Refinance Free Credit

Via the Wall Street Journal Wednesday comes a look at just how prevalent occupancy fraud really is — something that lenders and servicers across the nation are just now starting to come to terms with.

From the story:

Roughly 20% of mortgage fraud involved “occupancy fraud,” or borrowers falsely claiming they intended to live in a property, according to an analysis by BasePoint Analytics, a provider of fraud-detection solutions in Carlsbad, Calif. Another study, by Fitch Ratings, looked at 45 subprime loans that defaulted within the first 12 months even though the borrowers had good credit scores. In two-thirds of the cases, borrowers said they intended to live in the property but never moved in …

In Las Vegas, as many as 60% of the foreclosures last year involved non-owner-occupied homes, according to Applied Analysis, a real-estate-research firm.

Let’s stop right there — subprime borrowers with good credit scores? Either Fitch doesn’t realize steering when it sees it, or the WSJ reporting team got its facts mixed up. (I’d bet the latter.)

At any rate, it’s clear that fraudulently-originated loans are a big reason why lenders and servicers are becoming increasingly concerned about ‘walk-aways,’ and why rating agencies such as Fitch have had to ramp up their loss estimates lately.

There simply isn’t any sort of loan workout that solves for fraud. Nor should there be.

Its worth noting that one industry insider suggested to me this week that as much as 70 percent of the Alt-A market in 2005 and 2006 was fraud-based, including occupancy-fraud. Seven zero. That’s a stunning sort of number.

HW reported last week on Census Bureau numbers showing that the number of vacant homes for sale are at record levels — investors masquerading as owner-occupants would have to be considered as one of the largest drivers behind this trend.

In an op-ed published Wednesday by the New York Times, New York Private Bank and Trust CEO Howard Milstein writes that the Federal government should step in and guarantee principal on troubled subprime mortgages for 15 years, while banks agree to freeze “teaser” rates on affected mortgages.

From the story:

This would instantly give the lending banks new capital. As these mortgages would be guaranteed by the Treasury, they would suddenly be assessed, on bank balance sheets, at their original value — and a significant amount of the banks’ lost capital would be restored. Plus, the banks would receive, from most of the homeowners with subprime mortgages, up to 15 years of teaser-rate payments …

Under this arrangement, American banks would have an incentive to buy back the subprime debt now being held by foreign banks and other financial institutions. American banks could buy the securities at a discount to face value (reflecting the continued low teaser rates) and then, thanks to the government guarantee, hold them as capital assessed at their full value. That, in turn, would allow the other financial institutions to reinvest in other sectors of our economy.

Do not pass “moral hazard.” Do not stop at “taxpayer-funded bail-out.” Nothing to see here, people, move along.

I don’t typically cover too much of the backside of the mortgage market - particularly the bond insurers and the pivotal role they play in the secondary market function.  But like the rest of the gang they’ve been getting their lunch handed to them by the poor performance of mortgages that make up the debt obligations that they guarantee.

In fact, the carnage is so bad that many of the biggest banks in the world could face downgrades as a result of these bond insurers faltering in the face of the onslaught of delinquencies, foreclosures and other non-performance issues.

From Market Watch on how banks may be downgraded as a result of the flailing bond insurers:

“Bond insurers are suffering as a result of their roles as guarantors of mortgage-related securities, and downgrading them could affect all markets in which they are active, including the municipal bond, commercial mortgage-backed securities, and other structured finance areas,” Tanya Azarchs, a credit analyst for S&P, wrote in a note to investors. “In turn, dislocation in those markets could affect banks.”

Bond insurers guarantee billons of dollars worth of complex securities known as collateralized debt obligations (CDOs). But losses on these securities have begun to rise, imperiling the companies’ crucial AAA ratings. Banks and securities firms lost close to $146 billion from subprime-related products in 2007.

S&P estimated that bond insurers have guaranteed at least $125 billion of the principle and interest payments of subprime-related CDOs.

“We believe that the specific, identifiable effect on banks may be significant and, in a few cases, could lead to downgrades. Large global institutions have direct exposure to the bond insurers in a number of ways,” Azarchs said

Besides the doom and gloom of these insurers falling apart there was another interesting note in the article that only received one line of attention but speaks to the continuing larger problem that the mortgage market is facing.

The formerly hot CDO market has since slowed down to a trickle, with only one created in the U.S. in 2008.

