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taking into account the borrowers total monthly housing-related payments (including principal, interest, taxes, and insurance, commonly referred to as PITI) as a percentage of the borrowers gross monthly income (referred to as the debt-to-income or DTI ratio).
I did notice that that sentence is retarded, but I'm guessing they'll correct it in a revised version.
"The Securities and Exchange Commission (SEC) has provided clarification that entering into loan restructurings or modifications when default is reasonably foreseeable does not preclude an institution from continuing to treat serviced mortgages as off-balance sheet exposures."
OK
modifying the terms of the loan or deferring payments
means the investor who put up money did'nt agree to these terms, and has the right to sell...
Now, all those who want to buy a pool of pre-mod loans, step right up
This might even provide some protection for servicers against suits by holders of impaired tranches, since they can now show that reasonable loan mitigation is public policy. Question is, as usual, who defines "reasonable" ...
What I have in mind is that loan mitigation will, naturally, reduce interest payments compared to the contractual amount. That means less money for the bondholders, which may cause or increase the impairment of their tranche. Of course, they're generally better off than they would have been if the servicer had foreclosed rather than modified (the loss is almost always greater in foreclosure), but the bondholder can argue that the borrowers could have remedied their default or at least could have paid more than the modified amount. In my day, PSAs reduced servicer liability for such decisions to a minimum; I don't know what market standard is now, if there is one, but the mere filing of a lawsuit for multiples of a servicer's net worth could have a chilling effect.
This statement seems to me to provide some warm fuzzy comfort, assuming we all know what "reasonable" means. In that light, it provides some a ghost of solidity by hinting, I think, that any loan modifications that use DTIs of as low as the old housing and all-debt DTIs would be protected. Anyone remember what they were? 32 and 35 come to mind...
reality-based lawyer, you know one of the standards in a lot of PSAs for "reasonable" servicer behavior is comparing how the servicer handles loans it services for itself with how it handles investor servicing.
If these servicers are out there modifying loans in their own portfolios, I find it hard to believe they fail the "reasonable" standard with regard to an investor portfolio.
And these servicers who are depositories are going to be modifying the loans in their own portfolios, because the Federales just told them to get busy on that front.
"Of course, they're generally better off than they would have been if the servicer had foreclosed rather than modified (the loss is almost always greater in foreclosure)..."
One of the exceptions to this statement might be collateral must be disposed of in a market where prices are steadily falling. If a loan modification only keeps the mortgage alive for another year or two, the loss actually might be lower if foreclosure took place immediately.
Just keeping pushing reality off until tomorrow. SarbOx didn't change a thing. We're still living in an "Enron" world. When reality hits, it'll be New Century style.
This is the standard from the Goldman prospectus we looked at last week:
In servicing the mortgage loans, the servicers will be required to use
the same care as they customarily employ in servicing and administering
similar mortgage loans for their own account, in accordance with customary
mortgage servicing practices of mortgage lenders and loan servicers
administering similar mortgage loans and in accordance with the terms of the master servicing and trust agreement.
So if Wells Fargo modifies its own loans, it's hard to say Wells is ripping off a securitization for modifying the security's loans. OTOH, if Wells FCs all its own loans, it can't turn around and tell the security trustee that mods are a good idea.
Sept. 4 (Bloomberg) -- First American Corp., the largest U.S. title insurer, said it would cut 1,300 jobs, or about 3 percent of its workforce, to reduce costs this quarter as U.S. home sales slow.
Combined with 600 jobs it cut in the second quarter, First American expects the eliminations to lower expenses by $108 million a year, the Santa Ana, California-based company said in a statement today. LandAmerica Financial Group Inc., the third-biggest title insurer, said on Aug. 28 that it would cut 1,100 jobs.
Come what may....The LOrd God is watching and He cares about what is right....Same yesterday, today and forever...I changeth NOT!!!Ethics and Morality will be upheld in the end by the Most Awesome Power...Grace and Peace to all
Bilga has it right the longer the homeowner stays in an overpriced home that they can't afford the longer the the prices have to fall to reasonable levels and the greater the exposure to the note holder.
Say a prayer for the folks in honduras and nicaragua the poverty down there is beyond comprehension.
