On the Road Again

At the recent SourceMedia Best Practices in Loss Mitigation Conference I chaired in Dallas, I held a roundtable with some of the conference participants and my colleagues Amilda Dymi and Jennifer Harmon, for Mortgage Servicing News. The panel was keen to discuss the latest developments in the president's plan on loan modifications, as well as a number of other hot-topic button issues, like the government refi plan.Participants on the panel included Rich Rollins, CEO of Infusion Technologies; Ron Morgan, CEO of Sterling Home Retention Services; Chris Saitta, CEO of REOTrans; Greg Hebner, president of MOS Group; Frank Liddy, vice president of Genpact; and Robert Mackey, director in servicer evaluations, Standard & Poors.MSN: On the refinancing side of the program, what do you think about the recent lifting of the LTVs to 125? Is that a good thing? The last time we did 125 loans, they didn't turn out very well. Is that going to help more people refi?Ron Morgan: We didn't see a lot of success in the 105 program and obviously it's why they've moved it to the 125 and talking to not only the Treasury but to the GSEs, they don't see a lot of lift for the 125. And they've already jokingly started talking about a 150 program. So just try to supplement with some of the relief in refinancing some of these borrowers, but again, it's having the ability to scale to the volume that you could get out of that and at what point do you really be able to push as many loans like Freddie has before you could start to push it through the modification process for sure? So I think that remains to be seen how effective that 125 program is going to be at all. I don't see a lot of lift in it, honestly.MSN: Anybody else on that?Greg Hebner: I think there's certain markets where you'll absolutely see some benefit. I'm in Southern California, there's certainly a block of borrowers that are going to have an opportunity now under this plan that wouldn't - your hard-hit markets. Certainly there's people that are 175%, 200% LTV. But I do think you pick out sort of the worst markets, the ones that are in every newspaper, there are going to be people that would have not been able to be helped that will be able to be helped through this. I do think it's still - you talk about clarity - I think a lot of lenders have been extremely reticent to really throw a lot of resources at this thinking it's going to change at any point in time and not certain about - there's still questions about mortgage insurance, there's still some other open items out there. And again, I think this is a governmental challenge is if you give the industry really clear standards on what you do, they can build processes around it. And if not, they tend to wait. They wait for clarity.Ron Morgan: A couple comments on that is we've engaged, obviously, with a lot of borrowers in communication and what we're trying to convince some of them and trying to get to them, do a modification, keep their home and a lot of them are paying on a $400,000 mortgage and it's worth about $250,000. So their plan is, do I go down the street and buy the house for $250,000 or a half-million dollar house or $600,000 now for $300,000 and go ahead and move into that house and plan on staying there so I can build some equity again. So we're having a lot of people that would just like as soon turn in the keys, which is going to create doing deed in lieu or putting them in the cycle, and go through foreclosure. If you get arrogant with them, then they'll file bankruptcy and then carry the process out for two or three years. So I think the other side of that is what do we do with the people which may demand and require a writedown of principle at some point to try to keep these people in a home that it's going to take them five to ten years to again gain any equity out of? If we look what the stock market did to us five years ago and we all lost a lot of wealth in the stock market, now they've wiped out our equity in the housing industry and not only our equity, but our chances to get it back with any significant short time. What do we use housing equity for? We put our parents in homes, we put our kids through school, we did improvements to our house, we bought cars and all that credit has been taken away as well. One of the underlying factors is that the banks - remember, we start to open the dam up to push these foreclosures through, the banks are going to have problems with their net worth again and with their financial stability. And I know for a fact from discussing it with some of the top five that they're only allowing a certain amount of foreclosure to hit the balance sheet each month and I know some people that we dealt with that were in foreclosure where some of the top five actually rescinded the foreclosure because they didn't want the loss to hit the balance sheet at that time. And you know who the big players are out there. So there's just a lot of problems. You carry it one step further and you say well what about the investor? What about the guy that got wiped out at the stock market and said, "I'm going to go buy a second home because there's not a safer investment in real estate," and now we're sitting here and saying, "Well, we're not going to help the guy that has a condo at the beach, it's got to be your primary residence." Well, you're going to take the same $80,000 to $100,000 hit or bigger on that asset as you are on an owner-occupied asset.Robert Mackey: Shocking to the people who are still sitting there making their payments.Ron Morgan: Look at California, look at the lost income, look at the financial instability that all the states have today. So what are they doing? They're trying to recoup their money through exorbitant real estate taxes. The insurance is coming in now and pricing our homes so that your real estate taxes are and your insurance together could exceed what your mortgage payment was yesterday. And the guy down the street wants the same fix that you just gave the guy from an 8% mortgage to a 3.5%. He's very unhappy to sit in his house which is identical and pay 8% until I exhaust my $100,000 in savings and I end up now saying that I'm in default because I can't make my payments any more, or they won't do anything for me until I'm