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!

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?

"Repeal-But-Don't-Replace" - Ending Foreclosure Programs

On Friday, March 4, 2011, we informed you of HUD's notice to reinstate the Emergency Homeowners' Loan Program (EHLP), effective April 4, 2011. EHLP provides emergency relief to homeowners experiencing temporary involuntary loss of employment or underemployment resulting in a substantial reduction in income due to adverse economic conditions, and who consequently are financially unable to make full mortgage payments.

However, on March 3, 2011, virtually coinciding with HUD's Federal Register notice about its interim rule to reinstate EHLP, the House Financial Services Committee approved bills to terminate both the FHA Refinance Program and the Emergency Mortgage Relief Program.

In Congressional Newspeak, these two bills are the "Emergency Mortgage Relief Program Termination Act" (HR 836), and the "FHA Refinance Program Termination Act" (HR 830).

"Ineffective Foreclosure Programs"

Under the rubric Committee Votes To End Failed And Ineffective Foreclosure Programs, the Committee issued a Press Release late in the day on Thursday, March 3, 2011, about the termination bills.

The Committee believes that the elimination of these two programs -- the FHA Refinance Program and the Emergency Mortgage Relief Program -- provides $9 billion in savings.

Emergency Mortgage Relief - Committee's View

The Emergency Homeowner Relief Program provides loans to unemployed borrowers for a period of 12 months, with a possible 12 month extension. These loans increase the amount of the borrower's indebtedness, so a borrower who is unable to pay back either the original amount of principal or the additional loans made under the program will be worse off in the long run. Those borrowers derive no benefit from the program, and the government will suffer losses from their eventual defaults.

The Obama Administration, in its FY 2012 budget proposal, estimates the program to have an almost 98 percent subsidy rate. 

This means for every $1 spent, the government will lose 98 cents. Also, HUD regulations set up a process where the bridge loan can be forgiven over a five-year period.

FHA Refinance Program - Committee's View

The FHA Refinance Program, announced in March 2010 by the Obama Administration, modifies underwater loans into the FHA program.

Although more than $8 billion in TARP funds have been obligated for the FHA Refinance Program, only $50 million has been disbursed and only 40 applicants have been refinanced.

Push-Back

Carolyn Maloney (D-NY) introduced an amendment to HR 830   requiring 500,000 additional underwater mortgages to be refinanced by the Federal Housing Administration before the refinance program is terminated.

Mrs. Maloney stated that "nationally, 2.3 million mortgages are underwater, or 22.5% of all outstanding mortgages. If we can help 500,000 of those, we have made an enormous difference in the lives of people who are struggling to keep their homes and make their mortgage payments each month."

Maxine Waters (D-CA) in a Press Release ("Congresswoman Waters Blasts Republicans for Voting to Dismantle Programs that Help Homeowners Avoid Foreclosure") stated that:

"Republicans voted to terminate the Federal Housing Administration (FHA) Short Refinance program. Under the program, investors agree to write down at least 10 percent on the borrower's mortgage.  In exchange, the borrower is refinanced into an FHA loan.  Borrowers must be current on their mortgage, and federal funds are only spent in the event of a borrower default.

The program is an important option to have available for borrowers and numerous institutions, including Wells Fargo and GMAC/Ally, have recently agreed to participate in the program.

Republicans also voted to end the Emergency Homeowners Relief Program, which provides low-cost loans to unemployed homeowners to help them pay their mortgage. It is based on a highly successful program in Pennsylvania, which has helped 42,700 people since 1983. Congresswoman Waters was instrumental in getting this program included in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010."

Mrs. Waters concluded her remarks with these words: 

"This is just part one of the Republican assault on homeowners and working-class people.  The same attitude that led Speaker Boehner to say 'so-be-it,' in response to news that the Republican budget would eliminate jobs, is fueling the Republicans' 'repeal-but-don't-replace' agenda on foreclosure assistance."

What's Next?

This week, the Committee will take up plans to terminate two other government foreclosure programs:

• Home Affordable Modification Program (HAMP)

• Neighborhood Stabilization Program (NSP).

