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Showing posts with label FHFA. Show all posts
Showing posts with label FHFA. Show all posts

Tuesday, May 7, 2013

GSEs: Ability-to-Repay and Qualified Mortgages

Yesterday, the Federal Housing Finance Agency (FHFA) announced that it is directing Fannie Mae ("Fannie") and Freddie Mac ("Freddie") to limit their future mortgage acquisitions to loans that meet the requirements for a qualified mortgage ("qualified mortgage" or "QM"), including those that meet the special or temporary qualified mortgage definition, and loans that are exempt from the “ability to repay” ("ATR") requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).
In January, the Consumer Financial Protection Bureau (CFPB) issued a final rule implementing the “ability to repay” provisions of Dodd-Frank, including certain protections from liability for loans that meet the criteria of a qualified mortgage as outlined in the rule.
We have discussed the ability to repay provisions HERE, HERE, HERE, HERE, and HERE.
I would like to call your attention to a few important details.*
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IN THIS ARTICLE
Overview
Eligible for Sale to Fannie and Freddie
Additional Guidance and Notifications
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Overview
Considered historically, the Consumer Financial Protection Bureau (CFPB) issued a final rule on January 10, 2013, implementing the “ability to repay” provisions of the Dodd-Frank. That rule generally requires lenders to make a reasonable, good faith determination of a consumer’s ability to repay before originating a mortgage loan and establishes certain protections from liability for QMs.
The ATR rule takes effect for applications dated on or after January 10, 2014.
It is significant that, beginning January 10, 2014, Fannie and Freddie will no longer purchase a loan that is subject to the ATR rule if the loan:
  • is not fully amortizing,
  • has a term of longer than 30 years, or
  • includes points and fees in excess of three percent of the total loan amount, or such other limits for low balance loans as set forth in the rule.
The FHFA announcement states that "effectively, this means Fannie and Freddie will not purchase interest-only loans, loans with 40-year terms, or those with points and fees exceeding the thresholds established by the rule."
Fannie and Freddie will continue to purchase loans that meet the underwriting and delivery eligibility requirements stated in their respective selling guides. This includes loans that are processed through their automated underwriting systems and loans with a debt-to-income ratio of greater than 43 percent. But loans with a debt-to-income ratio of more than 43 percent are not eligible for protection as QMs under the CFPB’s final rule unless they are eligible for purchase by Fannie and Freddie under the special or temporary qualified mortgage definition. 
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Eligible for Sale to Fannie and Freddie
Just a few days ago, on May 2, 2013, the FHFA directed Fannie Mae and Freddie Mac to limit future acquisitions to loans that:
  • are qualified mortgages under the ability to repay rule, including those meeting the special or temporary qualified mortgage requirements; or
  • are exempt from the ability to repay requirements, such as investor transactions.
Thus, effective for mortgages with application dates on or after January 10, 2014, Fannie and Freddie will not be allowed to purchase any loans if they are subject to the ATR requirements and are either:
  • loans that are not fully amortizing (e.g., no negative amortization or interest-only loans);
  • loans with terms in excess of 30 years (e.g., no 40-year terms); or
  • loans with points and fees in excess of 3% of the total loan amount or such other limits for low balance loans as set forth in the ability to repay final rule.
Fannie will continue to purchase loans that meet the underwriting and delivery eligibility requirements (i.e., existing debt-to-income ratios, loan-to-value ratios, and reserves) stated in the Selling Guide, including loans processed through Desktop Underwriter®.
Freddie will limit future purchases to:
  • Mortgages that are “qualified mortgages” under the final rule, including those meeting the special or temporary qualified mortgage requirements, and
  • Mortgages that are exempt from the ATR, such as investor transactions.
Therefore, effective for mortgages subject to the final rule with applications received on or after January 10, 2014, Freddie will not be permitted to purchase the following:
  • Mortgages that are not fully amortizing (e.g., Mortgages with a potential for negative amortizations or interest-only Mortgages);
  • Mortgages with terms in excess of 30 years (i.e, 40-year fixed-rate Mortgages); and,
  • Mortgages with points and fees in excess of 3% of the total loan amount or such other limits for low balance Mortgages as set forth in the final rule.

