Housing Assistance 2012: Another Herculean Task for the FHA

Beginning the 37th month of his presidency, the Obama Administration today announced a laundry list of new programs to help struggling homeowners, crack down on abusive lending practices, make mortgage documents easier to read, convert REO to rental, and other assorted initiatives.  Some require Congressional approval; others are a work in progress, and a couple can begin quickly.
 
At the heart of the announcement is a broad new refinance program with the venerable FHA stepping in (once again) to help save the mortgage market by offering current but underwater non-FHA borrowers another lifeline.
 
Concurrently, the Administration appears to be on the verge of a broad-based “REO-to-Rental” initiative by announcing a pilot project to be led by FHFA, HUD, and Treasury.  I think the Administration is smart to move this initiative forward as they certainly have the political cover through last year’s RFI process.  They asked for comments and suggestions and reportedly received thousands of responses.  They can now say we are implementing what America said they wanted.   Of course, we do not yet know exactly how it will work.
 
Lawmakers and mortgage industry professionals have previously questioned whether or not FHA can handle yet another herculean task.  Recall in 2007 when the mortgage market sputtered and into 2008 when new higher loan limits were unveiled, FHA saw its share of the mortgage market jump exponentially in a matter of months. What was a $350 billion book of business in 2005 has today mushroomed to $1 trillion with more than 7.4 million homes with FHA insurance.
 
Since presumably these would be riskier borrowers (higher LTVs and underwater) it remains to be seen:

  1. If Congress will give FHA the authority to increase its current LTV caps.
  2. How OMB will “score” the proposal thus dictating the mortgage insurance pricing?
  3. Will proposed new bank fees and presumably higher premium revenue off-set the expected “cost” to FHA?

FHA is reportedly considering placing these loans in an insurance fund separate from its current Single Family books of business, but could ultimately require the FHA to invoke its “permanent indefinite” budget authority to keep it afloat (as opposed to the self-sustaining Mutual Mortgage Insurance fund).
 
That said, the Administration indicated the cost of these programs will “not add a dime to the deficit” and will be off-set by a fee on the “Largest Financial Institutions.”  (Note: Congress might have an opinion here.)
 
Since FHA has not in recent memory refinanced borrowers with LTVs in the 120-140 range (presumably one of the groups targeted by the Administration), I think it will be difficult to estimate the performance of these loans over time and thus their impact on FHA’s actuarial foundation regardless of which fund they place them in.  While the FHA “short re-finance” program announced in 2010 allowed a 115% CLTV, it has had very little participation thus making it difficult to gauge performance relative to what could be even higher LTV participants.
 
It should be noted that the Administration is targeting borrowers who have made 12 consecutive payments so one could argue that despite the fact they are underwater they have been able to afford their mortgage payments – presumably in some cases for several years.  So does that mitigate some of the potential risk meaning that they will certainly be able to afford reduced monthly payments?  But again, given FHA’s limited experience with borrowers outside their established guidelines and requirements predicting their performance with any degree of certainty is difficult at best.
 
And assuming those previously non-FHA borrowers default on their new FHA loan, who do you think will now be at-risk with an underwater property?  Again, the Administration stated these programs “will not add a dime to the deficit” – I hope they are right.
 
FHA’s actuarial soundness has been rocked by the on-going erosion of house prices nationwide which has led to three consecutive years of declines in their capital reserve ratio.  The best medicine for FHA is house price appreciation and the positive ripple effect of increased value to their housing portfolio.  But they have been waiting three years for that to happen.
 
Welcomed news as part of this new refinance program is they would be removed from an FHA lender’s compare ratio within Neighborhood Watch (FHA’s public database of lender’s default rates compared to its peers in a given geographic region).  That said, I suspect FHA will establish a separate category of compare ratios for this book of business, as it did for Negative Equity Refinances and the Hope For Homeowner (H4H) program.
 
So while this action will remove a potential barrier to participation, lenders should be cautioned that performance will still matter and they should stand ready for increased scrutiny especially by the HUD OIG.
 
I give the Administration credit for launching another round of housing assistance as too many homeowners continue to struggle.  Putting politics aside on the surface it appears to be the right and proper thing to do, however it remains to be seen the level of participation (and degree of Congressional acceptance) and ultimately what cost, if any, to the taxpayers – most of which have grown weary of the nagging housing crisis.
 
Note: We will continue to follow this initiative with keen interest as it makes its way through Congress and will offer periodic updates as developments warrant.

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Mountain Retreat

This four-bedroom mountain retreat, with natural stone from Montana and oak ceilings, is in Truckee, Calif., near Lake Tahoe, and is part of a development with a golf course and access to a ski lift.

SEC Names Ex-Credit Suisse Employees in Subprime Fraud Scheme

Four
former investment bankers and traders from the Credit Suisse Group were charged
by the Securities and Exchange Commission (SEC) Wednesday violating multiple
sections of the Securities Exchange Act of 1934 while trading in subprime
mortgage bonds
.  The indictments allege
the four engaged in a complex scheme to fraudulently overstate the prices of $3
billion of the bonds during the height of the subprime credit crisis. 

The
four are Kareem Serageldin, the group’s former global head of structured credit
trading; David Higgs, former head of hedge trading; and two traders, Faisal Siddiqui and Salmaan
Siddiqui.  According to the complaint
filed in U.S. District Court for the Southern District of New York, Serageldin
oversaw a significant portion of Credit Suisse’s structured products and
mortgage-related businesses. The traders reported to Higgs and Serageldin.

The SEC charges that the four
deliberately ignored specific market information showing that prices of the
subject bonds were declining sharply, pricing them instead in a way that
allowed Credit Suisse to achieve fictional profits, and, through the traders,
changing bond prices in order to hit daily and monthly profit target and cover
losses.  The scheme was driven in part by
the prospect of lavish year-end bonuses and promotions.  The scheme hit its peak at the end of 2007.

