On Foreclosures, Uncle Sam Courts Investors

On Wednesday, a U.S. housing regulator invited investors to submit initial applications to bid on pools of foreclosed properties owned by Fannie Mae, the government-controlled mortgage finance company, as part of a new pilot program.

The goal is to help stabilize the troubled housing market by turning properties into rental units. Similar programs are expected to be launched by Fannie Mae’s sibling company, Freddie Mac, and the Federal Housing Administration, the government-controlled mortgage insurer.

That pilot program would be limited to properties that Fannie has already leased through a program that allows tenants to rent homes when their landlords go into foreclosure. It involves real estate with an estimated value of at least $250 million in six areas: Southern California, Las Vegas, Chicago, Phoenix, Atlanta, and parts of Florida.

There are many more foreclosures that could be pooled into packages and sold to investors. More than 83,000 foreclosures were listed for sale by Fannie, Freddie or the Federal Housing Administration as of late December, with the largest concentrations in California, Georgia, Michigan and Florida. (View map.)

The idea of packaging these properties and selling them to investors has been kicking around in policy circles for quite a while now and has been seriously discussed by Obama administration, Federal Reserve officials and regulators since at least last summer.

“We’re working to turn more foreclosed homes into rental housing, because as we know and a lot of families know, that empty house or ‘for sale’ sign down the block can bring down the price of homes across the neighborhood,” President Barack Obama said in a speech Wednesday in Virginia.

The FHFA is setting up this pre-qualification process to make sure investors in such properties have strong enough finances and enough experience to handle the process. Investors would be required to rent out the foreclosures for several years.

Regulators selected Fannie Mae to run the pilot program rather than Freddie Mac because it has a larger inventory of foreclosures — more than 55,000 were listed for sale as of late December — and because it was easier to launch a pilot initiative with only one of the federally controlled mortgage giants.

–Nick Timiraos contributed to this report.

Follow Alan @alanzibel

Will the White House Move the ‘Boulder’ on Principal Write-Downs?

The aversion of the government-controlled mortgage companies Fannie Mae and Freddie Mac, and their regulator, to writing down the loan balances of homeowners has frustrated advocates of a more aggressive response to the housing crisis.

Democratic lawmakers in Congress have prodded the regulator, the Federal Housing Finance Agency, to carry out principal write-downs. Some have even called on President Barack Obama to remove the agency’s acting director, Edward DeMarco, if he doesn’t do more to aid the ailing housing market.

Now the Obama administration is raising the stakes on the issue. The administration on Friday said it would triple payments to the mortgage industry in an effort to encourage more loan forgiveness. And it challenged the FHFA to allow these same incentives for Fannie and Freddie.

To supporters of principal write-downs, this is a deal worth taking. In a blog post, Jared Bernstein, who was previously Vice President Joe Biden’s top economic adviser, says that Mr. DeMarco has been “a big boulder in the path to principal reduction.”

Mr. Bernstein writes:

Now, FHFA acting director Ed DeMarco has consistently resisted reducing principal. …But he’s also said he’d go there if there were incentives to do so—some way to mitigate the losses to the agencies (and the taxpayers) from the loan forgiveness.

Well, here it is, Ed.

Critics, however, aren’t so thrilled. Sen Bob Corker (R., Tenn.) said Monday that he would introduce legislation to ban the government from using taxpayer money to pay for principal write-downs. “The idea that federal tax dollars would be used to reduce the principal on some outstanding mortgages and perhaps even bailout investment properties and beach houses is terrible public policy,” Mr. Corker said. It means “that people who acted responsibly in Tennessee will be paying for the bad behavior of lenders and borrowers in places where reckless housing practices were most prevalent, something I find to be irresponsible.”

For its part, the FHFA said in a statement that it is studying whether the new incentives will provide a benefit to Fannie and Freddie, whose rescue has cost taxpayers $151 billion to date.

