Jul262013
Lenders benefit from loan modifications, homeowners not so much
Every aspect of government policy toward housing is geared to benefit banking interests. For need to placate the public, many of these programs have been sold as a benefit to struggling borrowers loanowners. Since some people actually believe the false rhetoric about helping borrowers, politicians and bureaucrats have to feign surprise when these programs serve their banking masters and fail the general public.
New Defaults Trouble a Mortgage Program
By SHAILA DEWAN — Published: July 24, 2013
Banks and other mortgage servicers have accepted $815 million in taxpayer-funded incentives for helping homeowners who have since redefaulted on their home loans, a watchdog for the Treasury Department’s Troubled Asset Relief Program, or TARP, reported on Wednesday.
The banks found a way to get some income out of these government-backed loans through modifying loans.
More than a third of homeowners who received loan modifications under TARP’s mortgage modification program have since stopped paying, but servicers kept the money they received for modifying those loans, according to a report by Christy L. Romero, the special inspector for TARP.
Sweet deal for the banks. They get to rake in for fees, and they can abdicate any responsibility for the outcome of their work.
Many of the homeowners received scant relief, with a large majority benefiting from a reduction of less than 10 percent on their monthly payments, according to an analysis by Ms. Romero’s office.
The Treasury has spent only about a fifth of the $38.5 billion allocated to help homeowners under TARP. Any TARP money not spent by the end of 2015 will be returned to the general fund.
“Treasury took extraordinary action to bail out the banks,” Ms. Romero said. “They still have to do the same for homeowners. The idea was not to put money into the banks and then have them fail later, and the same is true for homeowners.”
LOL! Really? The idea was always to bail out the banks. If a few loanowners managed to survive, that was a bonus, but the real goal was to delay foreclosure long enough for the banks to be able to absorb the eventual losses. Or in a perfect world, prices would go up, and the bank would be made whole. The fate of the loanowner was never a real consideration.
Treasury officials have defended the mortgage program, called the Home Affordable Modification Program, pointing to data showing that loan modifications under its rules have been longer-lasting, and more favorable to homeowners, than private loan modifications. …
So for as dismal as these results are, the private loan modifications are doing worse.
Each bank has its own pressures for survival. The bigger and stronger banks don’t have to be as accommodating on their loan modifications, so they have higher failure rates. The smaller and weaker banks cut better deals hoping to get a few more payments before they too have to take action. All loan modification measures are designed to maximize bank revenues, not actually help out a borrower.
At first, servicers received $1,000 for every loan modified. Now they are paid $400 to $1,600 for permanent loan modifications, depending on how many months in arrears the homeowner was (a modification made at the first sign of trouble is more effective than one made after many months of failure to pay). They can receive extra money if they reduce the monthly payment more or the loan modification lasts longer.
This does provide incentives for the services to keep borrowers in their houses longer. So I suppose that’s a good thing. But more importantly, it provides servicers with more money over a longer period of time. That helps the banks.
Timothy G. Massad, assistant Treasury secretary for financial stability, said the loans in question already posed a high risk of default. “While the housing market and the economy are improving, it is important to acknowledge the variety of challenges homeowners faced during the economic crisis, including unemployment and underemployment,” he wrote in a letter to Ms. Romero. “These facts limit the ability to achieve a very low redefault rate by program design alone.” …
This is bullshit layered upon bullshit.
The challenges facing loanowners stem from the basic fact that they can’t afford the houses they occupy. The false assumption in his statement is that homeowners could afford their mortgages before the financial crisis, they became unable to afford their payments due to a temporary loss of income, and they will be able to afford the payments in the future. This basic idea is nonsense. Most of these borrowers never could afford their properties, so even if given some kind of temporary assistance, they will not be able to afford their properties at some later date. This explains why loan modifications programs fail at very high rates, yet nobody is willing to admit this truth.
The Home Affordable Modification Program was initially supposed to help three to four million homeowners, but only 1.2 million received permanent modifications, of which about 27 percent have defaulted again.
The report found that the smaller the reduction in payments and overall debt, the more likely the homeowner was to redefault. Those who had low credit scores, owed significantly more than their home was worth or had mortgages less than five years old were also more likely to stop paying.
No kidding? Someone actually had to conduct a study to reveal the obvious?