If a loan modification only keeps the mortgage alive for another year or two, the loss actually might be lower if foreclosure took place immediately.
Of course. But who has an infallible loss projection model for these servicers to use?
They are supposed to be taking into account that a future FC might be more expensive than a current FC. They are also supposed to be updating their models with re-default rates for modifications.
It does get complicated. You could have 33% of your mods re-defaulting and resulting in more expensive FCs in the future, but if you saved enough on the 66% of mods that didn't redefault, you're money ahead. This is particularly true in securities, which are dynamic structures in which current cash flow that builds up overcollateralization can mean a lot more than certain future write-downs.
Tanta,
Yes, that's true. But I think a lot of servicers these days don't have many loans on their own books; if they keep the residual/B pieces, they may have tanked by now. So there wouldn't be any owned mortgages to compare to. And there's never, in my memory, been a market that would so tempt bondholders to test the servicing standards and disclaimers.
I agree about the servicers who are depositories. I've kind of lost track of how many of the surviving servicers are depositories, though.
Servicers used to publish servicing guidelines, to protect themselves against this risk, or just adopt the Freddie/Fannie guidelines if they sold to them. I think that practice has been eroded over the years. Maybe it will come back.
FWIW, I'm an old codger, vintage 1985. Not many of us left in the business....
Somehow I get the distinct impression that the mortgage old-timers, in their yearning for a return to the good-ole-days, are making the mistake of viewing loan loss mitigation results from those good-ole-days and projecting them on today's hopeless market.
Small scale past mitigation exercises where there may have been a job loss, divorce, illness, dog-ate-my-homework... bear no resemblence to what is in play here. We are looking at borrowers that have zero (NEGATIVE and Falling) equity and are failing on their first reset of MANY to come. RE has 30%-40% to fall so their motivation to struggle over time will clearly diminish.
This is going to result in millions of defaults - unless there's a real large scale Hillary bailout. You need to re-baseline your frame of reference since the "let's help this poor borrower get current so they can jump right back into the game" isn't relevant. Time to let the lenders and borrowers eat cake.
Anytime you have to issue a statement declaring the SEC said this is OK to keep off the balance sheet, there is smoke.
If it looks like it might go into foreclosure, work on the loan, but you can still keep that liability you are working on off the balance sheet. Why would investors want to know that little gem. Sounds like a great plan, where can I sign up.
" realty-based lawyer " - Fannie and Freddie both announced within the past week that they would not release their latest REMIC bonds to the market due to lack of demand.
That door is slamming shut.. if they can't securitize mortgages while staying under the cap, they can't take any more loans regardless of their quality!
Tanta,
Looks like the Feds were paying attention to your comments on the subject. Good news, for sure.
Realty Based Lawyer - No offense (well, not too much), but it is comments like this that cause confusion. Think about it - is your piece of the bond worth more if a mod is done of if a foreclosure is done?
Servicers are making decisions based on having their hands in the actual file and working with a real live borrower. The goal is preservation where appropriate and not to jack with the value of the underlying security. If they wanted to do that, all that would be needed is to sit by and watch the defaults kill any value left.
Keeping folks in a home that was overpriced and that they could never afford is not a win, only prolonging the overpayment for a inflated asset.
Yes, that's true. But I think a lot of servicers these days don't have many loans on their own books
Actually, I haven't seen a deal issued in the last 5 years that did not have a depository (or big porfolio lender like CFC) as Master Servicer, regardless of how many outfits there were as subservicers.
And that is exactly why you have a big depository or portfolio lender as your Master Servicer.
Tanta,
How do workouts square with the concept of tranches? The owners of the upper tiers are going to say they already accepted a lower rate in exchange for protection by the lower tranches failing. Isn't any workout that lowers their return essentially a repudiation of that deal unless the lower tiers are wiped out in order according to the orignial terms as well? Can they argue that the existing structure is/was in their best interests compared to what is being renegotiated?
if they can't securitize mortgages while staying under the cap,
Most of Fannie and Freddie's business is MBS pass-throughs, not REMICs.