Collateralized debt obligations were a massive conduit for mortgage liquidity as mortgage backed securities were packed in to CDOs and sold off to investors hungry for yield.  For all the folks out there who continue to parrot that “the secondary market is coming back” simply refer them to the above sentence.  While not the be all, end all in terms of providing mortgage liquidity, CDOs were a critical part in the liquidity expansion for the market and without them or a similar conduit the secondary market will continue to be severely impaired.

One CDO in all of 2008 is insane - that’s a truly dead market.

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Editor’s note: The below commentary is much more technical than the usual fare at HW, as well as significantly lengthier.

Tomorrow at 1:30 US EST, a couple of academics from Georgetown and Columbia will be holding a press conference touting their own study, which they claim “debunks interest-rate claims made by the Mortgage Bankers Association.”

The MBA has claimed that allowing cram-downs in Ch. 13 bankruptcy proceedings could add as much as two points to mortgage rates.

Adam Levitin, an associate professor of law at Georgetown, and Joshua Goodman, an economics doctoral candidate at Columbia, have authored a study that they claim proves that allowing modifications in Ch.13 bankruptcy proceedings would not result in an interest rate spike.

A recent working draft of the study, as with most academic papers, is already available (dated January 28, 2008).

As an ex-academic — HW readers may or may not know that it wasn’t too long ago that I was a Ph.D. student myself — I can’t help but comment.

I think the authors’ data — despite to Levitin’s bellowing to the contrary — surprisingly lends credence to the idea that altering bankruptcy law to permit cram-downs will, in fact, serve to raise mortgage rates.

Study 1: historical interest rates
In the first study, the authors performed a series of regression-based analyses on historical interest rate data, and included a variable intended to capture the effect of ’strip-downs.’ The data used was from the time period of 1988 to 1993, a time period when strip-downs/cram-downs were allowed — the idea here being that it is possible to tease out any effect of cram-downs in historical mortgage rate data.

The finding was that allowing ’strip-downs’ raised the median interest rate by 11 to 15 basis points, with the latter figure representing a statistically significant effect on a lagged six-month basis. This is seen as a “small” effect by the authors, and not a sizeable change to mortgage rates.

The regressions also lead the authors to conclude that allowing cram-downs did not affect the proportion of Ch. 13 filings relative to Ch. 7 — this is an important point in the analysis that I’ll get back to.

Study 2: rate survey
The authors pulled current mortgage rates, PMI fees and GSE delivery fees on single-family primary residences, investor properties, vacation homes, and multi-family residences in an effort to ascertain whether or not current rates diverged where cram-downs were allowed under current bankruptcy law.

While rates/fees generally diverged significantly between primary residences and investor properties, the authors found no such disparity between primary residences and other property types subject to cram-down risk. Thus, the authors concluded that cram-down risk could not explain the divergence between primary residences and investor properties.

Debunking the debunking
Let’s start with study one. I’ve noted in some earlier commentary that the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has had a dramatic impact on the bankruptcy landscape. In particular, the prevalence of Ch.13 filings has shot up dramatically since the enactment of the Act, while overall bankruptcy filings have dropped.

In the paper, the authors manage to test whether strip-down rulings have a bigger effect on mortgage rates in states where Ch. 13 filings are more prevalent. What they find is statistical relevance suggesting that every 10 percentage point rise in the proportion of filers using Ch. 13 leads to an additional 17 basis point increase in mortgage rates when strip-downs are allowed.

This ‘prevalence effect’ comes over and above the 10-15 bp rise found as a so-called main effect of allowing cram-downs.

It’s a finding that is sadly relegated to nearly zero discussion and cited as something to consider for “future work,” when in truth it should have been the focus of much further analysis.

While the authors do say they found no evidence in the historical data to suggest that allowing cram-downs drove more borrowers to file Ch.13, they completely failed to account for the so-called “means test” established under section 707(b) on the 2005 Act. That test, by its very definition, makes Ch.13 filings more prevalent.

The fact that the authors were able to find strong evidence of a ‘prevalence effect’ at all using historical data suggests that allowing cram-downs now — in a post-BAPCPA world — would have a pretty dramatic impact on overall mortgage rates. The failure to consider this has to throw the entire study’s conclusions into doubt.

But that’s not all — let’s take a peek at study two.

The authors find uniform evidence of higher rates and points for investor properties, as compared to single-family primary residences; but no such divergence exists for vacation homes and multifamily residences.

