State Total 2007
net gain or loss
Arizona -2,505
California -15,933
Delaware +200
Florida -2,507
Illinois -1,738
Louisiana +130
New York -2,071
Ohio -845
Texas +145
U.S. -86,071
Do mortgage servicing firms typically do other types of servicing, like auto loans?
Well . . . one reason why we talk about "platforms" rather than "firms" is because you don't ever mix loan types in a "platform." Mortgage servicing is very different from servicing other loans (not only are they shorter term, they often use different interest calculations, they don't have escrows, they're rarely insured, etc.).
But obviously a firm--GMAC, of course, but there are others--can have multiple platforms: a mortgage platform, an auto platform, credit cards, commercial, whatever.
I think there may be some corporate officers who are tempted to think, heck, a loan's a loan, let's service them all together, but those people scare the bejeezus out of me.
I am trying to get a handle on how this will play out for families which are upside-down. I was at a party last night where a fellow and his wife were talking about how they had primary and second mortgages on their home of $180,000. Their house in Douglas County Georgia, an exurb of Atlanta, would probably need to be $150,000 to sell this year. They would like to move into town, downsize into an apartment. They were even talking about jingle mail. What are the consequences in a state like Georgia for the $30,000 (or whatever) of upside down money. Is there a better way to give over the house without lawyers or a big 1099 bill? What are people going to do that need to move for one reason or another, but who are upside down in their own mortgage?
Does anyone know if these problems are serious enough to have reduced the market price of MSRs in recent transactions?
I suspect so. The analyst quoted in the American Banker article indicates that it's becoming an issue. People who never worried about the carrying costs of advances are starting to get out the old mechanical pencil and worry about it. (I am just guessing that the reference there is to non-bank servicers, whose borrowing costs are--presumably--higher than depositories.)
What are people going to do that need to move for one reason or another, but who are upside down in their own mortgage?
You know, at some level they're just doing the same thing everybody always did when they moved after having owned a home for less than ten years: they're paying too much in transaction costs to justify owning rather than renting.
Sure, these days that "transaction cost" sucks worse than usual, but that's what they are.
I was looking at the mortgage paperwork from Wells Fargo last night and this really jumped out at me. Paraphrased it said "If your house goes down in value and you are deducting the interest on your taxes - you can only deduct what the house is worth. The rest you have to pay..."
My brain read that four times without really grasping it. So if someone bought a house for 500k and deducts the interest it is ok. If the house is really only 400k then you have to change the amount you declare as interest to what it would be if you had bought it at 400k?
American banker, stay away from me
American banker, buddy let me be
Dont come hangin around my door
I dont wanna see your CDOs no more
I got more remunerative things to do
Than throwin' my Eurodollars down the hole with you
Now buddy, I said stay away,
American banker, listen what I say.
Paraphrased it said "If your house goes down in value and you are deducting the interest on your taxes - you can only deduct what the house is worth. The rest you have to pay..."
NoVa, I may be misunderstanding you, but where did you find such a claim in your mortgage paperwork?
If record refinances are replaced with record delinquencies and defaults and the servicing model is then broken then what is the likelihood of servicers going bankrupt and the consequences when they are unable to service due to insolvency?
Jingle mail will be socially INEVITABLE. It just makes sense sometimes. No skin in the game and way under water? This is a NO BRAINER.
This may be the one time in history where the little guy can stick it back to the system. Developers and REITS use this tactic or the threat of it all the time. Why shouldn't an under water home-owner?
In the future a down payment will be required. I look forward to an era of prudent lending.
Thanks for your response. A follow up question. When MSRs are valued for financial statements are models, recent sales prices, or models adjusted for recent sales prices used?
" Paraphrased it said "If your house goes down in value and you are deducting the interest on your taxes - you can only deduct what the house is worth. The rest you have to pay..."
NoVa, I may be misunderstanding you, but where did you find such a claim in your mortgage paperwork?
Tanta "
Tanta,
Any chance Wells or whoever is interpreting what is and what is not "secured debt"??
I believe the mortgage interest deduction is predicated upon it being secured debt - house as collateral,etc.
Could a bank really believe that if they are owed $500,000 on a house now worth $300,000 that $200,000 is unsecured debt and therefore not subject to the mortgage interest deduction?
Does the big mess get even messier?
Bart | 01.07.08 - 11:19 am | #
Bart...
Is it a ominous sign that the first five listed sales for my county in SW Florida are all REO's ??? Is it also bad that as of the 7th these are the only sales so far ??? It's gonna be an interesting year for sure.
Mike, it really would not surprise me at all if the IRS thought that way. It makes sense: The IRS would not allow you to borrow an arbitrary sum against your principal residence and claim that the entire interest payment is deductible.
I wonder to what extent the IRS enforces this in the case of declining value.
When MSRs are valued for financial statements are models, recent sales prices, or models adjusted for recent sales prices used?
As far as I know most MSR valuation uses the same models everyone else uses. Not to scare you to death or anything. They'll be using OFHEO or Case-Shiller or some other homegrown indexing to try to adjust for price changes.
Could the IRS think that way??
I guess maybe they could, but I've never encountered a lender willing to give tax advice to a borrower in the mortgage paperwork. As far as I know everyone just sends the borrower the 1098 at the end of the year--the report of the interest you paid for the year--and the rest is between you and the IRS. Unless you're dealing with something weird like an MCC (mortgage credit certificate) or bond program loan or something.