The FHFA , in a letter released last week has analyzed how principal write-downs and a principal forbearance program might impact Fannie and Freddie. The regulator indicated its preference for a principal forbearance plan, which does not require lenders to forgive debt. Instead, lenders set aside a portion of the loan, not requiring any payments on it until the borrower sells the home or pays off the loan.

For example, a lender could allow a homeowner to make principal and interest payments on only $150,000 out of a $200,000 mortgage, but the borrower would still owe the remaining $50,000 to the bank.

The FHFA’s analysis calculated that Fannie and Freddie would save $24 billion by enacting a forbearance plan for the 1.4 million of Fannie and Freddie’s borrowers who owed more than 15% more than their property’s current value as of last summer. The analysis found that a principal forgiveness plan for those borrowers would save less — $20 billion over the life of those loans.

White House Details Housing Plans

Saying that the housing crisis struck right at the
heart of what it means to be middle class, President Barack Obama has begun to
flesh out the housing-related proposals he made in his State of the Union
speech last Tuesday.  He spoke this
morning at Falls Church, Virginia about his housing plans, some pieces of which
have already been put into effect by the Departments of Justice (DOJ),
Treasury, and Housing and Urban Development (HUD) in the eight days since they
were first announced. The President spoke only briefly and most of the
information about his proposals comes from a Fact Sheet released by the White
House just before his speech.

The most ambitious part of the Administration’s
housing plan is the expansion of several existing programs to streamline
refinancing for homeowners
with existing high interest rate government or
Fannie Mae/Freddie Mac mortgages. The President wants to extend these
opportunities to homeowners with standard conforming non-FHA, VA, or GSE
mortgages through a new program run through FHA.  To be eligible the homeowner would have meet
a few simple criteria:

  • Borrowers will need to have been
    current on their loan for the past 6 months and have missed no more than one
    payment in the 6 months prior.
  • Borrowers must have a current FICO
    score of 580 to be eligible, a requirement met by approximately 9 in 10 borrowers.
  • The loan
    they are refinancing is for a single family, owner-occupied principal residence.

A
streamlined application process will make it simpler and less expensive for
both borrowers and lenders.  Borrowers
will not be required to submit a new appraisal or tax return, merely verify
current employment.  Those who are not
employed may still be eligible if they meet the other requirements and present
limited credit risk, however, a lender will need to perform a full underwriting
of those borrowers.

The President’s plan includes
additional steps to reduce program costs, including working with Congress to establish
risk-mitigation measures including requiring lenders interested in refinancing
deeply underwater loans to write down the balance of these loans before they
qualify.   There would be a separate fund created for the program to help
the FHA track and manage the risk involved and ensure that it has no effect on
the operation of the existing Mutual Mortgage Insurance (MMI) fund.  The estimated $5 to $10 billion cost of the program would be paid by a fee on the
largest financial institutions based on their size and the riskiness of their
activities

There were
also some changes suggested for GSE refinancing programs.  President Obama said he believed the steps he
proposes are within the existing authority of the FHFA but the GSEs have not
acted so he is calling on Congress to:

  • Eliminate appraisal costs for all borrowers by using mark-to-market
    accounting or other alternatives to manual appraisals where Automated Valuation
    Models cannot be used to determine loan-to-value ratios.
  • Direct the GSEs to require the same
    streamlined underwriting for new servicers as they do for current servicers to
    unlock competition and lower borrowing costs.
  • Extend streamlined refinancing to
    all GSE borrowers including those with significant equity in their home.

There are also proposals to streamline refinancing for
borrowers in the USDA and FHA housing programs but the White House noted that
the current FHA-to-FHA streamlined refinancing program has met with some
resistance from lenders who are afraid to make loans that might compromise their
FHA approved lender status.  FHA is
removing these loans from their “Compare Ratio” process which should open the program
up to more borrowers.

