One of the lesser known programs in the Fannie Mae arsenal of borrower help programs is the Deed for Lease™ program initially announced in November 2009. The program allows borrowers facing foreclosure and eviction to stay in their homes while providing continuing cash flow on the asset after it is returned to the investor.
The program was designed for borrowers who do not qualify for or have not been able to sustain other loan-workout solutions, such as a modification. Under the Deed for Lease™, borrowers transfer their property to the lender by completing a deed in lieu of foreclosure, and then lease back the house at current market rate. To participate in the program, borrowers must live in the home as their primary residence and must be released from any subordinate liens on the property. As part of the program, borrowers must be able to document that the new market rental rate is no more than 31% of their gross income. Leases under the program may be up to 12 months, with the possibility of term renewal or month-to-month extensions after that period. As with Fannie’s program for tenant occupied properties that are foreclosed, the Deed for Lease™ property that is subsequently sold includes an assignment of the lease to the buyer.
This appears to be a true “win-win” situation for all involved, including the servicer and the investor. First and foremost, it keeps the borrower/tenant in the home. The displacement factor has never been properly addressed in those situations where a permanent modification or refinancing (HAMP or HARP) are not involved. HALA, and the new Fannie Mae’s version that goes into effect August 1, at best provides a “cash for keys” provision in certain circumstances. That sometimes leads to the “missing toilets and countertop” syndrome as borrowers leave the property.
Next, unlike the HAMP or HARP, the servicer no longer has to worry about advancing on the mortgage loan. Since the start of HAMP, there has always been an issue of borrowers who initially qualify for the modification and then fall back into default. Since the servicer is required in most cases to advance on the mortgage, a modification and then subsequent default would put the servicer back (technically) in the position of having to advance again. Since the loan has been discharged as part of the deed in lieu, servicers are not required to continue to advance. Therefore, the cash flow of the servicer improves. Now, it is just a matter of the servicer selling the property, which came at the reduced cost as compared to foreclosure. And since it can be marketed as an investment property with a tenant already in place, sales should be easier.
And finally, the investor under this program should be getting some form of current cash flow from the rental income off the property, though probably not as much as the mortgage payment. But then again, the borrower was already in default and the servicer was probably not making any payments on the loan, so the investor was probably getting bubkis anyhow.
On the social side of the issue, it is clear that the significant problem that brought about the entire meltdown of the mortgage (and financial) markets was the concept that not every person that qualified for a mortgage should have been a home-owner. No matter which side of the aisle you sit on, the general consensus has always been that the market drive to put people into homes, especially the sub-prime borrower, was not the best founded concept. By readjusting those people caught, by their own errors or by a frenzied market, into a better situation with a minimal of personal trauma, is a good thing for the market.
So, Fannie Mae’s Deed For Lease™ is a program that, if properly executed by servicers, could bring about a dramatic turn in the continuing problems faced in the market today. Let’s hope they catch on.
Wednesday, August 11, 2010
Monday, April 26, 2010
FNMA THROWS THE UNDERWATER BORROWERS A LIFE SAVER
Think about it - if you're underwater, what is a life saver going to do but float above you out of your reach . . it is not going to help you stay afloat. That is what FNMA is proposing with its bulletin to lenders on April 14 providing that borrowers that take a short sale in following with Obama administration's Home Affordable Foreclosure Alternatives program (HAFA) could be eligible for a new FNMA loan in two years, rather than the four years currently in place.
By relaxing the rules that would otherwise prevented loan applicants who have participated in short sales or deeds in lieu of foreclosure from obtaining a new mortgage for four years (five if the home actually goes to foreclosure), FNMA thinks that this will entice troubled borrowers to work out solutions that avoid the heavy costs of foreclosure.
But that qualification is with strings attached. Beyond the issue of not being able to qualify because of damaged credit from a short sale or deed in lieu, which will be on the borrower's credit well beyond two years (foreclosures and short sales generally have the same effect on a borrower's credit), the two year qualification provides that the "resurrected" borrower be able to put down 20% for the new loan - unless there are "extenuating" circumstances.
Now, we are dealing with people that cannot make current monthly mortgage payments, yet FNMA thinks that in two years, there people will somehow be able to make a 20% down-payment, after they lost any equity they had in the home they just lost. From where????
Actually, the only benefit I see is that these people that can make the 20% down will be able to do so by re-adjusting their finances to purchasing a house that they actually can afford. But something tells me most of these people will not be able to make this adjustment, or the required down payment.