I would guess that mortgage servicing is not much different from student loan servicing, which is a low margin business that is only profitable in high volume, best case scenarios. And even then, you have to work your staff like dogs. If you have good systems with extra cycles on the mainframe and a plentiful supply of newly minted accountants from the local tech school, you may be able to squeeze a few bucks out of a servicing operation.
The tan man was one of the participants and he made the point that in the Texas '80s meltdown people hung on to their homes if they conceivably could, even if underwater. I know most of us are wary of people who say "Its different this time." but maybe it is.
Capital Gains Tax is based on transactions. If you sell a principle residence for a gain, you must pay taxes for gains in excess of the $500k exclusion. If you sell a principle residence for a loss, you can only roll the loss into a stepped up basis in the next house.
As an aside, the $500k exclusion can be floated. That is, you can defer it if that's in your interest. Since Cap gains are now taxed favorably, someone might want to lock-in the gain at a low tax rate and defer the exclusion for a few years. The other side of the coin is the loss of time value of the taxes paid.
Jinglemail? BK servicers? Fataly constipated lenders? Insolvency tsunami? As "Apocalypse Now" Captain Kurtz mutters when facing murder, "Oh, the horror!"
I faced evacuation during the San Diego wildfires in October... here's a different metaphor that occured to me:
Wild fires are horrifically destructive because wind blown sparks and scorching heat turn nearby living trees into flamable tinder more quickly than previously anticipated... especially by the confounded "experts".
For those who continue to predict the bottom, the soft landing, the Goldilocks scenario, consider that most of the time, most of us are mostly guessing. And guessing not too terribly well, history proves.
Have any Kool-Aid free dieters forecast how deep and how long the "correction" will be, given the "mistakes" that have been (and continue to be) made? I suppose that such forecasts need not be enumerated in percentage points, quarters or months, the number of years and rough 10% increments should suffice.
OT, sorry, but this song was going through my mind all weekend in thinking about where this economy was heading and the title of this post triggered it again:
What are people going to do that need to move for one reason or another, but who are upside down in their own mortgage?
Like anyone else, you add up the cost of moving, subtract if from the gains of moving and make your decision. Maybe more people will be staying put for now.
My brother had that problem back in the 90s in Long Beach. The agency he worked for moved the office so his commute went from 10 minutes on a bike to 45 minutes of freeway gridlock. He stayed put as he could continue to make the house payment--not being completely stupid, he had bought a house he could afford.
Like anyone else, you add up the cost of moving, subtract if from the gains of moving and make your decision. Maybe more people will be staying put for now.
The other punch to the gut of the RE market will be, one hopes, the sobering up of these people who have been telling me for years that a 2/28 ARM "makes sense" because they're "only going to be in the house for two years."
In any normal market that doesn't make much sense: the transaction costs are too high. In a depreciating market it's exposed for the insanity it is.
But the world is full of people who drank the "You Can Own With the Same Mobility As Renting" kool aid, and now they're an unhappy bunch.
And when they discover that their suburbs have no tax money to build those inter-county connectors to handle the commuters . . .
Lama's exactly right. People will hang in there when they feel like they made an investment (a down payment) that might return someday if they hold out long enough. People will also hang in there if they work near where they live.
If they bought for no-down out in the sticks with a city job? If the Tanned One thinks people are going to continue to put up with a 3-hour daily commute to an upside-down home with payments they can barely afford, he's fooling himself.
As far as I know most MSR valuation uses the same models everyone else uses. Not to scare you to death or anything. They'll be using OFHEO or Case-Shiller or some other homegrown indexing to try to adjust for price changes.
are you referring to prepayment models? i think nowadays most servicers use OAS methodology to value MSRs (as opposed to static methodology in the old days). OAS is better (conceptually as well as practically) because other mortgage products which are used for hedging trade on an OAS basis, so when you value MSRs with an OAS methodology, you have better hedge correlations by virtue of using the same methodology for the asset and the hedge. also, interest rate derivatives (also used for hedging) have positive exposure to implied vol, and using OAS gives an MSR negative exposure to vol (again, better hedging correlations). lastly, OAS gives you rate-shock profiles that are easier to hedge because duration and convexity is more stable than they are when using static valuation.
The other punch to the gut of the RE market will be, one hopes, the sobering up of these people who have been telling me for years that a 2/28 ARM "makes sense" because they're "only going to be in the house for two years."
Yeah they'll be leaving the house in two years, just not like they though they would.
Tanta,
I also am waiting for some creative journalist to point out that institutional RE investors carry out or threaten jingle mail all the time in a down market.
"If the billionaires are doing it, why can't you?"
" Paraphrased it said "If your house goes down in value and you are deducting the interest on your taxes - you can only deduct what the house is worth. The rest you have to pay..."
They seem to be saying that it may look like you are going to have deductible interest at the time you set up a line of credit (is this a HELOC or something?), but with unprecedented home price declines, you might not have deductible mortgage interest if your home price has declined such that at the time you draw on the line of credit, the borrowings are clearly putting you above 100% LTV.
If the Tanned One thinks people are going to continue to put up with a 3-hour daily commute to an upside-down home with payments they can barely afford, he's not fooling anyone.