“The
stunning scale of the illegal mismarking in this case was surpassed only by the
greed of the senior bankers behind the scheme,” said Robert Khuzami, Director
of the SEC’s Division of Enforcement and a Co-Chair of the newly formed Residential
Mortgage-Backed Securities Working Group
, “At precisely the moment investors
and market participants were urgently seeking accurate information about
financial institutions’ exposure to the subprime market, the senior bankers
falsely and selfishly inflated the value of more than $3 billion in
asset-backed securities in order to protect their bonuses and, in one case,
protect a highly coveted promotion.”  

SEC
explained that it was not charging Credit Suisse in the scheme because the
wrongdoing was isolated; Credit Suisse reported the violations to the SEC,
voluntarily terminated the four, implemented internal controls to prevent
additional misconduct, and cooperated with SEC in the investigation.  The SEC said that the four named in the
complaint also cooperated in the investigation and that assistance was provided
by the FBI, the U.S. Attorney’s Office for the Southern District of New York
and the United Kingdom Financial Services Authority.

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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

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Solemn Remembrance of Those Lost Aboard Shuttle Columbia

Like countless persons across the world, I watched in quiet disbelief as thousands of pieces of debris streaked across the vast Texas sky the morning of February 1, 2003.
 
Unlike what had transpired in 1986 during the launch of the shuttle Challenger, this time the shuttle Columbia was re-entering earth’s atmosphere.  Traveling at Mach 19 at an altitude of 200,000 feet, the shuttle was only a dozen or so minutes from touching down at the Kennedy Space Center – where family and support personnel waited.  Sadly, that landing never happened.
 
What also made this morning different for me was that I had taken over the White House Office of Cabinet Affairs only 10 days earlier.  The Office served as a policy-coordinating body across the White House policy councils, in addition to its primary function as an early warning system for events transpiring across the Executive branch – including NASA.
 
Watching the events unfold on television, I knew to quickly head to the office as I did most Saturdays and not surprisingly my phone went off en route to the White House.  I arrived at 10:00 and already meetings and conference calls related to the disaster were being scheduled.
 
There was no doubt that all aboard were lost – a point made crystal clear to us later that morning.  A human simply cannot withstand the tremendous physical forces from a rapid deceleration of that magnitude.  We also learned quickly that few nations have the capability to shoot down anything traveling at that altitude and speed, thus ruling out the possibility of an act of terror.
 
All we knew was that something had gone horribly wrong.
 
White House Chief of Staff Card entered my West Wing office early that afternoon and told me I was going to be the main point of contact for the White House for this tragic event and for the soon-to-be-announced accident investigation board.  I wasn’t quite sure what that meant at the time but Mr. Card instructed me to get the NASA chief of staff on the phone.
 
That is when I first met Courtney Stadd – an impassioned public servant who had dedicated his life to the US space program.  Courtney was amazingly patient with me and explained in great detail what protocols were already being invoked, as were dictated post-shuttle Challenger accident.  Courtney was laser-focused on the families of the astronauts, as was all of NASA.  Throughout the months-long ordeal of the accident investigation, Courtney worked diligently behind the scenes, focused at all times on the well-being of the families of the fallen astronauts.
 
Following a Homeland Security Council meeting that afternoon, a second meeting was held early in the evening among the various offices within the Executive branch, as we heard more about the soon-to-be-announced Columbia Accident Investigation Board and a memorial service at the Johnson Space Center later that week.
 
While it was not discussed that day, we also learned that, this time, the mindset of the public was questioning the American space program and, specifically, whether or not the risk of space flight was worth the reward.  That was in stark contrast to the mindset post-Challenger accident, when the public was eager for the shuttle to fly safely again as soon as possible.  This new mindset ultimately led us to chart a new course for NASA – a policy announced in January 2004.
 
But that was much later, as more immediate matters took precedent.
 
At the invitation of NASA, I attended the memorial service of Astronaut David Brown of Virginia.  I had never met Mr. Brown, but you could not help but be in awe of his accomplishments, which were many.  He was by training a medical doctor and was the first Navy flight surgeon to become a fighter pilot.  He was also a college gymnast and had somehow managed to remain single.  The similarities between the two of us were few and far between, yet as I sat only three feet from his flag draped coffin, I learned we were only a couple of months apart in age and both not yet married.  And as I heard others tell his life story during the memorial service at the Arlington National Cemetery Chapel, I felt a sense of deep regret that I never had the opportunity to meet him.
 
Following the service, the coffin was placed atop a horse-drawn caisson for the mile long walk to his final resting place near the marble amphitheater.  As we got closer, the crowd was 10 deep and I recall my amazement at seeing so many school kids who, I suspect, were there as part of a school trip.  Here they stood by the hundreds, heads draped and hands over heart as the cortege moved slowly toward Mr. Brown’s final resting place.  Many of them wiped away tears and occasionally cried aloud.  Otherwise, there was compete silence except for the occasional plane landing at nearby Reagan National Airport.
 
America buried many heroes that day and this is only one of many stories to be told of sacrifice and duty to Country which in this instance includes India and Israel.  I would hope that Americans remember them all, and on this — the 9th anniversary of Shuttle Columbia’s tragic accident — pay eternal solemn respect to the crew of her final mission: Commander Rick Husband, Commander William McCool, Commander Michael Anderson, Payload Specialist Ilan Ramon, Mission Specialist Kalpana Chawla, Mission Specialist Laurel Clark, and Mission Specialist David Brown.  The words of President Reagan spoken many years ago are a fitting tribute to each of them: May God cradle you in His loving arms.

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