Am I wrong to think securities holders see some benefit from mods in the current environment? Although their ROI is impacted, don't efforts to salvage distressed mortgages tend to protect the investors' principal?
Robert, they are obligated to use a "benefit to the deal as a whole" standard, not "benefit to any one tranche" standard.
You are confusing a tranched structure with a pass-through. Lowering the rate on the loans does not necessarily, or even likely, reduce the return to the top tranche holders. Most of them are getting paid at LIBOR plus some spread, not "weighted average yield of pool."
And because of the waterfall structure on principal payments, the top tranches amortize much faster than the underlying loans. FCing loans just amortizes them even faster, since the top tranches get the principal payments first. The less money you have invested, the less interest you get paid.
The big effect that these mods could have, if they became sufficiently numerous, is to delay step-down. That means that the lowest tranches continue to accrue interest, but don't get paid any in cash until a reasonable number of write-downs have been covered. The ones who will end up holding the bag are the lowest tranches, in any realistic view of this.
Sure, anybody can go to court over this. Perhaps it will even cause these issuers to put more thought into how they structure deals in the future, as they realize that these "opposing interest classes" create insolvable servicing problems. I don't think that would be a bad thing. I certainly don't think servicers should refuse to modify so that this doesn't happen.
A lot of people want to "rip off the bandaid" here. I'm all in favor of that at times, but I have my eye on a different bandaid, I guess.
If I remember right, the depositories tend not to be portfolio lenders due to the risk-based capital rules. Being a depository doesn't protect you from bondholder lawsuits -- it just gives investors comfort that you've got some assets. And investors who've lost money tend to look for someone with assets to help them recoup their losses (the "deep pocket" tactic).
I think this statement was intended to provide comfort for the servicers; if I were still a servicer's attorney, I'd read it that way. Subject, of course, to whatever limitations on modifications the PSA may impose.
Could someone refresh my recollection. If a Servicer modifies, say the ineterst rate down-what traunche usually takes the Hit? Compare that to if the Servicer forcloses what traunche usually recieves the proceeds? Are these two hypotheticals the Same truanche or do we have bondholders in conflict with each other?
Another way to say what I just said is that servicers are basically obligated to service pools of mortgage loans, not tranches of securities.
So for this purpose, a servicer treats a pool of loans as it would a portfolio of loans.
If I remember right, the depositories tend not to be portfolio lenders due to the risk-based capital rules.
The depositories all have RE portfolios. Not necessarily as large as their off-balance sheet securitized servicing, but they all have them.
Again, that's why they are used as Master Servicers on these deals. You simply wouldn't want a servicer who does not also service its own loans.
If you need your memory refreshed, go to the Compleat UberNerd link at the top right of the page, then find the links for MBS I-III. It will help you understand yield/tranche/credit loss issues on structured securities.
Tanta,
Thanks. I didn't understand that the topmost tranches were entirely insulated from the effects of a workout. At some point some slice is going to open their quarterly autodeposit and see less than they expected, they are not going to sit still. And back to those highest tranches; by not being amortized as fast as the market would normally run don't they end up with their investment covering assets that are not marked to market reducing the value of their holdings should they attempt to sell?
[If I am tiresome of just too far behind the class I'll shut up.]
Here's one take on the ability to move Los Angeles area borrowers into loans that they can "afford". This is in reference to refis, rather than mods, but same problem, I'm sure.
"Right now we're seeing 30-40 calls a day. And 85 percent of these families we can't help, simply because the gap of what they can afford and should have been able to afford is so huge," said Ester Cadavid, chief development officer and vice president of Los Angeles Neighborhood Housing Services.
"They bought too much house. Even if we refinance them into a fixed-rate (mortgage), the payment is still too much."
Bush bailout pledge gets cool reception in L.A. - LA Daily News
In LA, much of the problem can be boiled down to affordability. With a median household income of around $60k and a median price of well over half a mil, the population simply cannot support these price levels.
An analogy:
Character is a house painter standing-in for the FED and Wall Street.
