San Diego Housing Bubble News and Analysis

The thing you want to remember about Fannie and Freddie is that they are publicly traded companies that are in business to make a profit and must answer to their shareholders. Offhand, I'd say their allegiences are to their shareholders, not the federal government or its policies.

A tremendous increase in loss mitigation/loan workout efforts is coming. In line with the historical number of borrowers who are likely to find themselves in jeopardy due to loan recasts, I expect an equally historical effort to minimize as best possible a foreclosure epidemic. Much as many feel that the housing downturn is just getting started, I say with equal confidence that the loss mitigation machine is just getting warmed up.

I have heard the same from reliable sources in the lending industry.

Much as many feel that the housing downturn is just getting started, I say with equal confidence that the loss mitigation machine is just getting warmed up.

So what?

Think it through. They'll be able to offer you a couple extra months to get on your feet after a job loss, other than that, nobody is going along for the ride.

It's simple, the bulk of the loans out there are not going to default because of a job loss, medical illness, but for one very simple reason, they can't afford the payment at market rate for their loan amount.

It's even worse, they can't afford to make the interest payment on the loan if they got the government T-bill rate.

What they can afford is something that charges about $300 for every $100,000 they've borrowed a month. They have a $450,000 magic loan that is letting them pay $1350 a month, the boogeyman is coming and wants his $3000 a month. This game is over. Nobody is letting the little Casey Frauderboys squat with their $700,000 if they aren't getting their $4500 a month anymore.

Scummy deals are still being made though the lights coming on and the kitchen floor is covered in roaches that are about to get stomped.

Nicely and interestingly put NSR.

Upon reading the original post I wrote to Mudd today telling him just what I think about their bailout efforts.

"Think it through."
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It really doesn't require much thinking - it only requires listening to what mortgage professionals are saying about what is going to happen. Even Rich's inside man Ramsay reports that loss mitigation is going to take the form of loan modifications with fixed interest rates lower than the exploding Prime/LIBOR + margin recasts that are coming down the pike. The impending recasts are not going to be addressed by a one or two month forebearance, the likes of which we typically see offered due to illness or job loss. Mitigating losses will require longer-term and more sweeping modification programs. It is these types of modifications that we will begin to see more and more of. No one on the inside of the industry is saying anything different on this subject. Of course there will be many borrowers who enter foreclosure - no one is debating that fact - but we are talking about minimizing the carnage by way of loan reworks (not forebearance/short term fixes). I believe we will be seeing extensive loss mitigation and loan reworks for years to come.

You hear it time and time again, everyone is seeking to get back to the "F U N D A M E N T A L S". Unless incomes increase SUBSTANTIALLY (which isn't going to happen), the home prices will have no choice by to come down, sooner (or later). No Wall Street mogul is going to carry the debt of a stupid person for years and years and years. Not gonna happen. Plus, there is no way there is enough governmental funny-money to go around to even fund our military, the deficit, or social security such that our government-types are going to be able to pump enough money (or terms) into this over-inflated housing market.

It really doesn't require much thinking - it only requires listening to what mortgage professionals are saying

Umm, isn't that the same guys that started this mess?

but we are talking about minimizing the carnage by way of loan reworks

Yeah, rework. Read- refinance. They'll put you in a new secure advantage loan if you have some equity left and run the clock another two years.

In the end, the math is still the same, they're sitting with a $600,000 loan and holders want a real rate of return. If they have to take 1/2 the return, they'll take half the return, right now, in full. They aren't going take half the return for the next 30 years.

In the end, the people can't afford LIBOR, let alone any margin. That's a fundamental problem they won't be able to address without a forebearance of the loan amount. Increase risk requires increased return, it's a market fundamental.

They aren't going to recast the Casey Serin's, Casey and the clowns like him probably own half the trouble real estate around.