Wild fires are horrifically destructive because wind blown sparks and scorching heat turn nearby living trees into flamable tinder more quickly than previously anticipated... especially by the confounded "experts".
Excuse me but no. If by experts, you mean foresters and firefighters, you just didn't listen when they told you not to live in a chaparral ecosystem unless you were willing to be burned out from time to time.
Chaparral needs stand replacing fires to regenerate and survive. Mother nature kindly supplies the fires every 30 years, give or take 15 or so, she does not care if some stupid people have added framing lumber to the fuel load. Active fire suppression tends to allow fuels to build up, making the inevitable stand-replacing fire more intense.
What makes the situation worse now (2008) is the millions of people living in these fire-maintained ecosystems who think they can violate the laws of nature with impunity (much like the folks who thought the same about home prices).
"Paraphrased it said "If your house goes down in value and you are deducting the interest on your taxes - you can only deduct what the house is worth. The rest you have to pay..."
It would be better to consult a tax professional for tax advice. I would not trust my mortgage paperwork for tax code interpretation.
Tanta - are these folks blowing smoke or is there really a 'price problem'? I mean is the $700-$1000 per 'interaction' real out of pocket money cost or just a lot of overhead these guys want to show to pressure for more bips?
I ask because I suspect you can pretty much back of napkin judge the real costs of doing this just like I can look at a hunk of metal under the hood and have a pretty good idea of the real cost - both direct and 'reasonable overhead'.
I have the same feeling, Dryfly. If you had to add staff and overhead, yes, maybe, but if you can take it out of "standing around chatting about American Idol time", no, nothing like that.
I actually assumed the question was about the loss-given-default part.
i don't think anybody ever discloses what their assumptions or methodologies are for that (in terms of valuing MSRs). i think the general rule of thumb is that about 80% of MSR value (and most of the volatility) comes from the pure IO-like cashflows, so that's all anyone was worried about until now.
On Wells Fargo. I will type the exact wording in whemn I get home. The paperwork seemed to have been freshly redone. In that it addresses ARM's, etc. Simple language, most of it, then anything with numbers and lawyer talk makes my brain scream.
The other punch to the gut of the RE market will be, one hopes, the sobering up of these people who have been telling me for years that a 2/28 ARM "makes sense" because they're "only going to be in the house for two years."
What ever happened to credit curing? I was told 2/28's made sense, because subprime borrowers could use the two years to credit cure and become prime borrowers before the reset . . .
"What ever happened to credit curing? I was told 2/28's made sense, because subprime borrowers could use the two years to credit cure and become prime borrowers before the reset . . ."
(Total hypothesis):
I don't think it's necessarily an issue of the previously subprime borrowers staying subprime and thus not being able to refinance...
I think it's more CLTV issues.
when times were loose, 100+% financing was no issue.
now these folk have been in their IO loans for 2-3 years, so have NO equity built up (minimum payments).
today, the lenders don't want to do 100% loans to anybody, prime or subprime.
throw in the DEPRECIATION that's happened, and almost no lenders will do 100+% loans.
and the previously subrprimers don't have a downpayment (gasp) to help refinance, since most of them are just barely hanging on anyway.
I mean is the $700-$1000 per 'interaction' real out of pocket money cost or just a lot of overhead these guys want to show to pressure for more bips?
Oh, most of that's real money.
That's why if these were standard refinances, the borrower would be paying "closing costs." But since they're mods for borrowers who don't have any money, it's hard to pass those costs through to the borrower.
Some of it is hourly costs for the employee labor, or overhead. But the rest is paying for an appraisal or BPO, doing a title search to verify lien status, ordering a credit report, pulling the original recorded mortgage out of the custodian's hands, drawing up the modification agreement, overnighting it to the trustee for a signature, sending it to the local county for recordation and paying the recording fee, paying for a title insurance policy endorsement (to bring coverage down to the mod date). Stuff like that.
The problem is that, unlike the original loan transaction, in the case of workouts you quite often have a borrower whose cooperation is spotty. Possibly the borrower is just in so much distress that they can't think straight. But it happens all the time that you draw up the docs, send them to the borrower (with instructions to take it to a notary), and you get it back with an unnotarized signature. Or the borrower waits so long to send it back that another month has come and gone and the balance on the original mod doc is no longer correct. Or you're waiting for the second lienholder to send you a subordination agreement. Or you have to fax everything to the mortgage insurer to get a policy update from them. Any delinquent/default servicing process (short sales, too) is plagued with re-work. It's just the nature of the beast.
That's why there was that terrifying business in the "Hope Now" plan about not requiring the borrower-signed agreements. The usual blow it off today/eat it later when it comes time to pay off the lien or foreclose or make a BK filing and nobody has any effin' signed docs to take to court.
It makes you want to grab everyone by the throat and 'splain, one more goddam time, how much cheaper it is to DO IT RIGHT THE FIRST TIME.
That said, 50 bps is a lot of servicing fee--at least it is to some old prime-depository-midwestern-cheapskate like me. I really think we had some folks there who had never serviced subprime before, took a look at 50+10 and thought "cash cow"!
Well, they had to go buy some more software and they had to go buy some more analytics and just when they got the portfolio to the point of break-even the default costs started up. So yes, some of the bitching is from folks with a sunk cost problem.
But not all of it.
