In an article today in the Wall Street Journal by Prabha Natarajan, it looks like there is a renewed interest and demand for previously issued Alt-A securitization paper. While unclear, it appears these non-agency bonds include the sub-prime variety (there is some distinction between Alt-A and true sub-prime, which appears to have been lost in the recent financial hurricane).
As reported, in was stated by Jesse Litbvak, head of non-agency trading and Jefferies & Co in Stanford, CT (an MBS trading powerhouse?) that these trades are occurring because investors believe that the credit risk of continuing defaults are already priced into the bonds. That, together with the prospect of early redemption, as noted in the article by Matt Toms, head of U.S. public fixed income investment at ING Investment Management, means that the bonds have up-side potential.
Well, as we have seen from our recent past, that is anything but a sure thing. Of significance to this analysis of the value of the bonds is the redemption of the bonds before their maturity date. Currently, due to the refinance boom (or really, bubble), the bonds can be redeemed at their face value due to the early payment of the underlying mortgages. Where in the past, early redemption was something to be avoided (when the investor was paying 105 for the bond), now at the discount of 60-80, a redemption at face would be a good thing. And since in most securitizations, early payments are covered in the cash flow waterfall as a payment to the most senior bonds first, the AAA stand in line to get theirs before the rest.
Right now, with interest rates at historic lows, there has been an increasing portfolio of mortgages being paid off in the refinance market. However, this is still just a limited and decreasing pool of applicants. Beyond the fact that there are only a decreasing percentage of homeowners that will qualify for a refinancing over time, there is also the issue of whether the underlying mortgages are still tied to those ugly prepayment penalties that were the rage in the latter part of the Alt-A and sub-prime boom. And the only way to know that fact is to have loan level detail of the pool. So, while redemptions may be occurring today, do not expect this trend to continue strongly into the future.
The article discusses the fact that the play now is on the AAA bonds off the securitizations – yes those same AAA bonds that now everyone is questioning how the rating agencies reached that rating. More problematic will be the coming tsunami of realized losses on the securitization pools due to short sales and foreclosures that are then liquidated. With the failure of HAMP, HAFA, HALA and all the other programs to stem the tide, foreclosure still seems to be the outcome for a significant number of borrowers. Even Fannie is starting to put pressure on servicers to quicken the pace of foreclosures, as discussed in an article today entitled “Excessively Delaying Fannie Mae Foreclosures Will Now Cost Servicers” by Jacob Gaffney in HousingWire. And once the property is thereafter sold (at a loss to the unpaid principal balance of the loan plus costs and reimbursed advances), these “Realized Losses”, as defined in the securitization trust agreements, could press the losses beyond the mezzanine tranches and into the AAA bonds.
So, while the yields on these bonds may be double that of corporate paper and triple that of Treasurys, it looks like Wall Street is selling investors on stepping up to the tables and laying down money to roll the dice again. Let’s hope we don’t crap out (again).
Thursday, September 2, 2010
Tuesday, August 31, 2010
FANNIE MAE - PUMPING UP THE VOLUME
And the beat goes on. Fannie Mae has reported issuing $42.7 billion in MBS in July, showing an increase of 6.4% from June production. In comparison, Fannie’s kissing cousin, Freddie Mac, is showing a month-to-month decline.
While Fannie does not break out purchases of refinanced loans in its monthly reports, its monthly report shows MBS issuance slowly rising from May, clearly based on the recent surge in refinancing applications. As reported by the Mortgage Bankers Association, by the end of July, refinancing applications hit a 13-month high. Since these applications would then show up in MBS issuances in August and September GSE reports, we can assume that more good news is around the corner as this trend continues for the short term.
And where is this product going? Well, the ice cold grip of the MBS investor may be starting to thaw. MBS, especially those paying higher rates of interest than comparable Treasurys (currently at about 150 basis points over), are being looked at by the MBS investor needing to invest cash and take advantage of the higher yields. Given the cleaner underwriting standards for the underlying product, together with prepayment speeds reportedly being somewhat flat, investors may be willing to put more than a toe in the market pool. And though roughly 25% of all outstanding mortgages are reported to be under water with a national delinquency rate of just under 10%, it appears from industry figures that mortgagors are continuing to pay their loans even though they are under water. This is in spite of the fact that these borrowers may not be able to refinance because they have no equity, or cannot qualify for a modification.
