From Bloomberg with respect to a new plan to save the housing market and economy:

U.S. regulators will let qualified homeowners refinance mortgages regardless of how much their houses have dropped in value, expanding a government effort to chip away at one of the economy’s most unyielding problems.

The Federal Housing Finance Agency will also enhance the Home Affordable Refinance Program by eliminating some fees, reducing others and waiving some risk for lenders, Edward J. DeMarco, the agency’s acting director, said today.

And the paragraph at which readers might start raising an eyebrow or two:

The changes should encourage more lenders to participate, DeMarco said. Lenders can’t be faulted for a bad appraisal, for example, because under the new program they won’t be required in most cases, he said.

U.S. Plan Expands to Underwater Borrowers [Bloomberg]

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Comments from “Plugged-In” Readers

  1. Posted by Mikel

    The key here is “qualified” homeowners and lenders to participate. What define’s a qualified homeowner. These qualifications will quickly change. The problem is that many of these homeowners still don’t qualify.

  2. Posted by BobN

    If the owner is headed for eventual default, this changes nothing. If the home owner is going to stick it out, this lets him/her take advantage of extraordinarily low rates.
    This doesn’t strike me as a problem, except that it enlarges the pool of mortgage seekers and drives up rates.

  3. Posted by badlydrawnbear

    I believe the ‘qualified’ part is simply that they are current on their mortgage with no late payments.
    Since the LTV is out the window, and assuming they are making good on current payments, the new lower payment shouldn’t be a problem.
    The only thing that I see as a potential showstopper for the owner would be a recent job loss that would affect household income.
    This, to me, is less a move to prop up housing but is instead more of an attempt at a back door stimulus by putting a few hundred dollars of additional income into, hopefully, tens of thousands of peoples pockets.

  4. Posted by lyqwyd

    I agree with the the above. It seems unlikely to prevent many foreclosures, but is more likely an attempt to get some additional spending as some people will have a few extra bucks. It mainly seems to be part of Obama’s election campaign for 2012.

  5. Posted by Brahma (incensed renter)

    Like most of these types of things, this is a back door bailout for banks. From the next ‘graph after the one quoted above by the editor:

    “This is substantial relief from representations and warranties,” DeMarco told reporters on a conference call today.

    Mortgage lenders are “particularly gratified” at that change to the plan, said David H. Stevens, president and chief executive officer of the Mortgage Bankers Association in Washington.

    My read on this is that instead of bringing the widespread mortgage fraud and lack of proper due diligence in loan underwriting to light, FHFA is saying “lets’s punt” and let lots of buyers who should have never gotten a mortgage refinance, papering over the problem since this time lenders will get to cover the bases that they should have, but didn’t, take care of this first time.
    That way the home moaner (or the owner of the derived MBS) isn’t going to get clever ideas about filing a lawsuit against the lender or servicer. To me, the phrase “substantial relief from representations and warranties” means “letting people and companies with lots of potential legal liability off the hook”, or at least impairing the ability of aggrieved parties to litigate. Not properly taking into account the current market price of the property, via requiring an appraisal, is only part of the problem here.
    I hope Congress intervenes to put the kibosh on this, but I’m not holding my breath. A lot more likely that Herman Cain or Michele Bachmann will reverse this policy once they get into office.

