Questioning Lockhart's Grasp Of The Situation

I want to give FHFA Director James Lockhart the benefit of the doubt. I really do. He's been willing to take on the giant mess that the GSEs, Fannie Mae and Freddie Mac, find themselves in. It takes guts and brains and ability.

But his latest comments make me wonder about, well, his understdanding of the problems in the housing market. From Bloomberg, Dec. 10, Fannie, Freddie May Waive Appraisals for Refinancings:

Fannie Mae and Freddie Mac, the mortgage-finance companies seized by the U.S. government, are considering forgoing new appraisals on refinanced loans to help struggling homeowners, their regulator said.

“If they refinance someone, rather than doing a loan mod, do they need a new appraisal if they already have the credit?” Federal Housing Finance Agency Director James Lockhart told reporters after a speech in Washington today. “That’s an issue that’s being discussed. They’re looking at it.”

They're looking at it? You mean "they" (and you, Mr. Lockhart) are actually considering the idea of ignoring the actual/current value of the collateral on which tens or hundreds of billions of loans would be based? I certainly don't expect that you'd go as far as allowing loan applicants to place their own value on their properties. Of course not, that would be crazy.

Maybe you're thinking about just requiring an AVM (Automated Valuation Models) instead of a full appraisal. But wait, that's still a type of appraisal, and you did say "... do they need a new appraisal if they already have credit?"

Or would the plan be to have Fannie/Freddie accept the original purchase price or appraisal done for a previous refinance? If that's what you're going after, you'd certainly take care of a lot of underwater mortgages. But what about the investors, who Fannie/Freddie depend on for capital? The folks who buy your loans, do you really think they will accept this? I have a hard time believing they will if they know that what they're buying is upside down from the get go. Okay, you at least have the FED - they'll buy anything.

There's also a post (and tons of comments) on Calculated Risk - Report: GSEs May Waive Appraisals For Refis

After(post) Thought: FHFA could bring back the PIW (property inspection waiver) or the FNMA 2075 (Property Inspection Report) . The PIW required no appraisal/inspection, was used for purchases and refis with low LTV (80% or less) and applied to borrowers with high credit scores. A PIW cost the issuing bank $50, a fee which they passed on to the borrower at closing. The 2075 was also used for purchases and refis with low LTV, but did come from an appraiser and required them to inspect the property (but no value given). But using these on a nationwide, across the board basis in today's market could be very problematic.

Grill On The Hill

Former Fannie/Freddie chiefs testified at a House Financial Services Committee hearing on Tuesday (CSPAN Video).






Raines Faults Regulators For Fannie, Freddie Missteps (Bloomberg 12/09)

Fannie, Freddie Ignored Risky Loan Warnings (ABC News 12/09)
Fannie and Freddie Execs Defend Their Decisions as House Members Question Motives

Evading Fiscal Responsibility (op ed from Charlottesville's Daily Progress 12/10)

New Protections

Part of the reason we’re in the present mess is that many of people who originated loans during the housing bubble had no business doing so.  In the heyday, mortgage brokering promised a lot of money without requiring a lot of skill.  This attracted more than its share of scoundrels.

Personally, I know of one loan officer, still in the business I understand, who wrote subprime loans in between jail stints for drug possession.   Let’s call him, Jimmy.  Something of a local legend in the biz, there are lots of Jimmy stories.  He reportedly made forty-grand or more a month suckering decent people into bad deals. 

He even continued writing new loans in the prison yard using a smuggled cell phone.  Since he couldn’t go to closing during these stretches, Jimmy would even send his mother to the table to make sure that no honest title rep informed his clients as to how obscenely overcharged they were.

Fortunately, there should be a lot less of these reprobates coming into the mortgage business.  Starting last July, the state of Virginia put a new law into effect to raise the notoriously low barrier of entry into this industry.

Part of this law requires employers to perform background checks on any new employee who may have access to or process personal indentifying or financial information of a Virginia customer. 

Mercifully, new employees do not need to be fingerprinted.  But it is a thorough check.  It includes a criminal history generated by the Virginia State Police.

In no instance can a mortgage company employ someone with any felony or any misdemeanor involving fraud, misrepresentation, or deceit.

That means there will be less Jimmy’s entering this industry.  And that’s no small comfort.

Bair's On Board With Obama

This morning's story on Bank.com's blog:

Sheila Bair Encouraged By Barack Obamas Foreclosure Ideas

"The chairperson of the FDIC, Sheila Bair, has been pushing an aggressive plan, modeled off of what was tried when IndyMac went under, to help stop foreclosures. Her efforts, though, have been running into opposition from the Treasury Secretary, Henry Paulson, as well as other prominent members of the Bush Administration. The current administration seems reluctant to fund such a comprehensive plan aimed at helping individual homeowners. Now, though, it seems as though she can bide her time and wait for a Barack Obama administration. Maybe Timothy Geithner will be a more compatible and understanding Treasury Secretary."

Bair has been standing out on a limb for some time now with her forward thinking ideas about mortgage modifications. As we discussed in an August post, Indy Mac's failure and quick takeover by FDIC in August provided Bair and team an opportunity to do things her way. The success or failure of the modification program is yet to be seen, but I'd be very surprised if President-elect Obama didn't keep her on board to see it through (and possibly help implement it with other banks/lenders).