Ms. Romero said that Treasury had not collected enough information about what was causing loan modifications to fail.
Let me save them the expense of another worthless study:
THESE BORROWERS CANNOT AFFORD THEIR HOMES!
It is not more complicated than that. There is no mystery here.
“We’ve been focused on trying to get more people into the program, and Treasury has too,” she said. “And all of a sudden we were thinking, how many people are falling out of the program?”
Of the 865,000 people who have current loan modifications, she said, more than 10 percent are one or two payments behind. Those people may be eligible for help from other federal programs.
“Treasury should require, at the very least, the servicers to reach out to the homeowners,” she said, “and ask ‘What’s going on?’ ”
Government loan modification programs have been another source of fee income for the banks. They would be happy to continue modifying these mortgages over and over again.
Private loan modification programs are a method of can-kicking while banks wait for prices to rise enough to cover the outstanding loan balance.
In neither case does anyone really care if the borrower benefits in the long term. As long as the banks survive, these programs will be deemed a success, at least among the people that matter.
They couldn’t afford it
Not everyone in Orange County makes a huge salary. Some people are ordinary workers struggle to stay afloat in a very expensive place to live. The former owners of today’s featured property bought this modest condo for $240,000 on 5/30/2002. The borrowed $232,703 and put $7,293 down. In 2005 they refinanced with a $348,750 first mortgage and extracted over $100,000. The 50% increase in their mortgage was apparently not offset by a 50% increase in salary. They defaulted on the property and lost it in foreclosure.
[raw_html_snippet id=”newsletter”]
[idx-listing mlsnumber=”PW13141493″ showpricehistory=”true”]
29566 BROOK Ct San Juan Capistrano, CA 92675
$309,900 …….. Asking Price
$240,000 ………. Purchase Price
5/30/2002 ………. Purchase Date
$69,900 ………. Gross Gain (Loss)
($24,792) ………… Commissions and Costs at 8%
============================================
$45,108 ………. Net Gain (Loss)
============================================
29.1% ………. Gross Percent Change
18.8% ………. Net Percent Change
2.3% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$309,900 …….. Asking Price
$10,847 ………… 3.5% Down FHA Financing
4.37% …………. Mortgage Interest Rate
30 ……………… Number of Years
$299,054 …….. Mortgage
$94,677 ………. Income Requirement
$1,492 ………… Monthly Mortgage Payment
$269 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$65 ………… Homeowners Insurance at 0.25%
$336 ………… Private Mortgage Insurance
$284 ………… Homeowners Association Fees
============================================
$2,446 ………. Monthly Cash Outlays
($267) ………. Tax Savings
($403) ………. Principal Amortization
$17 ………….. Opportunity Cost of Down Payment
$59 ………….. Maintenance and Replacement Reserves
============================================
$1,851 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$4,599 ………… Furnishing and Move-In Costs at 1% + $1,500
$4,599 ………… Closing Costs at 1% + $1,500
$2,991 ………… Interest Points at 1%
$10,847 ………… Down Payment
============================================
$23,035 ………. Total Cash Costs
$28,300 ………. Emergency Cash Reserves
============================================
$51,335 ………. Total Savings Needed
[raw_html_snippet id=”property”]
[…] NY Times PBoC’s cold turkey approach to China’s credit addiction – Sober Look Lenders benefit from loan mods, homeowners not so much – O.C. Housing News As Mortgage Rates Rise, New-Home Orders Slow for Home Builders – […]
Loan mods are worthless without a principle reduction. In reality, the lender can either modify the principle now or later via short sale/foreclosure. It’s really that simple.
In reality, the lenders can do exactly what they have been doing and neither modify the principle nor short sell nor foreclose. It is really that simple.
God bless the government.
It seems like bringing the default rate down from 100% to 37% on these loans makes the program pretty successful. People like Larry expect absolute perfection but they have no experience dealing with real people in the real world struggling to keep their homes. Fitch was predicting 55%-75% redefaults on HAMP modifications within 12 months, and here we only have 37% redefaults after 4 years. The performance has exceeded all expectations.
http://www.housingwire.com/news/2010/06/16/55-75-hamp-mods-could-re-default-under-fitch-projections
Also, principle reduction is no panacea. If you reduce the principal to the current property value, but the borrower still can’t afford the payment, then it does nothing for them. The HAMP modifications bring the payment down to 31% DTI which means if the borrower is serious about keeping their home, they have the opportunity to do so. Of course not everybody is serious about keeping their home, and some have a reduction or elimination of income after they receive the modification so you won’t get a 0% redefault rate.