  6. Posted by tipster

    Um, lyqwyd, some people will have more money, others, the people lending, will have less. Because some of the lenders were foreigners, it’s a net positive for US spending, but it’s a world economy and even foreign people impact our economy. Bob, it frees up as much mortgage money as it commits, so the supply and demand are unchanged from that standpoint.
    However, had interest rates gone up, the lenders would be stuck with their bad decisions. When interest rates go down, everyone gets to refinance, so the borrowers are now unstuck. Although some people would get to refinance, the loans weren’t priced for this situation, where everyone gets unstuck.
    And now they will be. That means the lenders will have to price the loans with this “heads I lose, tails you win” feature built in.
    So it jacks up interest rates a bit. New buyers then have LESS to spend and prices fall a bit. Will that be offset by fewer borrowers defaulting, which would prop prices up? Doubt it. Those borrowers weren’t going anywhere. If they lose their jobs, the house is still going to get sold.
    What about the boost to the economy? That will help push prices back up. So this is probably a wash overall.
    But almost none of these borrowers are in the bay area. probably a decent amount of lenders are in the bay area. So it’s probably very slightly negative for us. Doubt it makes that much difference either way.
    Will congress, bought and paid for by rich people, allow this? It absolves the lenders of failing to do their due diligence the first time with regards to income and assets, that would otherwise allow the GSEs to push the loan back onto the lender. On the other hand, it takes away from rich people an awfully good deal: an above market interest rate from a buyer who will do everything not to default and comes with a government guarantee. Who knows if they’ll allow that to disappear.
    Finally, is this a free ride for the failure to do the due diligence, as Brahma suggests? No. These borrowers were the ones who are making their payments when they should rationally stop. If they didn’t have income and assets, this would have been a problem a long time ago. Even if they weren’t properly vetted, I doubt many will ever have been found – they will probably keep making payments forever. I’d actually think someone would want to do these deals just to get the sucker list of people with money making such poor financial decisions.

  7. Posted by Deshard

    As well your loan has to be held by Mae or Mac or guaranteed by one or the other.
    My question is can one list to sell once the loan has been modified and the property levels towards LTV. It seems like a way to avoid the credit smack of a short sale.

  8. Posted by A.T.

    This involves no principal reduction as far as I can tell. Even second loans remain, although they will still be seconds.
    So this seems reasonable. A borrower who owes $300,000 at 8% will still owe the same but now at 4 or 5%, so it helps the borrower (as tipster notes, these are borrowers who should logically walk away). The banks get the refi fees, so it helps the banks. It only applies to GSE loans. The GSEs are on the hook for losses anyway, and the only potential downside for the lenders/GSEs is where the underwater borrower would have continued making payments at 8% but now only pays 5%, but that should be offset by the numbers who keep current who would otherwise have defaulted. Homeowners who are in way over their heads will default anyway because the 3 or 4% difference in the interest rate won’t save them.
    Seems pretty reasonable to me. This will put some more cash into the economy. I don’t think it will have a material affect om home prices. If anything, it will further stretch out the time-to-bottom, which has always been the govt’s goal, by slowing the foreclosure rate a little bit, but the group this “helps” is as underwater as ever and still can never sell, so the ultimate numbers that end up in foreclosure won’t change that much – only when. “Helps” is in quotes because this simply prods the group to keep paying some principal on an underwater home longer than they logically otherwise would.

  9. Posted by eddy

    This will absolutely reduce foreclosures AND slow them down. The strategic defaulters have, or are already in the process of, defaulting. Every single person with a current, GSE backed loan on an underwater home will refinance. Good luck trying to spin this any other way. If this goes forward I would expect that traditional mortgages may follow suit if it proves to have a net positive benefit to Mae/Mac. The goal of the government right now is to keep people in their homes for as long as possible and to keep them making their payments.

  10. Posted by Brahma (incensed renter)

    Deshard wrote:

    My question is can one list to sell once the loan has been modified and the property levels towards LTV. It seems like a way to avoid the credit smack of a short sale.

    Let’s assume that you can. Then, even though your generous GSE-sponsored refinance took place, the new buyer is almost certainly going to have to get a real, actual, honest-to-goodness market value appraisal, which in the case of people deep underwater, is still going to come out at less than the outstanding loan amount, no? All that’s happening here is that the interest rate is being lowered, principal reduction isn’t part of this.
    So your proposed sale is still going to be “short” and you’re still going to take a hit to your FICO score. For this reason, this proposal isn’t as objectionable on moral hazard grounds.

  11. Posted by Guest666

    Doesn’t this to some degree toss the hot potato over insurance cos/pensions once the MBSs start to prepay? Other than for securities owned by the Fed, banks and foreigners, this prepayment and the resulting lower yield on new securities will likely lead to lower portfolio returns for other hard pressed entities.