The other problem a lot of these folks have also, btw, is that they located their businesses in SoCal where rents are crazy. You're probably hearing less bitching from servicers located in Des Moines.
The other problem a lot of these folks have also, btw, is that they located their businesses in SoCal where rents are crazy. You're probably hearing less bitching from servicers located in Des Moines.
Luckily, this fixed-cost "problem" can easily be solved by relocating to a cheaper state, as many a business discovered during the 1990s --and will rediscover very soon.
Esquire (abbreviated Esq.) was a social rank title above that of mere gentleman, allowed, for example, to the sons of the nobles and the gentry who did not possess any other title. It ultimately derived from the medieval term squire
Tan Man was a bit disingenuous in describing walk aways in Texas during the 80s. A friend of mine had a Texas SFR rental during that period. As I recall, Texas law allows the lendor to foreclose AND get an enforcable deficiency judgement if the house sale doesn't cover the mortgage (unlike many other states including Ca). Understandably, this tends to inhibit Texas borrowers from walking away from their homes and mortgage.
The other problem a lot of these folks have also, btw, is that they located their businesses in SoCal where rents are crazy. You're probably hearing less bitching from servicers located in Des Moines.
Please, oh please just tell me that First Horizon is tanking. They put me through such hell when I was trying to sell my house, up to threatening to foreclose when I was a week away from closing on the sale. Every time I called and asked them to note my account, they wouldn't do it. They had me spend $27 to fax them my financial records, then couldn't find it and asked me to resend it. They are absolutely the worst company I've ever worked with and I regretted that I refinanced with them instead of Countrywide.
I spent 6 years as the CEO of a third party servicer for sub prime credit products in the early to mid 90s. The bulk of our work was with sub prime auto, B- & C credits. We did not advance payments and managing the repoing of a car is infinitely easier than managing the foreclosure of RE. The standard servicing fee was 225 bps. It turned out that wasn't enough and we renegotiated the fee up to 250bps. Believe me, there is no way that you can service the kind of rubbish that these "sub-prime" loans are on 50 bps. As for carrying out the "Hope Now' BS, the loan will have to be completely underwritten. Chances are the files don't have the info to do a re-underwriting, remember the bulk of these loans are ninjas. In addition, Several months back I believe Tanta posted a Fitch study of files whereein almost 50% had Hawk Alerts. Clearly those loans wern't "underwritten". So based on my experience, these "servicers" will pay lip service to Hope Now, which itself is nothing more than lip service and we'll see more and more blow ups and banks lake WAMU, Downey & First Fed will also take big hits on MSRs.
One thing I don't quite follow: in the UK, non-conforming (basically, but not isomorphic with, subprime) mortgage securitisations have both a normal servicer and a "special servicer", who takes over delinquent and defaulted loans. Presumably the special servicer gets a higer fee than the general servicer (I'm definitely going to follow this up - thanks for the interesting story idea, Tanta), which covers the higher costs associated with special servicing. Does the US not have this dual system, and if so, why not? It seems a stunningly obvious weakness in the system.
Mortgage Job Analysis by State and Company
Mortgage Job Analysis by State and Company
| Reuters
Partial Table of State Findings:
State Total 2007
net gain or loss
Arizona -2,505
California -15,933
Delaware +200
Florida -2,507
Illinois -1,738
Louisiana +130
New York -2,071
Ohio -845
Texas +145
U.S. -86,071
Thanks for this, the economics of Loan Servicing allways amaze me.
Do mortgage servicing firms typically do other types of servicing, like auto loans?
Where the MEW went.
NYC's 'Ninja Bandit' Blamed For 19th Burglary - wcbstv.com
127g's in cash and stones??? @home?
Do mortgage servicing firms typically do other types of servicing, like auto loans?
Well . . . one reason why we talk about "platforms" rather than "firms" is because you don't ever mix loan types in a "platform." Mortgage servicing is very different from servicing other loans (not only are they shorter term, they often use different interest calculations, they don't have escrows, they're rarely insured, etc.).
But obviously a firm--GMAC, of course, but there are others--can have multiple platforms: a mortgage platform, an auto platform, credit cards, commercial, whatever.
I think there may be some corporate officers who are tempted to think, heck, a loan's a loan, let's service them all together, but those people scare the bejeezus out of me.
Ombudspig has been unusually busy this past week, and should resume oinking shortly. My tail, however, shall remain curled.
Oh, for the days of purely intellectual pursuits! Ah, the things we call college.
i suppose this means we can no longer Trust IO valuations of MSRs. ahahaha.
I am trying to get a handle on how this will play out for families which are upside-down. I was at a party last night where a fellow and his wife were talking about how they had primary and second mortgages on their home of $180,000. Their house in Douglas County Georgia, an exurb of Atlanta, would probably need to be $150,000 to sell this year. They would like to move into town, downsize into an apartment. They were even talking about jingle mail. What are the consequences in a state like Georgia for the $30,000 (or whatever) of upside down money. Is there a better way to give over the house without lawyers or a big 1099 bill? What are people going to do that need to move for one reason or another, but who are upside down in their own mortgage?
Does anyone know if these problems are serious enough to have reduced the market price of MSRs in recent transactions?
"Is there a better way to give over the house without lawyers or a big 1099 bill?"
No. Talk to the lawyer now or talk to the lawyer later. Or just be willing to take your lumps - maybe you'll get lucky.
