplace justice on behalf of low-income and vulnerable Americans. Among a litany of recommendations: A requirement that servicers give borrowers a document showing its affordable loan modification calculation and net present value calculation; produce specified documents, such as a pooling and servicing agreement, loan origination documents, an appraisal, and loan payment history; establish proof of their standing as the real party in interest, and document that they have considered alternatives to foreclosure.

Fannie Mae and Freddie Mac are approaching a combined total of 100,000 in real estate-owned assets with Fannie at 63,000 and Freddie, 35,000, according to former director of FHFA James B. Lockhart III. As a featured speaker at The Five Star Default Servicing Conference and Expo in Fort Worth, Mr. Lockhart said while HAMP and HARP are getting borrowers into safer mortgages, everyone is waiting to see if the modifications take or if they will re-default quickly. Their history has not been good, he said. Based on first quarter 2008 data, Fannie and Freddie only lowered payments for 3%. "If you aren't lowering payments, it's not surprising you are not getting good results." He did say there was a more dramatic change in the second quarter, which will hopefully help more people stay current. Fannie and Freddie have lowered interest rates from 6.5% to 5%. Unfortunately, economic trends and growing unemployment could still hurt the market. Looking at the future of Fannie and Freddie, 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. They gave people cheaper mortgages than they should have had and now taxpayers are paying for it." As to whether there will be a private label market comeback, he said it will take some time for that to happen, adding that it is important to divide the private from the public sector. "If you don't draw the lines clearly you have what we had. We had the private sector taking profits and then the public picking up the losses. That was the big problem. We need a better understanding of what the private-public sector should be."