  12. Posted by tc_sf

    “My question is can one list to sell once the loan has been modified and the property levels towards LTV. It seems like a way to avoid the credit smack of a short sale.”
    The people targeted here, deeply underwater yet still creditworthy, are those most prone to “buy and bail”. i.e. buy a new much cheeper home (which they probably can do since the way you know you are underwater is that similar comps are selling for much less) and then default on their first home. This program reduces, but does not eliminate, the economic upside of a buy and bail. (with the refi program they get lower interest on the same principal vs lower rates on a lowered principal for buy and bail). There will probably be some marginal effect because of this, less so for those deeper underwater where the principal is of more consequence then the rates.
    I don’t agree that everyone who will ever default has walked away along time ago. A great deal of people are waiting out the market. A refi will allow them to wait longer. If their local market brings them back up near the waterline they’ll probably keep the home. If their market stays flat or drops further I think they’ll be at a greatly elevated chance of default regardless of the refi program.
    Except for eliminating fees and appraisals, this seems like the same type of refi program that’s been available for people upto 25% underwater (i.e. HARP) for a few years. Since HARP has been somewhat of a failure, not sure why expanding it to people deeper then 25% underwater would work any miracles.

  13. Posted by tc_sf

    “My question is can one list to sell once the loan has been modified and the property levels towards LTV. It seems like a way to avoid the credit smack of a short sale.”
    Since prepayment is far better then no payment at all, it depends a bit on what you think the outcome of these loans would be. As Brama pointed out if this really gives banks a free pass on reps and warranties I can’t imagine that banks won’t take the opportunity to take out the trash and pass it off to the GSE’s. That adverse selection problem plus the fact that you’d get people predominantly greater then 25% underwater wouldn’t make this a great portfolio of loans.

  14. Posted by lyqwyd

    @tipster,
    “it’s a net positive for US spending”
    yeah, that’s what I said.
    This will definitely not hurt banks, nothing the U.S. has done, is doing, or is likely to do anytime soon, will hurt banks (except small banks).
    Brahma’s point is very relevant, and probably the biggest part of this story, which I totally missed, so thanks for bringing it up Brahma! This will eliminate many of the fraudulent / stupidly granted mortgages that are a ticking time time bomb in the banks portfolio, and replace them with fresh mortgages that cover up the original errors made in giving the mortgage. These will not prevent many foreclosures, but they will transfer a portion of the risk to the public, so it seems like it’s just another case of transfer of responsibility for losses from the wealthy private interests to the public.

  15. Posted by Brahma (incensed renter)

    Guest666 wrote:

    Doesn’t this to some degree toss the hot potato over insurance cos/pensions once the MBSs start to prepay?

    Yes, it does.

    Other than for securities owned by the Fed, banks and foreigners, this prepayment and the resulting lower yield on new securities will likely lead to lower portfolio returns for other hard pressed entities.

    Yes, it will. But the people actually paying on the underlying mortgages have always had the ability to prepay, so the overlying bond holders have been compensated for this fact via higher interest rates.

  16. Posted by Cal_Ursa

    What’s frustrating is that BofA and other non-Freddie Mac/May lending institutions seem to have no incentive to follow suit. I’m about $100k underwater in my SOMA loft (although the County of SF begs to differ in their unbelievably greedy assessment of my property’s value!) with a 5 year ARM about to reset. Initially the rates might translate to a lower monthly nut, but looming inflationary pressures suggest that won’t last for too long. I would gladly agree to continue to be responsible and make my payments on my BofA first and second, but at a modified/reduced interest rate. BofA shows NO interest in modifying my loans since I make enough money to pay for them. While that may be true, I’m beginning to believe it makes more sense for me to strategically default. Anecdotal evidence suggests it’s taking BofA almost 2 years to complete the default process, allowing me to live in the property rent-free for that period of time. I would be able to put aside a significant pile of cash to buy another property down the road when I emerged from credit hell. I’ve heard that keeping all other avenues of credit pristine would lead to a return to credit worthiness within 4-5 years. I guess I have two questions based on this rant. One, is it really taking BofA two years to complete the default process? And two, does a strategic default make sense under such circumstances? Thanks in advance for responses from the learned contributors to this site!

  17. Posted by tc_sf

    “But the people actually paying on the underlying mortgages have always had the ability to prepay, ”
    My 3:16 comment was actually meant in reply to Guest666, I just cut and pasted wrong.
    Regarding the above, if you’re deeply underwater and no one will refi you then the only way you can pre-pay is by bringing a great deal of cash to the table. I don’t think that in general many of these borrowers had either the ability or willingness to do this.