In Congressional Newspeak, these termination bills are, respectively:

• The HAMP Termination Act of 2011 (HR 839)
• NSP Termination Act (HR 861)

Visit Library

Committee Votes To End Failed And Ineffective Foreclosure Programs
House Committee on Financial Services, Press Release, 3/3/11
FHA Refinance Program Termination Act
HR 830 (2/28/11-3/3/11)
Emergency Mortgage Relief Program Termination Act
HR 836 (2/28/11-3/3/11)

The Principal Reduction Alternative

Jonathan Foxx is a former Chief Compliance Officer of two publicly traded financial institutions. He is the President and Managing Director of Lenders Compliance Group, the nation’s first full-service, mortgage risk management firm in the country.

About a half million permanent modifications have gone through HAMP, and 1.7 million trial modifications have been offered, even though the Obama Administration promised HAMP would assist three to four million homeowners. Anecdotally and statistically HAMP has failed.

RealtyTrac reports 2.9 million homes were in foreclosure in 2010, and 2.8 million in 2009, and 2.3 million in 2008. Furthermore, 2011 will see a 20% increase in foreclosure filings - that's above the 3 million mark! As to repossessions: approximately 2,800,000 since 2008, and still growing.

Is there a more effective way to prevent foreclosures?

HAMP - Problem or Solution?

Those who have been following our Newsletters already know that I have been highly critical of the boondoggle known as the Home Affordable Modification Program (HAMP).

Here's just a few selections from our Archive:

• HAMP: "Continues to Struggle"
• HAMP: Continues Downward Trend
• April Loan Modification Report: Is HAMP Failing?

Verdict of SIGTARP

Contrasting the RealtyTrac data with HAMP statistics, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) states in a report issued on January 26, 2011:

"The number of permanent mortgage modifications under HAMP remains anemic - there were just 522,000 ongoing permanent modifications as of December 31, 2010, with approximately 238,000 of those funded by and attributable to TARP. The remaining were funded outside of TARP by the GSEs. A combined total of more than 792,000 trial and permanent modifications have been canceled, with more than 152,000 trial modification still in limbo. These permanent modification numbers pale in comparison not only to foreclosure filings, but also to Treasury's initial prediction that HAMP would 'help up to 3 to 4 million at-risk homeowners avoid foreclosure' by reducing monthly payments to sustainable levels." (My Emphasis)

An Alternative

In a brief, but very concisely worded White Paper, entitled Principal Reduction Modification Math - A Report by Rick Rogers, JD/MBA, a compelling case is made for the fact that lenders will receive far more value from principal reduction modifications than from other mortgage modifications. The paper is fairly technical, but well worth reading. Rick's practice is devoted to foreclosure, mortgage default, and related matters, and he is an expert in Net Present Value (NPV) comparative analysis. Rick has kindly supported my wish to inform you of his insights.

You can download Rick's White Paper from the HAMP section of our Library.

First just a word about the HAMP program itself. There are several moving parts to the HAMP eligibility program.  

I will name a few significant aspects.

• NPV - the acronym for Net Present Value, when we've extricated the math and algorithm basics - is simply a calculation to decide if the lender is in a better profit position by approving a modification or would have a higher profit margin by foreclosing. It is part of HAMP procedures.
• Plus, the so-called waterfall process, which is really just a step-by-step analytical tool used for HAMP loan workouts. It consists of a series of calculations; however, in this case using such parameters as the gross monthly income, percentage of that gross income used to generate a target monthly payment, and so forth.
• Servicers evaluating HAMP modifications derive a mark to market loan to value (MTM-LTV) ratio on any loan greater than 115%. If so, a principal reduction then becomes available to reducing monthly payments to the eligible 31% of the borrower's gross income.
• Some generic rules: to get to the eligible 31% of gross income servicers reduce the interest rate, extend the loan term, even provide principal forbearance, but only use principal reduction as a last resort.

Nevertheless, these and certain other criteria are supposed to lead to successful permanent modifications based, among other things, on lowering the interest rate, extending the loan term, and/or reducing the loan balance until the eligible target payment is reached.

This White Paper asserts that the the re-default rate - the rate during the 12 months immediately following the modification - is the "single most important factor" when comparing the NPV of a standard Home Affordable Modification Program (HAMP) with the   Principal Reduction Alternative HAMP (PRA HAMP) modifications.