Does anyone know if these problems are serious enough to have reduced the market price of MSRs in recent transactions?
I suspect so. The analyst quoted in the American Banker article indicates that it's becoming an issue. People who never worried about the carrying costs of advances are starting to get out the old mechanical pencil and worry about it. (I am just guessing that the reference there is to non-bank servicers, whose borrowing costs are--presumably--higher than depositories.)
What are people going to do that need to move for one reason or another, but who are upside down in their own mortgage?
You know, at some level they're just doing the same thing everybody always did when they moved after having owned a home for less than ten years: they're paying too much in transaction costs to justify owning rather than renting.
Sure, these days that "transaction cost" sucks worse than usual, but that's what they are.
I was looking at the mortgage paperwork from Wells Fargo last night and this really jumped out at me. Paraphrased it said "If your house goes down in value and you are deducting the interest on your taxes - you can only deduct what the house is worth. The rest you have to pay..."
My brain read that four times without really grasping it. So if someone bought a house for 500k and deducts the interest it is ok. If the house is really only 400k then you have to change the amount you declare as interest to what it would be if you had bought it at 400k?
How is anyone going to figure that out?
American banker, stay away from me
American banker, buddy let me be
Dont come hangin around my door
I dont wanna see your CDOs no more
I got more remunerative things to do
Than throwin' my Eurodollars down the hole with you
Now buddy, I said stay away,
American banker, listen what I say.
wetzel -
Talking about 'jinglemailing' at a party, huh? What kind of people do you party with?
I think your tale just supports CR's theory - that jingle mail is on the cusp of becoming socially acceptable behaviour.
Paraphrased it said "If your house goes down in value and you are deducting the interest on your taxes - you can only deduct what the house is worth. The rest you have to pay..."
NoVa, I may be misunderstanding you, but where did you find such a claim in your mortgage paperwork?
NoVa -
I think you better read that a fifth time.
Welcome back, Shnaps. What did you bring us from your trip?
50 bps is $1000 per year on a typical $200k mortgage. That's not very efficient.
If record refinances are replaced with record delinquencies and defaults and the servicing model is then broken then what is the likelihood of servicers going bankrupt and the consequences when they are unable to service due to insolvency?
Does the big mess get even messier?
Jingle mail will be socially INEVITABLE. It just makes sense sometimes. No skin in the game and way under water? This is a NO BRAINER.
This may be the one time in history where the little guy can stick it back to the system. Developers and REITS use this tactic or the threat of it all the time. Why shouldn't an under water home-owner?
In the future a down payment will be required. I look forward to an era of prudent lending.
Tanta,
Thanks for your response. A follow up question. When MSRs are valued for financial statements are models, recent sales prices, or models adjusted for recent sales prices used?
" Paraphrased it said "If your house goes down in value and you are deducting the interest on your taxes - you can only deduct what the house is worth. The rest you have to pay..."
NoVa, I may be misunderstanding you, but where did you find such a claim in your mortgage paperwork?
Tanta "
Tanta,
Any chance Wells or whoever is interpreting what is and what is not "secured debt"??
I believe the mortgage interest deduction is predicated upon it being secured debt - house as collateral,etc.
Could a bank really believe that if they are owed $500,000 on a house now worth $300,000 that $200,000 is unsecured debt and therefore not subject to the mortgage interest deduction?
Could the IRS think that way??
Does the big mess get even messier?
Bart | 01.07.08 - 11:19 am | #
Bart...
Is it a ominous sign that the first five listed sales for my county in SW Florida are all REO's ??? Is it also bad that as of the 7th these are the only sales so far ??? It's gonna be an interesting year for sure.
Chris
Thanks T - I sure missed you guys.
I meant to bring back a souvenier photo of myself throwing back a pint at the "Pig & Swan", but I was having too much fun.
Mike, it really would not surprise me at all if the IRS thought that way. It makes sense: The IRS would not allow you to borrow an arbitrary sum against your principal residence and claim that the entire interest payment is deductible.
I wonder to what extent the IRS enforces this in the case of declining value.
When MSRs are valued for financial statements are models, recent sales prices, or models adjusted for recent sales prices used?
As far as I know most MSR valuation uses the same models everyone else uses. Not to scare you to death or anything. They'll be using OFHEO or Case-Shiller or some other homegrown indexing to try to adjust for price changes.
Could the IRS think that way??
I guess maybe they could, but I've never encountered a lender willing to give tax advice to a borrower in the mortgage paperwork. As far as I know everyone just sends the borrower the 1098 at the end of the year--the report of the interest you paid for the year--and the rest is between you and the IRS. Unless you're dealing with something weird like an MCC (mortgage credit certificate) or bond program loan or something.
I would guess that mortgage servicing is not much different from student loan servicing, which is a low margin business that is only profitable in high volume, best case scenarios. And even then, you have to work your staff like dogs. If you have good systems with extra cycles on the mainframe and a plentiful supply of newly minted accountants from the local tech school, you may be able to squeeze a few bucks out of a servicing operation.
If the loan is secured by the residence, it is fully deductible. RE valuation is not a factor.
If the loan is secured by the residence, it is fully deductible. RE valuation is not a factor.
Could we be confusing mortgage interest with capital gains exemption?
