HELP FOR HAMP

It’s a now familiar pattern.  The Treasury Department releases a quarterly report on the Home Affordable Mortgage Program (HAMP), the Obama Administration’s flagship foreclosure prevention initiative. The results are disappointing.  Treasury officials express their dismay, encourage participating lenders to do more and announce changes designed to improve the program’s effectiveness.  That pattern played out again at year-end, as the latest HAMP report brought more disappointing results and more plans to address the program’s perceived shortcomings.

The Treasury Department reported that approximately 900,000 trial modifications were begun in December, reflecting steady increases since June, when only 152,000 trials were logged by participating institutions.  To date, 67,000 trial modifications have been made permanent and another 46,000 are on the verge of conversion.  Borrowers who have received permanent modifications have seen their overall debt burden fall from 72 percent to 55 percent of gross income; trial and permanent modifications combined have saved borrowers a total of $1.5 billion to date, according to the Treasury report. 

That’s the good news.  On the negative side:  The permanent modifications represent only 7 percent of the borrowers in the trial phase. According to some estimates, at least half of the borrowers who have made the minimum of three payments required in their trial modifications will face foreclosure nonetheless, because they have not submitted the documentation required for conversion to permanent status.  Other analysts estimate that nearly 200,000 borrowers have missed some or all of their restructured payments.  And while the HAMP statistics have improved, these analysts note, the permanent and trial modifications combined pale in comparison with the 3 million borrowers who received at least one foreclosure notice last year and the estimated 15 million homeowners who are underwater, with mortgages that exceed the depressed value of their homes.

“We certainly have not turned the corner…despite major and commendable federal and state efforts,” the State Foreclosure Working Group concludes in its most recent report.  That task force, including attorneys general from 12 states, bank regulators from New York City, North Carolina and Maryland and the Conference of State Bank Supervisors, has urged the Treasury Department to make major changes in HAMP, primary among them, streamlining the documentation requirements blamed for the slow conversion rate, and requiring lenders to reduce the principal balance for eligible HAMP borrowers in areas struggling with “significant” declines in home values.  

“Given the correlation between negative equity and the likelihood of default,” the working group notes in its most recent report, “the failure to write down principal…is a glaring flaw” in loan modification efforts.  To date, only about 25 percent of the permanent modifications have involved principal reductions, while 70 percent have actually increased the balance, by adding deferred interest and penalty payments to the total.  That is precisely the wrong move, the state working group and many other critics believe -- a primary reason, they say, that an estimated 25 percent of the borrowers who receive modifications end up re-defaulting on those loans.  Increasing the outstanding balance “only adds to the likelihood of ultimate default,” the working group said in its report. 

Administration officials have thus far resisted calls to reduce principal for two reasons:  Concern about “moral hazard” (the risk that borrowers who don’t need this help will get it), and the prospect that writing off large portions of existing loans will produce losses that many lenders can’t (and most certainly don’t want to) absorb, requiring additional subsidies the government is not anxious to provide.

While those concerns remain, Treasury officials have indicated recently that they may be rethinking their opposition to principal reductions.  Hope for Homeowners – introduced during the Bush Administration but pushed aside by HAMP --is said to be a possible vehicle for dealing with underwater loans. 

Unlike HAMP, Hope for Homeowners is structured to allow principal reductions for under water loans. Although the program has assisted fewer than 100 borrowers since its inception in October, 2008, David Stevens, Commissioner of the Federal Housing Administration, told Bloomberg News, “We’re going to look at [it] very closely to make sure it can be as effective as possible, because [borrowers with negative equity] are another segment of the population that needs to be addressed.” 

Assistant Treasury Secretary Michael Barr agreed. “When negative equity gets very, very high….that starts to have a much larger impact on people leaving their homes,” he told reporters in a recent conference call discussing the Administration’s efforts to improve HAMP’s modification totals.  But Barr also noted the Administration’s continuing concern about “moral hazard.”  With any program that reduces principal, he said, the key question remains:  “Which of those people is it fair and appropriate to help.”  � 

SECOND LOOK

HAMP’s critics have focused primarily on the need to reduce the principal balance on under water loans (see related item), but equally problematic, many analysts believe, is HAMP’s failure to address second mortgages. Here again, the issue is cost.  

Many lenders and investors are holding second mortgages rendered virtually worthless by depressed property values but still priced at full value for accounting purposes. This “magical thinking” persists, analysts say, because it avoids write offs that would be painful for most and possibly fatal for some – the reason they also reject shun modifications.  But the refusal to modify second mortgages sometimes impedes efforts to restructure the primary loan (because primary lenders are reluctant to take a big hit if the second mortgage holder remains whole), or leaves borrowers who receive modifications with combined first and second mortgage payments they still can’t afford.

 “The issue of the second liens has to be escalated,” Richard Neiman, New York Banking Superintendent and a member of the Congressional Oversight Committee monitoring  the TARP program.  Neiman has suggested that the Administration should take a tougher stance, forcing lenders to participate in the second mortgage modification portion of HAMP instead of hoping they will do so voluntarily.

