Foreclosures

FDIC Practices What it Preaches: IndyMac Loan Modifications Are On Their Way

Ellen Seidman — Wed, 20 Aug 2008 20:22:00 -0400

This afternoon FDIC Chairman Sheila Bair and her team took the next important step in making good on their promise to treat borrowers whose loans are held or serviced by IndyMac as the Chairman has urged other banks to treat their borrowers. Simply put, the FDIC announced a blanket loan modification program, under which the loans of borrowers in default or having trouble making their mortgage payments will be automatically modified into fixed rate loans whose terms will be set so that housing debt consumes no more than 38% of the borrower's income.

Many of the loans covered will be Alt-A loans, the kind that enabled borrowers to pay no interest for the first few years of the loan, leading to payment shock when that period ended that can far exceed the already substantial shock on a sub-prime loan that resets from, say, 7% to 10%.

Most of the loans will be modified into fixed rate loans for the remaining term of the loan at the interest rate of similar-term conforming loans (currently about 6.5%). If that still yields too high a payment, the loan will carry a lower interest rate for 5 years, and then will gradually increase to the conforming rate. The modifications come with no fee or other charges.

The critically different thing about this plan is that it's automatic. The FDIC is conditionally modifying the loans before the borrower even says "help!". All the borrower needs to do to seal the deal is to send in a check for the new loan amount and a verification of the borrower's current income. And this is no "pilot" program: the first round of modification letters will go to 4,000 people.

This step on the FDIC's part is apparently based on the joint premises that (i) when an Alt-A (or indeed, a sub-prime) borrower gets into trouble, the trouble is very big and cannot be resolved without a major restructuring of the loan; (ii) foreclosure, especially in the California markets in which most of IndyMac's loans are located, is almost always a far worse proposition economically for the bank (and the FDIC), as well as for the borrower, than getting principal on the loan repaid; and (iii) the borrowers at issue will be both willing and able to live up to their new obligation. As yet, there's no indication the program will include reductions in principal. Given the ups and downs of the housing market in general and in California in particular, that may be an important limitation on the program's success in avoiding foreclosures.

Nevertheless, this is a bold and important move on the FDIC's part. If it succeeds, it will not only demonstrate that Chairman Bair has had it right all along (which undoubtedly will make her feel somewhat better about the fact that her proposals have not gotten the traction they should have), but more importantly, it will set the stage for all those other banks to follow suit. See "Indy Mac's Next Role: Modification Test Case," American Banker (Aug. 14, 2008). It will be critical that the FDIC keeps us fully informed of what it is doing, and what the results are, including the extent to which there are re-defaults. And it will also be helpful if the FDIC's examiners in other banks don't discourage any other institution that wants to, from emulating the mother ship.

It's More than a House

Ellen Seidman — Fri, 30 May 2008 15:18:00 -0400

The ongoing foreclosure crisis-foreclosures were up 65% in April from the April 2007 level and are undoubtedly headed higher, as house prices declined a record 14.1% in the first quarter from the first quarter of 2007-is teaching us a lot about the losses that extend beyond the loss of a house.

Take the community losses. Here are just a few examples. The Center for Responsible Lending estimates that each foreclosed property costs the jurisdiction in which it is located almost $20,000 in lost tax revenue and other related costs. Property values for houses near foreclosed properties will decline by almost $202 billion. This is already having an effect on city budgets: according to the National League of Cities, 33% of city officials reported that city revenues or revenue estimates have decreased over the past year. At the same time, demands on that revenue, for services ranging from increased police patrols to temporary housing, housing assistance and demolition of abandoned properties, have increased. And community losses are not just financial. The National League of Cities also reported that nearly two-thirds of city officials said it has become more difficult for low-income families to become homeowners in their communities.

Congress is currently considering legislation that has passed both the Senate and the House in different forms, to provide some assistance to states and localities to deal with the situation. This includes increased and enhanced tax-exempt bond authority and increased funds for housing counseling. The bills also include funds-$4 billion in grants in the Senate bill and a combination of $15 billion in loans and grants in the House bill-that would allow jurisdictions to respond to the crisis as needed in each jurisdiction. While the focus would be on purchasing foreclosed properties for affordable rental and ownership housing, communities would have flexibility to use the funds to meet needs that are not the same in Cleveland as they are in Las Vegas. It is essential that this neighborhood stabilization piece of the legislation be part of the law that is signed by the President-or enacted through a veto override.

Beyond the community losses, there are non-financial individual and family losses to foreclosure and forced moves that other research reminds us about. At a research session sponsored by the Center for Responsible Lending earlier this week, Marge Turner of the Urban Institute and Xav Briggs at MIT discussed their work on the results of the court-ordered Gautreaux desegregation program and the Moving to Opportunity demonstration. These experiences tell us a good deal about the impact of moves, forced and not, on family stability, health and educational success. The message is essentially that when forced to move, people strive for stability (such as keeping their kids in the same school even though they move out-of-district) and to keep social networks intact. When the move is from a neighborhood high in crime and low in opportunity, these tendencies can be counterproductive. But the foreclosure crisis is working in the opposite way-often forcing families from neighborhoods that had been strong and threatening family as well as neighborhood stability. Marge reported that homelessness experts at the Urban Institute fear a slow, downward spiral toward homelessness for many of these families.