Now, there is the "extenuating" circumstances provision that allows for only a 10% down payment if the borrower entered into the short sale or deed in lieu because of a significant financial occurance like a lost job, medical expenses or divorce. But just how large is that population of borrowers, and it still doesn't get past the credit damage issue (which would probably be worse in these situations anyhow). And again, these borrwers have suffered some major financial occurance, yet FNMA thinks that they will be able to pull together a 10% down payment in two years??? Bless them if they can.
So, who wins? Well, the servicers (and their parent organizations), not the borrower. By getting a borrower to agree to a deed in lieu, the servicer gets the borrower out of the home quickly, allowing for fast turnaround for a sale of the property. It also directs a borrower away from a possible loan modification (even a temporary one) with a promise that the borrower MAY be able to qualify for a new home loan in two years. This means no more advancing on the loan by the servicer. And the servicer avoids those costly foreclosure expenses (and any litigation that arises from it).
Well, lets hope that this life saver is wintery mint and not cinnamon, so the borrower's breath won't stink when he screams.
By relaxing the rules that would otherwise prevented loan applicants who have participated in short sales or deeds in lieu of foreclosure from obtaining a new mortgage for four years (five if the home actually goes to foreclosure), FNMA thinks that this will entice troubled borrowers to work out solutions that avoid the heavy costs of foreclosure.
But that qualification is with strings attached. Beyond the issue of not being able to qualify because of damaged credit from a short sale or deed in lieu, which will be on the borrower's credit well beyond two years (foreclosures and short sales generally have the same effect on a borrower's credit), the two year qualification provides that the "resurrected" borrower be able to put down 20% for the new loan - unless there are "extenuating" circumstances.
Now, we are dealing with people that cannot make current monthly mortgage payments, yet FNMA thinks that in two years, there people will somehow be able to make a 20% down-payment, after they lost any equity they had in the home they just lost. From where????
Actually, the only benefit I see is that these people that can make the 20% down will be able to do so by re-adjusting their finances to purchasing a house that they actually can afford. But something tells me most of these people will not be able to make this adjustment, or the required down payment.
Now, there is the "extenuating" circumstances provision that allows for only a 10% down payment if the borrower entered into the short sale or deed in lieu because of a significant financial occurance like a lost job, medical expenses or divorce. But just how large is that population of borrowers, and it still doesn't get past the credit damage issue (which would probably be worse in these situations anyhow). And again, these borrwers have suffered some major financial occurance, yet FNMA thinks that they will be able to pull together a 10% down payment in two years??? Bless them if they can.
So, who wins? Well, the servicers (and their parent organizations), not the borrower. By getting a borrower to agree to a deed in lieu, the servicer gets the borrower out of the home quickly, allowing for fast turnaround for a sale of the property. It also directs a borrower away from a possible loan modification (even a temporary one) with a promise that the borrower MAY be able to qualify for a new home loan in two years. This means no more advancing on the loan by the servicer. And the servicer avoids those costly foreclosure expenses (and any litigation that arises from it).
Well, lets hope that this life saver is wintery mint and not cinnamon, so the borrower's breath won't stink when he screams.
Wednesday, April 7, 2010
THE SEC's ATTEMPT AT SHOOTING THE MESSENGER
On April 7, the SEC opened up for comment its proposed rules that would fundamentally revise the regulatory regime for asset-backed securities. As stated by Chairman Shapiro in her announcement of the rules, "[t]he proposed rules are intended to better protect investors in the securitization market by giving them more detailed information about pooled assets, more time to make their investment decisions, and the benefits of better alignment of the interests of issuers and investors through a retention or "skin in the game" requirement." Query, wasn't that what Reg AB was suppose to handle, especially for transparency and information. And what ever happened to Static Pool data. Is anyone still filing (I can tell you that Litton isn't on many of its sub-prime deals).
Ms. Shapiro goes on to state that "as we know all too well, securitization . . . played a central role in the financial crisis." That is like trying to blame Enzo Ferrari for your car not starting after you put dog-sh_t in your gas tank. Securitization structures may have facilitated the capitalization of bad mortgage loans, but it was the loans, and not the securitization structure, that was the culprit of the financial meltdown.
So what are the proposals? Well, first on the information side, the SEC proposes requiring ABS issuers to file with the Commission standardized information about the specific loans in the pool at the time that the asset is securitized and on an ongoing basis. Additionally, these issuers would be required to file on the SEC Web site a computer program of the cash flow provisions, or "waterfall" in the securitization structure. And lastly, the SEC want to give investors a 5 day look-see.
