Are loan modifications merely postponing default?

Consumer advocates expressed some skepticism today about a Fitch Ratings study predicting a high redefault rate for mortgages that are restructured to avert foreclosure.

The study, which I wrote about in today's Times, looked at mortgages bundled up on Wall Street during the housing boom to back debt securities. It projected that 65% to 75% of subprime mortgages in these loan pools would be at least 60 days delinquent within a year of when they were modified.

Center for Responsible Lending officials said the study doesn't adequately account for the more drastic lowering of payments expected as Obama administration loan-mod programs kick in. The buzzword here is "sustainability" -- getting the loan payment to a level at which the borrower can realistically be expected to afford it over time.

The Obama programs aim at persuading lenders and loan investors to reduce payments on first mortgages to 31% of a borrower's income. The initiatives include financial incentives for mortgage customer-service firms to accomplish this by lowering interest rates, extending loan terms and sometimes suspending interest payments on part of the principal of the loan.

"The Fitch report applies to non-Obama plan mods," Center for Responsible Lending spokeswoman Kathleen Day said in an e-mail. "So this just shows the need for real sustainable mods."

Any thoughts on whether Fitch was overstating the potential problems?

-- E. Scott Reckard

Number of Fed-backed troubled mortgages rises

 

The mortgage woes of FHA borrowers are gaining ground. From an Associated Press brief  at latimes.com:

The government says the number of troubled loans backed by the federal mortgage insurance program is on the rise as economic troubles mount.

However, Housing and Urban Development Secretary Shaun Donovan is telling Senate lawmakers Thursday that the Federal Housing Administration is "unlikely to face the catastrophic losses borne in the subprime sector." He says in prepared remarks that that is partly because it didn't back loans for more expensive properties that have plummeted in value.

As of February, 7.2 percent of loans backed by the FHA were either 90 days overdue or in foreclosure, up from 5.8 percent last August.

The FHA is the main source of home loans to borrowers with poor credit and low down payments after the subprime lending market's collapse.

I'd be curious to know what percentage will qualify as a "catastrophic." The trend line sure doesn't look good.

-- Lauren Beale

Thoughts? Comments?

Photo: Housing Secretary Shaun Donovan, left, Treasury Secretary Timothy F. Geithner and FDIC Chairwoman Sheila Bair gather at Dobson High School in Mesa, Ariz., for President Obama's recent unveiling of his plan for preventing home foreclosures. Credit: Gerald Herbert  / Associated Press

 

Foreclosures increase for prime borrowers

An alliance of mortgage servicers is reporting a jump in prime-loan foreclosures from January to February. From Inman News:

HOPE NOW put the number of foreclosure starts on prime loans during February at 157,000, a 25 percent increase from the month before. Foreclosure starts on subprime loans fell by 5 percent, to 86,000.

The record 243,000 foreclosure starts recorded in February represented a 12 percent increase from the month before and a 36 percent increase from a year ago.

Not every home headed for foreclosure ends up there.

Nevertheless, completed foreclosure sales of homes purchased with prime loans jumped 86 percent in February, to 56,000. Foreclosure sales of homes bought with subprime mortgages fell 16 percent, to 32,000.

The 87,000 foreclosure sales for the month represented a high point not seen since July, when 92,000 foreclosed homes were sold.

Completed foreclosure sales as a percentage of starts rose to 46 percent, up dramatically from the recent low of 30 percent in December. The percentage was even higher for homes purchased with prime loans -- 54 percent, compared with 25 percent in December.

Although not unexpected, it's dramatic nonetheless, and another sign that the housing market is still on the downward slope.

-- Lauren Beale

Thoughts? Comments?

Photo: Chris Rank / Bloomberg News  

Job-related home losses mount

Evidence of job-related home loss comes via the Associated Press in "Delinquencies, foreclosures rise to almost 12 percent of U.S. home loans in 4th quarter" Thursday at latimes.com:

A stunning 48 percent of the U.S. homeowners who have a subprime, adjustable-rate mortgage are behind on their payments or in foreclosure, and the rate for homeowners with all mortgage types hit a new record, new data Thursday showed.