I wouldn’t say that I expect 0% default rates, but if these programs were to be successful, they shouldn’t have default rates higher than historic norms for loans. These clearly do.
I concur with your statement that these loans have exceeded all expectations. That says a lot about how low the expectations really were.
As I stated in the post, these loan have been successful from a banker’s perspective. From a homeowners, not so much.
I would add that BofA is now facing litigation for steering borrowers away from the HAMP program to their own in-house programs. Now why would they do a thing like that with such generous incentives from the guvmint?
The reason is that $1,000-$2,000 per loan is not enough to make up for the reduced interest rate from 7% to 2% for the first 5 years. The guidelines for HAMP are rigid so there’s not a lot of freedom for lenders to decide the terms of the modification… BUT for in-house modifications there is. The banks don’t want a borrower getting such generous loan terms because the $1,000-$2,000 incentive does not come close to making up for it, especially when borrowers perform on the loan for a long time as they typically do under HAMP.
That is pretty bad. B of A was doing what’s in its own best interest, loanowners be damned.
I banked with Bastards of America. Since I was a wee child. My wife also. We got so tired of their policy and basically closed down ALL of our accounts, personal and business and moved on. The manager was shocked we were closing down everything. I loathe anything to do with BofA. I made it my personal goal to convince everyone not to bank with them. I can only hope everyone goes and pulls their money out.
Left B of A for USAA and could not be happier.
“The best slave is the one who thinks he is free.” – Johann von Goethe
Very good quote.
Average back end DTI is 59.8% after modification for HAMP.
If SGiP is still around, maybe he/she can tell us what an underwriter is going to say to someone with a 31% front end DTI and a 59.8% back end DTI. And that is only the average.
The major difference is you are comparing standards for a newly originated loan to those for a program designed to help people retain their homes. You can’t control external debt loads when underwriting for a program like that.
SGiP isn’t a HAMP underwriter, but a loan officer for new originations. With all due respect for him, he’s not an expert in modifications. Sorry to burst your bubble.
Also, if the back end DTI is so onerous, why haven’t more people defaulted 4 years into the program? The argument you make is recycled from the early months of the program before any performance data was available. Nobody is making that criticism any longer because the performance data has exceeded all expectations.
Report: Five More Markets Fully Reflate Bubbles in May
Housing markets across the country continue to show improvement. Five more markets joined the list of fully recovered housing markets across the country, bringing the number to 19 as of the end of May, according to this month’s Homes.com Rebound Report released Wednesday.
Also, 39 markets are at least 50 percent recovered, meaning prices in these markets have regained at least half the value they lost during the recession.
“With five new markets reaching a full recovery over the last month and modest gains in some of the already fully recovered markets, the overall rebound of the U.S. housing market continues to move forward,” said Brock MacLean, EVP of Homes.com.
Several markets are more than fully recovered, and in fact, five markets have rebounded more than 200 percent since the recession.
Three of the top five markets demonstrating the strongest rebound are in Texas and the other two are in Oklahoma.
San Antonio, Texas; Houston, Texas; and Austin, Texas, top the list with rebounds of 227 percent, 218 percent, and 214 percent, respectively.
The market that has rebounded the least since the recession is Providence-New Bedvord-Fall River, Rhode Island-Massachusetts.
Other markets in the bottom 10 on Homes.com’s rebound are located in Florida, California, and Nevada.
Homes.com also released its Local Market Index Wednesday, revealing decrease in the number of markets demonstrating monthly increases in May. Prices increased in 83 of the top 100 markets in May, a slight disappointment following April’s impressive roster of price improvement included all 100 markets.
The New Orleans area posted the greatest monthly price appreciation in May—a gain of 6.09 index points.
Honolulu, Hawaii posted the greatest year-over-year increase in May, with prices posting a 22.85 index point increase.
The next three markets on the Homes.com list of year-over-year price appreciation are located in California—San Francisco with a 21.05 index point gain, Los Angeles with a 20.73 index point gain, and San Diego with an 18.21 index point gain.
