December 2, 2022

Archives for December 2008

Details Of Streamlined Mortgage Modification Released

The Federal Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac announced the details for streamlining the mortgage modification process for homeowners in default.  The new guidelines are an effort to standardize the eligibility requirements, thereby allowing the modification process to be completed more quickly.   Currently, the loan modification procedure is bogged down due to understaffed loss mitigation departments and varying rules which have turned the process into a two to four month ordeal for a homeowner already under financial stress.

Fannie Mae President Herb Allison stated that the new guidelines had been established by working with the Federal Housing Finance Agency (FHFA) and numerous lenders and service providers.  Mr Allison also noted that “These efforts are helping more than 10,000 delinquent borrowers every month get back on track”.

FHFA director Jim Lockhart noted that “I am pleased that our program is being rolled out right on schedule and that servicers are already working at modifying delinquent loans with the goal of keeping people in their homes”.

Loan Service Providers who administer the actual mortgage processing will attempt to notify eligible borrowers by mail of the details of the new Streamlined Modification Program (SMP).

The eligibility requirements for the SMP are as follows:

  • the borrower must own and occupy the home
  • the borrower is not eligible if he is presently in bankruptcy
  • the borrower must be delinquent at least three months
  • the borrower must have a loan to value of over 90%
  • the borrower’s income must be verified

The mortgage loan will be modified so that the borrower’s total monthly payment including escrows does not exceed 38% of his gross income.  To bring the ratio to 38% or lower, the term of the loan may be extended to 40 years and/or  part of the principal will be allowed an interest forbearance.   The interest rate on the modified loan may not be lower than 3%.  Any second mortgage on the property will be left outstanding.

There has been much controversy over whether or not the loan modification programs will ultimately work out well for the borrower since the loan principal is not being reduced.  As noted above, the servicer can make the borrower’s payment smaller by making a part of the principal interest free for a period of time (principal forbearance).   The homeowner, however, will in many cases still owe more on his home than it is worth and the reduced mortgage payment usually only lasts for 5 years.  It is therefore interesting to note that the new streamlined modification program does not allow for any type of principal forgiveness.

The loan modification process has generated a lot of controversy and criticism lately since the redefault rate was approximately 50% after 3 to 6 months.   Each party involved in the process has different interests to protect and were promoting different eligibility standards.   It will be very interesting to see if this new streamlined and standardized loan modification program will result in a smaller redefault rate going forward.

HUD Loan Modification Program Called A Failure

None other than the Secretary of Housing and Urban Development has declared the HUD loan modification program, known as Hope for Homeowners, to be a failure.   Steve Preston, HUD Secretary , blamed Congress for the program’s failure.  “What people don’t understand is that this program was designed to the detail by Congress”.

The Hope program,originally expected to help almost half a million people, has had only around 300 applications since its launch.   The chairman of the House Financial Services Committee blamed the Bush administration for opposing features of the bill that would have made it acceptable to lenders and easy to use by homeowners in default on their mortgages.   There have been calls by others on Capital Hill to use a portion of the TARP funds to ease and expand the Hope program.

In theory, the Hope program would have been beneficial to both borrower and lender by turning a defaulted loan into a performing loan.  It was structured to refinance a homeowner into a 30 year fixed rate mortgage insured by the FHA.

In reality, features of the Hope program seemed to have been designed to make it unattractive to both borrower and lender.  Specific provisions that created problems and made the program basically unworkable for all parties were as follows:

  • there was no obligation on the part of lenders to participate
  • the FHA would only insure  a new loan for up to 90% of the homes value.  Cash strapped borrowers had no way of coming up with the cash for the shortfall on what was owed.  For example, a homeowner owing $150k on a house now appraised at $100k could get a new low rate mortgage of $90,000 but only if he could come up with the $60k balance due on the original loan.   Someone with $60,000 available would probably not be in default on the mortgage.   The only other option to bringing $60,000 cash to closing was to request that the lender write down the loan balance to $90,000, which most lenders politely declined to do.
  • in order to qualify for the Hope loan, borrowers had to sign a statement testifying to the fact that all of the information they provided on their original loan application was accurate.  With the large number of stated income loans done in the past, many borrowers could not sign such a statement.
  • fees were to be assessed on any homeowner refinancing under the Hope program, monies that many homeowners did not have.
  • there were also limitations on the allowable debt to income ratio on the new loan in order to qualify.  Many would not have qualified even under the reduced loan amount and lower payment.
  • since the government was sharing with the original lender a portion of the losses on the refinance and loan write down, a portion of any future price appreciation upon sale by the homeowner would be due to the government