  18. Posted by The Milkshake of Despair

    “The goal of the government right now is to keep people in their homes for as long as possible and to keep them making their payments.”
    Exactly and the long gone Tittering Tiburon Tenant Trader used to call these folks heroes for exchanging their hard work for essentially nothing to fill the hole left by the burst bubble. It is a form of debt slavery except that many of the slaves don’t yet realize it.

  19. Posted by tipster

    A friend of mine with a loan from a different bank has not paid dime one since 2008.
    2009? Nothing.
    2010? Nothing.
    2011? Nothing.
    No trustee sale scheduled yet.

  20. Posted by A.T.

    It would be interesting to see the MBS numbers. The affected mortgages are those taken out at the peak where values have now plummeted. Presumably, all but a very few of the MBS tranches of these pools have already gone to zero. So we’re just talking about one or two tranches that are still performing at all. It is true that the holders of these most conservative tranches will now lose the income stream, although they will get the principal prepay. I’m betting this is not that big a deal given the shellacking the affected pools have already taken.

  21. Posted by tc_sf

    @Cal_Ursa — The LPS mortgage montior reports have data on the foreclosure pipeline. Some is broken down by state, but not by bank. The BofA SEC filings might have what you want. Last I checked the national average was just over 600 days.
    http://www.lpsvcs.com/LPSCorporateInformation/ResourceCenter/PressResources/Pages/MortgageMonitor.aspx
    Regarding strategic default, it seems like a big enough decision that a few hours spent consulting with a lawyer would be well worth it.

  22. Posted by *

    ^ BoA was in the news last August for ramping up their NoDs at a greatly accelerated rate.

  23. Posted by polip

    @badlydrawnbear
    This, to me, is less a move to prop up housing but is instead more of an attempt at a back door stimulus by putting a few hundred dollars of additional income into, hopefully, tens of thousands of peoples pockets.
    read it again – one of the key features is loans being switched from longer term to shorter terms (think 30yr -> 15yr).
    The end result, if that occurs will be
    a.) faster repayment of principal – creating the curing negative equity more rapidly
    b.) equivalent or even larger monthly payments
    so the deal here is simple. a ‘homeowner’ is badly underwater, wnats to stick it out in the house (who knows why) and has the cash flow to do it, but is the exact type of borrower that the banks are nervous will walk away (marginal strategic defaulter) – and then lead to buy backs etc
    so, the answer is simple – let the borrower ‘buy’ their house sooner – lower rate, in return for faster but more painful debt slavery
    carrot, meet stick, and guess which one is the bigger instrument here…
    the develeraging continues
    oh, and if the drumbeat is correct, don;t be surprised if QE3 knocks the 15 year below 2.75% and the 30 yr below 3.5% (conforming)
    after all, we are the land of the rising sun now -right?

  24. Posted by anon

    I need a recommendation for a bank/broker for a cash-out refinance of a 2 unit investment property in the mission. I have owned the property for 1 year and the value is much higher than what I paid. I’d like a loan for about 60% of new appraised value. Serious recommendations????

  25. Posted by Stucco-sux

    Dysfunctional relationship basics: when all else fails, dance with the one that brung ya, even if he is the one that broke your feet in the 1st place.
    Its like America’s whole economy has been modelled on pay day loan logic.

  26. Posted by jamesc

    Question, if you refinance under this plan does your no-recourse loan become a recoarse loan thus further prevents the owner from a future strategic default?
    My guess is yes and very few people who are under water will want to participate since it limits the home owner’s options in the future.