Mortgage Rates Trickle Down, Poised to Move Higher Again
Mortgage rates backed down for the second consecutive week, according to reports from Freddie Mac and Bankrate.com.
Freddie Mac’s Primary Mortgage Market Survey put the 30-year fixed-rate average at 4.31 percent (0.8 point) for the week ending July 25, down from last week’s 4.37 percent. A year ago at this time, the 30-year fixed-rate mortgage (FRM) averaged 3.49 percent.
The 15-year FRM this week averaged 3.39 percent (0.8 point), down from 3.41 percent last week.
Adjustable rates also eased, but only slightly. The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.16 percent (0.7 point), down from 3.17 percent, while the 1-year ARM averaged 2.65 percent (0.4 point) compared to last week’s 2.66 percent.
Freddie Mac chief economist Frank Nothaft said this week’s decline should “help to alleviate market concerns of a slowdown in the housing market,” noting that June data—including existing- and new-home sales and inventory—were promising.
Meanwhile, Bankrate’s weekly national survey showed the 30-year fixed falling to 4.54 percent and the 15-year fixed dropping to 3.61 percent. The 5/1 ARM also declined, dipping to 3.54 percent.
The downward trend may not last, however.
“Mortgage rates settled down over the past week, following two months of volatility,” Bankrate said in a release. “The tame movement in mortgage rates may prove to be only a brief reprieve however. With next week bringing a Federal Open Market Committee meeting and a new report on the job market, this week may have been the calm before the storm.”
Housing markets where cash is king
If you want to buy a house in Nevada you better bring cash.
In June, 58% of the sales in the state were made in all-cash, according to a report by RealtyTrac.
But it’s not just Nevada. All-cash deals in Florida comprised 57% of home sales during the month; in the state of New York, it was 51%, and in Vermont, a whopping 80%.
In markets like these, lingering foreclosures and depressed home prices are attracting private equity firms and other investors looking to buy before home prices go much higher, RealtyTrac said.
In other markets, where there are fewer distressed properties, the all-cash deals are a lot less prevalent. Nationwide, cash deals comprised 30% of home sales in June, down from 31% a year earlier, RealtyTrac reported. But in states like Texas, Utah and New Mexico, such deals were practically non-existent.
Related: Buy or rent? 10 major cities
“The U.S. housing market is slowly but surely moving toward a more normalized and sustainable pattern after a flurry of institutional and cash buyers flocked to residential real estate last year, pushing up prices and picking clean the best inventory available in many areas,” said Daren Blomquist, vice president at RealtyTrac.
The biggest metropolitan hotspot for investors right now is Atlanta, where all-cash deals represented 42% of sales in June and investors represented 27% of buyers, the highest ratio in the country. Atlanta is still struggling with one of the highest foreclosure rates in the country, making it a prime target for investors.
So, apparently there are only two people in the whole world that are qualified to run the Federal Reserve: Janet Yellen or Larry Summers. It’s like that bad movie line tag. “Whom ever wins, we lose….”
Excellent point.
The only person qualified to run a central bank is the one with enough brains to understand that centrally planning interest rates and money supply is a complete disaster.
May I add, the only person qualified to run a central bank is the one with enough brains to understand and be transparent that a central bank is ONLY necessary so that banks can control a country’s finances. The only person qualified to run a central bank is the one with enough brains to disband the central bank, end fiat currency and end fractional reserve banking.
I’m surprised this has affected the mortgage backed security market yet. Usually some thing big hits the debt market, it affect the whole debt market.
Muni bonds ‘hemorrhage’ $1.2 billion
Municipal bond funds saw outflows of $1.2 billion in the week ending July 24, on concern that Detroit’s filing for bankruptcy – the largest in U.S. history – will set an important precedent and more cities could follow suit. It was the ninth consecutive week of outflows from the fund type.
The move out of municipal bonds or munis began after the U.S Federal Reserve said it could scale back asset purchases later in the year, causing Treasury yields to jump.
“Caught up in the exodus from [Treasurys] and govies and the drama surrounding the nation’s largest city filing for bankruptcy (Detroit), municipal debt funds (ex-ETFs) experienced net outflows for the ninth week in a row,” Lipper said on Thursday.
Detroit bankruptcy followed years of a declining population and its once famous auto manufacturing industry.
