Potential Broad-Based Refi Plan Aims To Level Playing Field; Increase Home Prices

This is the second of two parts (Part 1: Prelude to HARP 3.0 as Donovan Testifies at Senate Hearing) of a summary of a hearing of the Senate Banking Committee held Tuesday during which Secretary of Housing and Urban Development (HUD) Shawn Donovan spoke on a range of housing issues but particularly on efforts to streamline and remove barriers to refinancing.  In addition to addressing the issue of “fundamental fairness” for borrowers, the plan also seeks to level the playing field among servicers and originators, as well as stimulate home-price appreciation, among other things.

Jeff Merkely (D-OR) asked Donovan what it would take, a regulatory or statutory fix, to address the limit on FHA loans to a 115 percent loan-to-value (LTV) ratio.  Donovan said it was actually an even lower ratio in practice but the proposal is for a broad-based refi to allow up to 140 percent with the clear view that any loan deeply underwater would have to be written down to those parameters.  That, he said, along with creating a separate fund from the FHA MMI insurance fund to protect that fund would be the key legislative changes required.

Merkley asked if an insurance fee for borrowers who are refinancing would be the strategy for financing the separate fund and Donovan said another suggestion is a broad-based financial sector fee of some sort but he was also looking at a risk transfer fee as a voluntary opt-in for companies that hold these underwater mortgages.  “And in laying this out over — over 40 years, if you have basically a spread, because of the federal government guarantee funds between a 2 percent and, say, a 5 percent mortgage, and you throw in the risk transfer fee, you end up with solvency under kind of reasonably conservative assumptions. But it’s not zero risk because dramatic things can happen. And that’s where the federal government guarantee through FHA becomes essential, or an extension of the federal government guarantee to utilize for the Federal Home Loan Bank system.”

Donovan said there is no question that by refinancing loans into FHA loans the government would be taking on some additional risk but the question is how to minimize that risk and by both focusing on current loans that meet additional underwriting criteria, lowering the cost of these already safe loans and being able to fully pay for it, they are hoping to offset any expected losses.

Most importantly, he said, there is enormous up-side potential.  “If we can just move house prices a few percentage points through this broad-based refinancing, the benefits to the taxpayers through improvements in the performance of Fannie Mae and Freddie Mac, FHA, and the broader lift that the economy would have are all potentially enormous.”

Donovan said there are two major changes to FHA enforcement powers they have been seeking.  One is the ability to hold lenders accountable through indemnification but there are some loans and lenders for which there is no clear authority to enforce standards.  The second is a somewhat perverse provision that allows FHA to go after lenders only for regional or local violations based on their track records compared to other lenders in that area.  That it is not possible to disqualify an entire company nationally through current standards makes no sense. 

Donovan said that there is a real urgency to get the refinancing programs on the right track because interest rates today are at the lowest level they’ve ever been for a 30-year mortgage. Low interest rates are typically one of the most beneficial things to boost the economy and the nation isn’t seeing the full benefit of record low rates that it should be seeing.  “And the quickest, most effective, and I think the most bipartisan way that we can increase the boost to the economy of these record low interest rates is to quickly get these — these proposals enacted and — and that’s something that I think hopefully we can all agree on and move with real speed in getting these done. But as the economy continues to improve, I think all expectations are that this window of record-low interest rates may not last a significant period of time. And therefore, it is particularly urgent that we take advantage of this.”

Shelby returned to the issue of second mortgages and the impact of first lien modifications on those junior liens and vice versa.  Donovan said that while they have been able to insert some requirements for dealing with junior liens into HAMP guidelines and into the settlement agreement the lack of general rules for dealing with lien priority has been a problem.  There are no rules, he said, except when you get to a foreclosure.  No rules for what happens in a modification, especially if the second lien is current.  The department has tried to get around this by putting rules in place, but it would be better to do that within the context of a universal refinancing proposal.

In answer to another question by Shelby as to the number of additional homeowners, above those participating in HARP 2.0, might be helped by the Menendez-Boxer legislation Donovan said he would have to answer as a range with Christopher Mayer estimate of 12 million at the high end.  He said his department’s expectations are significantly lower than that but not as low as the one million projected by some. 

Even with all the benefits that would accrue to them, there are two things that are stopping some borrowers from refinancing.  Some simply cannot do it – they may be above water on their first lien but have a second lien that make refinancing impossible.  The second barrier is high costs – they need an appraisal or there is a monopoly in effect where their current servicer can charge them high fees, in one estimate as much as $15,000, because of the lack of competition between servicers.

Merkley underlined the urgency of taking advantage of low interest rates, recounting a program he had been involved in which was effectively killed because of rapidly escalating home prices but said to him a more critical issue is how to help homeowners who do not have GSE guaranteed loans.  When he talks to constituents about their loans they generally do not know who holds it.   Then he looks and finds that some are not GSE-backed and he has no help to offer them. It seems like a lottery, he said, when a family who is doing the right things can’t get help simply because their loan isn’t the right type.  Donovan said it was correct that this is about fundamental fairness and that is one of the important issues here. 

Merkley said his staff had looked at whether a fund could remain solvent and what the risks factors are and they think that the risk factors are greatest during the first few years after refinancing when a loan is still substantially underwater and the family either defaults strategically or runs into financial problems.  The federal guarantee has been extended and it is the government that is picking up the losses.  Maybe it is offsetting them through a risk transfer fee, insurance, or some other mechanism, but the assumptions about how to do that are critical.  Then there is the question about restrictions on a homeowner in the first few years.  Do you put place a rule as part of the mortgage that says you cannot walk away from this, Merkley asked, make it a legal requirement?  The issue of recourse is usually determined on the state level, but has there been a discussion about rules related to recourse or whether we should have a federal overlay on this?

