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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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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OBAMA ADMINISTRATION RELEASES DECEMBER HOUSING SCORECARD

WASHINGTON- The U.S. Department of Housing and Urban Development (HUD) and the U.S. Department of the Treasury today released the December edition of the Obama Administration’s Housing Scorecard – a comprehensive report on the nation’s housing market. Data in the December Housing Scorecard show some subtle improvements in the market over the past year, but underscore fragility as the overall outlook remains mixed. For example, new and existing home sales rose compared to the prior month and remain higher than a year ago, and homes are more affordable than they have been since 1971. Median-income families today have nearly double the funds needed to cover the cost of the average home. However, home prices showed a slight dip from the prior month and remain below year ago levels. The full report is available online at www.hud.gov/scorecard.

Home Prices Tumble

The beleaguered housing market continued to struggle as U.S. home prices posted declines in November.

Case-Shiller Reports Continued Erosion in Home Prices

Home prices continued to fall in November according to the
S&P/Case-Shiller Home Price Indices released this morning.  Both the 10-City and the 20-City Indices were
down 1.3 percent in November compared to the previous month and for the second
month in a row19 of the cities also saw their prices inch lower.   Phoenix was the only one of the 20 to post a
gain in November.

The year-over-year price declines in November widened from those in October.  The 10-City and 20-City Composites were down
3.6 percent and 3.7 percent respectively from November 2010 to November 2011
compared to the -3.2 percent and -3.4 percent annual rate of change in
October.  Thirteen of the cities in the
larger index also saw a large drop in annual prices than they had in October. 

Atlanta had the worst performance with its annual return down 11.8 percent.  Atlanta’s prices fell 2.5 percent in November
following a 5.0 percent decline in October, 5.9 percent drop in September and
2.4 percent loss in August.  As was the
case in October, only two cities, Detroit and Washington, DC saw an improved
annual rate, but in both cases that annual increase was lower than their
October number.

David Blizer, Chairman of the Index Committee at S&P Indices said,
“Despite continued low interest rates and better real GDP growth in the fourth
quarter, home prices continue to fall. 
Annual rates were little better as 18 cities and both Composites were
negative.  Nationally, home prices are
lower than a year ago.  The trend is down
and there are few, if any signs in the numbers that a turning point is close at
hand.”

The 10-City Composite is now about 1.0 percent above its crisis low reached
in April 2009 and the 20-City is 0.6 percent above the low it reached in March
2011.  Both Composites are close to 33
percent off of their 2006 peak levels. 
As of November average home prices across the U.S. are back to mid-2003
levels.

“It’s not telling us much we don’t know. A lot of people fell into the trap of looking at the upturn in housing starts at the end of the year and mistaking that for a turnaround in the housing market. That’s absolutely premature.” – Andrew Wilkinson, Chief Economic Strategist, Miller Tabak & Co., New York.

 

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