Thursday, December 6, 2012

Throwing a Lifesaver to Underwater Borrowers

The Federal Housing Finance Agency (FHFA) released its September 2012 Refinance Report (Report) on November 28, 2012. The Report provides some statistical information, most of which comes as no surprise to mortgage industry participants, while there are some tidbits of data that seem to demonstrate the impact of the Home Affordable Refinance Program, known as HARP, on the GSEs (viz., Fannie Mae and Freddie Mac). The end date for HARP was extended until December 31, 2013 for loans originally sold to the GSEs on or before May 31, 2009.
HARP was established in 2009 to assist homeowners who are unable to access refinance due to a decline in their home value. The program was originally designed to provide these borrowers with an opportunity to refinance by permitting the transfer of existing mortgage insurance to their newly refinanced loan, or by allowing those without mortgage insurance on their previous loan to refinance without obtaining new coverage.
The premises for HARP are simply stated, as follows:
1) Since the GSEs are already responsible for certain high LTV loans; and 
2) Default risk is lowered by allowing a refinance of these high LTV loans; therefore, 
3) HARP loans refinancing high LTV loans at lower rates reduce default risk.
One of my concerns with HARP, or as it is referred to now HARP 2.0, is it has failed homeowners because it just is not reaching enough qualified borrowers and many lenders take too long to issue approvals. One remedy would be to have the government expand its guidelines to include non-agency lenders and by removing certain features of the 2009 origination qualifier. Also, low credit scores remain an obstacle by preventing underwater homeowners from taking full advantage of the current HARP guidelines with respect to refinancing eligibility.
HARP has obviously triggered a wave of refinance activity, just as expected. In speaking with several of our clients that are very involved in HARP refinances, it seems that about 50%-75% of their refinance business may be coming from homeowners who have LTVs above 125%. Because the 125% ceiling on LTV was removed, some lenders are actually refinancing LTVs of 155%.
In the following discussion, I will offer some consideration to HARP's most recent survey.*
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IN THIS ARTICLE
Overview
HARP Refinance, Quarterly Volume
Monthly HARP Volume by LTV
Percentage of HARP Refinances by LTV
Mortgage Terms, LTVs Greater than 105%
Total HARP, Percentage of Total Refinances
Timeline for Interest Rate Changes
Library
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Overview
-More than 90,000 homeowners refinanced their mortgage in September through HARP with more than 709,000 loans refinanced since the beginning of this year.
-Since the program’s inception in 2009, the GSEs have financed more than 1.7 million loans through HARP.
-In September, half of the loans refinanced through HARP had LTV of greater than 105% and one-fourth had LTVs greater than 125%.
-In September, 19% of HARP refinances for underwater borrowers were for shorter-term 15-year and 20-year mortgages.
-HARP refinances in September represented 45% of total refinances in states hard hit by the housing downturn - Nevada, Arizona, Florida and Georgia - compared with 21% of total refinances nationwide.
-In September, HARP refinances for borrowers with LTV ratios greater than 105% accounted for more than 70% of HARP volume in Nevada, Arizona and Florida and more than 60% of the HARP refinances in California.
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HARP Refinance, Quarterly Volume
1-HARP Refinance-Quarterly
HARP volume continued to represent a material portion of total refinance volume in 2012 as HARP enhancements took effect in the first half of the year. HARP volume represented 24% of total refinance volume in the third quarter of 2012.

