The Borg - I Mean Obama Administration - Intend To Pay Homeowners To Sell Their Houses

"Have you made a horrible decision and find your mortgage 70% underwater? Please let us give you $1500 of Chinese, I mean tax payer money as a reward! And we'll strong arm banks to let you out unscathed in the process. Congratulations on your hard won earnout."

Ah, the Borg, resistance is futile.

I am so happy they have not given up on their command and control efforts to manipulate our economy from their proverbial perch high up in the moral tower that is White House. What these puppeteers don't realize is the problem has little to do with insolvent homeowners not wanting to sell their homes via short sale and has everything to do with banks wanting to get paid back the money the lent (crazy, I know!).

The NY Times wrote about this on Sunday March 7th. Love the headline. All emphasis added [and TILB comments in brackets].

March 7, 2010
Program Will Pay Homeowners to Sell at a Loss
By DAVID STREITFELD
In an effort to end the foreclosure crisis, the Obama administration has been trying to keep defaulting owners in their homes. Now it will take a new approach: paying some of them to leave.

This latest program, which will allow owners to sell for less than they owe and will give them a little cash to speed them on their way, is one of the administration’s most aggressive attempts to grapple with a problem that has defied solutions.

More than five million households are behind on their mortgages and risk foreclosure. The government’s $75 billion mortgage modification plan has helped only a small slice of them. Consumer advocates, economists and even some banking industry representatives say much more needs to be done.

For the administration, there is also the concern that millions of foreclosures could delay or even reverse the economy’s tentative recovery — the last thing it wants in an election year. [TILB - ah, the political truth...]

Taking effect on April 5, the program could encourage hundreds of thousands of delinquent borrowers who have not been rescued by the loan modification program to shed their houses through a process known as a short sale, in which property is sold for less than the balance of the mortgage. Lenders will be compelled to accept that arrangement, forgiving the difference between the market price of the property and what they are owed. [TILB: I'm sure banks will sign up left and right to fore go their rights]

...

The problem is highlighted by a routine case in Phoenix. Chris Paul, a real estate agent, has a house he is trying to sell on behalf of its owner, who owes $150,000. Mr. Paul has an offer for $48,000, but the bank holding the mortgage says it wants at least $90,000. The frustrated owner is now contemplating foreclosure. [TILB - The guy is SEVENTY PERCENT UNDERWATER; unless he wants to keep paying for his mortgage, he should have absolutely no say in this matter! What world do I live in? What is this, Russia? HOW IS THIS EVEN A QUESTION?]

To bring the various parties to the table — the homeowner, the lender that services the loan, the investor that owns the loan, the bank that owns the second mortgage on the property — the government intends to spread its cash around.

Under the new program, the servicing bank, as with all modifications, will get $1,000. Another $1,000 can go toward a second loan, if there is one. And for the first time the government would give money to the distressed homeowners themselves. They will get $1,500 in “relocation assistance.” [TILB - Why does a guy that probably put close to no money down get a $1500 windfall but the lender gets ZERO?! Note, the $1000 goes to the servicer(s) of the loan(s), not the lender(s). This is crazy.]

Should the incentives prove successful, the short sales program could have multiple benefits. For the investment pools that own many home loans, there is the prospect of getting more money with a sale than with a foreclosure. [TILB - Dear David Streitfeld c/o The New York Times: Use your brain. If the lender thought they'd get more back doing a short sale, they already have the ability to pull the trigger. This has zero impact on that reality.]

For the borrowers, there is the likelihood of suffering less damage to credit ratings. And as part of the transaction, they will get the lender’s assurance that they will not later be sued for an unpaid mortgage balance.

For communities, the plan will mean fewer empty foreclosed houses waiting to be sold by banks. By some estimates, as many as half of all foreclosed properties are ransacked by either the former owners or vandals, which depresses the value of the property further and pulls down the value of neighboring homes. [TILB - This must be heaven, because everyone wins! The lender, the borrower and the community! How exciting!]