Well...to save money, I bought a big bucket of paint, but I couldn't take it up on the ladder with me. So, I poured some of the paint from the big bucket into one of my two little buckets, and carried the little bucket op to the top of the ladder. When I got to the top of the ladder, I dropped my paint brush, and it fell into the big bucket of paint I had left on the ground. When I climbed down to get my brush, I accidentally stepped into the second little bucket and got my foot stuck. When I bent over to get the little bucket off of my foot, I slipped and got my ass stuck in the big bucket. I then grabbed the ladder to pull myself up, and the bucket of paint I had just carried up the ladder fell, and got stuck on my head - Drenching me with paint.
By the way, while I was up on the ladder, I noticed that your gutter was coming loose. Would you like me to repair it while I'm up there? I'll only charge you an extra $125.
deb brings up the elephant in the room with all the discussion of loan mods. Helping people stay in their houses who can afford to stay is great. But what percentage of them are SOL because they can't afford the house under any reasonable terms?
Tanta,
I think we're in heated agreement here. I think the statement is a good thing for modifications. I agree that a logical investor would want a Master Servicer that had its own portfolio to service and/or held the residual/B tranche -- but there are a lot of asset classes where that requirement has gone by the boards in the last several years.
Also, if Wells is the MS for one of the toxic subprime deals, did it also originate such deals? If not, how do you show its modification practice for the serviced deals is the same as for its portfolio?
All I'm trying to say is that the liability question is complicated enough that the shelter, fuzzy as it is, provided by this statement may in fact help. On the one hand, it encourages servicers to modify appropriately; on the other, there's a quiet suggestion that not modifying might not be a good idea.
From what I remember reading here at some point, any effort the servicer invests in working with a borrower gets paid by the collected interest before whatever remains gets distributed. That would be what remains of the collected interest since the borrower involved in the protracted workout exercise is presumably already not paying. ANd the servicer can make this a revenue positive exercise so they have plenty of motivation - at odds with the securities holders.
Am I correct?
reality-based lawyer, I liked that 'heated agreement' comment, but you and Tanta are looking at two different situations. She, of course, is thrilled at the joint statement since it does seem to encourage servicers to do modifications whenever 'reasonable' (whatever that means).
You, though, correctly pointed out in your first post that there is an awful lot of downside for the servicers when the bondholders start filing lawsuits over just how 'reasonable' the servicers' actions were.
More recently you said: "All I'm trying to say is that the liability question is complicated enough that the shelter, fuzzy as it is, provided by this statement may in fact help."
I think the potential liability is so severe, and the related upside so minimal, that no servicer should engage in any but the most obvious modifications.
Even the statement says "Servicers are encouraged to use the authority that they have under the governing securitization documents . . . ."
To me the question is what servicer will be so sure of its interpretation of those governing documents that it sticks its neck out to do a lot of modifications.
I've love to see the mods from a macro standpoint, as would Tanta, but I would hate to advise a servicer on what the lawsuits might look like a year or two from now.
any effort the servicer invests in working with a borrower gets paid by the collected interest before whatever remains gets distributed
No.
The servicer's normal servicing fee comes out of the interest payments before they are passed through to the trust. If the contractual servicing fee is 0.50%, the servicer takes 1/12 of 0.50% off the top every month the loan is on the books. The investor gets the rest.
However, modification expenses are not billable back to the trust. The servicer either rolls the cost of the mod into the borrower's loan amount (as one would on a refi where you refinance your closing costs), or the servicer eats it.
Servicers are often willing to eat it because they will make more money if a loan stays on the books, rather than getting FC'd. Of course, this only works if those mods do not just turn around and redefault.
I admit to being amused at how stupid everyone thinks the servicers are. I just had a post on an investment bank report not long ago showing that mods on average cost servicers about $1,000. They only earn that back if the loan performs for a minimum of another year, and usually more like two (it depends on the servicing fee and loan amount).
We are going to discover before this is over that there have been bondholders begging for workouts, but the servicers didn't do them because they didn't want to risk losing their own out-of-pocket expenses. I'll go on record with that prediction.
As far as people who can't afford the mod terms? Read the interagency statement again. Those people go straight to FC. Always have. Still will.
Robert, there's just no way to win at that game. Extention of the bond duration may cause its price to decline, but so will a high rate of FC in the pool. This just isn't linear or univariate enough, unfortunately. That's why everyone uses "service the pool" instead of "service the deal." You can do loss on an NPV basis to the pool calculations. You can't get anywhere with estimated future price differentials of seasoned bonds.