The amount of the new loan allowed under the Hope program and insured by the FHA has now been raised to 96.5% in an effort to make a refinance more appealing to the original mortgage lender.

Additional change to the Hope program are expected after the new administration takes over in January.

FOREX Traders Call Bernanke’s Hand

Currency traders have voted on the Fed’s latest policy decisions and this is the result – a collapsing dollar.

Courtesy of

The magnitude of the latest rate cut apparently surprised foreign dollar holders who can only assume that the US economy is weaker than they previously believed.  Why would a foreign investor hold dollars that return zero interest and also risk foreign currency losses on top of that?

The Fed’s intention to create as many dollars as necessary to cure the credit markets is creating a huge oversupply of dollars.  Is the falling dollar the result of unintended consequences or was it a deliberate calculation by the Fed to weaken the dollar?  A weak dollar means US companies can sell their goods at cheaper prices, thus boosting sales and profits.   A weak dollar would also boost the price of foreign imports and in theory help prevent further deflation.  If the Fed was planning on a weak dollar policy, it was a poor choice on either count.  Consumers can’t afford higher prices and other nations can also cut rates to zero.

Previous actions of the Treasury and the Federal Reserve have not inspired confidence.  They are trying everything that might work with no certainty of the end result.    An almost proactive policy to weaken the dollar may only invite competitive devaluations, creating further havoc in the currency markets.

The factor that may now cause the most fear is that  interest rate cuts are no longer a policy option.  The unintended consequences of applying unconventional monetary policy, the only option left, may now be the biggest fear of all.

The Age Of Austerity

Very little of the $8 trillion plus that the Government has committed to the economy seems to be trickling down to the average consumer.

One in five U.S. households was behind on its utility bills

One in five U.S. households was behind on its utility bills coming out of last winter, a new survey concludes, raising fears that the current heating season could be even worse. One in 20 households had its utility service terminated in 2007.

The survey, expected to be released on Wednesday, was conducted by the National Association of Regulatory Utility Commissioners, or Naruc, an organization of state utility regulators that has become increasingly concerned about a worsening trend of payment delinquencies and service shutoffs.

“We know the economy is in worse shape than when the numbers were taken, and we know people are struggling,” said Rob Thormeyer, spokesman for Naruc in Washington, D.C.

Sign of the times: about 1,000 apply to burger joint

Some wore ties. Some wore their pants too low. Some were balding. Some owed two months of mortgage payments. Some spoke openly of suicide. Some asked this reporter for a job. Some asked the manager at the hotel hosting the event for a job.

Ahead of a new In-N-Out restaurant opening in Las Vegas, close to 1,000 applied for a $10-an-hour job flipping or serving burgers. There are 50 available jobs, at most.

There was 42-year-old Freda Beckwith, who Wednesday observes three months of joblessness. Her resume ends at the Bellagio, where she was a cashier until Sept. 17, when she and 14 others in her department were stripped of their jobs.

Her husband is disabled and brings in only $700 a month in Social Security disability payments. They are now two months behind on payments on their house, she said.

She has applied for jobs at every hotel and casino on the Strip; she has filled out dozens of applications. She thinks younger people are getting the jobs.

As noted in The Illusion Of Prosperity Ends, many are facing very hard times.  Those without jobs can’t spend and those with jobs don’t want to spend.

As conditions continue to deteriorate at a rapid pace, there is one question that no one wants to address.  Can the Fed backstop the entire US economy?