Monday, October 31, 2011

Learning to Play the HARP

A week ago the Obama Administration announced revisions to the Home Affordable Refinance Program (HARP).
Better late than never! Actually, coming three years belatedly, a change to HARP may bring some relief to homeowners and the economy.
But is it a viable solution?
As you may know, I have written extensively about the failure of both the Home Affordable Modification Program (HAMP) and HARP.
Is the new and improved version of the two-year old HARP a quick fix or yet another boondoggle in the making?
Real Estate and Jobs
Last week's announcement stems from the revisions developed by the Federal Housing Finance Agency (FHFA), the GSE's overseer, with feedback from lenders, mortgage insurers and other mortgage industry participants. In a sense the revisions are a patent admission that the economy simply will not regain its strength without a robust real estate market; or, put another way, jobs will not return unless a strengthened real estate market returns.
The linkage of real estate to jobs has roots in the MBS World, a murky realm way below the revisions contemplated by the Administration and the homeowners' needs.
The Federal Reserve has a central place in the MBS World, since it is permitted to participate in the agency MBS financial instruments, and not permitted to participate in buying equity, real estate, or corporate debt.
Remember: MBS yields are the primary trigger in the formation of mortgage rates. The safest financial instruments, of course, are Treasuries; so, relative to Treasuries, the margin or spread between mortgage rates and yields on 10-year Treasuries has continued to move upward. When the Fed makes its MBS purchase, it thereby reduces mortgage interest rates, compressing those relative margins. Operationally speaking, then, a so-called target for mortgage rates is set in this manner.
Ostensibly, lower mortgage rates lead to refinances and the concomitant diminution of financial pressure on homeowners who have been trapped in the housing crisis with underwater mortgages, because such reduction both lowers the cost of debt service through refinance and supports purchases of houses, which creates demand - and thus an increase in pricing - for housing.
What Went Wrong?
To date, a tiny percentage of seemingly eligible borrowers have refinanced through HARP.
In my estimation, these are the factors that led to the HARP failure:
-Resistance: the refusal by some second lienholders to subordinate themselves to the first mortgagee.
-Fear: the GSEs might "put back" the new loans if they subsequently move into default, which causes constrained underwriting.
-Restrictions: the original MI being applied to the new loan, particularly if the new loan has a different servicer.
-Reluctance: homeowners afraid of being rejected, lack of public awareness, and insufficient news about program information.
Also, it is common knowledge that lenders have rejected all but the most creditworthy borrowers from taking advantage of HARP, out of reluctance to take on the risk of existing representations and warranties; however, this may yet find a solution (see below).
Plans and Suggestions
In this latest version of HARP, there is an extension of the program's mandates through December 2013. As a quick overview, I think it's fair to describe HARP as a temporary program by the GSEs, the primary goal of which is to permit borrowers whose loans are currently guaranteed by the GSEs to be refinanced, despite the fact that these loans are significantly higher than 80LTV.
There are some important revisions, perhaps the most important being the removal of the 125LTV ceiling. In addition, in many cases a new appraisal is eliminated, fees to borrowers are lowered, and the GSEs are waiving some lender representations and warranties (about which we will know more by November 15, 2011, when the program guidelines are issued).
I think the revisions to representations and warranties are needed and justified, inasmuch as all loans eligible under HARP have been seasoned for more than three years, and defects in a loan usually show up in the first few years of the loan. So, the risk - and the implications for representations and warranties - is certainly much lower at this point.
As to homeowners' reluctance and lack of information, although the HARP revision does not require it, I think the GSEs should communicate with potentially eligible borrowers and let them know that their loans are eligible under HARP at current mortgage rates.
With respect to the resistance of second lienholders, many studies suggest that second liens are no longer a major barrier to refinancing. It is very important that second lienholders participate in the program, because refinancing the first lien ameliorates the condition of the second lien, due to the fact that it frees up funds that can be used for second lien servicing.
The MI issue is a thorny one. The fact is, notwithstanding the foregoing, borrowers with MI will have fewer options than others to refinance. It remains to be seen how the proposal to waive aspects of the representations and warranties will incentivize servicers to resolve the MI debacle.
A Macroeconomic Solution
So, can revamping HARP bring new jobs and stabilize the real estate market?
One study I have read, a CBO research paper, estimates that a revised HARP, structured along the lines I've outlined above, would (1) result in $428 billion additional refinancings with annual savings to households of $7.4 billion, (2) would have a small positive effect on the GSEs' net worth, and (3) would have a small net cost to the government of less than $1 billion (which, in any event, is subsumed by the Fed's prepaid MBS portfolio).
The overall effect is to create a stimulus, since HARP beneficiaries will have higher marginal means to create demand, that is, their consumption will more than offset the opposing demand from existing MBS investors (i.e., financial institutions). Based on the studies I have read, if HARP increased GDP by as little as $1 billion per year for two or three years, the additional tax revenues would significantly exceed the costs. So, the macroeconomic effect would be net positive and stimulative.
Finally, if mortgage rates were sustained by the 2% to 2.5% range that has been a trending indicator, when combined with the HARP revisions, there would be a very substantial boost of mortgage loan originations, perhaps enough of a boost to a sizeable part of the GSE portfolio. Such an impetus would mean a re-set of trillions of dollars in asset value, and a yearly reduction in household interest expenses into the many billions.
The Fed's Role
As I see it, the Fed can weigh in forcefully in supporting the HARP revisions.
For instance, if the Fed purchased as much as $2 trillion of new MBS, then existing MBS holders would be displaced into investing that $2 trillion elsewhere. Hence, such re-investment would lead to an increase in stock prices, reduction in debenture yields, increase in real estate values, and higher foreign currency values.
A recent study, conducted by the San Francisco Fed, clearly shows that Fed purchases upward of 2$ trillion would increase GDP by more than 2% in two years and create 3 million new jobs. If the HARP refinance revisions are factored in, the overall stimulative effect would be much larger, perhaps as high as creating 4 million new jobs.
Moving forward robustly with the HARP revisions would surely lead us to conclude that the new and improved version, though coming about belatedly, is not too little, too late.
What do you think?
Please feel free to comment!