Borrowers utilizing either the Home
Affordable Refinancing Program (HARP) or the new FHA-based program would be
given an alternative to allow them to rebuild the equity in their home.  This option would require refinancing into a
20 year mortgage and the homeowner would continue to make the old mortgage
payment.  The excess money would be
applied directly to principal that, along with the shorter term would allow the
homeowner to quickly rebuild equity.  To
encourage borrowers to make this choice (which also reduces lender risk) the
administration is proposing legislation to provide for the GSEs and FHA to
cover the loans’ closing costs.

A
Homeowner Bill of Rights proposed by the Administration would apply to the mortgage
servicing system which the White House said “is badly broken and would benefit
from a single set of strong federal standards.” 
Among the items proposed for this Bill of Rights are:

  • Simple,
    Easy to Understand Mortgage Forms
  • Disclosure of all known fees and
    penalties
  • No conflicts of interest between
    servicers and investors or servicers and junior lien holders.
  • Assistance
    for at-risk homeowners to include early intervention, continuity of contact,
    and time and options to avoid foreclosure.
  • Safeguards
    against inappropriate foreclosure including the right of appeal, certification
    of proper process.

The President plans to include $15 billion in his Budget for
a national effort to hire construction workers to rehabilitate hundreds of
thousands of vacant and foreclosed homes and businesses
.  Similar to the Neighborhood Stabilization
Program, Project Rebuild will enlist expertise and capital from the private
sector, focus on property improvements, and expand property solutions like land
banks.  The Budget will also provide $1
billion in funding for the Housing Trust Fund to finance the development of
affordable housing for extremely low income families while providing jobs in
the construction industry.  

Other initiatives which the
President talked about this morning or which were covered in the White House
Fact Sheet have already been launched in the last few days including a joint
investigation
with the states into mortgage origination and servicing abuses, expansion
of eligibility criteria for HAMP and increased incentives for lenders in the
program to reduce principal balances, and a pilot sale announced to transition
foreclosed properties into rental housing in certain highly distressed
communities which was announced by HUD this morning

The White
House said that, while the government cannot fix the
housing market on its own, the President believes that responsible homeowners
should not have to sit and wait for the market to hit bottom to get relief when
there are measures at hand that can make a meaningful difference, including
allowing these homeowners to save thousands of dollars by refinancing at
today’s low interest rates.

Conventional wisdom holds that the
President’s proposals will be “dead on arrival” when they reach Congress and,
in fact the reaction of Speaker
of the House John Boehner to the speech was, “How many times are we going to do
this?  How many times are we going to
suggest programs to help people who can’t make payments on their
mortgages?  The programs don’t work.”

A
kinder assessment was released in a statement from David H. Stevens, President
and CEO of the Mortgage Bankers Association. 
Stevens commented specifically on the Homeowner Bill of Rights saying
the Association agrees that a single national set of standards “can help
provide confidence and certainty in the real estate market for borrowers,
lenders, and servicers alike.”

He
also commended the administration for “recognizing that more can be done to get
our housing market on track.  The programs announced today will give lenders and other
stakeholders additional tools to help borrowers and foster a renewed confidence
in our real estate finance system.” 
 

Video Included

…(read more)

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What’s in the Latest White House Proposals on Housing?

Associated Press
President Barack Obama is set to give a speech on housing Wednesday.

President Barack Obama is set to give a speech Wednesday outlining his call for more help for the nation’s housing markets, according to administration officials. Here’s a preview of what’s on the White House wish list:

Extend refinancing options to more borrowers: Last October, the Obama administration and the federal regulator for Fannie Mae and Freddie Mac revamped a program, called the Home Affordable Refinance Program, that allows borrowers with loans backed by the mortgage-finance companies to refinance if they meet certain qualifications. The changes allow borrowers to refinance even if they owe far more than their homes are worth.

The latest push would require congressional action to make the HARP changes broadly available to everyone else who doesn’t have Fannie and Freddie-backed loans. Under the plan, homeowners would be able to refinance into new loans backed by the Federal Housing Administration.