...

Under the new federal program, a lender will use real estate agents to determine the value of a home and thus the minimum to accept. This figure will not be shared with the owner, but if an offer comes in that is equal to or higher than this amount, the lender must take it. [TILB - Right. This should work. Let's see, we're going to pay a real estate agent to come up with a price. No matter what price he/she comes up with, the bank would be FORCED to sell at that price. I bet they'll err to the high side (stop laughing at me, it hurts my feelings).]

Mr. Paul, the Phoenix agent, was skeptical. “In a perfect world, this would work,” he said. “But because estimates of value are inherently subjective, it won’t. The banks don’t want to sell at a discount.”

There are myriad other potential conflicts over short sales that may not be solved by the program, which was announced on Nov. 30 but whose details are still being fine-tuned. Many would-be short sellers have second and even third mortgages on their houses. Banks that own these loans are in a position to block any sale unless they get a piece of the deal.

“You have one loan, it’s no sweat to get a short sale,” said Howard Chase, a Miami Beach agent who says he does around 20 short sales a month. “But the second mortgage often is the obstacle.” [TILB: This is the reason short sales are less common than one might expect. Second lien holders can obstruct the process. But that is okay, that is their contractual right. They are owed money by the borrower and he/she is trying to shirk, generally, 100% of his obligation to them. I might hold up the process too if someone were trying to stiff me and then ask me for a favor.]

Major lenders seem to be taking a cautious approach to the new initiative. In many cases, big banks do not actually own the mortgages; they simply administer them and collect payments. [TILB: This is servicing] J. K. Huey, a Wells Fargo vice president, said a short sale, like a loan modification, would have to meet the requirements of the investor who owns the loan.

“This is not an opportunity for the customer to just walk away,” Ms. Huey said. “If someone doesn’t come to us saying, ‘I’ve done everything I can, I used all my savings, I borrowed money and, by the way, I’m losing my job and moving to another city, and have all the documentation,’ we’re not going to do a short sale.” [TILB: Boom. Principled.]

But even if lenders want to treat short sales as a last resort for desperate borrowers, in reality the standards seem to be looser.

Sree Reddy, a lawyer and commercial real estate investor who lives in Miami Beach, bought a one-bedroom condominium in 2005, spent about $30,000 on improvements and ended up owing $540,000. Three years later, the value had fallen by 40 percent.

Mr. Reddy wanted to get out from under his crushing monthly payments. He lost a lot of money in the crash but was not in default. Nevertheless, his bank let him sell the place for $360,000 last summer.

“A short sale provides peace of mind,” said Mr. Reddy, 32. “If you’re in foreclosure, you don’t know when they’re ultimately going to take the place away from you.”

Mr. Reddy still lives in the apartment complex where he bought that condo, but is now a renter paying about half of his old mortgage payment. Another benefit, he said: “The place I’m in now is nicer and a little bigger.” [TILB - the market at work.]

Amherst Securities Issues A Report On The True Housing Inventory Overhang

Amherst Securities, perhaps most famous to TILB readers for their famous jobbing of JP Morgan, is back and this time they share an analysis of the true housing inventory overhang that exists today.

Basically, while the traditional media regularly touts the improvement signified by the contraction of housing inventory down to 8.5 months, these stories overlook the massive foreclosure/REO* inventory and pipeline that is building on the books of banks and servicers. Loans continue to move through the delinquency pipeline toward REO at a rapid pace but are moving out at a slow pace (meaning bank balance sheets (and the FDIC balance sheet!) are filling up with foreclosed homes that ultimately need to be sold). These properties are destined for liquidation of one kind or another and thus will be competing for scarce buyers with "normal" housing inventory. TILB argues that the shadow inventory is understated yet further by two factors:

1. Folks that would like to sell but are unwilling to list their house during an unstable market. Everyone knows someone(s) like this and we suspect this is a huge backlog (of course, most "normal" sellers are would-be buyers as well)
2. Investment properties. An enormous number of foreclosure sales have been purchased by investors that ultimately plan to re-list the properties they've acquired in order to have an exit and chrystalize their "gains". Unlike #1, these sellers do not come accompanied with a buyer. They are net sellers.