  27. Posted by Rillion

    I’m in a similar situation as Cal_Ursa. My first is not owned by one of the GSE’s (I’ve checked both of their online inquiry systems). I got both my loans from American Home Mortgage a couple months before they went under. Wells Fargo now services my 1st and the servicing on my 2nd went to EMC (which was Bear Sterns at the time) and now is owned by some bank in Georgia that uses a servicer that is also a collection agency (so I suspect they bought it at a steep discount knowing my place is so far under water that the 2nd will be completely wiped out if I default). So I won’t be able to take advantage of this new program.
    A couple points brought up earlier by others that I want to express some mild disagreement with, one, not many people are still paying an 8% interest rate on an underwater loan. Before the market started dropping their was an opportunity to refi at lower then 8% and anyone with an adjustable is going to be at much lower rates. I’ve got one of the highest rates then any of my friends as I bought later then they did and I’m at 6.25% and their loans have all reset to under 4%. Mine will reset in April 2012 to the 1-year LIBOR plus 2.25, so roughly 3% assuming rates don’t change much between now and then. Meanwhile the rate on my 2nd has been at 3.5% ever since prime dropped to 3.25% a couple years ago.
    Second, not everyone that is considering a strategic default has already pulled the trigger. For me it will all depend on what happens to rates between now and when I next have to pay any principal. If rates increase it is going to cost me significantly more to continue living in my condo then it would be to rent a similar place (right now at 6.25% I’m paying within 5% of what I used to pay per square foot to rent 4 1/2 years ago) then I’ll consider it. If in 2017 when my loans recast and amortize over 20 years I’m still significantly underwater then I’ll consider it, again doing the math to see what I’d be paying in rent compared to what my new monthly payments will be. Might also consider trying to cut a deal to settle on my 2nd if it makes economic sense and they are willing to see the wisdom of getting some money rather then gambling on trying to foreclose on me and hope they can sell it for enough to pay off the 1st.

  28. Posted by tc_sf

    “one of the key features is loans being switched from longer term to shorter terms ”
    This would be interesting, give people the carrot of lower rates and the stick of a shorter term as you say, but while I’ve admittedly not yet read more then a few articles about this new proposal I don’t see where you’re getting this. I just see a mention of waving some risk based fees for people going into less then 20-year terms.
    Except for the fee waver, going into a shorter term seems like a hard sell for a homeowner. If you’re waiting out the market I’m not sure what benefit you’d get by putting more principal into a deeply underwater house.
    On a separate note, even by the FHFA’s estimate this is not expected to significantly change the current low pace of HARP refi’s.
    http://blogs.reuters.com/felix-salmon/2011/10/24/obamas-pathetic-refinancing-initiative/

  29. Posted by tc_sf

    “For me it will all depend on what happens to rates between now and when I next have to pay any principal.”
    This is exactly why I don’t see people chomping at the bit to get into a 15-year loan. Why accelerate principal payments when you’re just waiting on the market?

  30. Posted by Brahma (incensed renter)

    tc_sf, the key mistake you’re making is that you’re assuming that everyone is a real estate speculator and is just waiting “for the market to come back” so they immediately can sell for more than the amount of their mortgage and in the short-term.
    While I agree that a lot of people have this attitude, if there’s any justice in this world (hah!) the majority of people in that category will have non-GSE backed mortgages.
    All that said, you’re likely correct that there is no requirement that people refinance into shorter-term mortgages; this is just what the FHFA would like people to do. From the FHFA press release (link via Felix Salmon, available from tc_sf’s comment above), page two:

    An important element of these changes is the encouragement, through elimination of certain risk-based fees, for borrowers to utilize HARP to refinance into shorter-term mortgages. Borrowers who owe more on their house than the house is worth will be able to reduce the balance owed much faster if they take advantage of today’s low interest rates by shortening the term of their mortgage.

    So if you are actually a person financing a place to live, versus a speculative investment opportunity, you’ll be able to pay off the mortgage sooner and own the place free and clear by taking on the shorter-length mortgage.

  31. Posted by tc_sf

    “tc_sf, the key mistake you’re making is that you’re assuming that everyone is a real estate speculator..”
    Mostly conjecture on my part, but I’d assume that most people will just go to the smallest monthly payment (i.e. the longest mortgage term). But even for those more strategic, I don’t think you need to be a speculator intent on dumping the house to question paying down more principal. If you look at the anecdotes by Rillion and Cal_Ursa above you’ll see that there can be a reluctance to keep paying on a deeply underwater house. I’m sure you can find stats and other anecdotes to bear this out as well.
    Fundamentally paying more principle just makes the homeowner realize more of a loss if prices don’t recover. If they do, the only upside is the waived fee and rate spread between the short and long term loans. Since I doubt these HARP loans will have pre-pay penalties, they can always choose to make larger payments if the market recovers. Possibly even refi into a shorter term at that time if the rates are still favorable.
    I don’t think that *everyone* will feel this way, but from the Salmon article only a small number of mortgages are going through HARP and I think any fraction of that small number going to a shorter term isn’t going to be significant for the wider market.