The conclusion, and associated footnote:

Because investor properties share the same bankruptcy modification risk as vacation homes and multifamily residences, the mortgage rate premium on investor properties cannot be attributed to bankruptcy modification risk.

[footnote] It is not surprising that vacation homes have the same rates as single-family principal residences. Vacation homes reputedly have lower default rates because typically only well-heeled buyers purchase them. They do not have tenant risks such as vacancy, non-payment, or damage, and they are typically well-maintained because of the pride of ownership factor.

What is “bankruptcy modification risk,” exactly? The authors don’t define it explicitly, but I can assure you that investor homes and vacation homes absolutely do not face the same risk of being modified as part of a Ch.13 bankruptcy — simply because vacation homes are less likely to default and/or be subject to a borrower bankruptcy to begin with. (It’s in the authors’ own footnote, for crying out loud.)

I should note here that I’m not defending the 200 basis point figure generated by the MBA per se; what I’ve said all along is that allowing cram-downs will have a meaningful impact on mortgage rates.

That could be a rise of 90 basis points, and not 200 bps; but given today’s market, that’s still the sort of rise that should be seen as problematic for borrowers.

Shifting its initial review of the capital sufficiency of monoline bond insurers into an “ongoing analysis,” Fitch Ratings said late Tuesday that it will update modeling assumptions used to assess the strength of major rated financial guarantors.

By “update,” Fitch appears to mean turning the ratings process entirely onto its head.

The bottom line: capital adequacy is no longer all that matters for monoline ratings, as Fitch said that rapidly increasing claims payments alone would be enough to throw ‘AAA’ financial strength ratings into question — regardless of the level of capital.

From the press statement:

Fitch believes that a sharp increase in expected losses would be especially problematic for the ratings of financial guarantors — even more problematic than the previously discussed increases in ‘AAA’ capital guidelines, which has been the primary focus of recent analysis of the industry. Expected losses reflect an estimate of future claims that Fitch believes would ultimately need to be paid by a guarantor. A material increase in claim payments would be inconsistent with ‘AAA’ ratings standards for financial guarantors, and could potentially call into question the appropriateness of ‘AAA’ ratings for those affected companies, regardless of their ultimate capital levels.

The core risk factor here is exposure to structured finance CDOs, primarily those backed by subprime mortgage assets, which Fitch said face “material” increases in previously-expected losses.

Beyond expected losses, Fitch said that its capital guidelines were likely to increase “materially” as well — suggesting that monoline insurers, including MBIA, would need to raise significant new capital in order to maintain their current ‘AAA’ rating.

Not surprisingly, both MBIA and CIFG were put on negative ratings watch by Fitch soon after it announced the new ratings assumptions. Both MBIA and CIFG raised $1.5 billion in the past month to meet prior modeled capital shortfalls; Fitch said that the additional capital raised so far at each company would likely not be enough to maintain a ‘AAA’ rating.

There has been plenty of discussion lately on a proposed bail-out of the guarantors by various large financial institutions dependent on their guaranty business; it’s clear that the price tag of any potential bail-out is likely to go up significantly at this point.

The $15 billion that had reportedly been suggested by New York Insurance Superintendent Eric Dinallo in late January is looking like it may already be out-of-date.

Having just returned from ASF 2008, I can tell HW readers that the monoline issue is one of the largest concerns hanging over the secondary market at this point in time.

Goldman Sachs CFO David Viniar said Wednesday that rescuing bond insurers will help solve some — but not all — of the industry’s problems, according to a report filed by Reuters this morning. Viniar suggested that any bail-out of the monoline industry will be more challenging than the well-publicized bail-out of Long Term Capital Management over a decade ago.

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In Midst of Mortgage Crunch, a Rush to Refinance

Refinance and lock rate today

Fremont General, the parent company of the Investment and Loan that was slapped with a cease-and-desist order for its role in questionable subprime lending, was downgraded by ratings agencies and faces liquidity concerns reports Market Watch.

From the article covering Fremont’s downgrade and liquidity concerns:

Standard & Poor’s downgraded Fremont General to CCC+ from B- late Tuesday and warned that the Californian lender may not be able to meet its debt obligations. “Liquidity at the holding company has deteriorated substantially,” S&P credit analyst Adom Rosengarten said in a statement. Liquidity remains strong at the company’s banking business. But Fremont has been hit with a cease-and-desist order from regulators which restricts the bank unit from paying dividends to the holding company during the past year, the analyst noted. That’s greatly decreased liquidity levels at the parent company, he said. “We have concerns about the parent’s ability to meet its debt obligations, given our assessment of its reduced cash holdings,” Rosengarten concluded.