Until recently, that hope for voluntary participation looked slim.  But Bank of America just announced that it will participate in HAMPs Second Lien Modification Program (“2MP”), the first institution to do so.  A bank press release indicated that Chief Executive Officer Brian Moynihan made that “verbal commitment” in a meeting with Treasury Secretary Timothy Geithner a few weeks ago. 

“As the nation’s largest mortgge servicers, the bank’s participation in 2MP is particularly noteworthy,” Barbara Desoer, president of B of A’s home loans and insurance group, said in the press statement. 

The bank’s announced commitment comes in advance of the Obama Administration’s guidelines for the second mortgage program, which are still “a couple of weeks away,” Bill Apgar, a senior adviser at the Department of Housing and Urban Development, told reporters at the end of January.  “This is not an easy problem to solve,” he added.  � 

LOSS CONTROL

The Federal Housing Administration (FHA) has announced a combination of underwriting changes and stricter oversight of FHA lenders aimed at stemming the losses that are draining the agency’s insurance fund. 

The underwriting changes will:

·         Require borrowers with credit scores below 580 to make minimum down payments of 10 percent (the current 3.5 percent down payment will continue to apply to borrowers with higher scores);

·         Reduce allowable seller concessions from 6 percent to 3 percent of the purchase price. 

·         Increase the up-front insurance premium from 1.75 percent to 2.25 percent of the loan amount.   

In addition to these changes, most of which will take effect this summer, agency officials also plan to seek Congressional approval to increase the maximum annual FHA premium (now 55 basis points).  If the higher ceiling is approve, the agency will fold at least some of the up-front premium increase into the annual payment to reduce the impact on borrowers.

The stricter lending standards are designed to ”strike the right balance between managing the FHA’s risk, continuing to provide access to underserved communities, and supporting the nation’s economic recovery,” FHA Commissioner David Stevens said in announcing the changes.

That balancing act has become more difficult as the FHA has become a crucial component of government efforts to bolster the fragile housing market.  The agency is currently insuring close to 30 percent of all new mortgage originations -- as much as 40 percent in some markets --compared with only a 3 percent market share in 2007. 

But more than 500,000 of the 5.8 million FHA loans outstanding were “seriously delinquent” at the end of last year and continuing losses have pushed the agency’s cash reserves to 0.5 percent – the lowest level in FHA history and well below the 2 percent minimum the agency is required by statute to maintain.    “They are running on empty,” one industry analyst told the New York Times.

The tension between supporting the housing market and stemming loan losses is evident in the agency’s policy decisions.  While moving to tighten underwriting standards, the agency also recently announced that it was suspending a rule barring loans on properties that were resold within 90 days of their purchase.  Intended to prohibit speculative “flipping” activity that was artificially inflating home prices in some markets, that rule was having the unintended effect of impeding the ability of investors to purchase foreclosed properties and re-sell them.  The new rule prohibits FHA financing on properties with “multiple re-sales” in the past 12 months and requires additional documentation if the selling price exceeds the seller’s purchase price by 20 percent or more. 

Congress is also struggling with the competing pressures on the FHA to both support the housing market and avoid loan losses.  Lawmakers recently increased the cap on the agency’s lending authority to $400 billion for 2010 but also directed agency officials to slash the popular reverse mortgage (HECM) program to help make up a subsidy shortfall there.  Separately, some lawmakers are sponsoring legislation that would reinstate the down payment assistance program Congress killed at the FHA’s request, because of out-sized losses on those loans. 

Industry executives generally agree that the FHA’s recent steps to tighten underwriting standards and increase premium costs are “prudent,” but they disagree on the likely impact. 

“[FHA] borrowers may have to pay a little more for their…mortgages or certain borrowers will have to put more money down on their home,” Robert Story, Jr., chairman of the Mortgage Bankers Association, said, “but these changes are necessary given the stress that the housing downturn has put on the FHA program.” 

Scott Stern, president of Lenders One cooperative agrees that the changes are necessary, but he thinks the near-term impact will be “painful.”  The problem, he told National Mortgage News, is the jolting change.  “For the past four years, the FHA was an ‘anything goes’ environment.  What makes it hard is that with the FHA having around 40 percent of new loan originations, even small rule changes echo through the housing market with a big impact.” 

Tackling the loan loss problem from a different direction, FHA officials are intensifying their scrutiny of authorized FHA lenders and cracking down on those with “abnormal” default claims.  Among other steps, agency officials are seeking legislative authority to require all approved FHA lenders to assume liability for loans they originate or underwrite if the loans violate agency policies or underwriting standards.

In a move that stunned industry executives, the agency announced that it is investigating 15 large lenders with default rate that are at least twice the  average for peers in their market area.  The goal, HUD Inspector General Kenneth Donohue explained at a press conference, is “to determine why there is such a high rate of defaults and claims with these companies, and whether there is wrongdoing involved.”  Donohue emphasized that the agency has no evidence of wrongdoing and “is not making any accusations at this time.” 