The OTS shindig linked in a post on Friday was interesting reading. http://www.ots.treas.gov/docs/4/481057.pdf
The tan man was one of the participants and he made the point that in the Texas '80s meltdown people hung on to their homes if they conceivably could, even if underwater. I know most of us are wary of people who say "Its different this time." but maybe it is.
Maybe, Does this answer it?
Capital Gains Tax is based on transactions. If you sell a principle residence for a gain, you must pay taxes for gains in excess of the $500k exclusion. If you sell a principle residence for a loss, you can only roll the loss into a stepped up basis in the next house.
As an aside, the $500k exclusion can be floated. That is, you can defer it if that's in your interest. Since Cap gains are now taxed favorably, someone might want to lock-in the gain at a low tax rate and defer the exclusion for a few years. The other side of the coin is the loss of time value of the taxes paid.
Jinglemail? BK servicers? Fataly constipated lenders? Insolvency tsunami? As "Apocalypse Now" Captain Kurtz mutters when facing murder, "Oh, the horror!"
I faced evacuation during the San Diego wildfires in October... here's a different metaphor that occured to me:
Wild fires are horrifically destructive because wind blown sparks and scorching heat turn nearby living trees into flamable tinder more quickly than previously anticipated... especially by the confounded "experts".
For those who continue to predict the bottom, the soft landing, the Goldilocks scenario, consider that most of the time, most of us are mostly guessing. And guessing not too terribly well, history proves.
Have any Kool-Aid free dieters forecast how deep and how long the "correction" will be, given the "mistakes" that have been (and continue to be) made? I suppose that such forecasts need not be enumerated in percentage points, quarters or months, the number of years and rough 10% increments should suffice.
Any estimates?
mbartv, In the 80's people would have lost their down payments and have had to plan on another down payment....skin in the game.
OT, sorry, but this song was going through my mind all weekend in thinking about where this economy was heading and the title of this post triggered it again:
YouTube -
2008 will the first time in many lives that they will get to experience what Dylan was saying.
"How does it feel?"
What are people going to do that need to move for one reason or another, but who are upside down in their own mortgage?
Like anyone else, you add up the cost of moving, subtract if from the gains of moving and make your decision. Maybe more people will be staying put for now.
My brother had that problem back in the 90s in Long Beach. The agency he worked for moved the office so his commute went from 10 minutes on a bike to 45 minutes of freeway gridlock. He stayed put as he could continue to make the house payment--not being completely stupid, he had bought a house he could afford.
bacon dreamz, didn't you post a link to an article on servicing a few months ago?
Like anyone else, you add up the cost of moving, subtract if from the gains of moving and make your decision. Maybe more people will be staying put for now.
The other punch to the gut of the RE market will be, one hopes, the sobering up of these people who have been telling me for years that a 2/28 ARM "makes sense" because they're "only going to be in the house for two years."
In any normal market that doesn't make much sense: the transaction costs are too high. In a depreciating market it's exposed for the insanity it is.
But the world is full of people who drank the "You Can Own With the Same Mobility As Renting" kool aid, and now they're an unhappy bunch.
And when they discover that their suburbs have no tax money to build those inter-county connectors to handle the commuters . . .
Lama's exactly right. People will hang in there when they feel like they made an investment (a down payment) that might return someday if they hold out long enough. People will also hang in there if they work near where they live.
If they bought for no-down out in the sticks with a city job? If the Tanned One thinks people are going to continue to put up with a 3-hour daily commute to an upside-down home with payments they can barely afford, he's fooling himself.
U.S. IN RECESSION, SAYS TOP MERRILL ECONOMIST - CBSMARKETWATCH.COM
(All caps is from the website - not me)
As far as I know most MSR valuation uses the same models everyone else uses. Not to scare you to death or anything. They'll be using OFHEO or Case-Shiller or some other homegrown indexing to try to adjust for price changes.
are you referring to prepayment models? i think nowadays most servicers use OAS methodology to value MSRs (as opposed to static methodology in the old days). OAS is better (conceptually as well as practically) because other mortgage products which are used for hedging trade on an OAS basis, so when you value MSRs with an OAS methodology, you have better hedge correlations by virtue of using the same methodology for the asset and the hedge. also, interest rate derivatives (also used for hedging) have positive exposure to implied vol, and using OAS gives an MSR negative exposure to vol (again, better hedging correlations). lastly, OAS gives you rate-shock profiles that are easier to hedge because duration and convexity is more stable than they are when using static valuation.
this was completely irrelevant, but too bad.
bacon dreamz, didn't you post a link to an article on servicing a few months ago?
probably. do you remember more specifically what it was about?
The other punch to the gut of the RE market will be, one hopes, the sobering up of these people who have been telling me for years that a 2/28 ARM "makes sense" because they're "only going to be in the house for two years."
Yeah they'll be leaving the house in two years, just not like they though they would.
Tanta,
I also am waiting for some creative journalist to point out that institutional RE investors carry out or threaten jingle mail all the time in a down market.
"If the billionaires are doing it, why can't you?"
" Paraphrased it said "If your house goes down in value and you are deducting the interest on your taxes - you can only deduct what the house is worth. The rest you have to pay..."
They seem to be saying that it may look like you are going to have deductible interest at the time you set up a line of credit (is this a HELOC or something?), but with unprecedented home price declines, you might not have deductible mortgage interest if your home price has declined such that at the time you draw on the line of credit, the borrowings are clearly putting you above 100% LTV.