Wednesday, October 12, 2011

Plethora of Languid Foreclosure Prevention Programs

Keeping foreclosures down and homeownership up has been the stated goal of policy makers for the last few years. The record shows that nearly all of the promulgated programs have failed to provide much relief to lenders or borrowers. And even if there were a chance for them to succeed, the obstacles to their viability are daunting.
I think a brief review of such programs is in order.
My list is not meant to be complete, but it is indicative of the success of presumptive remedies to the foreclosure crisis.
The Land of Cockaigne
I don't think many Americans ever really bought the 'spiel' about "a car in every driveway," "a chicken in every pot," "a salary for every able-bodied person," and "a house for every citizen." But it's not as though they weren't given plenty of reasons to pursue the so-called American Dream - at least the homeownership version. Presidents and their Administrations have equated owning a home with being as American as Apple Pie. Congress followed the narrative and fortified the burgeoning real estate industry with seemingly infinite funds boosted by and through the GSEs. The Federal Reserve did its part. But it was all trumped-up! Unsupported by the fundamentals of economic theory, dream-thinking nevertheless entrenched itself.
In the 13th century, a French poem described the "pays de cocaigne," which is Middle French for "The Land of Cockaigne." A fair translation of the poem portrays Cockaigne as a country where "the houses were made of sugar cakes, the streets were paved with pastry, and shops provided goods for nothing." (My translation.) Later, in the 16th century, the Dutch artist Pieter Bruegel the Elder depicted Cockaigne as an imaginary land of self-indulgent luxury and idleness, a utopia of gluttony, complacency, instant gratification, and physical excesses, where the lowly and beleaguered peasants could finally be free of their oppressive, daily struggles to survive.
In effect, Cockaigne was a medieval peasant's dream. But it was a chimera!
This is not to say that the modernized version of Cockaigne, perhaps our own American Cockaigne, was meant to curry the favor of people who were gluttonous or complacent in return for their votes. It is not to say that Americans are peasants in the fashion of medieval peasants. And it is not to say that we should run away from our dreams. But living a dream has consequences. 
So, let's take a look at some of those consequences. Let's see how foreclosure prevention programs have fared in mending the harm caused by our own version of Cockaigne.
The "Job's Bill"
The Obama Administration has proposed a plan to provide $15 billion to fix foreclosed and vacant properties. The idea is to provide a means to revitalize communities blighted by foreclosures. It would also offer a boost to construction jobs. Is there anybody reading this who actually believes that this bill, at least in its current form, will receive even a scintilla of Congressional approval anytime soon?
Converting Vacant and Foreclosed Homes to Rentals
The Administration has asked for proposals to convert foreclosed houses into rental properties. This would reduce the oversupply of foreclosed properties and reduce the demand causing rising rents for existing rentals. As far as I know, no politically viable proposals have been publicly announced. However, some statistics indicate that benefits could be outweighed by adverse consequences.
Principal Reduction
In effect, this approach asks banks to adjust the total amount owed on a mortgage, based on the post-bubble value of a home. However, this could lead to strategic foreclosures and perhaps an incentive for borrowers to take out riskier loans. I get that this remedy is supposed to be a way to deal with the $800 billion overhang, that is, the amount that borrowers owe above the value of their homes.
These so-called "underwater" mortgages are being just left out there dangling away! It seems to me that principal reduction could work, given the right methodologies. For instance, most mortgages are either owned or guaranteed by Fannie and Freddie, so the overall public could benefit through principal reduction.
However, here's the nasty secret: the FHFA, the regulator overseeing Fannie and Freddie, will not even consider principal reduction, because it would adversely impact the GSE's bottom line. Even after being bailed out, the GSEs are $141 billion in the negative. So, a decision to keep the losses off the books leads principal reduction into a dead end.
Bailout Money
At least President Obama recently admitted that his Administration had not made "enough progress" on dealing with the foreclosure crisis and he is "going back to the drawing board." This is how many years since the bubble burst? Going "back to the drawing board?"