Fremont Investment and Loan was known as one of the most “subprime” of all the subprime lenders with underwriting guidelines that were nearly non-existent.  Their lending practices got them in to hot water with Feds back at the beginning of the crisis when they were served with an order that prohibits the bank from making mortgage loans and paying dividends to parent company choking off cash flow needed to service the existing debt of the company.

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Clayton Holdings, Inc. said today that it had partnered with consumer credit giant Experian to provide analytics and outsourcing services to the mortgage and securitization industries, centered on enabling so-called ‘fast-tracking’ of loan modification efforts.

The cooperation between the two firms will leverage Experian’s data assets and predictive analytics, currently relied upon in the primary markets, to assess and mitigate risk in the secondary market.

Many servicers face staffing shortages in loss mitigation as they attempt to implement and execute the voluntary “rate-freeze” program finalized by the ASF late last year, which recommends that troubled borrowers be segmented into three distinct groups. Earlier in the week, Federal Reserve governer Randall Krozner cited “capacity constraints” at servicers as a major bottleneck in efforts to fast-track loan modifications, and said servicers needed to do more.

“The Paulson/ASF program sets a high hurdle for large subprime servicers,” said Clayton CEO Frank Filipps. “Our new alliance integrates the data intelligence and analytic capabilities of Experian with the loss mitigation skills and outsourcing resources developed in Clayton’s Surveillance, Special Servicing and Consulting businesses.”

The new offering will identify rate-freeze candidates, and, if requested, provide turnkey fulfillment services to contact borrowers and secure their agreement for any steamlined loan modification effort. For those borrowers that are able to refinance, servicers can choose to outsource both the counseling and processing of refinance opportunities for borrowers eligible for FHA and other refinance programs, Clayton said.

Clayton operates its own special servicing sub, Quantum Servicing Corp., which was added to Standard & Poor’s select servicer list last April. According to S&P’s ratings report, Quantum’s portfolio totalled 3,477 loans worth $667 million in UPB at the end of the second quarter of last year.

The Clayton/Experian partnership would appear to suggest that Experian is taking a different route to market than competing credit agency Equifax, who launched a competing loss mitigation package in December as a stand-alone product. By integrating with a survelliance provider, Experian is clearly betting that partnering with Clayton will give it an end-to-end solution that “constrained” servicing shops will be more likely to adopt.

For more information, visit http://www.clayton.com.

You may have been thinking about getting a reverse mortgage but are you really sure it is the right thing for you? You need to figure out what is best for your situation, and in order to do that we have set up some cons in order to let you know what to look out for. This is just a guideline to help you. The final decision should be yours, but feel free to look over these in order to get a better grasp.

The Cons you Need to Know

• High front end costs

These types of mortgages often come with very high front end costs. This is why most lenders really enjoy giving these types of mortgages. You tend to get charged more to start off with. But this may not be made known to you until it is too late. This can cause some big burdens if you are not able to afford those costs. But your options will then become limited because it is too late.

• Points, interest, and origination fees

These are three things that lenders really enjoy. This is what helps them make their money. You need to watch out for these fees, and make sure they are made known to you up front. You also need to watch for high interest rates that may arise. Then there is the matter of closing costs; reverse mortgages also tend to come with higher closing costs than normal.

• Mortgage insurance

Mortgage insurance will make sure the lender receives as full of a payment as possible. Even if there is a property decrease, that will not matter in how much you will have to pay. You are also stuck with the charges of mortgage insurance. This can be bad because you will probably be stuck with homeowners insurance, repairs and other payments. The last thing you need it something else trying to take your money away from you. You really do not have to worry about anything when your home appreciates. There tends to be no difference between mortgages in that regard.

These are just a couple of aspects to pay attention to when you are signing up for a reverse mortgage. Just because there are cons with this mortgage does not mean that other mortgages have no cons. You still need to research the other mortgages, and you may find that reverse mortgages are the right thing for you. We just wanted to make you more aware of things that you need to be watching for, in order to protect yourself better.

Additional Resources:

• Tips for Consumers on Reverse Mortgages
• Reverse Mortgage Marketing Tips