The writing is on the wall regarding loss mitigation as far as I am concerned. I believe it will be a massive, sweeping, combined effort by the government, public interest groups, lenders, servicers, and yes indeed, Wall Street. I'm done talking about it - naysayers can simply read about it in the news over the next few years.
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Capitol Hill and Mortgage Industry Working on Foreclosure-Prevention Fixes
by Kenneth R. Harney

Congress and private lenders are looking to create new tools to help prevent mass foreclosures in the ailing subprime sector nationwide. Tomorrow on Capitol Hill, a House financial services subcommittee will discuss alternative programs to assist home owners who bought more than they could afford at the height of the housing boom, and who are now facing sharp payment increases they cannot afford.

Last week in the Senate, the Joint Economic Committee issued a report suggesting that the Federal Housing Administration (FHA) might play an important role in transitioning subprime borrowers out of high-cost, adjustable rate loans and into fixed rate government insured mortgages.

Private mortgage firms are also ratcheting up their own "loss-mitigation" efforts, reaching out to borrowers heading for-but not yet in-serious delinquency. EMC Mortgage Corp., a subsidiary of Wall Street bank Bear Stearns, announced creation of a roving 50-person "Mod Squad" team of loss-mitigation and workout specialists. Named after a popular TV program from the late 1960s-early 1970s, EMC's Mod Squad plans to work in dozens of cities with borrowers individually, and to reach out through community and credit counseling groups.

The squad's goal will be to modify the terms of mortgages to better fit borrowers' actual economic situations today. Among the optional forms of modification will be lowering interest rates, switching from floating-rate to fixed rate, restructuring payment schedules and deferring repayment of arrears. EMC is not offering the program solely out of the goodness of its heart, however. Foreclosures cost bond investors around $80,000 per case, whereas a loan modification may cost just a small fraction of that.

Tom Morano, global head of mortgages for Bear Stearns, said "proactively avoiding foreclosures can reduce the severity of losses, benefiting both homeowners and bondholders. (It's) a win-win proposition."

Meanwhile, attention is being focused on new foreclosure prevention concepts that go beyond loan modifications and do not require "short sales" of properties or deeds in lieu of foreclosure to satisfy the owner's debt. One idea is being discussed on Capitol Hill was proposed by a Virginia-based loss-mitigation firm, Lyons McCloskey LLC. The program is a variation of FHA's "partial claim" option, where money is advanced to bring a borrower's loan account current. The advance is structured as a second lien against the property, but carries no interest rate and must be paid from the proceeds of any future sale of the house.

In the Lyons McCloskey plan, seriously delinquent borrowers would be refinanced into fixed-rate mortgages insured or provided by FHA, the VA, Freddie Mac or Fannie Mae. The refi costs and any arrears on the previous mortgage would be treated as a "soft second" lien with no interest payments due. FHA would partially guarantee the second lien, and the bondholders or investors would assume the risks on the uninsured portion.

Full payment of the lien would not be due until the house sold or the homeowners had the financial wherewithal to pay off the debt.

The key to this program, according to Bob Lyons and Joe McCloskey of the loss-mitigation firm, is that it has the capacity to handle situations where borrowers are able to make mortgage payments at a lower interest rate, but are shackled with arrears that they can't afford to repay and mortgage balances in excess of the current home value.

Some legislation would likely be required for any FHA role in this or other new programs, but housing leaders in both the House and Senate appear ready to consider foreclosure-prevention remedies as part of pending FHA reform legislation.

Speaking of the Mod Squad, did you know that Linc and Peggy were married in real life?

The squad's goal will be to modify the terms of mortgages to better fit borrowers' actual economic situations today.  I suppose when they examine "today", the GSEs/lenders/investors will forgive 50% of the loan on the over-inflated purchase so they can afford a payment?  Perhaps wait until a buyer can get a 100% pay increase?  Get a job??  Win the lottery?

 
Among the optional forms of modification will be lowering interest rates [the rates are already low and FB’s are still losing their homes], switching from floating-rate to fixed rate [whatever the fixed rate will be, the rate will still probably be too high for FBs to make their payments], restructuring payment schedules and deferring repayment of arrears [yeah, okay, but what about the FACT that since the FBs fell behind in the first place, they will probably do it again – will FHA/VA/FNMA, et al. defer a deferment !].