The comparative analysis offered indicates that the more effectual means to preventing foreclosure is not through the standard HAMP but through the PRA HAMP program, because PRA HAMP not only includes the above-outlined HAMP criteria but also specifically permits the reduction of principal. However, PRA HAMP is optional and lenders determine whether or not to implement its principal reduction feature.

As the White Paper affirmatively states:

"Lenders will receive far more value from Principal Reduction modifications than from other mortgage modifications."

FRB Report

Rick cites a recent Federal Reserve Bank of New York Staff Report (FRB Report), entitled Second Chances: Subprime Mortgage Modification and Re-Default , that serves to support the findings that "principal reduction modifications were included in a sufficient number for the authors [of the FRB Report] to state the following conclusion in the Abstract:  '... the re-default rate declines relatively more when the payment reduction is achieved through principal forgiveness as opposed to lower interest rates.'" 

Furthermore, Rick culls the following conclusion from page 30 of the FRB Report:

"Restoring the borrower's incentive to pay in this way [referring to principal reduction] nearly quadruples the reduction in re-default rates achieved by payment reductions through interest rate modifications and term extensions alone."

Put another way: in many instances, principal reduction through PRA HAMP modalities is a more effective foreclosure prevention solution than just reducing the mortgage interest rate along with the other standard HAMP modalities.

And by what ratio? The White Paper points out that "the FRB Report suggests 4 of every 10 standard HAMP modifications will fail, while only about 1 in 10 PRA HAMP modifications will fail."

Here is one of several suggestions offered in this White Paper:

"Consistent with the HAMP concept, a PRA HAMP modification should be mandatory for participating Lenders whenever its NPV exceeds that of both the standard HAMP modification and the "No Modification" alternatives."

Principal Reduction Alternative

Principal reduction is surely a viable means to preventing foreclosure through the PRA HAMP procedures, so it is hard to fathom why the Obama Administration continues to advance dubious claims of success relating to the HAMP program, without further encouraging lenders and servicers to make more use of PRA HAMP.
As the aforementioned SIGTARP report states:

"Treasury's central foreclosure prevention effort designed to preserve that goal [of 'preserving homeownership'] - the Home Affordable Modification Program (HAMP) - has been beset by problems from the outset and, despite frequent retooling, continues to fall dramatically short of any meaningful standard of success." (My emphasis)

The Treasury's most recent Press Release about the HAMP "Scorecard" has this rosy and promising subtitle: "New Making Home Affordable data reveals mortgage help reaching struggling middle class, underwater and minority homeowners."

Political temporizing and vapid Press Releases are not helpful. The HAMP program is a failure, plain and simple.

Dressing HAMP up with fancy statistics and glowing pronouncements can't be convincing to those homeowners who would be better served by more aggressive and effective foreclosure prevention methodologies. Facts are stubborn things, and can't be wished away by the Obama Administration claiming that HAMP works for the "middle class, underwater and minority homeowners" - when, all the while, this government program clearly does no such thing for most of them. HAMP may be "reaching" these mortgagors, but it's really not helping them very much!

It seems to me that principal reduction through PRA HAMP should be more fully implemented and supported.

I'll give Rick Rogers the last word on the potential results of the principal reduction alternative:

"Lenders will achieve far greater financial benefits than with any current modification program, and borrowers will have a fighting chance to regain equity and security in their home."

What do you think?

I would welcome your comments. Please feel free to email me at any time.

Fannie: Introduces Second Lien Modifications

On August 13, 2009, the US Department of Treasury (Treasury) published Supplemental Directive 09-05, introducing the Second Lien Modification Program designed to work in tandem with the Home Affordable Modification Program (HAMP). The Supplemental Directive 09-05 was revised on March 26, 2010.

HAMP and the Second Lien Modification Program (which is named "2MP") are meant to create a "comprehensive solution to help borrowers achieve greater affordability by lowering payments on both first-lien and second-lien mortgage loans."

On September 21, 2010, Fannie issued Announcement SVC-2010-14, which introduces its Second Lien Modification Program and provides guidelines to Fannie servicers.

All Fannie Mae-approved servicers must participate in the program for all eligible Fannie Mae second-lien mortgage loans and must implement the 2MP program no later than January 1, 2011.