Signs Of A Bottom In Real Estate

The Federal Reserve would like us to believe that lowering rates will reverse the decline in housing values.   They have brought interest rates to virtually zero  providing some payment relief to selected borrowers.  In the long run, however, efforts to prop up the price of housing with rate cuts and loan modifications will merely prolong the slide in values.   If the Fed had the power to prevent a decline in housing prices, they would have done so.  In a free market economy, prices will eventually reflect the reality of matching home ownership with income.   The Fed can lean against the primary trend but it cannot change it.

The lending distortions of the past that created the bubble in housing are now gone.   It is no longer enough to say that you make $150,000 – you need to prove it.   It is no longer possible to get 100% financing with poor credit.  The poor lending decisions of the past are causing pain for both borrowers, banks and the economy at large.  Lower rates alone will not clear the market.

The free market has solutions to over leverage and poor lending decisions.   The solutions are called write offs, bankruptcy and foreclosure.   As painful as these measures are, they are the mechanism for building a financially strong base of homeowners who will be far less likely to default on their mortgages.

During the height of the housing bubble several years back, only 10% of California households qualified for a conventional 30 year fixed rate mortgage.  The bubble prices were nurtured and sustained by exotic lending programs with no income verification.  Fast food workers bought $1,000,000 homes.  Now the bubble has burst.  The positive side is that prices are reverting to levels where real buyers with real income can now buy and have an affordable and sustainable payment.

Evidence of a healthier housing market is also seen in the National Association of Realtors housing affordability index.  This index shows an all time high of housing affordability based on income.  The Case Schiller data on price to income ratios also shows a marked improvement of affordability although it is still 20% over the long term average prior to 2000.  This is all good news which is being masked by the ongoing  housing bust.

Hints that we are finally arriving at fundamental values in housing can already be seen in San Diego.

Forbes reports that intrepid investors are buying houses out of foreclosure and renting them out at a profit – often to neighbors who lost their own homes.

Randy L. Perkins amassed a nice fortune in real estate, life insurance and investment banking in southern California over the past 30 years. Since May he has sunk $5 million of it into the one place most investors least want to be: housing.

Perkins has bought two dozen homes in the San Diego area through his Westview Financial Group. One was a dilapidated three-bedroom stucco in Escondido for which Westview paid $158,000–a 61% discount from the previous selling price of $408,000.

Westview eventually spent $40,000 on acquisition costs and improvements. Then it rented the home for $1,800 a month, netting about $18,000 in annual profit after property taxes, maintenance and insurance. That’s a 9% return on the acquisition cost before income taxes…

Currently one in every 32 San Diego homes, a total of 34,854 units, is in foreclosure. That ranks it as the 21st-most-troubled housing market in the nation.

Now first-time buyers and investors like Westview are offering a glimmer of hope. In September the number of San Diego homes sold rose 56% from a year earlier to 3,366, according to DataQuick. More than half were bought out of foreclosure, indicating that Perkins is far from alone in seeing promise amid the wreckage.

Priced properly anything will sell.  Time and price will accomplish what the Fed cannot.  There are oceans of private money looking for an adequate return on capital.  Let the free markets do their work – and the pain of the housing bust will soon be solved.

Deflation Everywhere As Credit Unwinds

Motorola Tightens Belt Again – Wall Street Journal

Motorola Inc. announced most employees won’t get raises next year and put a freeze on its U.S. pension plan and matching 401(k) contributions as the struggling cellphone maker continues to cut costs.

The moves are on top of $800 million in cuts announced two months ago that include 3,000 job cuts and suspending breakup plans.

The telecom-equipment-maker said it will permanently freeze its U.S. pension plans, preserving vested benefits accrued by employees and retirees but eliminating future benefit accruals, effective March 1. The company said it intends to continue to provide funding to meet its pension obligations to present and future retirees. The 401(k) match suspension begins Jan. 1.

Messrs. Brown and Jha have agreed to have their 2009 base salary cut 25%. Mr. Brown also will forgo a 2008 cash bonus and Mr. Jha’s bonus will be cut by the amount Mr. Brown is forfeiting. The remainder will be taken in the form of restricted stock units.