To me the question is what servicer will be so sure of its interpretation of those governing documents that it sticks its neck out to do a lot of modifications.
I did a post last week on ABX remittance data, that showed a Goldman deal did 21 mods just in August. I further quoted at length from the prospectus, because the language on workouts was so explicit and clear that it didn't sound like necks being stuck out anywhere.
It really makes me nervous when we prefer to argue from cynicism rather than data. When I don't have data to back up a point, I do say so. What I liked about this interagency statement is that it is clarifies the issues and standards. Not that it means people will or will not get mods. They will, guys. Promise you that.
Servicers owe a fiduciary responsibility to the investors, their own shareholders, and the borrowers. After that they take marching orders from the regulators. We might as well stop expecting them to act based on what's best for rapid clearing of the RE market. They do not have a duty to the RE market. That may be unfortunate, but it's true.
Bottom line: Neither Trammel nor Calabasas-based Countrywide has yet been able to work out a deal to spare her small house in Citrus Heights from foreclosure. There are no loan modifications. No refinance options. No waiving of a pre-payment penalty that stings a borrower for thousands of dollars to get out of trouble.
"I asked, 'What's your solution? Give me some ways I can keep this from happening,' " says Trammell of her dealings with the nation's leading lender. "They said, 'Get a roommate.' That's what she told me. I said, 'OK. Well, I guess we're done talking.' "</i>
duh, the answer to the FC problem is: 'get a roomate'. AHAHAHAHA!
The real question is who is going to buy future mortgage back securities--The answer is nobody because the model is broken and most investors want to sell what they have. Hence, the financing for homes continues to shrink and real estate prices will continue declining. The mods suggested are irrevelant.
The same can be said for asset backed securities for car loans and credit cards. Watch for credit card companies and captive finance companies to stop loaning to high credit risks.
Buy gold and stop getting brain damage.
If the lawsuits get out of hand the Feds are likely to step in to protect against litigation and/or consolidate as many suits into federal court where they lord over proceedings. Expect new legal case law out of this all the way to the Supremes.
"I asked, 'What's your solution? Give me some ways I can keep this from happening"
Making the payment in full and on time would be a start.
and falling to my knees in desperate prayer that this will eliminate some of the confused and backwards reporting on this issue in the financial press.
The press in this country is hopeless no matter what the topic. Understanding the topics they report on appears to be far too much work and they prefer to just repeat the last thing they heard from any source. I'm bemused that Tanta thinks the press' reporting might actually get better.
Uncle Ben could issue daily statements lucidly explaining the mortgage market and the it wouldn't help the press.
[If I am tiresome of just too far behind the class I'll shut up.]
Back to the thread with BW re:slogging
Hey, if I could understand all this stuff easily I wouldn't need to be here; thank god this site is open.
More on track: IMO the number of successful workouts/ solutions hardly matters now, it's more a case of better to light a candle than curse the darkness.
Washington Post 9/3/2007
When Controversy Follows Cash
Here is a FDIC modification for you.
When Controversy Follows Cash - washingtonpost.com
When I read the statement, all that I came away with was: servicers, do your job in a reasonable manner as allowed under your agreements. If mods make sense, then do them; if they don't, then foreclose.
Am I missing something here, or are the agencies just telling the servicers to do their jobs, which includes loss mitigation (and that may or may not include mods)? Do these guidelines have some additional implicit meaning to the servicers that I am missing?
Do these guidelines have some additional implicit meaning to the servicers that I am missing?
Yes. There is always a subtext to regulatory documents. My reading of this one is:
Supplement issued by one of the same and two different regulators, clarifying that DTIs over 50% are not a good idea:
FDIC: Press Releases - PR-74-2007 09/04/2007
Doesn't necessarily create a safe haven for DTIs under 50%, but I think a suing bondholder would have a heavier burden at under 50%, while the servicer would probably be expected to explain why they felt a particular borrower couldn't support a 50% DTI (except, perhaps, in the rather unlikely event the similar loand in their own portfolio had tighter ratios). So, in the tension between maximizing contractual interest and keeping theh loan afloat, is 50% the new rule of thumb? If so, what does that do to cash flows on most subprime MBS? And would it mean that the borrower would probably actually be able to make the payment?
