Proposal to Seize Underwater Mortgages via Eminent Domain not Well Received

The Board of Supervisors in the California county of San Bernardino has,
perhaps unintentionally, picked a fight with some of the giants of the real
estate industry.  The Board unanimously
approved a plan two weeks ago that would use eminent domain to seize underwater
mortgages
and restructure them for homeowners unable to sell or refinance the properties.

The Homeowner Protection Program, in which San Bernardino would partner with
the cities of Ontario and Fontana within its borders, is only broadly sketched
out at present but it has already provoked a strong reaction from the Securities Industry and Financial Markets
Association (SIFMA).  SIFMA claims to
represent the interests of hundreds of securities firms, banks and asset
managers.  The trade association fired
off a letter to the Board on Friday, cosigned by more than a dozen of its
member organizations, protesting the proposed actions.  “Based on publicly available information on
the Agreement,” the letter said, “we are very concerned that the good
intentions of the Board of Supervisors will instead result in significant harm
to the residents the Agreement intends to help.”

The thrust of the letter is that such an action as proposed in San
Bernardino would significantly reduce access to credit for mortgage borrowers.  “If eminent domain were used to seize loans,
investors in these loans through mortgage-backed securities or their investment
portfolios would suffer immediate losses and likely be reluctant to provide
future funding to borrowers in these areas. 
It is essential to remember that investors in mortgage-backed securities
channel the retirement and other savings of everyday citizens through their
investment funds.  This program may cause
loans to be excluded from securitizations, and some portfolio lenders could
withdraw from these markets.  In other
words, this program could actually serve to further depress housing values in
the county by restricting the flow of credit to home buyers”

The Los Angeles Times quotes David
Wert, a spokesman for the county as saying the country would use eminent domain
to condemn mortgages on properties that are underwater, that is the owner owns
more on the mortgage than the value of the home, and would then renegotiate the
mortgages at a lower amount.  Only
homeowners who are current on their mortgage payments would be eligible for the
program.

The move is intended to help stimulate the region’s hard-hit economy by
freeing up people who have been stuck in their homes, Wert said. “Real estate
is the foundation of the inland economy, 
 [It] is based on the building and
selling of homes, and this is one way to stimulate that again.”

The program is still in its initial stages and additional details will be
hashed out in public the spokesman on said. 

Among those signing the SIFMA letter one were the Mortgage Bankers
Association, American Bankers Association, National Association of Realtors®,
The Financial Services Roundtable, American Securitization Forum, and the
Residential Servicing Coalition.

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Mortgage Apps Pull Back From Multi-Year Highs

Mortgage
application volume
as measured by the Mortgage Bankers Association’s (MBA) Market
Composite Index fell 7.1 percent during the week ended June 22. The change was
the same for both seasonally adjusted and unadjusted data.  Responses to MBA’s Weekly Mortgage
Applications Survey send the Refinance Index down 8 percent from the week ended
June 15 and the refinancing share of mortgage activity decreased from 80 percent of total applications
to 79 percent.  The seasonally
adjusted Purchase Index was down 1 percent from a week earlier while the
unadjusted index decreased 2 percent week-over-week and 3 percent from a year
earlier.

“Refinance volume fell
last week due largely to a fall-off in refinance applications for government
loans, which had more than doubled the prior week,” said Michael Fratantoni,
MBA’s Vice President of Research and Economics.  “The large swings in
activity were due to the implementation of FHA’s new premiums on streamline
refinances, and borrowers timing their applications to lower their premiums.”

“The decline in the refi index isn’t particularly troubling considering
the past two weeks saw the highest levels since early 2009,” says
Mortgage News Daily’s Matthew Graham.  “The pop higher in apps was fueled not only by the drop in FHA MIPs
on June 11th, but also by fresh record low rates, as well as the
announcements by several big box lenders that they’d no longer be
accepting open access (or “different servicer”) streamline
applications.  These factors not only helped concentrate application
volume in the previous two cycles, but the pull-back in open access availability
likely weighs on the current cycle as it raised new hurdles for some
borrowers, or at the very least, decreased the market’s overall capacity
to churn out streamlines.  Bottom line: this week’s drop makes sense.”

Purchase Index vs 30 Yr Fixed

Click Here to View the Purchase Applications Chart

Refinance Index vs 30 Yr Fixed

Click Here to View the Refinance Applications Chart

Interest rates were
mixed.  The contract rate for the most
popular product, the conforming (loan balance of $417,500 or less) 30-year
fixed-rate mortgage (FRM)   Jumbo 30-year FRM, (balances over $417,500)
increased to 4.12 percent with 0.35 point from 4.06 percent with 0.38 point and
the effective rate increased as well.   

The average contract
interest rate for 15-year fixed-rate mortgages decreased to 3.24 percent from
3.25 percent, with points decreasing to 0.44 from
0.45. The effective rate decreased from the previous week.

The average contract
interest rate for 30-year fixed-rate mortgages backed by the FHA decreased to
3.71 percent from 3.72 percent, with points decreasing to 0.46 from 0.47. The
affective rate decreased.

Adjustable rate
mortgages (ARMs) had a 4 percent share of mortgage applications filed during
the week.  The average contract interest
rate for 5/1 ARMs increased to 2.81 percent from 2.75 percent, with
points increasing to 0.41 from 0.33. The
effective rate increased from last week.

All interest rates
quoted are for loans with an 80 percent loan-to-value ratio and points include the
origination fee. 

 MBA’s survey covers over 75 percent of all U.S. retail residential
mortgage applications, and has been conducted weekly since 1990. 
Respondents include mortgage bankers, commercial banks and thrifts.  The base period and value for all indexes is
March 16, 1990+100.