If the Tanned One thinks people are going to continue to put up with a 3-hour daily commute to an upside-down home with payments they can barely afford, he's not fooling anyone.
are you referring to prepayment models?
I actually assumed the question was about the loss-given-default part.
But we're UberNerds, we can take whatever better answers you can throw at us.
Wild fires are horrifically destructive because wind blown sparks and scorching heat turn nearby living trees into flamable tinder more quickly than previously anticipated... especially by the confounded "experts".
Excuse me but no. If by experts, you mean foresters and firefighters, you just didn't listen when they told you not to live in a chaparral ecosystem unless you were willing to be burned out from time to time.
Chaparral needs stand replacing fires to regenerate and survive. Mother nature kindly supplies the fires every 30 years, give or take 15 or so, she does not care if some stupid people have added framing lumber to the fuel load. Active fire suppression tends to allow fuels to build up, making the inevitable stand-replacing fire more intense.
What makes the situation worse now (2008) is the millions of people living in these fire-maintained ecosystems who think they can violate the laws of nature with impunity (much like the folks who thought the same about home prices).
"Paraphrased it said "If your house goes down in value and you are deducting the interest on your taxes - you can only deduct what the house is worth. The rest you have to pay..."
It would be better to consult a tax professional for tax advice. I would not trust my mortgage paperwork for tax code interpretation.
Tanta - are these folks blowing smoke or is there really a 'price problem'? I mean is the $700-$1000 per 'interaction' real out of pocket money cost or just a lot of overhead these guys want to show to pressure for more bips?
I ask because I suspect you can pretty much back of napkin judge the real costs of doing this just like I can look at a hunk of metal under the hood and have a pretty good idea of the real cost - both direct and 'reasonable overhead'.
Is this for real or is this just posturing?
I have the same feeling, Dryfly. If you had to add staff and overhead, yes, maybe, but if you can take it out of "standing around chatting about American Idol time", no, nothing like that.
I actually assumed the question was about the loss-given-default part.
i don't think anybody ever discloses what their assumptions or methodologies are for that (in terms of valuing MSRs). i think the general rule of thumb is that about 80% of MSR value (and most of the volatility) comes from the pure IO-like cashflows, so that's all anyone was worried about until now.
On Wells Fargo. I will type the exact wording in whemn I get home. The paperwork seemed to have been freshly redone. In that it addresses ARM's, etc. Simple language, most of it, then anything with numbers and lawyer talk makes my brain scream.
The other punch to the gut of the RE market will be, one hopes, the sobering up of these people who have been telling me for years that a 2/28 ARM "makes sense" because they're "only going to be in the house for two years."
What ever happened to credit curing? I was told 2/28's made sense, because subprime borrowers could use the two years to credit cure and become prime borrowers before the reset . . .
probably. do you remember more specifically what it was about?
It was from a few months ago and it talked about the feasibility of a mass modification (due to cost and staff needed)
"What ever happened to credit curing? I was told 2/28's made sense, because subprime borrowers could use the two years to credit cure and become prime borrowers before the reset . . ."
(Total hypothesis):
I don't think it's necessarily an issue of the previously subprime borrowers staying subprime and thus not being able to refinance...
I think it's more CLTV issues.
when times were loose, 100+% financing was no issue.
now these folk have been in their IO loans for 2-3 years, so have NO equity built up (minimum payments).
today, the lenders don't want to do 100% loans to anybody, prime or subprime.
throw in the DEPRECIATION that's happened, and almost no lenders will do 100+% loans.
and the previously subrprimers don't have a downpayment (gasp) to help refinance, since most of them are just barely hanging on anyway.
just a thought. no facts.
more concise:
it's not a subprime/prime issue holding back the refinancings, it's the LTV issue.
RacerX, i think this is it:
http://www.criterioneconomics.com/docs/20071003%20Loan%20Modification%20Paper.pdf
I mean is the $700-$1000 per 'interaction' real out of pocket money cost or just a lot of overhead these guys want to show to pressure for more bips?
Oh, most of that's real money.
That's why if these were standard refinances, the borrower would be paying "closing costs." But since they're mods for borrowers who don't have any money, it's hard to pass those costs through to the borrower.
Some of it is hourly costs for the employee labor, or overhead. But the rest is paying for an appraisal or BPO, doing a title search to verify lien status, ordering a credit report, pulling the original recorded mortgage out of the custodian's hands, drawing up the modification agreement, overnighting it to the trustee for a signature, sending it to the local county for recordation and paying the recording fee, paying for a title insurance policy endorsement (to bring coverage down to the mod date). Stuff like that.
The problem is that, unlike the original loan transaction, in the case of workouts you quite often have a borrower whose cooperation is spotty. Possibly the borrower is just in so much distress that they can't think straight. But it happens all the time that you draw up the docs, send them to the borrower (with instructions to take it to a notary), and you get it back with an unnotarized signature. Or the borrower waits so long to send it back that another month has come and gone and the balance on the original mod doc is no longer correct. Or you're waiting for the second lienholder to send you a subordination agreement. Or you have to fax everything to the mortgage insurer to get a policy update from them. Any delinquent/default servicing process (short sales, too) is plagued with re-work. It's just the nature of the beast.