The reckless lending practices in states like Florida, California and Nevada that were the epicenter of the housing crisis are no longer driving up the nation's delinquency rate. Instead, the foreclosure crisis now is being fueled by a spike in defaults in states like Louisiana, New York, Georgia and Texas, where the economies are rapidly deteriorating and thousands are losing their jobs.

A record 5.4 million American homeowners with a mortgage of any kind, or nearly 12 percent, were at least one month late or in foreclosure at the end of last year, the Mortgage Bankers Association reported. That's up from 10 percent at the end of the third quarter, and up from 8 percent at the end of 2007....

"We're seeing increases in fixed-rate categories and that's where the problems are coming from," said Jay Brinkmann, the group's chief economist. "The foreclosure picture is more clearly driven by the jobs market."

Until the job situation gets sorted out, the problems with housing and mortgages are here to stay. What next?

-- Lauren Beale

Thoughts? Comments? 

Photo: A house in foreclosure in Oakland, Calif., photographed on Feb. 20 has an open house sign that's 3 months old. Credit: Paul Sakuma / Associated Press

Strange times, strange solutions: Just stay put

Remember the guy in Florida who breaks into vacant foreclosures and matches them up with a homeless "house sitter"? Well, Ohio Rep. Marcy Kaptur is eliminating the middleman and urging troubled homeowners to just stay put. From the Toledo Blade on Saturday:

U.S. Rep. Marcy Kaptur (D., Toledo) is advocating homeowners threatened with foreclosure exercise squatter's rights in trying to stave off the loss of their house.

"I'm saying to them possession is 99 percent of the law; you stay in your house," Miss Kaptur said yesterday, continuing a crusade she started several weeks ago in Congress and CNN picked up Thursday night.

She said she believes that many so-called predatory and subprime loans -- those made to borrowers who did not qualify for a conventional mortgage -- may have been illegal.

She urged homeowners not to panic and leave their home just because they receive a foreclosure notice from their lender, and she said they should demand that the mortgage-holder produce a mortgage audit.

"I say to the American people, you be squatters in your own homes. Don't you leave," she said during a speech in Congress earlier this month.

Her advice is causing a flap in some corners. The Blade quotes Realtor Jim Moody, a Toledo mayoral candidate, as saying "This is goofy."

Her motivation?

Miss Kaptur said she started advocating that homeowners fight foreclosure by staying [in] their home after it became clear that the $700 billion bailout of the financial industry passed last year was not working as intended by Congress.

Well, she got that part right.

OK, we've seen a Florida "solution," now an Ohio version. It's probably just a matter of time before a Californian tops these. Hat tip to Luke Mullins' Home Front blog at U.S. News & World Report.

-- Lauren Beale

Thoughts? Comments?

Photo: Rep. Marcy Kaptur spoke during a rally at a Jeep plant in Toledo, Ohio, in December. Credit: Madalyn Ruggiero / Associated Press

Next wave of foreclosures gains momentum

About 28% of option ARMs were delinquent or in foreclosure as of December, reports the Wall Street Journal today:

Defaults on a popular form of mortgage that gave home buyers a choice of how much to pay each month are rising and could rival those on subprime loans, potentially causing more trouble for investors and banks.

Nearly $750 billion of option adjustable-rate mortgages, or option ARMs, were issued from 2004 to 2007, according to Inside Mortgage Finance, an industry publication....

Option ARMs typically were made to borrowers with higher credit scores than those getting subprime mortgages. But many of these borrowers were stretched thin even when they were making payments, and are particularly vulnerable to a weakening economy and falling home prices. Borrowers can face payment shock when they must begin making payments of full interest and principal.

As usual, the Golden State is at the forefront:

Option ARMs are concentrated in areas such as California and Florida that have seen some of the biggest home-price downturns....

Nearly 61% of option ARMs originated in 2007 will eventually default, according to a recent analysis by Goldman Sachs, which assumed a further 10% decline in home prices.

That further price decline -- I realize it's not a prediction so much as a calculation tool -- almost seems optimistic considering where we are in the larger economic picture in California.

-- Lauren Beale

Thoughts? Comments?

Photo: A home in the El Sereno area of Los Angeles. Credit: Francine Orr / Los Angeles Times

New HUD mortgage forms -- will they help?

Past attempts to disclose mortgage information to homebuyers have resulted in thick stacks of documents dropped like bricks on the table as the sale is completed.