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TransUnion: Borrowers with Modifications Perform Better on Consumer Loans

A new study has found that consumers
who received mortgage modifications outperformed
those who did not on new
consumer loans they opened after their initial mortgage delinquency.   The study, conducted by TransUnion, looked at
consumers who were 120 days past due at some point on their mortgages and
compared the credit performance of those who had received a loan modification
and those with a similar credit score who had not.

The study found that 41.9 percent of
mortgages that were modified during the period studied – 2008 to 2010 – were 60
days delinquent on that mortgage at the 12 month mark following modification
and 59.1 percent by the end of 18 months.

Generally speaking, borrowers who
received a loan modification and then opened a new auto loan or credit card
account performed better on those new loans than those who had not received a
modification.  For those with modifications
6.06 percent were 60 or more days delinquent on that loan 12 months after
opening the account.  For credit cards
the rate was 13.63 percent.  Where borrowers
had not received a mod the 60 day delinquency rates were 11.40 percent and
17.13 percent.

Within the population of modified
mortgages, the study looked at borrowers who had defaulted on their mortgages
but on no other loans compared to those with multiple delinquencies. The
12-month recidivism rate for mortgage-only (MO) defaulters was 38.8%, while the
recidivism rate for multiple delinquency (MD) borrowers was 46.2%.

The subset of borrowers who had
multiple defaults also performed more poorly on new credit than MO borrowers.  The former group at the end of 12 months had
a 60 day delinquency rate on auto loans of 8.65 percent and credit cards of
27.69 percent.  The group with only a
mortgage default had rates of 4.03 percent and 6.55 percent respectively.

“MO defaulters significantly outperformed MD defaulters on new loans
opened after mods even when controlling for credit score,” said Charlie
Wise, director of research and consulting in TransUnion’s financial services
business unit. “After 12 months, MO defaulters had an average 45% lower
delinquency rate on new auto loans opened following a mortgage mod, and an
average 63% lower delinquency rate on new bankcards.”

Of more than 5 million mortgage
loans
that were originated prior to 2008 and were delinquent during the study
period TransUnion identified approximately 559,000 records of mortgage
modifications
which were analyzed for 6-, 12- and 18-month performance.  It may be worth mentioning that the 41.9
percent redefault rate at the 12 month and 59.1 percent rate at 18 months noted
by this study are much higher than the redefault rates reported by the Home
Affordable Modification Program (HAMP) which accounts for about one-sixth of
the 5.5 million modifications done since 2008. 
HAMP claims that about 27 percent its modifications completed within that
period (HAMP began modifications in 2009) were delinquent at the 18 month mark.
 

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Refinance Demand Remains At Multi-Year Highs, FHA Apps Surge

Mortgage application volume
during the week ended June 15 fell back only slightly from the 18 percent gain
it scored a week earlier. The Mortgage Bankers Association said this morning
that its Market Composite Index decreased 0.8 percent on a seasonally adjusted
basis from the previous week and slightly more than 1 percent on an unadjusted
basis. 

Refinancing
activity increased to 81 percent of all applications from 79 percent the previous
week and the Refinancing Index rose one percent.  The seasonally adjusted Purchase Index however
fell 9 percent; unadjusted it was down slightly more than 9 percent and was 2
percent lower than during the same week in 2011. 

“Refinance
volume increased again last week, but the composition of activity changed
markedly.   Despite rates remaining near all-time lows, conventional
refinance application volume declined, and the HARP share of refinance activity
dropped to 20 percent,” said Michael Fratantoni, MBA’s Vice President of
Research and Economics.  “On the other hand, FHA refinance volume exploded
to an all-time high, more than doubling over the week.  New, lower FHA
premiums on streamlined refinance loans came fully into effect, and borrowers
seized the opportunity to lower their mortgage rates without increasing their
FHA premiums.  Purchase activity fell off last week, but this is likely
only a recalibration following the Memorial Day holiday, as the level of
activity remains within the narrow band seen for the past 3 years.”

Purchase Index vs 30 Yr Fixed

Click Here to View the Purchase Applications Chart

Refinance Index vs 30 Yr Fixed

Click Here to View the Refinance Applications Chart

Mortgage
rates
were mixed. The average contract interest rate for 30-year FRM with conforming loan balances ($417,500 or less) decreased
to 3.87 percent, matching the lowest rate in the history of the survey, from
3.88 percent, with points increasing to 0.49 from 0.43.  Jumbo 30-year FRM (balances greater than
$417,500) decreased to 4.06 percent, the lowest rate in the history of the
survey, from 4.12 percent, with points decreasing to 0.38 from
0.41.  The effective rates of both conforming
and jumbo loans decreased.

Even
though the interest rate for FHA-backed 30-year FRM increased one basis point
to 3.72, points decreased to 0.47 from 0.59 and the effective rate decreased from the previous week.  Rates also increased for 15-year fixed-rate
mortgages, from 3.23 percent with 0.48 point to 3.25 percent with 0.45 point. The effective rate also increased.

The 5/1
adjustable rate mortgage (ARM) rate decreased to 2.75 percent, the lowest rate
in the history of the survey, from 2.78 percent,
with points dropping to 0.33 from 0.49.  The effective rate decreased. The ARM share
of application activity decreased to 4 percent of total applications.

All
interest rates are for 80 percent loan-to-value ratio loans and points include
the origination fee.

MBA
reports that during the month of May investors filed 6 percent of applications
for home purchase mortgages, unchanged from April.  Investor activity in several regions did
increase, including East South Central and South Atlantic which were up by 0.5
percent. 

Data is
derived from MBA’s Weekly Mortgage Applications Survey which covers over 75
percent of all U.S. retail residential mortgage applications, and has been
conducted weekly since 1990.  Respondents include mortgage bankers,
commercial banks and thrifts.  Base period and value for all indexes is
March 16, 1990=100.

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