in default. So there's just a lot of different issues that need some concentration and discussion on. I think the problem is with some of the brains we've had in the world economy that have tried to address this, I think that hearing from us at the street level and the ground level, may help resolve a lot of these issues. But I just think there are a whole scale of issues yet to be solved. Technology, you can't build that overnight. It just doesn't happen.Greg Hebner: I think one thing, Ron, that we see a lot of is the situation you described where people actually can afford their payments, but the financial situation justifies them not making them. You see that a lot in California. Very well-to-do borrowers with substantial income and substantial assets, they're just looking and saying, "I'm five to 10 years from ever getting back whole and I have the financial wherewithal to go do something else, I simply won't pay." And it's hard to blame them. And a jumbo California loan today that wouldn't qualify for a HAMP, there is no possible conversation until you fall into delinquency. Once you fall into delinquency, your credit is already destroyed, I'll take my income, I'll take my assets, I'll do something else and ... thinking about it, and again, a lot of these major services are tied to major financial institutions. They know that borrower A has a $100,000 CD and they have $50,000 in their savings account. This is where the technology analytics aren't there. If somebody is in a home where instead of taking a $400,000 loss or a $300,000 loss, wants to take a $100,000 loss, they should be out talking to these borrowers. And as Ron said, the 8%, they could do things about this outside of HAMP. But those borrowers are really in a predicament. I mean it's hard - why should they continue to make their mortgage payment when they're that far - if you had a second property or an investment property, nothing covers, nothing covers you under HAMP. So I bought that secure rental property, a single-family unit, I was going to rent it out. That was going to be my retirement, now I'm $100,000 underwater. Let it go, let it go. And those are some of the situations. We see those types of examples. We take people's financial information - there's no question they can make the mortgage. They just don't want to do it.Frank Liddy: We're still in a period where there's moral hazard out there. Until we get to the state of clarity for the rules and a recognition that not everyone is going to be saved. But I also think for those that are setting up the strip mall shops and exploiting borrowers, homeowners in that regard, there's not been a lot of talk around what are the criminal penalties around. So if a lot of these players are receiving federal funds, does this become a federal offense? That's going to have to be explored as well. I think someone who has been relatively silent as a group has been the mortgage-backed securities market. And if you think about their role in providing liquidity and the funding here, they're sitting on a lot of high-risk paper, there's virtually no liquidity in that market right now. Those that are selling are selling at less than 15 cents on the dollar just to get out in many cases and I think whoever is the voice of that industry and coming into this conversation quickly at the public policy level to help enable more liquidity on a go-forward basis is also, I think, a critical need going forward.Greg Hebner: That's the elephant in the room to me. No one has talked about the conforming mortgages, which have one-fifth the delinquency rate of mortgage-backed securities. It's where all the focus, where all the public policy and all the money is going. It's a small fraction of the overall delinquencies and the two are obviously feeding into each other because they're in the same property markets. Destruction without any opportunity to help these borrowers in mortgage-backed securities is only destroying the portfolios of the government-backed securities, but they decided to focus really on one problem, which is their own portfolio, not necessarily understanding the overall implications of the other side of the fence. And I have not seen anything come out - we're in Southern California, the subprime capital of the world. You took out a New Century mortgage or an Ameriquest mortgage, you could be at 10% or 11% right now and there is not a thing anyone will do for you. There are no programs, there's no plans, the servicers ... they will have nothing for you. That's the elephant in the room for me.MSN: How can we bring in new investors and how can we change - or is there anything that can be done like in an emergency fashion?Greg Hebner: I think the biggest challenge in the investors - and there's people around this table I think that are more versed than I - is simply the divergent interests. There's some paper where they're just holding their breath and hoping it goes to foreclosure so they get paid back. Then there's others that are so far down the risk curve that they've already written it to zero and don't expect anything. Then there's hundreds and hundreds in the middle. These are investors from ... Middle Eastern sovereign funds, it's European insurance companies, it's global at a level that we've never seen before.Rich Rollins: You've got, like you say, you've got different issues, different tranches. Some guys want a foreclosure, some guys don't.Greg Hebner: So I think the government, I think there needs to be some sort of public policy position with incentives and with the investor who is in the first position in a foreclosure is going to need to be compensated for him to relinquish the rights that he has because he's in a position - what you hope and I hope doesn't happen - I'm still blown away by the fact, you look at the auto industry and they took secured creditors and they basically said you have no rights. They took people in a debt position - for the first time at least in my business career - they said your secured position is no longer secure. You're going to fall below somebody else.Chris Saitta: It's not only unsecured, it's been subordinated. And we'll determine the value of the asset.Greg Hebner: And we'll tell you what it's worth. So there's nothing to stop the government