This point about "net sellers" is an important point. While "normal" housing inventory are homes owned by a bunch of sellers that expect to be buyers (e.g., they are moving and so they may sell a house in Cupertino and buy a house in Dallas, thus they are "net zero" to the nationwide supply/demand dynamic), REO inventory and investment property inventory are net negative. They do not have an natural "buy" that follows their sale. As such, this is a much "worse" kind of inventory, from a house price perspective.

Here's the synopsis Amherst provides about their report followed by the report itself. It is excellent.

Enjoy.

The single largest impediment to a recovery in the housing market is the large number of loans that are either in delinquent status or in foreclosure that are destined to liquidate. This creates a huge shadow inventory. We estimate this housing overhang at 7 million units, 135% of a full year of existing home sales. We look at the impact on a number of local markets, then look to the causes of the overhang: (1) transition rates are high, (2) cure rates are low and (3) loans are taking longer to liquidate. We are concerned that, in light of this housing overhang, the stabilization we have seen in home prices the last few months is temporary.

Here's another juicy tidbit:

The Mortgage Bankers Association (MBA) Quarterly Delinquency Survey covers 44.7 million units, or approximately 80% of the total universe. Thus, about 55.9 million homes in the United States have a mortgage. Exhibit 1 (below) shows that at the end of Q2 2009, a staggering 13.54% of mortgages in the MBA survey were in some stage of delinquency: 4.3% of units surveyed were in foreclosure, another 3.88% were 90+ delinquent, 1.68% were 60 days delinquent, and 3.68% were 30 days delinquent.
...
Using transition rates for the calculations, our Q2 numbers indicate that the cure rate is near “0” for loans in foreclosure, and it’s 0.8% for 90+ days delinquent, 4.4% for 60 days delinquent, 26.5% for 30-day delinquent loans (thus, we assume 100% of the foreclosure bucket, 99.2% of the 90+ delinquent bucket, 95.6% of the 60 day
delinquent loans and 72.4% of 30 day delinquent loans will eventually liquidate). This implies that of the 13.54% delinquent units, we expect 12.42% of units to eventually liquidate. If the MBA data is representative of the mortgage universe, it suggests that 12.42% of 55.9 million units (6.94 million units) are already in the delinquency pipeline and will eventually liquidate.

To put that into perspective, existing home sales total around 5.2 million units - - so the overhang is approximately 1.35X one year of existing home sales. [emphasis added]

Honestly, we could go on and cut and paste the entire report, but you may as well click the below link and enjoy the source document yourself.

Green shoots!

Shadow Inventory Report Amherst 9-23-09


*REO means "Real Estate Owned". This is industry parlance for homes that banks and servicers have taken back, generally due to foreclosure, and thus no longer are recorded as a mortgage "loan" on the balance sheet of these entities but are now recorded as REO.

-------------------------------
If you enjoy TILB, please send the link to a friend. Spread the anger.

Commerical Mortgage Defaults Continue To Skyrocket

The pile-up that is the CRE lending market is just beginning to reveal itself.

Unlike resi-mortgages, which hopefully are approaching Camp O'Donnell on the final legs of their death march toward consumer capitulation, commercial mortgages have just recently left Bataan. [sorry, insensitive reference - apologies in advance]

TILB recently came across a great graph that showed 60+ day delinquencies* for loans in CMBS by aggregate annual collateral vintage beginning in 2003 (this includes the vast majority of outstanding loans underlying CMBS). The X-axis shows the number of months since issuance and the Y-axis shows percentage of loans from that vintage that were 60+ days delinquent. See below for the graph.