Merkley asked about the prospects for addressing increased risk factors inherent in the first few years after refinancing when a loan is underwater and the family defaults.  Donovan effectively said that this was not the topic at hand, and that the issues mentioned by Merkley arise when a family is delinquent or where there is significant principal reduction happening.  Rather, what is being discussed here are borrowers who are current, “so, we didn’t see a need to go beyond that, given that these families are responsible, have been doing the right things and paying, and are not getting substantial principal reduction, at least below the 140 LTV, to — to be able to stay”.

It is appropriate in those cases to give them an incentive to be responsible in reducing their principal balance.  That is why there are incentives for them to use their savings to shorten their term rather than lower their payments and thus build equity faster.  “They’re really giving themselves a light at the end of the tunnel that makes it less likely that they’ll default in future years. And so that’s something I think you’re exactly right in your legislation to encourage.”

On the investor side, Donovan said, there is some concern whether loans are going to be in place for a significant period of time.  Investors have been generally supportive of HARP and other efforts but what they are concerned about is whether we will see a continuous cycle of refinancing.  “So what we have been clear on is that once you refinance to this record low level, you’re not going to see a refinance in that loan quickly.  And that’s a protection for investors that we do think is important in HARP and that we certainly have been open to doing in this broad-based refinancing.”  In other words, expect any changes to eligibility dates to be hard-fought. 

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CoreLogic: Housing and Economy Looking Up; Judicial Foreclosures a Hurdle

CoreLogic’s March edition of The Market Pulse, produced in a magazine
format, has two articles that caught our attention.  The first, “Keep on Trucking,” contains one
of the most positive takes on the economy and the role of housing that we have
seen in a long time.  The second article reviews
and provides support for one theory of what is holding back any housing rebound
in some metropolitan areas.

First the economy.  CoreLogic says that a positive trend is
clearly emerging as good news continues. 
The GDP was expanding at a 3 percent rate in the fourth quarter of 2011,
defying some economic expectations that growth could slip below “stall speed,
and CoreLogic is looking for 2 percent growth in early 2012 “despite the
buffeting blows of a slowing European economy and increasing U.S. fiscal
constraints.”

Initially business investment in
equipment and software were driving the economic expansion as businesses
substituted labor for capital as they cut costs and sought greater
efficiencies.  Now investment in
equipment and software and productive growth are all falling signaling the need
to create more jobs.  And private sector
jobs are being created – 253,000 in January – which, in turn is leading to
increased consumer confidence.  And that brings
the report to housing.

The report says that one of the biggest
concerns for the housing market is the lack of demand which is no surprise
given how many people were hurt by the housing market in the past five
years.  This, coupled with the economic
situation has led to uncertainty which leads to inaction, thus many potential
buyers are voluntarily not participating in the housing market while many
others are shut out because of insufficient equity in their existing homes.  As labor markets grow and confidence returns
demand will as well.

CoreLogic ticks off some key points.

  • While
    sales of both new and existing homes are ragged, they are trending up and
    inventories are dropping. The supply of
    existing homes dropped to 6.1 months in December, the lowest point since March
    2005. “Research has shown that four to
    six months home supply is a healthy level of inventory that puts neither upward
    nor downward pressure on prices, so this is a good sign for further
    stabilization in 2012.”
  • Mortgage
    originations in October 2011 increased to $108 billion, a significant
    improvement over the low point of $60 billion the previous May. Much of the origination activity is due to
    mortgage refinancing which made up 74 percent of originations. The long run average share of refinance activity
    since the beginning of the millennium is 55 percent, due largely to low-rate
    environments throughout the decade and the high level of equity extraction during
    the housing boom. Year to date through
    October 2011 originations topped $784 billion and at the current rate is
    expected to be right around one trillion for the year.
  • The
    mortgage market, while still small by recent historic standards, is slowly
    growing on the strength of refinance activity. (Editor’s note: this report appears to be dealing with data
    as of mid-February). “While this
    activity may fade as we move through 2012 if interest rates rise, it may well
    be replaced by purchase loan volume from increased home sales.”

The second
article in The Market Pulse is “Unlikely
Company – What do Denver, Detroit and Miami Have in Common?
” The answer is they
rank one, two, and three on a list of most improved markets as ranked by home
sales, home prices, and delinquencies. 
What they also have in common is that they do not appear on the list of
the markets with the most clogged foreclosure pipelines.

By analyzing the
ratio of properties in foreclosure versus properties in lender inventories
(REO) CoreLogic says one can see how foreclosure congestion is preventing
improvement in many markets.  Albany, for
example, is number 77 (out of 100) on the improved markets list and is number
one in congestion with 66 properties in the process of foreclosure for each one
in REO.  The three least improved markets
are in the top ten foreclosure congested markets and every MSA in the top ten
of that list was in the bottom 50 on the improved list.

In analyzing the
top and bottom markets CoreLogic said it becomes clear that foreclosure laws
matter.  Nine of the ten least improved
markets are in judicial foreclosure states while eight of the top ten improved
markets are among the least foreclosure congested.

CoreLogic looked
at the performance of several counties that are in the same metropolitan area
but are in different states and subject to different foreclosure laws.  “The takeaway is clear; even while adjusting
for the same metropolitan geography  
(which is a control for the local economy, demographic and housing
market dynamics) counties in non-judicial states are able to clear and reduce
the stock of distressed properties more quickly than counties in judicial
states, even if they are in the same metropolitan areas.”

Where pipelines
are congested many properties are prevented from being cleared out which holds
back liquidation of these properties into REO and then as distressed
sales.  While distressed sales are
negative for home prices and the market in the short term, the shadow they cast
on the housing market prevents house prices from improving and creates an expectation
of lower prices going forward.  ‘Clearing
the foreclosure pipeline can help markets recover in the long run.”

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