Bottom line, whatever they try will be too little, too late.

These people aren't in trouble because of the terms of their loans; they're in trouble because their income isn't sufficient in relation to the amount of money they borrowed.

It might be appealing to think that the gov't and Wall Street can work together to come up with "new tools" to apply to this problem but the simple fact of it is that these tools all have costs. They can't be effective in a situation where a borrower owes more than they can pay. These investors have money out on the street and they require return of and on investment capital. They might forego getting the return on their investment, but they cannot forego getting the return of their capital and there's no reason to think they should.

This end of the cycle is just starting in the metro markets across the nation. While not all the markets are overextended, there are enough of the metro markets that are to make these finger-in-dyke proposals pointless.

Locally, there are still a lot of problems with the intertwined trends of the declining prices and the demise of mortgage-capable employment. Let's be real here, the creation of retail jobs down at the mall isn't a substitute for the RE dependent jobs that are vanishing every week. Service jobs can't pay these mortgages even at the teaser rate.

It's a trend and we're just a few months way from that trend taking on a life of its own. At that point it won't matter what jobs are in town because the market psychology will drive the pricing all by itself. Irrational exuberance has an evil twin and we're about to meet it (again).

Stick a fork in it because it's done.

I agree with you Bugs, but ...

Since we long ago left financial-reality-land here in the US why can't the Fed just monetize the portion of the mortgage that the people can't pay

Let's take the working farm couple that makes $30K per year and has a $700K mortgage as an example (unfortunately, this couple actually exists and actually has the mortgage)

Let's use very round numbers and say the couple is capable of servicing a $100K mortgage using traditional financing

The Fed writes a $600K check to the mortgage holder and creates a lien against the property for $600K

The F'd buyer now services the remaining $100K on his mortgage and ignores the lien

After 5 years or so we distract the sheeple with another war or 9/11 event and then pass a 'home lien forgiveness' bill while they aren't looking

LOL, that's the REALTYTIMES singing don't worry, be happy. The government going fix everybody's loans so nobody has to sell for less than they paid.

I think it's pretty simple, but I'm just a simple guy.

The government is never going to bail out the people. They may bail out any of the big banks that may have exposure and dress it up like its a people bail out.

There is good history of this happening through the IMF lending to third world country's where we bail out the defaulting country but payment must be made immediately with the proceeds to the lender (U.S. bank), who then gives them a new loan.

The lenders themselves may try and prolong the agony but in the end the market will win out and the excessive crazy financing will get purged. Anything beyond that is noise IMO.

However its one more reason to own gold. If they try and monetize fanny's and freddies debt that will be just one more reason in a parade of reasons for the dollars decline.

Give a man a fish, feed him for a day. I read that somewhere. Funny how things change but stay the same. Hell, the habitat for humanity staff actually try to talk residents out of refinancing their 0% loans into subrpprime and only convince 35% to keep their loan. You can change the loan but you can't change the person. Double the credit limit of every person with a maxed out credit card and show me that none of them hit their new max and I'll agree that this will work. Give them economics classes, televise Robert Shiller's lectures from Yale and reprogram their t.v.'s so he's on every channel, I'd watch.

These ideas will get a lot of publicity but I doubt these programs get to many actual people, it's just spin. Milton's "invisible hand of economics" has never been denied by the government and it never will(sorry for the cheap econ 101 reference but he died this year and I still miss him).

On a side note I was driving home and heard a commercial for a law firm asking people who had a pay option or neg am mortgage to call an 800 number to join a class action lawsuit and it sounded just like an ambulance chaser personal injury ad. I wonder how many alternative loan products will be offered after the companies begin to factor litigation costs into them. Right or wrong, the legal costs are going to make the product vanish for at least a decade. Don't believe me, ask small aircraft or silicone breast implant companies about what class actions can do to a product.

Most of the lenders will be insulated from liability by the layer of mortgage brokers that will go poof in the night. Many already have.

sdr the real question here is how many people who post here remember the mod squad!

SD Realtor