So, it appears that the two porch dogs that people have been liking to kick these days appear to be doing what they are suppose to do. Which is to watch out for the old homestead.
While Fannie does not break out purchases of refinanced loans in its monthly reports, its monthly report shows MBS issuance slowly rising from May, clearly based on the recent surge in refinancing applications. As reported by the Mortgage Bankers Association, by the end of July, refinancing applications hit a 13-month high. Since these applications would then show up in MBS issuances in August and September GSE reports, we can assume that more good news is around the corner as this trend continues for the short term.
And where is this product going? Well, the ice cold grip of the MBS investor may be starting to thaw. MBS, especially those paying higher rates of interest than comparable Treasurys (currently at about 150 basis points over), are being looked at by the MBS investor needing to invest cash and take advantage of the higher yields. Given the cleaner underwriting standards for the underlying product, together with prepayment speeds reportedly being somewhat flat, investors may be willing to put more than a toe in the market pool. And though roughly 25% of all outstanding mortgages are reported to be under water with a national delinquency rate of just under 10%, it appears from industry figures that mortgagors are continuing to pay their loans even though they are under water. This is in spite of the fact that these borrowers may not be able to refinance because they have no equity, or cannot qualify for a modification.
So, it appears that the two porch dogs that people have been liking to kick these days appear to be doing what they are suppose to do. Which is to watch out for the old homestead.
Wednesday, August 25, 2010
JUST WHAT WE NEED – AN FDIC FOR THE ASSET-BACK WORLD
From an article published Monday by Donna Borak for the American Banker, there appears to be a soon to-be-published paper written by two Federal Reserve Board economists — Wayne Passmore and Diana Hancock - proposing the establishment of an FDIC-like entity to explicitly price an insurance fund created to cover catastrophic risks on a wide range of asset classes, including mortgages, credit cards and auto loans. As reported by Ms. Borak, these economists believe that this explicit form of “backstop” could ensure the stability of the system in future financial crises and help eliminate the concept of "too big to fail" institutions. This seems to follow the discussions reported from the Treasury Department conference last week, where there appears to be some discussion of the creation of an insurance fund for MBS.
The paper envisions a GSE agency (a re-jiggered Fannie, Freddie, or a combination of the two) taking on the responsibility for running the insurance fund. This newly designed GSE, however, could not sell its own unsecured debt or build a mortgage portfolio. Rather, it would just collect the guarantee fee. But rather than using those fees for profit, as they have in the past, this GSE would simply build up a fund, like the Deposit Insurance Fund, to absorb losses in a crisis.
It appears that the proposal would get rid of the implicit guarantee of the Federal Government since the GSEs would no longer be able to sell debt or hold portfolios. Instead, the guarantee would be explicit for specified asset types that the government could define. By doing so, the proposal believes that these GSEs could restrict the guarantee to relatively safe loans with certain underwriting standards.
Where to start? While it is a valiant effort to put the GSE into the role of the private asset backed insurers, wasn’t the whole point of Fannie and Freddie to have the implicit guarantee of the U.S. government to allow for better pricing on the more risky loans. And so this proposal just pulls this business out of the private sector – for cost efficiencies?? Because the government can do a better job of this than the private sector?
And how do you structure the “club” function of the FDIC for the ABS world – the infamous “bank take-over” function that the FDIC has been using in record application for the last two years. To take over the securitization structure? From the Trustee (who structurally is brain dead already and has no real functional responsibilities)? From the servicer? Because this new agency will be better positioned to service multi-billion dollar pools? That is what Fannie and Freddie are trying to manage in the current melt-down. The FDIC has the ability to take on a failed bank to manage the turn-around and protect its insurance fund - which it has been doing pretty successfully, given the size of the financial crisis it has been managing to date.
I guess we will have to wait and see the full read of this mystery paper to better understand what is being proposed and how it may help avoid the next asset-back melt-down.