Well, I guess the SEC thinks that investors of ABS securities are "Mom and Pop" investors, without the where-with-all to have these technical abilities. And what are the "standardized" information that is not already required in the Prospectus Supplement that will give investors better knowledge of the loan level issues. Maybe an information point should be which loans, and what percentage of the pool, were written outside the underwriting guidelines. You know, the loans that did not meet the nice disclosure contained in the Prospectus Supplement.
Next, the SEC proposes to rid itself of the references to the ABS' credit rating as an eligibility requirement for shelf registration, replacing this instead with four new eligibility criteria: (1) the chief executive officer of the ABS depositor would need to certify that the assets have characteristics that provide a reasonable basis to believe that they will produce cash flows as described in the prospectus (2) the ABS sponsor would be required to retain a five percent "skin in the game" interest; (3) the ABS issuer also would be required to provide a mechanism whereby the investors could confirm that the assets comply with the issuer's representations and warranties; and (4) the ABS issuer would have to agree to file Exchange Act reports with the Commission on an ongoing basis.
Boy, I don't know where to start. So, instead of having an independent agency confirm their position on an ABS offering (I guess the government wants to get the rating agencies out of the business), we have an executive of the issuer certify that the cash flow works. Well, based upon what assumptions? That only 3% of the pool default? That the CPR is a certain %? This would turn out to be a worthless certification based upon assumptions. And don't we already get this somewhat covered in Reg AB and SOX certifications?
So, "skin-in-the -game". But didn't we always have that, in the fact that the originator kepts the residual piece (although NIM pieces changed that). And what 5%. -the top peice or the bottom piece that they could book on their balance sheet at some number based on market-to-market accounting rules as applicable on that day(Ms. Shapiro obviously does not remember the late 1990's securitization melt-down)
Representations and Warranties enforcement. Hum, isn't that the job of the Trustee and Servicer. I can tell you from personal experience that those "dead-head" Trustees are not doing anything to enforce rep and warranty issues. And the Servicers are part of the problem, since they are usually owned by the originator/sponsor of the ABS securities. And how are you going to have investor enforement of the reps and warranties? They would still have to go through the "dead-heads" who would then just turn into "bobble-heads".
Like with Reg AB, the SEC is making the required "Hill Noise" to make it look like they know what they are doing and are here to "protect" the investing public. What it will turn out to be is another failed attempt by bureaucrats pretending to fix a system they do not understand, rather than attacking the players that control the industry.
Ms. Shapiro goes on to state that "as we know all too well, securitization . . . played a central role in the financial crisis." That is like trying to blame Enzo Ferrari for your car not starting after you put dog-sh_t in your gas tank. Securitization structures may have facilitated the capitalization of bad mortgage loans, but it was the loans, and not the securitization structure, that was the culprit of the financial meltdown.
So what are the proposals? Well, first on the information side, the SEC proposes requiring ABS issuers to file with the Commission standardized information about the specific loans in the pool at the time that the asset is securitized and on an ongoing basis. Additionally, these issuers would be required to file on the SEC Web site a computer program of the cash flow provisions, or "waterfall" in the securitization structure. And lastly, the SEC want to give investors a 5 day look-see.
Well, I guess the SEC thinks that investors of ABS securities are "Mom and Pop" investors, without the where-with-all to have these technical abilities. And what are the "standardized" information that is not already required in the Prospectus Supplement that will give investors better knowledge of the loan level issues. Maybe an information point should be which loans, and what percentage of the pool, were written outside the underwriting guidelines. You know, the loans that did not meet the nice disclosure contained in the Prospectus Supplement.
Next, the SEC proposes to rid itself of the references to the ABS' credit rating as an eligibility requirement for shelf registration, replacing this instead with four new eligibility criteria: (1) the chief executive officer of the ABS depositor would need to certify that the assets have characteristics that provide a reasonable basis to believe that they will produce cash flows as described in the prospectus (2) the ABS sponsor would be required to retain a five percent "skin in the game" interest; (3) the ABS issuer also would be required to provide a mechanism whereby the investors could confirm that the assets comply with the issuer's representations and warranties; and (4) the ABS issuer would have to agree to file Exchange Act reports with the Commission on an ongoing basis.
Boy, I don't know where to start. So, instead of having an independent agency confirm their position on an ABS offering (I guess the government wants to get the rating agencies out of the business), we have an executive of the issuer certify that the cash flow works. Well, based upon what assumptions? That only 3% of the pool default? That the CPR is a certain %? This would turn out to be a worthless certification based upon assumptions. And don't we already get this somewhat covered in Reg AB and SOX certifications?