All too often, consumer advocates say, borrowers simply grab the pen and start signing with little regard to what's in the documents, especially in states such as California where lawyers aren't required at closing. That, the advocates say, has contributed to the fraud that seemed especially prevalent in the market for subprime and complex nontraditional mortgages.

Attempts continue to make mortgages terms clearer, the latest coming today from the U.S. Department of Housing and Urban Development, which is requiring lenders and mortgage brokers to provide a standardized three-page good faith estimate to borrowers. Key aspects of the loan, including settlement costs, are on lines replicated on the final settlement document known as HUD-1, to make any changes apparent.

The new regulations, in the works since March, take effect on Jan. 1. HUD estimated they would save consumers nearly $700 on average.

HUD Assistant Secretary Brian Montgomery said in a statement that the agency considered opinions "from every corner of the mortgage market" while developing the new rule. "None of us can lose sight of the fact that millions of Americans simply don't understand the fine print of their mortgages and this, in many respects, is at the heart of today's mortgage crisis," Montgomery said.

HUD Secretary Steve Preston also issued remarks saying changes in the housing markets and the epidemic of foreclosures demanded action.

Your thoughts? Can these new rules really provide home buyers with the information they need to make informed decisions or are there pitfalls, as so often seems to be the case?

-- Scott Reckard

Credit clampdown

In case you were still wondering if the credit crunch is real: A quarterly Federal Reserve survey of senior loan officers found that getting any type of mortgage became tougher during the third quarter.

The survey, conducted in October and released today, tallied up responses from 55 U.S. banks, the large majority of which reported they had tightened their lending standards.

Tightening by category: 70% for prime loans, 90% for nontraditional mortgages and 100% for subprime home loans at the four banks that said they were still writing mortgages for people with poor credit scores. (The nontraditional category includes such products as adjustable-rate mortgages with multiple payment options, interest-only loans, mortgages with limited income verification and loans on properties not occupied by the owners.)

Sinking housing prices took a toll on the availability of home equity lines of credity as well. About 75% of the banks reported having made it harder for borrowers to qualify for revolving HELOCs over the past three months.

About 85% of domestic banks also reported tightening lending standards for commercial real estate loans.

Of course, mortgages were only part of the picture -- nearly 60% of the responding banks told the Fed they had imposed tighter standards on credit card loans, and nearly 65% indicated they made other consumer loans harder to get over the past three months.

-- E. Scott Reckard

Subprime lending and the housing bubble: Tail wags dog?

That's the title of a provocative and seemingly counterintuitive study by UC Irvine's Paul Merage School of Business Center for Real Estate. It wasn't the selling of home loans to credit-risky borrowers that sparked the phenomenal run-up in prices per se, it was "the changing credit regime" beginning in 2003 that inflated the bubble -- and Fannie and Freddie seem to be have major, albeit unwitting roles.

When Fannie Mae and Freddie Mac pulled back from the credit markets in 2003 and significantly slowed their lending volume in response to internal accounting problems and outside political pressure, the breach was filled by aggressive securities issuers in the private mortgage market.

And helping to fuel them on was an enthusiastic administration pushing the "dream of homeownership" without a whole lot of regulatory restraint. As a result, total mortgage volume skyrocketed and pushed up home prices "with momentum characteristic of a bubble," the study says.

Rather than causing the run-up in house prices, the subprime market may well have been a joint product, along with house price increases, (i.e., the "tail") of the economic, political, and regulatory environment characteristic of the early- to mid-2000’s (the "dog").

"We were quite surprised to find the intensity of subprime lending was insignificant after controlling for all the other factors including the market," says Kerry Vandell, the UCI finance professor and director of its real estate center who was the lead researcher on the study. "But we were really blown away when Fannie's and Freddie's continuing presence in the market was shown to be so important."

Co-authoring the study was doctoral student Major Coleman IV and Michael LaCour-Little, a Cal State Fullerton finance professor who theorized in a provocative 2006 research paper that prepay penalties saved borrowers money.

The latest study was partly funded by the Mortgage Bankers Assn., the National Assn. of Realtors' Subprime Crisis Research Consortium and -- drumroll please -- Freddie Mac.

--Annette Haddad, Times staff writer

Photo credit: Associated Press

Questions? Comments? Tips? E-mail annette.haddad@latimes.com