As part of Detroit’s restructuring plan, Emergency Manager Kevyn Orr wants to treat general obligation (GO) bonds as unsecured debt. If that request is approved by the bankruptcy judge, the $3.7 trillion muni-bond market could be turned on its head, as would the long-held assumption that GO bonds represent a relatively risk-free investment.
Detroit’s decision helped to drive yields on 30-year AAA muni bonds higher to 4.14 percent on July 19, the highest since August 2, 2011.
Yields on 10-year AAA-rated bonds were steady at 2.76 percent on Wednesday and yields on top-rated 30-year bonds were at 4.31 percent, according to the latest data from MMD, a unit of Thomson Reuters.
This is put pressure to lower home prices in the future.
Where have all the households gone?
This week’s drop in existing-home sales may have been largely due to the large amount of “pent-up demand,” aka kids who won’t move out of Mom and Dad’s place.
Most aspects of the housing recovery are … recovering. However, household formation is undoubtedly lagging behind the rest of the recovery.
Thanks to years of below-normal household formation the number of missing households has accumulated, writes Trulia ($37.04 -0.46%) Chief Economist Jed Kolko in his latest blog post.
According to the 2013 Current Population Survey data, there are still 2.3 households out there that are just missing. This is extremely close to the peak of 2.6 million back in 2010 and 2011 — the peak of the recession. So where are these “missing households?”
Most of these missing households are youngsters who have yet to leave their parents’ casa. The share of 18-34 year-olds — also known as Millennials — living with their parents increased from around 27% before the housing crisis to 31%, where it remains in 2013. Of those living with their parents, 44% of 18-34 year-olds were unemployed, while 25% held a job.
But here’s the catch. The housing recovery depends on household formation to continue recovering. The likelihood that young people live with their parents is just 8% back to normal, according to Trulia. The other recovery measures tracked by Trulia are much further along: existing home sales are 82% back to normal, the delinquency + foreclosure rate is 57% back to normal, and even construction starts are 43% back to normal. In contrast, household formation has barely begun to recover, writes Kolko.
So how can we get these kids out of their parents’ houses and into their own? Jobs will be a huge factor. However, Millennials have a lot further to go than other generations. And besides, even when the Millennials do start landing jobs again, it will take some time to accrue enough money to move out on their own. All we can do is wait, and hope that other generations can make up a portion of these “missing households” for now.
Since the system has been set-up ‘by the banks–for the banks’, this should come as no surprise.
Warp, I mean wrap, your brains around this.
Unbacked money is lunacy, and those who support it are mentally deficient.
http://www.zerohedge.com/node/476886
How can a central bank go bust? Their liabilities are all in a currency they print. No matter how bad it gets, they can always print more money. They may debase their currency like Zimbabwe, and the holders of that currency end up with worthless paper, but they can never truly go bust. What am I missing here?
Andrew Jackson got rid of the then central bank, and it was the first and only time this country was not in debt.
IR – Our central bank does print money, but not all central banks can, ie. Deutsche Bundesbank can not print Euros.
Then move somewhere that uses backed money. Perhaps an Indian reservation with a wampum-based economy?
If we get Yellen as Fed Chairman then in about 3 years wampum will probably be our next currency after the dollar collapses.
MR – There are numerous examples of fiat currencies in history and numerous examples of currencies backed by gold and/or silver, and the longevity of backed currencies far exceeds those mandated by fiat. You may care to know something about money and currency before you make ridiculous arguments.
“Better to be silent and be thought a fool, than to open one’s mouth and remove all doubt.
How many backed currencies are still in existence today? What does that say about longevity?
Of course lenders do not benefit from this new modification. It is as if expect pay day lenders of quick money be happy when terms of getting loans will tighten. Same thing with mortgage loans, lenders need customers, but with the modifications no way many people will get a chance to be approved for big loans or for any loans at all. So they simply expect noticeable slowdown. Surely, we will not see any improvements any time soon for the real-estate market. So from one side I am happy with tightened standards, as only those who can afford paying off mortgage loan can taken it out
[…] modifications are designed to improve a lenders bottom line, not keep people in their homes. (See: Lenders benefit from loan modifications, homeowners not so much and Today’s loan modifications are tomorrow’s distressed property […]