Borrowers with privately held mortgages who have made their last six payments and have no more than one delinquency in the prior six months can participate. The program is open only to owner-occupants whose loans are within their county FHA loan limit. Borrowers who can verify current employment don’t need to otherwise go through the regular underwriting process. Banks have to agree to cut loan balances for borrowers who owe more than 140% of the value of their homes.

Improve refinancing for FHA borrowers: The new program doesn’t apply to loans that are already backed by the FHA, but the administration says the agency will take steps to ease restrictions that have inhibited refinancing of FHA loans.

Broaden HARP: Fannie and Freddie and their regulator didn’t make a handful of technical changes to HARP that had been sought by the Obama administration, which will instead ask for Congress to make those changes. Among other steps, it will seek to extent HARP to borrowers who have more than 20% equity in their homes. Currently, HARP is only open to borrowers with less than 20% equity.

New uniform standards for mortgage servicers: The administration is set to unveil a borrower “bill of rights” that would become an industry standard code of conduct for mortgage servicers.

Among other steps, the proposal will clarify steps to modify the so-called “dual track” process by which banks process foreclosures at the same time that they evaluate borrowers for a loan modification. Under the code, banks will have to certify in writing that they’ve taken all appropriate loss-mitigation steps before referring loans to foreclosure.

Converting some foreclosures to rentals: Given the huge overhang of distressed homes in some markets, officials are preparing a pilot program to turn foreclosures into rentals through bulk sales of the properties to private investors. The first pilot program, which would be conducted by Fannie Mae, is limited only to properties that Fannie has already rented out through a program that allows tenants to rent out homes when their landlords go into foreclosure, according to people familiar with the matter.

The first pilot covers real estate with an estimated value of at least $250 million that would be pooled into portfolios in six areas: Southern California, Las Vegas, Chicago, Phoenix, Atlanta, and parts of Florida.

McCain Pushes Ban on Fannie, Freddie Bonuses

Reuters
Sen. John McCain wants to ban executive bonuses at Fannie Mae and Freddie Mac while the companies remain under federal control.

An effort to bar bonuses for executives at Fannie Mae and Freddie Mac could move forward in the U.S. Senate this week.

Sen. John McCain (R., Ariz.), a long-standing critic of the mortgage giants, said Tuesday he would try to advance a measure that would bar senior executives at Fannie and Freddie from receiving bonuses while the companies remain under federal control. (Video.)

Mr. McCain and Sen. Jay Rockefeller (D., W.Va.) sought to attach the restriction on pay to a bill prohibiting members of Congress from trading on inside information about government activities that could impact stocks. That bill easily cleared a 60-vote procedural hurdle on Monday and could pass by the end of this week.

Lawmakers became outraged last fall over nearly $13 million in bonus and incentive pay for Fannie’s and Freddie’s top executives granted last year.

“I find it hard to believe that we can’t find talented people with the skills necessary to manage Fannie and Freddie for good money…without the incentive of multi-million dollar bonuses,” Mr. McCain said on the Senate floor on Tuesday. “There are many examples of intelligent, well-qualified, patriotic individuals working in our federal government who make significantly less than the top executives at Fannie and Freddie with just as much responsibility.”

Representatives for Fannie and Freddie declined to comment. Their regulator, the Federal Housing Finance Agency, didn’t immediately comment.

The FHFA has defended the current pay packages as appropriate given the technical expertise needed to oversee two companies that guarantee $5 trillion in mortgages and the fact the executives couldn’t be paid in the companies’ stock, which essentially is worthless.

Taxpayers, who have put about $151 billion into Fannie and Freddie since their takeover in fall 2008, “would not be better off if we provoke a rapid turnover of senior management by further slashing compensation,” said Edward DeMarco, the FHFA’s acting director, at a November hearing.

Fannie CEO Michael Williams announced in mid-January his plans to step down as soon as the Fannie board finds a successor. His counterpart at Freddie Mac, Charles E. Haldeman Jr., said last fall that he would leave sometime in 2012. Both executives took their jobs in 2009, less than a year after the government put the companies under federal control.