Doesn't this encourage almost everyone to go 90 days late if they want a 'mod' and a rate reduction?
I understand that if someone obviously can afford their current mortgage that won't work but my understanding has been that most who bought in the last two years are on thin ice because of the resets coming.
This is terrible in my opinion. Get a second job? Nope. Don't buy that new car? Nope. Get a roommate? Nope.
Damn, I think I'll go buy an overpriced house and get refinanced to 1%.
Tanta I usually agree with you but modifying loans rewards bad behavior and risk taking.
Thanks, Tanta. I figured I had to be missing something since I gathered that you think it is important but my reading of the text left me underwhelmed as to the "new" guidelines (always couched with "when reasonable," "when appropriate," etc.).
As realty-based lawyer mentioned, it looks like the DTI (apparently now at 50% or, maybe, even lower) is the big unknown as far as how many people will qualify for mods.
Tanta, I'm sorry if you believe that my comments about servicers not wanting to stick their necks out too far was arguing from cynicism rather than from data.
First of all, I wasn't arguing with you or anyone else. I stated my opinion that the potential liability of large numbers of modifications by a servicer outweighed the potential upside of doing so, not for the USA on a macro level, but for that particular servicer who ends up a defendant and may go out of business as a result of the litigation (win, lose or draw).
Secondly, I don't have, and I don't know anyone who does have, actual data on modifications to date beyond the remittance numbers you cited for August for a certain number of deals, including one GS deal with 21 modifications that month. You have acknowledged not having any cumulative data, and I certainly don't, so neither one of us knows how many of the 3900+ loans could benefit from a modification. Similarly, neither one of knows the actual language for the prospectuses for all the other deals out there, no matter how clear the language was in the one you cited.
This 'crunch' (with whatever preceding adjective you choose) will end badly; that's my opinion. I don't think you disagree that we're in unchartered territory in the MBS world. Lots of people are going to lose lots of money. I've noticed that, when lots of people lose lots of money, lots of lawsuits get filed.
If I were to advise a servicer on proactively seeking modifications, I would first want to see the actual agreement and probably get a specific waiver or release from the pool members before recommending too aggressive an approach.
The interagency statement is fine for its general purpose, but none of those agencies are going to give a damn about the plight of individual servicers getting dragged through the courts for the next few years.
Best wishes,
Doesn't this encourage almost everyone to go 90 days late if they want a 'mod' and a rate reduction?
Think about how this works in very practical terms. Read the interagency statement again.
When you have a borrower in default, you consider "other obligations and resources." That means, to start with, that you get updated income and bank account information (paystubs, statements) and an updated credit report. You're trying to see what the borrower can afford to pay. Not what the borrower wants to pay.
If I, the servicer, find out that you apparently have plenty of ability to repay your loan but simply won't, because you think you can force me to give you a mod, I will send your ass to the FC department. Furthermore, you'd better hope that your credit cards don't have a "universal default provision" on them, because if you let your mortgage go 90 days down just to see if a servicer would give you 1%, you're going to be seeing 29% on your credit cards.
Really, there have always been people who can pay their debts, but just won't. They have never been a large part of the population, but they have always existed. About the first thing you learn in servicing school, after "the check is in the mail," is that you must distinguish between those who can't pay but want to and those who can pay but don't feel like it this month.
sportsfan, are you an attorney?
Tanta, I'm primarily a sportsfan, and it is football season again, but yes, I did represent private lenders trying to do workouts in California in the 1990s and I fear the volume this time will be overwhelming. As with you, I see little advantage to a large number of FCs and would prefer modifications, where appropriate, to keep people in houses paying mortgages. Congress could help out a lot in this area, but I haven't heard any constructive proposals from any politicians yet.
Tanta, I think Yves at Naked Capitalism likes you. I hope he sends you flowers!
Doesn't this encourage almost everyone to go 90 days late if they want a 'mod' and a rate reduction?