These examples remind us how close we all are to the effects of the current crisis. It's not just THEIR house, it's ours too.

Prices Fall and Sales Rise, Light at the End of the Tunnel for Housing?

Ian McAllister — Wed, 28 May 2008 16:06:00 -0400

Housing prices continued their downward slide in April with a monthly decrease of 2.2%, a decline of 14.4% from last year's levels. In an unexpected twist, monthly home sales actually rose by 3.3%. Some optimists see this as an indication that the market is nearing its bottom and beginning to work its way through a massive glut of unsold homes as sellers cut their overvalued asking prices and buyers open their wallets to bargains. Others point to worsening consumer confidence and tighter lending requirements as evidence that April's sales figures were a statistical blip in a market that has much further to fall.

Snapshot asks, to what degree will further credit turmoil stop buyers from clearing the housing market?

Wall Street Journal - Home Sales Rise in Hard-Hit Areas
Bloomberg.com - U.S. Home-Price Index Fell 14.4% in March
Washington Post - Existing Home Sales Rise as Prices Plummet
New York Times - Home sales post unexpected April increase
Yahoo News - Home sales unexpectedly rise in April

They're Not Waiting for Washington

Ellen Seidman — Fri, 16 May 2008 21:40:00 -0400

With the drama playing out in the Senate about whether a bill responding to the mortgage crisis as well as enhancing regulation of Fannie Mae and Freddie Mac will get out of the Banking Committee with enough Republican support to both pass and avoid a veto, a Washingtonian might be forgiven for not paying attention to what's going on in the states. (Some wonder whether we ever do.) But in fact, there is a good deal of action-as well as frustration at the lack of activity inside the Beltway.

State action is focused both on preventing foreclosures and on dealing with their aftermath-the vacant and vandalized properties; decline in the tax base; increased demand for community services; and enhanced need for affordable housing, both owned and rented. On preventing foreclosures, several states (Ohio and Massachusetts among them) started working a year ago on bond programs to enable borrowers having trouble to refinance. Especially in the face of Congressional delays in making additional tax-exempt bond authority available, these programs have not been very successful. So while counseling and refinance programs are still getting some attention, states are moving on to other strategies.

Foreclosure moratorium bills are pending in Minnesota (where a one-year deferment has passed the Senate), New York (where a one-year moratorium has passed the Assembly) and Massachusetts. Mainly, these reflect dissatisfaction at not being able to get servicers to move and are, like the Bankruptcy Law change that has so far been blocked at the federal level, an attempt to change the negotiating dynamics and force servicers to the table.

But moratoria are not the only types of laws being considered. Georgia has just enacted a law that requires the security interest entitling someone to foreclose to be filed in court prior to the foreclosure sale and that the notice of foreclosure include the name, address and telephone number "of the individual or entity who shall have full authority to negotiate, amend, and modify all terms of the mortgage with the debtor." These safeguards, which ensure both that the foreclosing entity has the right to take the property and that the borrower has one last effective chance to negotiate, are particularly valuable in a non-judicial foreclosure state like Georgia, where foreclosures can occur very quickly. They would also be helpful in judicial foreclosure states where, for example, judges have begun to throw out foreclosure petitions because the underlying security interest can't be produced.

Renters are also getting increasing consideration. Following New Jersey's lead, a bill is pending in Massachusetts that would prevent a lender from evicting tenants from foreclosed properties without "just cause," such as non-payment of rent. In part this reflects concern for tenants, but it is also a reflection of the fact that foreclosed property that is vacated is far more likely to turn into a vandalized property that demands more services and brings down neighborhood property values. Of course, making sure the new landlord provides maintenance and utilities (a particularly important issue in a New England winter) may prove challenging.

But recognizing that there are already many properties that have been foreclosed on and that the trend is unlikely to stop any time soon, states and-more immediately-local governments are focusing attention on what to do with property already in foreclosure (or foreclosed property's close cousin, property subject to tax liens). The State of Michigan has an aggressive land banking law, which Genesee County-where Flint, one of the hardest-hit cities in the country, is located-has been using since 2003 to acquire, hold and reuse tax-lien property. That land bank is now being used to acquire homes being lost in the current crisis.

In Cleveland, the city has partnered with the state and a group of community-based organizations to buy 300 homes to forestall foreclosure, buy an additional 300 vacant properties for demolition and construct 150 new units for a lease-purchase program. In Chicago the Troubled Building Initiative has been placing vacant buildings that, if left unattended, would have to be demolished, with one of several community based organizations for reclamation. And many Chicago partners are working on a variety of strategies to get foreclosed property back into circulation for either rental or affordable homeownership.