To read the full article by Ms. Borak, see:
http://www.americanbanker.com/issues/175_161/backstop-for-abs-markets-1024428-1.html
The paper envisions a GSE agency (a re-jiggered Fannie, Freddie, or a combination of the two) taking on the responsibility for running the insurance fund. This newly designed GSE, however, could not sell its own unsecured debt or build a mortgage portfolio. Rather, it would just collect the guarantee fee. But rather than using those fees for profit, as they have in the past, this GSE would simply build up a fund, like the Deposit Insurance Fund, to absorb losses in a crisis.
It appears that the proposal would get rid of the implicit guarantee of the Federal Government since the GSEs would no longer be able to sell debt or hold portfolios. Instead, the guarantee would be explicit for specified asset types that the government could define. By doing so, the proposal believes that these GSEs could restrict the guarantee to relatively safe loans with certain underwriting standards.
Where to start? While it is a valiant effort to put the GSE into the role of the private asset backed insurers, wasn’t the whole point of Fannie and Freddie to have the implicit guarantee of the U.S. government to allow for better pricing on the more risky loans. And so this proposal just pulls this business out of the private sector – for cost efficiencies?? Because the government can do a better job of this than the private sector?
And how do you structure the “club” function of the FDIC for the ABS world – the infamous “bank take-over” function that the FDIC has been using in record application for the last two years. To take over the securitization structure? From the Trustee (who structurally is brain dead already and has no real functional responsibilities)? From the servicer? Because this new agency will be better positioned to service multi-billion dollar pools? That is what Fannie and Freddie are trying to manage in the current melt-down. The FDIC has the ability to take on a failed bank to manage the turn-around and protect its insurance fund - which it has been doing pretty successfully, given the size of the financial crisis it has been managing to date.
I guess we will have to wait and see the full read of this mystery paper to better understand what is being proposed and how it may help avoid the next asset-back melt-down.
To read the full article by Ms. Borak, see:
http://www.americanbanker.com/issues/175_161/backstop-for-abs-markets-1024428-1.html
Wednesday, August 18, 2010
YIELD SPREAD PREMIUM – GONE BUT NOT FORGOTTEN
YIELD SPREAD PREMIUM: YSP, that little understood compensation provision that provided the ultimate incentive to mortgage brokers to put consumers into higher priced mortgage loans. Brokers argued that it was frequently done for the borrower, especially a low-income buyer, to pay a higher interest rate in exchange for lower closing costs (needing less cash to closing). Did we really need more gas on the fire??
NOT A PREDATORY LENDING PRACTICE: The California Court of Appeals found that the payment of YSP was not a predatory lending practice in Wolski vs. Fremont Investment & Loan (where I was Deputy General Counsel). In its determination, the court found that a covered loan under the California Covered Loan Law had to have total points and fees payable by the consumer at or before closing in exceed 6 percent of the total loan amount. The court explained that Yield Spread Premium (i) was a bonus paid by a lender to a broker for delivering a loan with an interest higher than minimum otherwise approved by the lender, and (ii) that the payment was not made at or before the closing. The appellate court reasoned that the meaning of the phrase "at or before closing" was unambiguous and "does not include payments made after closing and over the life of the loan, such as interest." So, the court reasoned that the added interest over the life of the loan to be paid by the borrower to the lender was to be used by the lender to pay the mortgage broker a bonus at the time of the closing of the loan.
THE NEW RULE: Now, the Federal Reserve has stepped in to end this practice as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Reform Act”) by adopting new rules banning yield spread premiums. Provisions of the Reform Act amend the Truth in Lending Act (“TILA”) by imposing restrictions on loan originator compensation and on steering by loan originators. The final rules issued by the Fed on Monday prohibit payments to loan originators, which includes mortgage brokers and loan officers, based on the terms or conditions of the transaction other than the amount of credit extended. The final rules further prohibit any person other than the consumer from paying compensation to a loan originator in a transaction where the consumer pays the loan originator directly. The finalized rules also prohibit loan originators from steering consumers to consummate a loan not in their interest based on the fact that the loan originator will receive greater compensation for such loan.
