Upside Down – Part II

by Larry Levin


I ended yesterday’s missive with "Next up, 100-year mortgages." I was wrong. Next up is government housing for the unemployed, thus further distorting the housing market. If this is forcefully passed, for all intents & purposes, Uncle Sam is your landlord - excuse me - overlord. In “A Dark Day for the Mortgage Industry” Paul Jackson describes it all.

http://www.housingwire.com/2010/03/01/a-dark-day-for-the-mortgage-industry/

If the Mortgage Bankers Association was hoping to show that it’s in touch with the needs of the mortgage servicing industry – and taxpayers, too – a proposal unveiled at last week's servicing conference in San Diego may quickly have shot that notion to the ground. MBA president and CEO John Courson used the show’s opening remarks to announce that the trade organization was backing what it called a “Bridge to HAMP” proposal for unemployed borrowers. The shock and dismay from many servicers in the audience was actually audible, and I saw plenty of executives shaking their heads in collective dismay. Not because they don’t want to help troubled borrowers, mind you – but because they understood what capitulation looked like when they saw it.

We'll get into the details, because details matter. What you need to know is this: the MBA, along with committee input from Fannie Mae, Freddie Mac (read: government) and others, are now pushing the U.S. Treasury to extend taxpayer-funded forbearances to unemployed owner-occupants. I say "taxpayer-funded" for a reason, as you'll see. Under the MBA proposal, unemployed borrowers would be asked to make nominal payments equal to 31% of whatever their remaining income is - which for many millions of Americans without savings would be 31% of their unemployment benefits, not nearly enough to cover their usual mortgage. In exchange for whatever they can afford, borrowers would receive forbearances for up to 9 months - with the servicer continuing to advance full principal and interest to investors the entire time.

But the servicer isn’t on their own in this proposal: servicers would have access to a mutant cousin of the discount window, called a Low Cost Advancing Vehicle (LCAV), which would see the U.S. Treasury "supply reasonable funds at a fixed rate to participating mortgage servicers to facilitate advances of principal, interest, taxes and insurance for the extended forbearance period."

Leaving the more complex accounting minutiae aside for now (i.e., is a nine month forbearance a troubled-debt restructuring, thereby requiring a charge-off?), my comment is this: this proposal represents a dark day indeed for the mortgage industry, because it brings with it the distinct possibility of nationalizing our housing stock.

Let's look at the fundamental question: by "bridging" unemployed borrowers to HAMP, are these borrowers really likely to be able to re-perform on their loan? To find the answer, we need look no further than an earlier attempt to tide borrowers over, a largely failed Fannie Mae program called HomeSaver Advance. When HomeSaver Advance was rolled out in June of 2008, it was supposed to provide troubled borrowers with that needed jump start to get them on track to a performing mortgage. Borrowers could get a loan amount up to $15,000, unsecured, at a fixed 5% rate- with no payments and no interest for the first six months, and payments then spread over 174 months. The money was meant to cure any shortfalls due to temporary setbacks experienced by a borrower. (You know, like loss of a job?)

Turning back the clock to the middle of 2008, HomeSaver Advance was Fannie's primary tool for loss mitigation. In fact, 45 percent of all loss mitigation activity in the U.S. during the third quarter of 2008 was through the HomeSaver Advance program. But by May of 2009, in a report to Congress, then-director of the Federal Housing Finance Agency James Lockhart indicated that roughly 70% of the mortgages tied to the HomeSaver Advance program had redefaulted and were in the foreclosure pipeline again. The program still exists today, by the way, for borrowers facing temporary hardship that don’t qualify under HAMP - but it’s no longer a preferred alternative, guidelines have changed, and it’s clearly a shell of its former, short-lived glory.

To recap: under HomeSaver Advance, borrowers were directly given the means to cure their mortgages, and largely could not do it. I’m not sure how the MBA’s 2010 version of this program-which effectively bypasses the borrower and channels funds directly to investors-somehow changes that equation.

Way back in August of 2007-that's now more than two and a half years ago-I first warned of the coming problem of millions of borrowers stuck in homes they could not afford, and argued against the futility of trying to keep those people in their homes. I suggested then that we begin considering the use of federal funds to help borrowers land on their feet as renters, enabling them to re-enter the home purchasing market at a later point-thereby enabling properties to move from weaker hands to stronger hands. You know, the basic stuff that economic recovery is eventually made of.

Our housing market works, if it’s allowed to do so. Regular readers will know that I’ve been disappointed-but not altogether surprised-to see Capitol Hill reach into mortgage markets and regulate market activity. And some regulation was, and is, clearly warranted. But this proposal from the MBA reaches a much darker level. What do you really think happens when Uncle Sam is in deep for investor advances, and millions of U.S. "homeowners" have been allowed to stay in their homes for next-to-nothing in payments? It’s a question I’d rather never see an answer to.

Paul Jackson is the publisher of HousingWire.com and HousingWire Magazine.


Previous Day's Trading Room Results:

Trade Date: 3/2/10

E-Mini S&P Trades*
(before fees and commissions):

1) No "secrets" trades filled today.

2) Algorithm positions (6)

3) "Reading the Tape" positions (16)...combined Secret’s, Algo, & "Reading the Tape" total...-3.25



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