Historically a graph like this would start out low and flat, trending up ever so slightly. Beginning in month 60 (year five), we'd see a spike up and then back down after the first set of maturities passed (forming a hump). The same would occur around month 84 (year seven) and so on. If well underwritten, each vintage should behave about the same. Certainly no vintage would show a meaningful spike beginning in month 16 (for 2007 vintage), 28 (for 2006) or 40 (2005). But that is precisely what the graph shows. And these upticks are not the beginning of humps; they are the beginning of rockets that have basically gone vertical.

As fascinating as those 2005-2007 vintages are (and they are indicating an astoundingly bad future), we find 2004 to be the most informative because that vintage has just hit its first round of maturities (5 year balloons). Perhaps it represents the proverbial canary?

Let us dig.

For 2004-vintage loans included in CMBS, 24% of those maturing in 2009 are 60+ days delinquent versus less than 2% for those maturing later. Read that again: 24% of all 2004 CRE mortgages packaged in CMBS that are maturing in 2009 are already 60+ delinquent. That's not 24% of all 2004 loans that already have matured in 2009, it's 24% of loans that already have or will mature in 2009 are 60+. 24% through May!?!?

By the end of 2009, this may very well be 40%+ as the five year loans underwritten in the second half of 2004 (and thus ballooning in 2H09) were written just as asset values seemed to take off and lending standards loosened. In fact, according to NCREIF's website, cap rates were still 7%+ for most of 2004, basically in the middle innings of the fateful cap rate plunge to nearly 5%.

In 2004, a few conservative folks thought CRE was getting a bit frothy, though for the most part underwriting standards were still reasonable (at least compared to the 2005 - 1H2008 period). Basically we are saying that the 2004 vintage is failing despite not being astoundingly "toxic". Underwriting standards and the valuations used to support them became progressively more "flexible" every year thereafter.

CMBS Delinquency Graph - May 2009

If the commercial mortgage delinquencies experienced so far in 2009 worry you, just wait until next year (2010) when the aggressively underwritten 2005 vintage has maturities, then 2011 when the 2004 seven year maturities and the egregious 2006 five year wave hits!

Every time you think the last car has hit the pile-up, just think about the ensuing year.

2012 is unfathomably bad: seven year maturities from 2005 originations and five year from 2007; two truly toxic vintages have big resets together.

TILB's personal view is that the way banks and insurance companies try to "solve" this nightmare is by extending maturities in exchange for some amount of new equity injection, tighter covenants and a new rate. This will not be practical in many situations, but it will occasionally be accomplished. This is not an act of charity; it will be their attempt at postponing the recognition of and provision for bad loans. Securitizations will probably be more aggressive in dealing with problem loans now which will keep pressure on CRE prices, preventing recovery.

In any case, as banks and insurers extend, it will have a suffocating effect on new lending as these loans will continue to eat balance sheet capacity for lending institutions (and new securitization will remain dormant). This lack of fresh lending capacity will obliterate CRE valuations for obvious reasons.

Watch what happens in two or three years when these postponed problem loans come due at the same time that two major maturity waves from problem vintages hit: a shitstorm of Texas sized proportions.

We look forward to watching Geithner and Bernanke somehow argue that Wells Fargo/Wachovia, Bank of America and the regional banks, which have just begun digesting these trends, are well capitalized. The ultimate losses lenders absorb will be astounding.

As a self aggrandizing aside, here's a brief reminder from TILB's annual Prediction and Surprises we wrote in late December and posted this past January (#3 and #6 in particular):

3) Housing prices cross the -30% peak to trough level (Case Shiller 20-city index). Commercial real estate becomes the watchword as housing price declines begin to slow toward the end of 2009.