_______________________________________

Highlights

Modification Eligibility

• Borrowers in Bankruptcy

• Coordination with Other Making Home Affordable Programs

Modification Process

• Matching Second Liens to HAMP First Liens

• Reliance on First-Lien Data

• Standard Modification Steps

• Compliance with Applicable Laws

• Borrower Communication

• Trial Period Requirements

• Borrower Response

• Effective Date of 2MP Modification

• Reclassification or Removal of MBS Mortgage Loans Prior to Effective Date of Modification

• Borrower Notice

• 2MP Modification Documents

• Assignment to MERS

Use of Suspense Accounts and Application of Payments

• Monthly Statements

Reporting Requirements

• Reporting to Fannie Mae Through HSSN

• Reporting to Treasury

• Reporting to Credit Bureaus

Mortgage Insurers

• Mortgage Insurer Approval

• Reporting to Mortgage Insurers

Fees and Costs

• Servicing Fees

• Late Fees

• Administrative Costs

Incentive Compensation

• Servicer Incentive Compensation

• Borrower Incentive Compensation

• Re-default and Loss of Good Standing

Compliance

Record Retention

Transfers of Servicing

_______________________________________

Visit Library for Issuance

Fannie: Home Affordable Modification Program:
Introduction of Second Lien Modification Program
SVC-2010-14
September 21, 2010

_______________________________________

LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

HAMP: “Continues to Struggle”

Yesterday, we provided an outline of the continuing downward trend of the Home Affordable Modification Program (HAMP) program, as reported in the most recent June Report, issued on July 20, 2010.

On July 21, 2010, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), stated in its Quarterly Report to Congress (Report), that HAMP "continues to struggle to achieve its original stated objective to help millions of homeowners avoid foreclosure 'by reducing monthly payments to sustainable levels.'"

It would be helpful to refer to our compliance update, "HAMP: Continues Downward Trend," issued on July 22, 2010, for comparative analysis.

The Report states that the number of homeowners being helped through permanent modifications "remains anemic," with fewer than 400,000 ongoing permanent modifications and HAMP has not put an "appreciable dent" in foreclosure filings. Furthermore, according to the Report and as we also indicated in yesterday's compliance update, the number of trial and permanent modifications that have been canceled substantially "exceeds the number of homeowners helped through permanent modifications."

In a telling statement of fact, the Report unequivocally finds that the Treasury "clings to its prior statements that it plans to offer trial modifications to three to four million homeowners, a measure that the SIGTARP has previously shown to be essentially meaningless," and that its refusal to provide meaningful goals is a "fundamental failure of transparency and accountability."

Finally, the SIGTARP takes the position that the "American people are essentially being asked to shoulder an additional $50 billion of national debt without being told, more than 16 months after the program's announcement, how many people Treasury hopes to actually help stay in their homes as a result of these expenditures, how many people are intended to be helped through other subprograms, and how the program is performing against those expectations and goals."

Without clearly defined standards, opines the SIGTARP, positive comments about HAMP's success are "simply not credible," and leads to a growing "public suspicion" that HAMP is an "outright failure."

It should be noted that of the anticipated $75 billion dollar cost of the Making Home Affordable (MHA) program that commenced on February 18, 2009, $50 billion will be funded through TARP. HAMP is one of the MHA programs.

If you have any questions about this matter or would like assistance with mortgage compliance, please contact Jonathan Foxx, Managing Director or call 516-442-3456 x 100.

Highlights

As of June 30, 2010, a total of 753,275 mortgages are currently being modified, either permanently or on a trial basis. Of those, 389,198 were active permanent modifications and 364,077 were active trial modifications.

SIGTARP uses statements from the June reviews provided by HUD and Treasury to explain why the number of cancellations of mortgage modifications has increased, as decisions on aged trials are being reached, such as:

• Many borrowers who received temporary modifications were not able to meet eligibility requirements such as verifying their income and successfully making trial payments.

• Borrowers had mortgage payments already less than 31% of their income or did not occupy the property as their primary residence.

Visit Library for Issuance

Office of the Special Inspector General
of the Troubled Asset Relief Program
Quarterly Report to Congress
July 21, 2010

HAMP: Continues Downward Trend

The government program established to assist homeowners in distress continues to under perform, with 91,118 trial modifications under the Home Affordable Modification Program (HAMP) being canceled in June and of those more than 70% had been in a trial period for six months or longer.