  32. Posted by Brahma (incensed renter)

    tc_sf wrote:

    Fundamentally paying more principle just makes the homeowner realize more of a loss if prices don’t recover.

    So the borrower takes FHFA up on this offer and refinances into a 15-year mortgage. In 15 years, they’ll own the property free and clear. You’re proposing that in 15 years there’s a possibility that prices won’t recover in that time frame?
    You’re a hard-core bear and probably the biggest bear around here with the possible exception of tipster. I personally don’t think this is in the realm of possibility and if it does happen, we’ll have a lot more serious problems at hand than just the lack of home owner equity.

    If they do, the only upside is the waived fee and rate spread between the short and long term loans.

    What do you mean “only”?
    The borrower originally signed a contract for a home at a particular price and at a given interest rate that may have been adjustable or be scheduled to adjust in the future. There was no guarantee built anywhere in their mortgage documents that the market value of the property would be higher after a certain (short) period following signing.
    Therefore, the upside potential driving their decision should be a straightforward finance 101-type problem where (as you’ve allowed) the borrower is paying for almost fifteen years less interest than if they didn’t refinance. But that’s nothing to sneeze at, it’s a hell of a lot of money.
    Taking Malia Cohen’s alleged condition when she strategically defaulted as an example and because I can’t put my hands on my HP at the moment I’m writing this, the mortgage comparison calculator at bankrate.com says that the total interest for a 30-year mortgage on the $415,000 balance owed on the 1st at 6.25% would be $385,864.00 more than that of the 15-year mortgage at 3.5%. That’s real money and she could use it.

  33. Posted by tc_sf

    “You’re proposing that in 15 years there’s a possibility that prices won’t recover in that time frame?”
    I do think that there’s a possibility that a non-insignificant fraction of homes in the nation will be worth less then the bubble peak in 15 years. I don’t think this is anywhere near tipsters belief that real SF houses will hit 1997 nominal prices.
    Just for a sense of proportion, take Vegas. The earliest CS datapoint for Jan 1987 was 66. It took until Sept 2003 for it to double to 133. Almost 17 years, and *note that this includes the early part of the bubble appreciation years*! The current level is at 95, if it doubles to 190 it will still be about 20% below the bubble peak of 234.
    I’m not saying that the above will happen, just that a return to an above normal growth rate hardly seems like the most bearish scenario imaginable. Plus this isn’t even about the average, since even within a MSA some areas may do much better or worse then others.
    I also think that anchoring off peak pricing and wanting it to “recover” is a severe cognitive mistake. The bubble pricing was abnormal. Some areas or industries may have improved over that time adding in some real gains, but I think it’s best to start from a baseline of something like price/rent, price/income, trend appreciation and look at what could cause changes from that baseline.
    Tech is undoubtably a real industry with a lot of growth potential which has changed the world in the last few years. But nearly 12 years later the NASDAQ is close to half its peak value.
    “What do you mean “only”?”
    The key is that without a pre-pay penalty the owner with the longer loan can make a larger payment at their option anytime they choose. The cost of this option is the spread between the 30-year and 15-year loans, now roughly 0.3%
    In the aggregate if homeowners have more equity I do think it stabilizes the market, but individually more equity makes the owner realize a larger fraction of any loss. Taking Malia Cohen’s case, with zero down she didn’t realize much of the loss. Had she made aggressive principal payments before defaulting, less of the loss would hit the bank but more of it would go to her.

  34. Posted by A.T.

    Heck, tc_sf, you can stay closer to home. CSI-SF took 12 years to double from 1988 to 2000, and that included several years near the epicenter of the greatest creation of wealth the world has ever experienced. That also coincided with the baby boomer housing expansion that is now in reverse as that group enters retirement. If current prices (per CSI) bounce around even for 3 years then increase 4% a year (pretty decent) for the next 12 years, we still won’t get back to the peak bubble level here in the SF area.
    I don’t think it’s just a possibility that a non-insignificant fraction of homes in the nation will be worth less then the bubble peak in 15 years – it’s all but a certainty.

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