START DATE: The final rules apply to closed-end transactions secured by a dwelling where the creditor receives a loan application on or after April 1, 2011. This allows for a bit of continuation of the YSP practice as the economy works through this “refi” bubble now going on. There is also a record retention requirement of two years for all mortgage transactions consummated following the April 2011 start date.
WHO IS COVERED: The final rule applies to loan originators, which are defined to include mortgage brokers, including mortgage broker companies that close loans in their own names in table-funded transactions, and employees of creditors that originate loans (e.g., loan officers). Therefore, only parties who arrange, negotiate, or obtain an extension of mortgage credit for a consumer in return for compensation or other monetary gain are covered by the new rules. Creditors are excluded from the definition of a loan originator when they do not use table funding, whether they are a depository institution or a non-depository mortgage company. However, employees of such entities are loan originators.
As a little caveat, the final rule only applies to extensions of consumer credit and does not cover servicer modifications on an existing loans on behalf of the current owner of the loan. This final rule does not apply if a modification of an existing obligation’s terms does not constitute a refinancing. A question though outstanding is, while HAMP may not be covered, is HARP covered by these new rules?
THE KEY PROVISION OF THE ANTI-STEERING RULE:
(e) . . .
(3) . . .
(i) The loan originator must obtain loan options from a significant number of the creditors with which the originator regularly does business and, for each type of transaction in which the consumer expressed an interest, must present the consumer with loan options that include:
(A) The loan with the lowest interest rate;
(B) The loan with the lowest interest rate without negative amortization, a prepayment penalty, interest-only payments, a balloon payment in the first 7 years of the life of the loan, a demand feature, shared equity, or shared appreciation; or, in the case of a reverse mortgage, a loan without a prepayment penalty, or shared equity or shared appreciation; and
(C) The loan with the lowest total dollar amount for origination points or fees and discount points.
(ii) The loan originator must have a good faith belief that the options presented to the consumer pursuant to paragraph (e)(3)(i) of this section are loans for which the consumer likely qualifies.
THE FUTURE: There are still some holes in the Reg. Z that need to be patched, as acknowledged by the Fed. One of the more significant is the ability of brokers to be compensated based upon volume. Naturally, this could lead to the “flight to quantity over quality” that was seen in the past. Also, since the allowable compensation will be based upon the amount of credit extended, given the underwater equity positions, if and when underwriting requirements start to loosen, returning to a 125 LTV product (or its successor) may challenge the new rules once again. And while “tier compensation” has been addressed in the new rules, under the final rule, a consumer may finance upfront costs, such as third-party settlement costs, by increasing or “buying up” the interest rate regardless of whether the consumer pays the loan originator directly or the creditor pays the loan originator’s compensation. Thus, the final rule does not prohibit creditors or loan originators from using the interest rate to cover upfront closing costs, as long as any creditor-paid compensation retained by the originator does not vary based on the transaction’s terms or conditions. This could also lead to abuses.
So, in the end, the Fed has created another level of regulatory hoops in the mortgage business. And like with all of these new regulations, it is going to be the enforcement that will actually bring about change. So, will Congress let this dog to hunt by giving government enforcement teeth? Or will it just turn out to be posturing for another four years of administrative quagmire?
NOT A PREDATORY LENDING PRACTICE: The California Court of Appeals found that the payment of YSP was not a predatory lending practice in Wolski vs. Fremont Investment & Loan (where I was Deputy General Counsel). In its determination, the court found that a covered loan under the California Covered Loan Law had to have total points and fees payable by the consumer at or before closing in exceed 6 percent of the total loan amount. The court explained that Yield Spread Premium (i) was a bonus paid by a lender to a broker for delivering a loan with an interest higher than minimum otherwise approved by the lender, and (ii) that the payment was not made at or before the closing. The appellate court reasoned that the meaning of the phrase "at or before closing" was unambiguous and "does not include payments made after closing and over the life of the loan, such as interest." So, the court reasoned that the added interest over the life of the loan to be paid by the borrower to the lender was to be used by the lender to pay the mortgage broker a bonus at the time of the closing of the loan.