from doing that, obviously, in the invest market. But I think you're going to need public policy involvement. I don't think you're going to get everyone to sit around the table like this, their interests are too divergent. If anybody has any different views to that.Rich Rollins: I still think a couple years from now ... we're through the bulk of this and we've got three, four, five million REOs sitting out or needing somebody to come into them and the only way to do that, we're going to have some national grace period that we said, "Look, all you guys that were in this debacle in the last three or four years, your credit was screwed up, there's a grace period here. If you can requalify now, we're going to forgive the sins of the past, we've got to get this inventory occupied." And I think when all this dust settles, I do believe there'll be some type of national grace period that forgives the debt.Greg Hebener: Federal mulligan.Robert Mackey: Yes, federal mulligan. It's the only way to get this thing in the ultimate recovery that we need.MSN: Do you think there will be a tidal wave of foreclosures with all of these loan modifications happening, or is it going to die down?Rich Rollins: I think the mods will put in a dent, but it's a tsunami that's coming. And you're going to see some pockets of success, you're going to see this program implemented, maybe some new programs, nonretention strategies come out. It is just a tsunami that's going to come out.Greg Hebner: Loan mods are not going to save the Detroit real estate market.Rich Rollins: No, the entire city has been gifted.Greg Hebner: Yeah, 15%, 20% unemployment. There's just nothing - you're just going to see some markets that have been so devastated that ... there'll be five years of foreclosures in Detroit.Rich Rollins: I think there's a lot of things that will help impact and stop, slow down the flow, but I don't think there's any silver bullet that will kill the beast.Robert Mackey: There's too many variables. Again, you talk about jobs. Unemployment, a decrease is obviously going to help, an increase is going to make it worse. Then you've got moratoriums that are timed in different parts of the country. We're going to have to just work through this.MSN: In dealing with all the vacant properties and the different city laws at the different local level is overwhelming. How do banks keep up with that?Chris Saitta: We have a lot of our clients looking to us to figure out from a decision matrices perspective, what the state guidelines are. And I think everybody is considering a rental strategy because these properties that - regardless of the volume that will foreclose, there is a volume that's already foreclosed. And there's not a real estate market or a financing environment available to really push those out at a quick pace. So people are considering a rent and hold strategy.Rich Rollins: Freddie's got a program for that.Robert Mackey: On a positive note, I'm starting to hear a little bit of good news out of California. Again, the prices may be discounted to the point where it's almost giving it away, but several major services have told me that they're starting to see multiple bids for some of their REOs and some are starting to see people show up at foreclosure sales and there is some bidding. And they're not losing, they're not getting a bid for a dollar, it's being bid up.Rich Rollins: The problem that we've seen on the short sale, we can get the offers in, we fine-tune the process and everything is electronic and you get down to the end, but the borrower is still having difficulty getting financing. Banks are still really tight ... so you do everything you can, you get everybody to agree on the offer and you get a good value, you've got the seconds and thirds all negotiated and you get down to the end and can't get financing. So you still have that issue to deal with.Chris Saitta: It used to be investors would come in and buy foreclosed homes and REOs and flip them. It's not the environment to do that, so it's a buy-and-hold strategy now. So even the investors that are coming in who either have financing or all cash are buying and then going to a rental.Greg Hebner: I do think that the federal tax credit in some markets, not California per se, offering the $8,000 to first-time home buyers, I think is a - well, now I think it's just not even first time, but if you haven't owned in three years - that's the kind of federal policy, to me, to stimulate demand. You are seeing people - a market like this, be it Dallas or the Midwest, where it's 10% up to cap at $8,000. If you're buying a $100,000 home today ... I wish 20 years ago when I bought my first home, you would have given me $8,000 of equity with a 3% down FHA loan. So I have an opportunity for, I mean to actually come in and really start my financial future as a first-time homebuyer and a new couple with real equity. And in a lot of markets, for $100,000 to $140,000, you can get a nice starter house. California not being one of them.MSN: California also has a state grant it issues on top of it.Greg Hebner: There are state grants you can put on top of it. I think if some of those things applied to investment properties, to other areas within the real estate market, you may see people more apt to jump. If I was the governor of Florida, I'd be thinking about some pretty aggressive things in certain markets. I've got to stimulate demand. I'm watching it sink month after month after month after month. I'm destroying so much value that I'm losing other aspects that makes that economy vibrant. I'd be looking at how do I stimulate buyers? Whether it be international buyers, whatever it may be, I need to stimulate that. You need to understand the impact of that on a market.Chris Saitta: To build on that, if you really come up a level, there's a one-to-many relationship. There's one borrower and there's many services, lenders, liens involved. And the government program focuses on the many aspect. I think you're right, if there was more to stimulate on the borrower aspect, which might be simpler, quicker, easier, easier implementation, that would meet in the middle where modifications bring down to affordability and real estate hopefully spurs demand to a point where there's a tipping point.