So, "skin-in-the -game". But didn't we always have that, in the fact that the originator kepts the residual piece (although NIM pieces changed that). And what 5%. -the top peice or the bottom piece that they could book on their balance sheet at some number based on market-to-market accounting rules as applicable on that day(Ms. Shapiro obviously does not remember the late 1990's securitization melt-down)
Representations and Warranties enforcement. Hum, isn't that the job of the Trustee and Servicer. I can tell you from personal experience that those "dead-head" Trustees are not doing anything to enforce rep and warranty issues. And the Servicers are part of the problem, since they are usually owned by the originator/sponsor of the ABS securities. And how are you going to have investor enforement of the reps and warranties? They would still have to go through the "dead-heads" who would then just turn into "bobble-heads".
Like with Reg AB, the SEC is making the required "Hill Noise" to make it look like they know what they are doing and are here to "protect" the investing public. What it will turn out to be is another failed attempt by bureaucrats pretending to fix a system they do not understand, rather than attacking the players that control the industry.
Saturday, March 20, 2010
First American Title - Do They See Trouble Coming
In the law suit filed by Bank of America against First American Title and its sister firm United General Title Insurance this month, BofA is looking to be paid its charge-off amount for title insurance issues. But rather than pay the claims on the 4,500 properties claimed by BofA, First American and United General denied 2,200 alleged claims and have not acted on another 2,300 claims.
Meanwhile, First American Corporation announced its desire to separate its two operating divisions, the Financial Services Company and the Information Solutions Company, into two separate publically traded entities. The Financial Services Company would hold the title insurance companies (with all the liability) and the Information Solutions Company would have the services like CoreLogic, without the title insurance liability. HUMMM?
Meanwhile, First American Corporation announced its desire to separate its two operating divisions, the Financial Services Company and the Information Solutions Company, into two separate publically traded entities. The Financial Services Company would hold the title insurance companies (with all the liability) and the Information Solutions Company would have the services like CoreLogic, without the title insurance liability. HUMMM?
Monday, March 15, 2010
Moody's Fires A Warning Shot at the Fed.
From the March 15, 2010 article in the New York Times by David Jolly[http://www.nytimes.com/2010/03/16/business/global/16rating.html?hp] Moody's was reported as saying that "Major Western economies have moved “substantially” closer to losing their top-notch credit ratings, with the United States and Britain under the most pressure . . ." Even better is their comment that “their ‘distance-to-downgrade’ has in all cases substantially diminished.”
For those that can read between the lines, Moody's statement of “Preserving debt affordability (the ratio of interest payments to government revenue) at levels consistent with Aaa ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion” looks like a veiled threat against Congress, given that the Obama administration is looking to increase federal debt to 64% of G.D.P. Looks to me that they are saying we are going to have a significant tax increase to cover federal debt service.
As reported, U.S. debt currently remains affordable, as the debt affordability ratio fell to 8.7 percent in the current year, after peaking at 10 percent two years ago. If that trend were to reverse, which it would based on the desire to increase federal debt, the Moody’s analysts said, “there would at some point be downward pressure on the Aaa rating of the federal government.”
And what exactly is the testing of "social cohesion." Is Moody's worried about the outbreak of anarchy if the U.S. Governmnet raises taxes and cuts more social services (the fiscal adjustments) to cover its debt service to avoid a downgrade? I think they are.
I guess if the government wants to keep their ratings up (and limit the cost of raising more capital in the world market) Congress should not investigate how Moody's (or S&P) concocted AAA ratings for sub-prime mortgage securitization structures where the loans underlying the securities were comprised of such strong products like 2/28 interest only teaser rates, negative amortization and "pick-a-payment" loans. Clearly, Moody's thought that those securities were well worth their AAA rating. I wonder about the debt affordability factor that Moody's used in their analysis of those structures.
For those that can read between the lines, Moody's statement of “Preserving debt affordability (the ratio of interest payments to government revenue) at levels consistent with Aaa ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion” looks like a veiled threat against Congress, given that the Obama administration is looking to increase federal debt to 64% of G.D.P. Looks to me that they are saying we are going to have a significant tax increase to cover federal debt service.
As reported, U.S. debt currently remains affordable, as the debt affordability ratio fell to 8.7 percent in the current year, after peaking at 10 percent two years ago. If that trend were to reverse, which it would based on the desire to increase federal debt, the Moody’s analysts said, “there would at some point be downward pressure on the Aaa rating of the federal government.”