THE NEW RULE: Now, the Federal Reserve has stepped in to end this practice as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Reform Act”) by adopting new rules banning yield spread premiums. Provisions of the Reform Act amend the Truth in Lending Act (“TILA”) by imposing restrictions on loan originator compensation and on steering by loan originators. The final rules issued by the Fed on Monday prohibit payments to loan originators, which includes mortgage brokers and loan officers, based on the terms or conditions of the transaction other than the amount of credit extended. The final rules further prohibit any person other than the consumer from paying compensation to a loan originator in a transaction where the consumer pays the loan originator directly. The finalized rules also prohibit loan originators from steering consumers to consummate a loan not in their interest based on the fact that the loan originator will receive greater compensation for such loan.
START DATE: The final rules apply to closed-end transactions secured by a dwelling where the creditor receives a loan application on or after April 1, 2011. This allows for a bit of continuation of the YSP practice as the economy works through this “refi” bubble now going on. There is also a record retention requirement of two years for all mortgage transactions consummated following the April 2011 start date.
WHO IS COVERED: The final rule applies to loan originators, which are defined to include mortgage brokers, including mortgage broker companies that close loans in their own names in table-funded transactions, and employees of creditors that originate loans (e.g., loan officers). Therefore, only parties who arrange, negotiate, or obtain an extension of mortgage credit for a consumer in return for compensation or other monetary gain are covered by the new rules. Creditors are excluded from the definition of a loan originator when they do not use table funding, whether they are a depository institution or a non-depository mortgage company. However, employees of such entities are loan originators.
As a little caveat, the final rule only applies to extensions of consumer credit and does not cover servicer modifications on an existing loans on behalf of the current owner of the loan. This final rule does not apply if a modification of an existing obligation’s terms does not constitute a refinancing. A question though outstanding is, while HAMP may not be covered, is HARP covered by these new rules?
THE KEY PROVISION OF THE ANTI-STEERING RULE:
(e) . . .
(3) . . .
(i) The loan originator must obtain loan options from a significant number of the creditors with which the originator regularly does business and, for each type of transaction in which the consumer expressed an interest, must present the consumer with loan options that include:
(A) The loan with the lowest interest rate;
(B) The loan with the lowest interest rate without negative amortization, a prepayment penalty, interest-only payments, a balloon payment in the first 7 years of the life of the loan, a demand feature, shared equity, or shared appreciation; or, in the case of a reverse mortgage, a loan without a prepayment penalty, or shared equity or shared appreciation; and
(C) The loan with the lowest total dollar amount for origination points or fees and discount points.
(ii) The loan originator must have a good faith belief that the options presented to the consumer pursuant to paragraph (e)(3)(i) of this section are loans for which the consumer likely qualifies.
THE FUTURE: There are still some holes in the Reg. Z that need to be patched, as acknowledged by the Fed. One of the more significant is the ability of brokers to be compensated based upon volume. Naturally, this could lead to the “flight to quantity over quality” that was seen in the past. Also, since the allowable compensation will be based upon the amount of credit extended, given the underwater equity positions, if and when underwriting requirements start to loosen, returning to a 125 LTV product (or its successor) may challenge the new rules once again. And while “tier compensation” has been addressed in the new rules, under the final rule, a consumer may finance upfront costs, such as third-party settlement costs, by increasing or “buying up” the interest rate regardless of whether the consumer pays the loan originator directly or the creditor pays the loan originator’s compensation. Thus, the final rule does not prohibit creditors or loan originators from using the interest rate to cover upfront closing costs, as long as any creditor-paid compensation retained by the originator does not vary based on the transaction’s terms or conditions. This could also lead to abuses.
So, in the end, the Fed has created another level of regulatory hoops in the mortgage business. And like with all of these new regulations, it is going to be the enforcement that will actually bring about change. So, will Congress let this dog to hunt by giving government enforcement teeth? Or will it just turn out to be posturing for another four years of administrative quagmire?
Wednesday, August 11, 2010
FANNIE’S “DEED FOR LEASE™” PROGRAM - THE RIGHT STEP IN THE RIGHT DIRECTION
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.
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.
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.
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