Asked why the agency had decided to publicize the investigation before it was complete, Donohue said, “We want to send a message to the industry that, as the mortgage landscape has shifted, we are watching very carefully and are poised to take action against bad performers.” 

Some of the targeted lenders complained that the public announcement of the investigation was inappropriate and could harm lenders whose results simply reflect poor market conditions by implying that they have done something wrong.  One of the targeted mortgage companies, Security Atlantic Mortgage of New Jersey, announced recently that it has stopped accepting applications because of “unfavorable publicity created by the recent unorthodox HUD press conference and the concerns this press conference has raised with our lenders and investors.”  � 

MAKING LENDING LEMONDADE

Credit unions have an opportunity to turn lemons (the continuing credit crunch) into lemonade – a possibly winning argument in favor of increasing the cap on credit union member business loans.  This is a goal the industry has pursued unsuccessfully for years, but instead of focusing on a stand-alone bill that has been blocked by fierce banking industry opposition in the past, credit union trade groups are urging lawmakers to include the measure (doubling the MBL cap from 12.25 to 25 percent of assets) in a jobs creation bill pending in the Senate now. 

President Obama’s emphasis on jobs as a top priority for his Administration this year will almost certainly buoy that legislation.  Fury over the banking industry bail-out and Wall Street bonuses, which has made banks Washington’s favorite political punching bag, may also strengthen the credit unions’ hand this time around – in the House as well as in the Senate.

Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee, who has been reluctant to mark up the credit union bill (for fear of alienating both credit unions and banks), indicated recently that he might be willing to advance it this year.  His committee will be holding hearings soon on small business lending and related issues, and the credit union business lending cap “is going to be one of the things we are going to talk about,” he told CongressDaily recently. 

While some features of the political and economic landscape may have shifted in favor of credit unions, the banking industry’s opposition is as strong as ever.  Both the American Bankers Association (ABA) and the Independent Bankers Association have written the Senate Majority and Minority Leaders, arguing that the credit union measure is unnecessary and vowing to oppose any effort to include it in a job-creation bill.   

“There are thousands of credit unions that could make those [business] loans today under the cap that exists,” insisted Floyd Stoner, executive vice president for the ABA. Only a few “large and aggressive” institutions are pushing to increase it, he told Congress Daily. 

Credit union trade organizations, for their part, have accused the bankers of hypocrisy and insensitivity to the needs of small businesses.  “The bankers once again oppose efforts aimed at providing small businesses with capital, and offer no alternative to the current problems facing small businesses ¾ problems that they have helped create and appear to be doing little to help alleviate,” Dan Mica, President and CEO of the Credit Union National Association (CUNA), said in a letter to the Senate leaders.

The National Association of Federal credit Unions also weighed in, urging lawmakers to reject the banking industry’s “shameless attack” on credit unions and recognize the “hypocrisy” behind it.  In a letter to Senate leaders, Daniel Berger, NAFCU’s executive vice president of government affairs, wrote:  “As if taking billions in bailouts and bestowing millions in bonuses were not enough, the massive hypocrisy of banks has reached new levels as they fight to prevent others from helping the same small businesses they have turned their backs on….Unlike many banks,” Berger added, “credit union stand ready to assist our nation’s small businesses with their lending needs.”  

THE NEXT BIG (BAD) THING 

If you’re trying to predict the next big BAD financial problem, commercial real estate loans would be a good candidate.  Testifying recently at a Congressional field hearing in Atlanta, Jon Greenlee, associate director of the Federal’s Reserve’s Division of banking Supervision and Regulation, noted the Fed’s growing concern about the commercial real estate market and the potential for large-scale loan losses related to it.  Reduced demand resulting from a weak labor market has increased vacancy rates for office and industrial space nationwide, Greenlee noted, while constrained consumer spending has taken a toll on retail projects, as well.  

“The combination of reduced cash flows and higher rates of return required by investors has lowered valuations, and many existing buildings are selling at a loss. As a result, credit conditions in CRE markets are particularly strained and commercial mortgage delinquency rates have increased rapidly,” conditions that the Fed is predicting will persist at least through the end of this year,” Greenlee said. 

Examiners are already reporting “sharp deterioration” in the performance of commercial real estate loans and securities backed by commercial mortgages, Greenlee noted, and the banking industry’s exposure levels are high.  Banks and thrifts currently hold about $1.7 trillion of the $3.5 trillion in CRE debt outstanding plus another $900 billion in collateral for commercial mortgage-backed securities, the falling value of which will add to the losses resulting from shrinking property cash flows and “deteriorating conditions” for construction loans. “These losses will place continued pressure on banks' earnings,” Greenlee cautioned, “especially those of smaller regional and community banks that have high concentrations of CRE loans.”