6) The credit crisis is not arrested. After having rolled through housing, it begins its attack on commercial and corporate in force. The default rate for HY approaches double digits but bank debt only makes it to mid single digits (5-7%), so far. As I predicted a few years ago, the default wave continues to roll through credit sub-classes. While it was initially in subprime, which had the nearest resets and the lowest quality borrowers and collateral, we see it move into Option ARMs as people begin to reach 115% of their initial balance due to minimum payments and some 3/1 and 4/1 ARMs from the more toxic vintages of 06 and 05 hit resets. New CRE (commercial real estate) financing is unavailable at attractive interest rates and cap rates climb near double digits. That said, the CRE default wave only begins to pick up modest steam in 09 as the 5/25 balloons from 2004 and early 2005 approach or cross through their reset periods. Covenant-lite LBO debt performs horribly, but due to a lack of covenants, the defaults are really a 2010 and beyond phenomenon. Because each of these huge credit asset sub-classes really have staggered aggregate maturities, the credit crisis has trouble getting past us (subprime 2007-08, option ARM 2008-09, jumbo prime 2009-10, CRE 2009-14, full covenant bank debt 2009-10, HY 2009-11, muni 2010-11, cov-lite bank debt 2010-12). All flavors of credit are obviously correlated as the companies and institutions that provide the loans are the same for all kinds of credit and this continues to drive availability of credit down and the price of and standards for credit up. This adjustment hurts many people.

As the creator of the above graph noted, the only green shoot we are seeing is the vertical green line on the 2004 vintage mortgages.

* 60+ days delinquency generally indicates serious delinquency (whereas 30+ includes folks that may simply have foot faulted).

Re-default Rate For Modified Resi Mortgages

JP Morgan put together a helpful overview of re-default (or "recidivism" as many insiders prefer to call it) rates by modification type. Not surprisingly, given the way most Americans manage their finances (month to month), the most effective form of modification is to reduce monthly payments. Loan forgiveness (basically reducing the outstanding balance on the mortgage) is the second most effective method.

In every scenario, a huge portion of modified mortgages re-default, generally within the first six months of the mod.

One of the points not mentioned, but which I think is worth noting, is that loan mods really only began in earnest last summer and, as such, the dataset is still very young. Certain kinds of loan mods (like loan forgiveness) are even newer efforts, at least in scale. So all of the recidivism rates are likely to keep rising simply as a result of time passing allowing for more re-defaults.

This is based on data that JP Morgan pulled together from the Loan Performance database on the Loan Performance database.

Here's what the JP Morgan analyst said about the analysis:

Moving on to the subject of re-default, we note that the overall re-default rate stands at 40%. Breaking that number out by modification methods, we observe that capitalization has the highest re-default rate of 54%, and rate reduction the lowest of 24%. Also, the more severe the starting delinquency status before modification, the higher the re-default rate (Table 7). Despite rate reductions seemingly being more effective than principal forgiveness in terms of re-defaults, we note that lowering the balance of a mortgage through a modification by 20% or more results in a re-default rate of 32%, compared to 43% when the balance is increased (mainly due to capitalization)—i.e., balance modifications impact redefault rates.

There also seems to be a strong correlation between monthly payment amounts and re-defaults (Table 6), reaching from 26% of modified borrowers re-defaulting when their payment drops by 30% or more, to 59% redefaulting when the payment increases. Given the mechanics of capitalization (delinquent amount is added to the loan balance and the loan is re-amortized resulting in higher payments) and the high re-default rates with an increase in monthly payment, it is obvious that the payment increase is the main driver for high re-default rates when capitalization is applied. Therefore the combination of capitalization and rate reduction, which results in an unchanged or decreased monthly payment 94% of the time and a re-default rate of 41%, is much more effective than just capitalization with a 54% redefault rate. Additionally, 66% of re-defaults happen within six months after modification. We think a 40% re-default rate for modified loans is reasonable going forward.

Re Default Rate

Publish at Scribd or explore others: Finance Business & Law mortgages mortgage modificatio