Based on the June 2010 Servicer Performance Report (Report) issued on July 20, 2010, it appears that, more often than not, most borrowers aren't surviving the trial modification stage.

Servicers also converted 51,205 trials to permanent modifications, approximately 3,481 more conversions than occurred in May. During the same period, the number of trial modifications also increased from May, growing from 30,099 to 38,728.

The recidivism rates for HAMP modifications six months after converting to a permanent modification are 5.9% of HAMP loans are 60+ days delinquent and 1.7% are 90+ days delinquent. At nine months after conversion, the rates rise to 7.7% for 60-day delinquencies and 2.4% for 90+ day delinquencies.

The velocity of the program is slowing down considerably!

On a cumulative basis, trial modifications started in September-October 2009 were 156,019, but the number of trial modifications in May-June 2010 were 15,753 - about a 90% reduction!

If you have any questions about this matter or would like assistance with mortgage compliance, please contact Jonathan Foxx, Managing Director or call 516-442-3456 x 100.

Highlights

●Number of permanent loan modifications: 346,816 to 389,198 (Increase: 42,382)
●Number of trial modifications canceled: 429,696 to 520,814 (Increase: 91,118)
●Number of "active trials": 467,672 to 364,077 (Decrease: 103,595)

These statistics clearly show that the number of failed trial modifications to date are significantly greater than the number of successful, permanent ones, while the number of trials started has dropped precipitously.

As indicated above, the velocity of the program is slowing down considerably. On a cumulative basis, trial modifications started in September-October 2009 were 156,019, but the number of trial modifications in May-June 2010 were 15,753 - about a 90% reduction!

This is the slowest month-over-month pace since the program began.

Taken together, the above two charts indicate why trials modifications are probably slowing down: servicers are now pre-qualifying borrowers and are also running out of eligible borrowers.

The median front-end DTI before modification is 44.8% (which is about where it has remained for several months); and, the back-end DTI before modification is an astronomically high 79.9% (which, in any event, has been in this high range of 77.5% to 80.2% for several months).

That back-end DTI discloses an inescapable fact: nearly 80% of the borrower's income is going to servicing debt - and nearly 63.7% of income even after loan modification - a troublesomely high back-end ratio, which indicates likely defaults in the future.

It's no wonder that many borrowers never make it out of trial modification into permanent modification. Indeed, these are "median" characteristics - so many borrowers have even higher risk profiles.

Clearly, the program is not meeting with the kind of success predicted at its inception and is gradually coming to an end.

Visit Library for Issuance

Making Home Affordable Program
Servicer Report - June 2010 (07/21/10)

July 1st: Home Affordable Unemployment Program

Overview

Under the Home Affordable Modification Program (HAMP), servicers apply a uniform loan modification process to provide eligible borrowers with sustainable monthly housing payments. On May 11, 2010, a Supplemental Directive was issued that gave servicers flexibility to provide assistance to borrowers whose hardship is related to unemployment.

When a borrower is unemployed, a HAMP trial period plan or permanent HAMP modification may not be appropriate, and in some cases, the borrower may not have the ability to make the required payments.

So, the Supplemental Directive requires servicers to consider eligible borrowers for the Home Affordable Unemployment Program (HAUP), which grants borrowers a forbearance plan during which regular monthly mortgage payments are reduced or suspended.

Borrowers will be evaluated for HAMP at the earlier of re-employment or 30 days prior to the expiration of the UP forbearance plan.
The Supplemental Directive pertains to first lien mortgage loans that are not owned or guaranteed by Fannie Mae or Freddie Mac (Non-GSE Mortgages) or insured or guaranteed by a federal agency, such as the Federal Housing Administration (FHA).

Effective for all participating servicers on July 1, 2010.

Highlights

Eligibility

Servicers are required to offer an HAUP forbearance plan to a borrower who meets the following HAMP minimum eligibility criteria:

• The mortgage loan is secured by a one- to four-unit property, one unit of which is the borrower's principal residence.
• The mortgage loan is a first lien mortgage loan originated on or before January 1, 2009.
• The current unpaid principal balance of the mortgage loan is equal to or less than $729,750.1
• The mortgage loan is delinquent or default is reasonably foreseeable.
• The mortgage loan has not been previously modified under HAMP and the borrower has not previously received an UP forbearance period.