With what money? After all, $30 billion in unused bailout money from the previous foreclosure programs cannot be used to fund new programs.
Making Home Affordable
This program was supposed to encourage servicers to lower mortgage payments. Political pundits labeled it the "homeowner bailout."
It began in the spring of 2009 and was meant to assist four million homeowners who were facing foreclosure. But MHA is a major malfunction. Servicers were thrown into backlogs, improperly processed cases, made numerous errors, all while regulators did very little to prevent this debacle. As of August 2011, as I have reported previously, only about 816,000 homeowners had received loan modifications through MHA - which is less than 25% of those who applied for MHA assistance!
Here's yet another nasty secret: the government is expected to spend about $7 billion of the $46 billion in bailout funds that were set aside to help homeowners. Consequently, nearly $30 billion meant to address the foreclosure crisis may instead be used to pay down the deficit. Yes, that would be those same $30 billion I mention above, meant to address the foreclosure crisis, and will instead likely be spent to pay down the deficit.
Home Affordable Refinance Program
This is the program that permits homeowners to refinance their mortgages at lower interest rates. It is another program from 2009. With much fanfare, the Administration estimated that five million homeowners would be served. As of June 2011, just 838,000 homeowners had refinanced through the program.
But where is this program going? The FHFA stands in the way, since refinancing is deemed to be more risk to Fannie and Freddie, which happens to own or guarantee about 5 million mortgages that are underwater.
President Obama has stated that he would increase the number of homeowners in the program. How is that supposed to happen, given that the FHFA's professed mission now is to further protect Fannie and Freddie from taking on any new risk?
Emergency Homeowners' Loan Program
The basic concept of this program is to loan money to jobless homeowners so they can avoid foreclosure. I fail to see how this is a solution at all to foreclosure. At best, maybe it postpones it. As promulgated in 2010 and commenced in June 2011, the program consists of $1 billion and is supposed to affect 30,000 families, by offering interest-free federal loans of up to $50,000 to qualifying homeowners. Essentially, to be qualified for this program, the borrower must have lost income because of unemployment or a medical condition. To date, only 10,000 to 15,000 of the 100,000 applicants have actually qualified for these loans.
But here's the catch: there is a deadline of September 30, 2011 for lending out money to eligible homeowners before the unused funds are to be returned to the Treasury. So, the application period has now expired. At this point, it is estimated that only half the allotted funds will be spent.
States Foreclosure Prevention Programs
The notion of giving funds to states to remedy the foreclosure epidemic goes back to February 2010, when the Administration promised almost $8 billion to finance "innovative" programs. The money was supposed to go to the states that had the worst foreclosure problems.
But reports issued in July indicate that only $478 million of the government's $8 billion had been actually loaned. I have read several reports that some of these states have failing programs due to burdensome enrollment procedures. In Arizona, for instance, 4,000 homeowners were to be assisted through principal reduction. But recent news reports indicate that Arizona only approved three homeowners for this remedy. And, again, banks and the GSEs do not want to participate in principal reduction, a particular feature of that state's "innovative" program.
Bankruptcy Protection
I seem to recall that candidate Obama expressed a willingness to permit bankruptcy judges the power to lower mortgage payments. The modern vernacular calls this a "cramdown." Banks were against cramdown from the start. Members of Congress, particularly some Democrats, tried to pass legislation permitting cramdown. But the legislation was defeated. And, anyway, President Obama's very own economic advisers rejected it. At this point, the Obama Administration has virtually abandoned it as a remedy.
Cockaigne Redux
Pieter Bruegel the Elder lived during the time of the famed Dutch Revolt. There is much symbolism in his painting, "The Land of Cockaigne." That symbolism, according to some authorities, refers to the failure of leadership, the effects of complacency, and the proclivity of the people to become dependent on their formidable abundance, while being unwilling to take risks that would bring needed systemic change.
I wonder: is the American Cockaigne a dream from which we refuse to wake up?