We will be seeing many more headlines similar to this as the great credit unwind continues.  The panic moves by the Federal Reserve to lower credit costs and increase lending are at the margin as demand and spending continue to spiral lower.  Lower demand, lower incomes and asset destruction due to defaults are all deflationary.

Pay cuts, job losses and salary freezes are spreading throughout the economy with increasing speed and frequency.   As this self perpetuating cycle of lowered demand continues, lower interests rates may have only a marginally beneficial affect.  Employees receiving pink slips, pay cuts and lowered benefits are not likely to be spending more regardless of the level of interest rates.

The Federal Reserve is doing what it is supposed to do by stabilizing the economy, but they will not be able to change the economic fundamentals of a market economy that is attempting to correct past credit excesses.

The Illusion Of Prosperity Ends

Every day brings more examples of the failed strategy of fostering economic growth through the use of easy credit.  Modern economies need credit to grow and prosper.   Applying credit growth on an exponential basis ultimately fails when borrowers become so leveraged that any hope of repaying their debts becomes impossible.

The Perils of Consumer Debt on Display in South Korea

After the Asian financial crisis hit South Korea a decade ago, the government helped the export-dependent economy recover by pumping out money and convincing people to borrow and spend more.

But this time around, the high household debt that accumulated in the past decade is depressing spending — an experience that has relevance around the world as governments seek ways to get consumers to help lift their economies.

As exports drop and South Korea’s economy slows, a high level of household debt is keeping consumers from spending more and the government — like others elsewhere — is wrestling with the question of how much to intervene.

“Everybody is too much in debt, so they cannot consume,” says Kim Kyeong-won, a senior vice president at Samsung Economic Research Institute.

Consumer debt in Korea expanded 350% over the last decade trailing average yearly economic grow of approximately 5%.

Korea is not just one example of reckless lending; it is a worldwide problem.  Ironically, the amounts of debt and leverage are so unsustainable that to cease lending to the overextended risks a collapse far worse than what we have seen to date.  We have reached the classic debt trap and the Federal Reserve acknowledges as much by extending virtually unlimited credit in every direction.

Bernanke Goes All In (Wall Street Journal)

If the current Fed believes there are limits to monetary policy, you can’t tell from yesterday’s Open Market Committee statement. The 10 members voted unanimously to take its target fed funds rate down to between 0% to 0.25%, from 1%. With Treasury bills already trading at close to zero as the world flees toward safe investments, the practical impact of this rate cut is negligible.

With the velocity of money collapsing as the recession deepens, the Fed is trying to put a floor under the economy by pledging an unlimited supply of dollars. Another goal is to fight the risk of deflation, or falling prices, as long as the economy continues to shrink. And judging from yesterday’s rally in stocks and bonds, many investors like the idea.

Now the Fed is embarking on a further monetary adventure and asking the world to believe that this time it will work. We sincerely hope it does. And if a lack of liquidity is the problem in some credit instruments, the Fed’s direct purchase of those assets should contribute to a credit thaw. It has already contributed to a decline in mortgage rates.

However, the larger economic problem today isn’t an overall lack of liquidity. It is fear and uncertainty. Banks, consumers and business are dug in their foxholes, conserving their cash until they believe the worst has passed. Meanwhile, investors around the world are deleveraging to reduce risk and cut their losses, a process that the Fed can do little about.

It would appear that whatever victory the Fed may achieve will do little to enhance the future financial stability of the consumer or the government.

When A Walmart Clerk Beats A $2 Million Trust Fund

The Federal Reserve fired its last bullet today by formally cutting interest rates to zero percent.  A Fed statement noted that  “The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability”.   In addition, the Fed will keep rates at this exceptionally low level for an extended period of time.

To date, the Federal Reserve has spent trillions and driven down rates on short term treasury paper to zero.  None the less, rates on loans for most individuals and corporations are much higher than when the credit crisis began.   One area that that has seen rates decline to all time lows is home mortgages, although it is debatable how many borrowers qualify for the best advertised rates.   Those most in need of funding are most often turned down at any rate due to issues with credit, income or collateral.