There is undoubtedly more going on elsewhere. The point is, they've stopped waiting for Washington out there in the country. But it sure would be nice if Washington got its act together to help.

The FDIC Does It Again

Ellen Seidman — Wed, 07 May 2008 21:28:00 -0400

FDIC Chairman Sheila Bair has struck again-with yet another creative response to the ongoing mortgage crisis. Chairman Bair has a history of being ahead of just about everyone else in Washington with proposals to respond to the crisis in a manner that is doable and fair. This time it's the Home Ownership Preservation or HOP loan, and the FDIC estimates about one million loans-make that one million homeowners in trouble-might be eligible.

Any mortgage loan taken out between January 1, 2003 and June 30, 2007 by an owner-occupant at a level below the FHA conforming loan limit that was unaffordable at origination would be eligible. What does "unaffordable at origination" mean? According to the FDIC website, it means that when the borrower took out the loan, his or her total housing payment-for principal and interest on the loan, taxes and insurance-exceeded 40% of income. And, according to an FDIC conference call May 7, that does not mean that the amount the borrower actually paid at origination exceeds 40%; it means that the amount the borrower would have paid had escrows for taxes and insurance been included and had the initial payment been for both principal and interest, at the fully-indexed rate, not the teaser rate. This makes the proposal far more powerful than it appears at first glance.

The way HOP would work is that a servicer would apply to Treasury for a loan to the borrower that would pay down 20% of the current mortgage. In exchange, the servicer would agree to modify its loan into a fully-amortizing fixed rate mortgage for the balance of the mortgage term, with interest set so that the borrower's monthly mortgage payment, including taxes and insurance, would not exceed 35% of the borrower's verified current income. Interest on the modified loan could be no higher than Freddie Mac's published rate for 30-year fixed rate mortgages, and if that interest rate were not low enough to get down to 35% of income, the lender would have to set a lower rate. And no negative amortization, prepayment penalties or deferred interest would be allowed.

The lender would pay the Treasury the first five years of interest on the Treasury loan up front, and would also subordinate its interest to the Treasury's. Thus, if the borrower defaulted or the property was transferred, the Treasury would get paid first-giving the lender a real incentive to make the loan work. The borrower would not pay anything on the Treasury loan for the first five years, and then would pay off the entire principal (with interest at Treasury's rate) during the remaining 25 years of the larger mortgage.

In addition to creating affordable mortgages the appeal of the HOP program lies in three primary characteristics:

It leaves the mortgages in their existing pools, and, according to the FDIC, requires alterations that are totally consistent with current Pooling and Servicing Agreements (PSAs)
It does not affect the interest of subordinate lien-holders, which means they can't hold up the process of modification
The amount of and interest rate on the modified mortgage are not dependent on appraisal of the property, but rather only on the borrower's verified current income

Like all proposals that attempt to deal with this difficult situation, HOP has its flaws:

Eligibility is dependent on information that lenders should have in their files, but may well not, at least not accurately, as we know that at origination of many loans now in trouble there was either no verification of income, and/or the amount "verified" was incorrect
To retain consistency with the PSAs, this proposal, like many before it, requires the servicer, not the borrower or someone acting on the borrower's behalf, to initiate the process; so far, servicers have been slow on the draw, to put it mildly
The Treasury loan could, in some circumstances, generate an unaffordable "payment shock" in the fifth year when the borrower needs to start paying it down; the FDIC's own examples would take the borrower up to a 40% debt to income ratio, even assuming that the borrower's income grew 1.5% annually

But HOP is a creative, constructive addition to the dialog. Maybe its largest flaw is one that Chairman Bair desperately wanted to avoid: it requires legislation. Let's hope it gets serious consideration by Congress and a fair hearing by the White House.

Getting the Housing Mess Right

Ellen Seidman — Mon, 21 Apr 2008 16:50:00 -0400

With a sense of irony and amazement that Congress actually might be getting the housing mess right, Sebastian Mallaby's column in today's Washington Post hits the nail on the head. It's interesting that it took a writer whose major beat is international economics to see the point about negative externalities and the collective public good. As several of us, through many forums--I've been working with the Center for American Progress on the Save America's Family Equity or SAFE proposal--have been saying for months, this is not a matter of bailing out either borrowers or lenders or of preventing house prices from falling. This is a matter of cushioning the blow for all the rest of us--the communities that will pay dearly from declining tax revenues and increased demand for services; the homeowners whose mortgages are long-since paid off or who have been paying faithfully and can and will continue to do so; the renters who have lost their homes because their landlord can't afford to pay the mortgage any more.

Mallaby points to the positive steps Congress is taking to enable loan servicers to sell or refinance their loans after taking a substantial haircut and to enable borrowers to get new loans that they can support--with upside to the government to compensate for taking the risk. I wish he'd included the proposal outlined in Congressman Frank's bill for bulk transfers of loans, because I believe that ultimately that will be necessary. But the essential points are there. As is the point that the tax giveaways in the Senate's "housing" bill are outrageous.