Exactly. In the same way bypass surgery 'rewards' eating barbeque or chemotherapy 'rewards' smoking.
If you think going through default process is fun - try it yourself. Anyone can be a 'lucky ducky' - just don't pay and receive your 'reward'.
Sportsfan - there is precious little Congress can do. The big problem is price exceeds income by so much in many of the bubble areas - modification isn't a reasonable possibility.
As a result Congress will wail and moan but little else.
dryfly, there's no hope for some who bought way beyond their means. Everyone agrees with that, I believe. The question is how many somewhat stronger subjects can be saved (only 80,000?) and how much damage to the economy can be averted by keeping people in their houses and keeping the payments rolling in on the housing debt.
In that sense I think there are things Congress could do to help the current situation. One thing, clearly, would be a revision of tax laws. Basically, the modification should become a non-taxable event even if it otherwise would have triggered some tax code section.
Another would be federal preemption of the many different state laws relating to mortgages, deeds of trust, permissible modifications, foreclosures, and so on. Since the MBS market is national, perhaps international, there's no reason to have an additional layer of confusion (times 50) added to sorting out the mess. Take charge, say what the rules are for the next two or three years, and provide some clarity to the world. (I don't think there are too many "states rats" supporters out there.) Only Congress can do that although I suppose Bush could propose it.
This interagency statement, while well-intentioned, is just paying lip service, or attempting to jawbone, or whatever other metaphor applies. If what the Fed and other agencies are saying is that important, put it into law. I don't think Bush would veto a comprehensive plan that treated everyone fairly while not being an obvious federal bailout. Let's get a sense of uniformity at the least.
Even the creation of an RTC style entity to act as a clearinghouse for posting the losses would be a step towards greater stability in the markets and that has to begin with Congress.
But I agree that we'll probably just hear moaning and wailing about poor old J6P being forced to vacate. It's what they do.
@ Reality-Based Lawyer:
Back when mortgage underwriting took several weeks for each & every file (hard-copy verification of all income, expenses, and assets), the Fannie/Freddie D/I ratios were 28% for PITI and 36% for all debt (excluding term debt with 10 or fewer monthly payments remaining). If we'd kept to 28/36 we'd never have seen the subprime crisis. As far as I can tell, the only ones who would lose under the strict 28/36 underwriting guidelines are Mercedes dealers.
Great points sportsfan - agree with them all. But especially the last one where Congress does nothing.
I lived through the farm crisis in the Midwest & distinctly remember the help Congress gave farmers & how it all ended up in the coffers of ADM, Cargill & John Deere. Not that it wasn't a nice idea to help 'family farmers'... the help just wasn't intended to help family farmers. It did exactly what it was intended to do.
We'll see the same except this time it will be Citi, BoA and the best connected of that clan who come out smelling fine. J6P not so much.
Heh. Great comments. At the end of the day, Wells, WaMu and a handful of big servicers are going to decide what's "reasonable" in terms of mitigation, mostly because they're the only ones left. I'm not terribly worried about bondholder suits over mitigation because, by the time we get there, nothing will be left to sue for, and besides, no court in the land is going to toss Wells Fargo under the bus for mitigating a few loans in this market. Ain't gonna happen.
More interesting are Lew Ranieri's speculations that loan restructuring could blow up true sale. IMHO it's a lot more likely that the IRS will bring down the house of cards than some bondholder with an axe to grind.
What effect does the presence of many investors who have bought options that were sold to hedge default risk on these bonds have on the ability of the servicer to mitigate loses even when they want to. There are people making millions on the failures of the mortgages since they bought the options that others sold. Can they sue the servicer for reducing the value of their assets.
Sorry if this is stated crudely. I have read stories about some funds that have cleaned up this year on defaults. If loans are modified to prevent this they will loose money, my guess is they will not do so quietly.
Thank you.
@ Captain Ned
Back when mortgage underwriting took several weeks for each & every file (hard-copy verification of all income, expenses, and assets), the Fannie/Freddie D/I ratios were 28% for PITI and 36% for all debt (excluding term debt with 10 or fewer monthly payments remaining).