That's why there was that terrifying business in the "Hope Now" plan about not requiring the borrower-signed agreements. The usual blow it off today/eat it later when it comes time to pay off the lien or foreclose or make a BK filing and nobody has any effin' signed docs to take to court.
It makes you want to grab everyone by the throat and 'splain, one more goddam time, how much cheaper it is to DO IT RIGHT THE FIRST TIME.
That said, 50 bps is a lot of servicing fee--at least it is to some old prime-depository-midwestern-cheapskate like me. I really think we had some folks there who had never serviced subprime before, took a look at 50+10 and thought "cash cow"!
Well, they had to go buy some more software and they had to go buy some more analytics and just when they got the portfolio to the point of break-even the default costs started up. So yes, some of the bitching is from folks with a sunk cost problem.
But not all of it.
The other problem a lot of these folks have also, btw, is that they located their businesses in SoCal where rents are crazy. You're probably hearing less bitching from servicers located in Des Moines.
Excellent work mr. dreamz!
That's DR. dreamz!
Show the young man some respek.
Don't you mean "respeck"?
The spelling around here compleatly sux.
How about b. dreamz esq.
Tanta's right. You guys should take more pride in your spelling and punctuation.
Dr. Mr. bacon dreams
esq.
The other problem a lot of these folks have also, btw, is that they located their businesses in SoCal where rents are crazy. You're probably hearing less bitching from servicers located in Des Moines.
Luckily, this fixed-cost "problem" can easily be solved by relocating to a cheaper state, as many a business discovered during the 1990s --and will rediscover very soon.
Esquire (abbreviated Esq.) was a social rank title above that of mere gentleman, allowed, for example, to the sons of the nobles and the gentry who did not possess any other title. It ultimately derived from the medieval term squire
Esquire - Wikipedia, the free encyclopedia
Reverend Dr. Bacon Dreamz...
mbartv,
Tan Man was a bit disingenuous in describing walk aways in Texas during the 80s. A friend of mine had a Texas SFR rental during that period. As I recall, Texas law allows the lendor to foreclose AND get an enforcable deficiency judgement if the house sale doesn't cover the mortgage (unlike many other states including Ca). Understandably, this tends to inhibit Texas borrowers from walking away from their homes and mortgage.
The other problem a lot of these folks have also, btw, is that they located their businesses in SoCal where rents are crazy. You're probably hearing less bitching from servicers located in Des Moines.
You read my mind.
Reverend Dr. Bacon Dreamz...
trail | 01.07.08 - 2:48 pm | #
I would have suggested 'master dreamz' but I'd hope we've all out grown those by now...
Mortgage cartoons posted today in the Irvine Housing blog.
http://www.irvinehousingblog.com/wp-content/uploads/2008/01/ok_folks.jpg
http://www.irvinehousingblog.com/wp-content/uploads/2008/01/mortgage.jpg
http://www.irvinehousingblog.com/wp-content/uploads/2008/01/bad_credit_home.jpg
and this one dedicated to the 50bps + 10 bps servicing
http://www.irvinehousingblog.com/wp-content/uploads/2008/01/cartoon_mortgage.gif
If the servicer is out 1-2k in expenses prior to walking away from a home equity loan that has no value, how and when do they get repaid?
Same question at 10K in expenses on a house that ultimately gets foreclosed and then sold.
Same question on a multi that needs 25k of lead paint remidiation, has 10k of other expenses and then sells for $30k
Thanks,
Please, oh please just tell me that First Horizon is tanking. They put me through such hell when I was trying to sell my house, up to threatening to foreclose when I was a week away from closing on the sale. Every time I called and asked them to note my account, they wouldn't do it. They had me spend $27 to fax them my financial records, then couldn't find it and asked me to resend it. They are absolutely the worst company I've ever worked with and I regretted that I refinanced with them instead of Countrywide.
No, I'm pretty sure it's respek
But then again, they done taken it outta da dictionary!
I spent 6 years as the CEO of a third party servicer for sub prime credit products in the early to mid 90s. The bulk of our work was with sub prime auto, B- & C credits. We did not advance payments and managing the repoing of a car is infinitely easier than managing the foreclosure of RE. The standard servicing fee was 225 bps. It turned out that wasn't enough and we renegotiated the fee up to 250bps. Believe me, there is no way that you can service the kind of rubbish that these "sub-prime" loans are on 50 bps. As for carrying out the "Hope Now' BS, the loan will have to be completely underwritten. Chances are the files don't have the info to do a re-underwriting, remember the bulk of these loans are ninjas. In addition, Several months back I believe Tanta posted a Fitch study of files whereein almost 50% had Hawk Alerts. Clearly those loans wern't "underwritten". So based on my experience, these "servicers" will pay lip service to Hope Now, which itself is nothing more than lip service and we'll see more and more blow ups and banks lake WAMU, Downey & First Fed will also take big hits on MSRs.
hjwlax,
Could you post more often?
One thing I don't quite follow: in the UK, non-conforming (basically, but not isomorphic with, subprime) mortgage securitisations have both a normal servicer and a "special servicer", who takes over delinquent and defaulted loans. Presumably the special servicer gets a higer fee than the general servicer (I'm definitely going to follow this up - thanks for the interesting story idea, Tanta), which covers the higher costs associated with special servicing. Does the US not have this dual system, and if so, why not? It seems a stunningly obvious weakness in the system.