I have yet to hear of anyone who feels that the Fed really made a difference and saved them from financial ruin by cutting rates.  Whatever savings might have been accrued by the average consumer have been more than  outweighed by the losses suffered in their retirement portfolios and home equity declines.  The banking system was saved, the average worker was not.

One group that has and will continue to suffer great stress due to diminished income is the never mentioned saver.  The saver group by definition spent less than they made due to thrift and hard work and put their savings in their local bank so that they money could be lent out to borrowers who bought homes and such, frequently at 100% financing.  Now that the borrowers are in trouble, the Fed needs to cut rates to help them.  Helping those in trouble is fine, but the consequences of the Fed’s rate cutting campaign is impoverishing those very same people who provided savings capital to lend in the first place.

Let’s take the case of a Walmart clerk who retires after 30 years of service and is awarded a pension of $25,000 per year.  The Walmart clerk’s retired neighbor lives off a $2,000,000 trust fund established by her father who directed that the monies be conservatively invested only in government debt securities.  The trust fund provides a life interest of income only to the beneficiary.   The original $2,000,000 principal goes to charity after the beneficiary’s death.

This $2,000,000 trust fund, laddered in 6 month and 2, 5 and 10 year government paper yields a total of $22,100 at today’s interest rates.   Should the Fed succeed in driving long term rates to the sub 1% level that we see in Japan today, the trust fund baby would be lucky to receive $10,000 per year.

Result of ultra low interest rates?

Walmart worker stays retired and lives poorly.  Trust fund baby lives poorly and goes back to work at Walmarts.

Loan Modification Efforts Continue

Despite the recent news that many of the mortgage loans modified have gone back into default, the loan modification effort continues.  Until a better solution is found loan modification efforts will continue, especially given the full backing by the FDIC and other government leaders.  It is likely, however, that the approach and methods will change to ensure that future loan mod efforts are more successful.

Bank United Announces New Loan Mod Efforts

Bank United announced today that it will intensify its efforts to save troubled homeowners  by outsourcing much of the work involved in a loan modification.   To anyone familiar with the delays and inconsistent procedures being employed by many banks in their loan mod efforts, this new approach is a welcomed fresh approach.  Many loss mitigation departments are overwhelmed with work, causing many months of delays before the homeowner receives any type of loan mod offer.   In many cases, the rules as to which loan is modified and under what terms also seems to be inconsistently applied.

Many of the $1 billion in delinquent loans at Bank United apparently are due to the large number of pay option arm loans that were originated.   Given the large drop in property values and the negative amortization features of the pay option arms, many borrowers in this category  have a large negative equity position.   The most probable course of action that Bank United will take for this category of borrower is to reduce the principal balance.   Without principal reduction, the borrower would still be in a negative equity position which frequently leads to default.  Unless the homeowner is wildly bullish about housing prices, very few people will continue to make payments on a $400,000 mortgage when the house is valued at $200,000.

With Bank United stock selling at 33 cents and almost 10% of their loans in default, they would apparently have little to lose by offering to put their borrowers in a stronger position through principal reduction.  As previously discussed, long term housing stability is based on strong borrowers.

Ocwen Shows High Success Rate With Loan Mods

Ocwen Financial reported that results with their loan modification efforts far exceed the industry results.   Ocwen is experiencing less than a 25% delinquency rate 60 days after the loan mod, compared to the industry average of over 50%.

CEO William Erbey stated that “The salient issue is not the efficacy of loan modification as a loss mitigation tool, but whether mods are being properly designed.   Our loan approach achieves the twin objectives of keeping homeowners in their homes and maximizing the net present value of the mortgages to the investors who own the loans.”

Mr Erbey further stated that “the re-default problem lies with how some servicers are doing modifications, not with concept of modification. It’s possible to do modifications right. It’s challenging, but we’re doing it — and doing it in a way that’s scalable.”

Ocwen’s good results seem to reflect it’s use of high technology applied on an individual basis.  Rather than having a loan mod decision made by an individual, the characteristics of the loan and the borrower are assessed using artificial intelligence technology.

To date, Ocwen appears to be an industry example of the right way to do loan modifications.  This year alone, Ocwen has kept over 60,000 borrowers in their homes with the mortgages now being paid on time.