Back in the day with all of those regulations, I think I was given a mortgage of 3X my gross yearly income at around 28% PITI being encouraged to buy higher. Even with credit card debt of around 25% of my GYI. With a mere 3% down.
I made it work, it sucked, but I made it work. I'm just glad I didn't buy even higher because I couldn't have made that work.
20 years later my house payment is 1/2 what rent is my area, but back in the day it was double what my rent was in a much more desirable area. I rented a flat in what's called the Fab 40's, three blocks from former Governor Reagan's rented home. I wish I'd been able to buy in that area but the prices were 4X's my rent just to buy a condo conversion of my four flat and 5X's the cost of 1 unit of a 1/2 plex, with almost zero yard and looked raw and horrible back then but now fits with time and is selling (as advertised) at over $1M.
For those who claim boomers are gouging GenX let me present the gouging by the "Greatest Generation Ever" courtesy of Ted Koppel.
I'd love for somebody to do a cost analysis on what it has cost homemoaners of 10-20 years to stay in their homes. I read people writing things like "they only paid $100k-$200k for these dumps 20 years ago and now they want $300k-$600k for the same property".
Again, I'm not talking about speculators or flippers. I'm seriously asking; what's a fair price for a home that somebody put 20% down on that cost $100k twenty years ago?
The cost of loans back then, without refinancing, was roughly 8-12%. The payoff at these rates was somewhere between $200k-275k...on a 30 year loan for $80k.
I know, the answer is: the price is whatever the market will bear. But, beyond that answer, I'd love to hear/read a cost analysis of homemoanership over a 10-30 year basis based on original price, mortgage rate, payoff amount, taxes paid, taxes avoided via IRS sanctioned deductions, and normal home maintenance costs such as roof replacement and updating, county fees such as water, trash, and all those "miscellaneous" fees homemoaners pay that renters don't.
I believe that four years ago the market would bear the cost basis of people getting out at near cost of owning. With this flipper/speculator market in California? Ain't gonna happen for ten more years. The pendulum is going to swing too far the other way, just like in the early 90's. Meh, another downturn.
I really need to pay attention to what appears to be a recurring swing in Cali home prices.
Upturn: 1983?-1989 (Dunno, I can't remember when it started up, but I bought two years before it headed down).
Downturn: 1990-1998
Upturn: 199
This is the serious question within my rambling post:
I know, the answer is: the price is whatever the market will bear. But, beyond that answer, I'd love to hear/read a cost analysis of homemoanership over a 10-30 year basis based on original price, mortgage rate, payoff amount, taxes paid, taxes avoided via IRS sanctioned deductions, and normal home maintenance costs such as roof replacement and updating, county fees such as water, trash, and all those "miscellaneous" fees homemoaners pay that renters don't.
I had a longer post about the "greatest generation ever" selling homes they bought for $2k-$12k to boomers at 50X's their cost but I'll save that for another post.
Captain Ned: Thanks. I'd forgotten. I as looking for my first home then and remember thinking that I could afford more home than I'd qualify for and that those ratios should be adjusted for taxes and as disposable income increased -- I agree with you about the Mercedes dealers.
sportsfan and dryfly: Completely agree that any legislation/regulation is likely to get it wrong. Example: I think almost anyone with some experience (who didn't have an axe to grind) knew that more oversight of lending practices would have been good, that investors were completely ignoring risk and that this crash was coming -- most of us have been wondering what took so long. But Money was Being Made and more people were allowed to become Homeowners, so the politicians (who probably weren't as stupid as they appear) and regulators (who almost certainly saw this coming) also knew that their heads would be handed to them politically if they tried to stop the crash before anything had gone wrong. Dunno what you do about that.
For now, though, I think some kind of regulation (not legislation) providing a safe harbor for loss mitigation modifications could be a good idea. Don't know whether the FDIC standard is a good starting point, because I don't know whether the numbers work, but the concept of sheltering DTIs up to a certain point -- properly developed -- seems useful, with some guidance as to which loans should be modified and which not. Maybe price/income ratios too. What do you think?
Servicers, regulators or someone should also be educating trustees and their counsel to propose amendments of PSAs that overly restrict mitigation modifications. And investors, who will have to vote on the amendments. Yes?