The Morning After-Still Just Rumors

The morning after has revealed few details of Paulson’s latest plan to save us.   In fact, more questions and concerns have reared.

Here’s what we do know.  Treasury would give us 4.5% 30-year fixed loans through Fannie and Freddie.  The two GSE’s would buy the bonds at around 4%.  Banks would sell the loans around 4.5%.   

This is a point below current market rate.  (As a historical note, rates have not fallen below 5.375% in the last 45 years).  That means Federal bucks will be needed.

Whatever will be spent will most probably be in addition to the $600 billion committed last week to buying mortgage-backed securities (MBS).  But there’s still no clearer idea of where the money might come from.

Concerns about private investors have reared.  Will they still want to buy MBS while the government floods this market with dollars and forces down the return on bonds?  Will government become the all but exclusive buyer of agency MBS?

Who will this help?  Less than the numbers might suggest.  Bloomberg quotes Rajiv Setia, a fixed-income strategist for Barclays Capital.  “Over 90 percent of the mortgage universe out there would be refinancable, but you can't force banks to lend to people. . .”

These would be agency loans.  That’s not going to help people in trouble, those facing foreclosure.  Homeowners nearing this precipice are going to have damaged credit.  They won’t qualify for an agency product. 

Same with most of the consumers in subprime loans.  They were in subprime because they couldn’t get an agency loan.

This will also mean nothing for those with jumbo loan amounts.

And one of the biggest questions is whether this was just a trial balloon floated up to see if anyone thought this might work or a genuine leak. 

If it was a leak, some have suggested that it came from one of the realtor or builder lobbyists who have been pushing for something similar.  They might be publicizing it in hopes of pushing Treasury more towards this.

Our brothers in these industries may not realize what havoc this will cause to us in the mortgage industry.  This news is disrupting loan pipelines throughout the country, as borrowers now want to wait for what may be the much better deal.

But if it was a trial balloon, I wonder if Paulson and his crew realize how all this is starting smell of desperation.  They keep trying one thing after another and nothing seems to work.  Nevertheless, it keeps costing the taxpayer untold billions.

Everybody Limbo!

How low can we go?  4.5% mortgage rates?

That’s the breaking story on CNBC, Wall Street Journal and others in what could be one of the biggest headlines for our business this year. 

A leak has emerged suggesting that the Treasury Department wants to stimulate the housing market by lowering the mortgage rates to 4.5% on a 30 year fixed. The devil will be in the details, which remain sketchy at this point.

How will they do it?  Where all the money come from?

And will it be for all mortgage types?  If it includes refi’s, this leak could destroy whatever pipelines loan officers have at the moment.  All current customers could pull their loans in the hopes of waiting for that magic number.

Even those still in the midst of their recession days could be pulling out of their closed but not funded loans. 

If this was the Drudge Report, we’d have a spinning siren at the top of our page.  Stay tuned.

For The Modern Pilgrim: Plymouth or Jamestown?

As I'm still not ready to let go of the Thanksgiving holiday, I thought I'd share this interesting post I found on the Cyberhomes blog.

Plymouth vs. Jamestown: Which is best?

"As you enjoy leftover turkey today, Cyberhomes offers something to think about: If the first U.S. settlers were to choose a settlement in 2008, which would be the better place to live: Plymouth, Mass., or Jamestown, Va.?"

Happy Thanksgiving!

MBS Market Rallies, Mortgage Rates Set To Improve

10:20am



I guess this is what happens when the Federal Reserve announces a plan to purchase $500b MBS from Fannie Mae and Freddie Mac. Here's today's Bloomberg article about the plan.

And here's the Treasury's announcement to purchase $200b in additional asset backed securities.

Looks like the Administration is directly targeting mortgage rates.

I expect rates to be ~.25% better this morning, and wouldn't be surprised to see the 30yr fixed in the low to mid 5% range this week.


FNMA 30yr 5.5 coupon
up 130bps at 10:15am

The Fixin might need Fixin

Chairman of the Federal Deposit Insurance Corporation, Shelia Bair has found religion.  She believes that she has found the solution to the foreclosure crisis:  loan modifications.

Qualifying homeowners in serious delinquency get a letter from the FDIC offering them a way off the foreclosure highway:  more affordable monthly payments! 

The Feds can do this through reducing the interest rates on the loans, extending the amortization and deferring principal payments.  We commented on this here.

As we mentioned in an earlier post, the FDIC has used this pilot program on more than 5000 formerly Indymac borrowers the corporation inherited when the bank collapsed. In congressional testimony over the last several weeks, Bair has been hailing the success and wants other banks to follow the FDIC’s example.

Of course, all this costs money.  Millions so far.  Which will make Barney Frank and some of his Democratic colleagues on the Hill very happy.  They want some of Paulson’s 700 billion bailout money to be used for homeowner relief instead of the many curious ways the Treasury Secretary has disbursed it so far.

But will this work?

The Wall Street Journal’s MarketWatch does not fill me with confidence.  “For the industry in general, after mortgages are modified roughly 25% go delinquent again after just one post-modification payment and more than half end up delinquent after several post-modification payments. . .”

Maybe the solution will need a solution.