Additional HAUP forbearance plan eligibility requirements include that the borrower:

• Makes a request before the first mortgage lien is seriously delinquent (before three monthly payments are due and unpaid). A request for UP may be made by phone, mail or email. Servicers must document the date of the UP request in the servicing file and, within 10 business days, confirm the receipt of the request with the borrower via mail or return email.
• Is unemployed at the date of the request for UP and is able to document that he or she will receive unemployment benefits in the month of the Forbearance Period Effective Date (defined below) even if his or her unemployment benefit eligibility is scheduled to expire before the end of the UP forbearance period.

Terms

• Term must be three months or upon reemployment (whichever is less). Servicers may extend this period according to their investor/regulatory guidelines.

• Monthly mortgage payment must be reduced to less than or equal to 31% of the borrower's gross monthly household income and may be suspended in full.

Transition to HAMP

Borrowers in an HAUP forbearance plan will be evaluated for HAMP at either reemployment or 30 days prior to the UP forbearance period expiring (whichever happens first).

Visit Library for Issuance

Home Affordable Unemployment Program
Home Affordable Modification Program Supplemental Directive
May 11, 2010

OCC-OTS: MORTGAGE REPORT SHOWS MIXED REVIEWS

Overview

On June 23, 2010, the Office of the Controller of the Currency (OCC) and the Office of Thrift Supervision (OTS) jointly issued their Mortgage Metric Report (Report) for the first quarter 2010. The Report provides performance data on first-lien residential mortgages serviced by national banks and federally regulated thrifts. These mortgages comprise more than 64% of all mortgages outstanding in the United States.

Among the disclosed statistics, the Report showed that approximately 41% of loan modifications made in second quarter of 2009 were 60 days or more delinquent nine (9) months after the modification, and the failure rate within nine (9) months was almost 52% in the fourth quarter of 2008.

The Report further discloses that nearly 25% of loan modifications made in the fourth quarter of 2009 were 30 days or more delinquent after three (3) months and Home Affordable Modification Program (HAMP) recidivism rate was 17% in the same period.

Although the Report's Key Findings, Mortgage Performance, Home Retention Actions: Loan Modifications, Trial Period Plans, and Payment Plans, Modified Loan Performance, and Foreclosures and Other Home Forfeiture Actions give varying results, both positive and negative -- as the saying goes, the "devil is in the details!"

Visit Library for Issuance

Highlights
Findings

• Delinquency rates dropped in the first quarter of 2010, with improvement in all categories of mortgages-prime, Alt-A, and subprime.

• The number of foreclosures increased substantially, including new foreclosures, foreclosures in process, and completed foreclosures.

• The number of loan modifications and other home retention actions also increased.

• Re-default rates for modified mortgages remain high.

• Recent "vintages" (i.e., 2009 loan modifications) performed better.

Visit Library for Issuance

Charts

Serious delinquencies declined across all risk categories during the first quarter of 2010. Subprime mortgages recorded the most significant improvement, while prime loans had the least improvement. Overall, there were 2,210,495 seriously delinquent mortgages at the end of the first quarter, 7.5 percent less than the prior quarter but 36 percent more than a year ago.

Early stage delinquencies-mortgages 30-59 days delinquent-significantly declined across all risk categories during the first quarter. Overall, early-stage delinquencies, at 2.8 percent, were 17.7 percent less than the prior quarter and 3.6 percent less than a year ago.

During the first quarter of 2010, servicers implemented 629,678 new home retention actions: loan modifications, trial period plans, and payment plans. This 5.4 percent increase in home retention actions from the prior quarter was driven by the 79,301 increase in HAMP modifications and 25,732 increase in other modifications, which more than offset the 74,091 decrease in new trial period plans. In total, servicers initiated 2,731,408 home retention actions over the last five quarters.

Visit Library for Issuance

Mortgage Metrics Report
Disclosure of National Bank and Federal Thrift Mortgage Loan Data
First Quarter 2010
Issued 06/23/10