And what exactly is the testing of "social cohesion." Is Moody's worried about the outbreak of anarchy if the U.S. Governmnet raises taxes and cuts more social services (the fiscal adjustments) to cover its debt service to avoid a downgrade? I think they are.
I guess if the government wants to keep their ratings up (and limit the cost of raising more capital in the world market) Congress should not investigate how Moody's (or S&P) concocted AAA ratings for sub-prime mortgage securitization structures where the loans underlying the securities were comprised of such strong products like 2/28 interest only teaser rates, negative amortization and "pick-a-payment" loans. Clearly, Moody's thought that those securities were well worth their AAA rating. I wonder about the debt affordability factor that Moody's used in their analysis of those structures.
Friday, February 12, 2010
FANNIE/FREDDIE PLAYING THE FASB 157 CARD
From February 11 Wall Street Journal Article by Nick Timiraos, Fannie and Freddie are stepping up their efforts to purchase some $200 billion of delinquent mortgage loans in their securitization structures. Rather than waiting the 24 month period on a delinquent loan, they mortgage-finance giants are looking to buy those loans out after only going delinquent 120 days.
Good news for investors, as Freddie said that it would buy "substantially all" of its 120 day delinquent portfolio, to the tune of about $70 billion, in one single shot. Fannie is looking at a $127 billion portfolio of delinquent loans, which is claims will be repurchasing over a period of time.
Remember, the federal government took over these two organizations a year and a half ago, and providing over $110 billion from the Treasury. In December, the government agreed that it would cover an unlimited position of losses over the next three yeears, which means that the organizations can't lose. Plus, they can hold the assets and mark-to-market under FASB 157, giving them stronger balance sheet position.
Good news for investors, as Freddie said that it would buy "substantially all" of its 120 day delinquent portfolio, to the tune of about $70 billion, in one single shot. Fannie is looking at a $127 billion portfolio of delinquent loans, which is claims will be repurchasing over a period of time.
Remember, the federal government took over these two organizations a year and a half ago, and providing over $110 billion from the Treasury. In December, the government agreed that it would cover an unlimited position of losses over the next three yeears, which means that the organizations can't lose. Plus, they can hold the assets and mark-to-market under FASB 157, giving them stronger balance sheet position.
Saturday, January 30, 2010
Repurchases - Fannie/Freddie Start Chasing the Money
From the January 30, 2010 Wall Street Journal article by Nick Timiroas, Fannie Mae and Freddie Mac are starting the process of chasing down mortgage originators (or their successors) for repurchase obligations. With about $300 billion in loans to borrowers at least 90 days behind on payments, Fannie and Freddie have started to sift through mortgage files for proof of underwriting flaws. The default is usually the first sign of a possible breach of a representation or warranty in the mortgage loan sale document.
The result so far, as reported by Mr. Timiroas, is that Freddie Mac required lenders to buy back $2.7 billion of loans in the first nine months of 2009, a 125% jump from $1.2 billion a year earlier. Mr. Timiroas reports that Fannie Mae won't disclose its figure, but trade publication Inside Mortgage Finance said Fannie made $4.3 billion in loan-repurchase requests in the first nine months of 2009. This corresponds to the fact that the loans would probably have a origination dates in 2006 and 2007, where the quality of the underwriting and the type of loans originated (i.e. stated income, interest only 2/28 and 3/27) would give rise to significant defaults.
While this report was for the Fannie/Freddie portfolio, the non-agency paper would have a corresponding need for increased scrutiny of its defaulted portfolio. The issue is whether the private investors of RMBS have the same desire to chase after money that belongs to them. SASA can provide that support.
The result so far, as reported by Mr. Timiroas, is that Freddie Mac required lenders to buy back $2.7 billion of loans in the first nine months of 2009, a 125% jump from $1.2 billion a year earlier. Mr. Timiroas reports that Fannie Mae won't disclose its figure, but trade publication Inside Mortgage Finance said Fannie made $4.3 billion in loan-repurchase requests in the first nine months of 2009. This corresponds to the fact that the loans would probably have a origination dates in 2006 and 2007, where the quality of the underwriting and the type of loans originated (i.e. stated income, interest only 2/28 and 3/27) would give rise to significant defaults.
While this report was for the Fannie/Freddie portfolio, the non-agency paper would have a corresponding need for increased scrutiny of its defaulted portfolio. The issue is whether the private investors of RMBS have the same desire to chase after money that belongs to them. SASA can provide that support.
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