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U.S. Treasury: Putting the ‘Short’ Back in Short Sales?

Kathleen A. Scanlon — Sun, 06 Dec 2009 03:33:16 +0000

Any real estate professional, who engages in small sale negotiations, is fully aware of just how frustrating the process can be or even downright impossible. There are financial incentives for mortgage servicers to drag out the process as long as possible. It takes weeks, sometimes months, to get a response from the banks, who often misplace packages and request that they be faxed over and over again. This past Monday, but, the U.S. Treasury has issued guidance in its new Home Affordable Foreclosure Alternatives Program (HAFA) which takes effect April 5 , 2010 (supposedly, many servicers are already modifying their programs to be compliant). In small, HAFA provides incentives in accepting a small sale or a deed-in-lieu of foreclosure (DIL) on a loan eligible for modification under the HAMP program. HAFA applies to loans not owned or guaranteed by Fannie Mae or Freddie Mac (they will be implementing their own versions of HAFA shortly).

Highlights of the HAFA program are as follows:

Servicers have 10 days to approve or disapprove a request for small sale.
Uses borrower financials and other documents already submitted for a loan modification.
Allows borrowers to receive pre-approved small sales terms before listing the property (including the minimum acceptable net proceeds).
Prohibits servicers from requiring a reduction in the real estate commission agreed upon in the listing agreement (up to 6 percent).
Requires borrowers to be fully released from future liability for the first mortgage debt (no cash contribution, promissory note, or deficiency judgment is allowed).
Uses standard processes, documents, and timeframes/deadlines.
Provides financial incentives: $1,500 for borrower relocation help; $1,000 for servicers to cover administrative and processing costs; and up to $1,000 for investors (note holders).
Caps proceeds to second lien holders at $3,000.00. (fascinating but I wonder at how those lien holders in the second position feel about this)

Requirements:

Loan must be HAMP eligible – Services must evaluate a buyer for a HAMP modification first before giving any consideration for a HAFA small sale or Deed in Lieu (DIL);
Property is borrower’s principal residence;
the mortgage is a first lien and was originated before January 1, 2009;
the loan must be delinquent or default reasonably foreseeable;
loan amount limit is 729,750 (on 1 family units);
borrower’s total monthly payment exceeds 31 percent of the home owner’s income and attested to by affidavit;
Sale must be an arm’s length agreement and the buyer must agree not to sell the property for 90 days (problematic and I believe will diminish the potential of this program);
Requires property to be listed with a real estate broker (I wonder who lobbied for this…so this has to be added on to the servicer’s Minimum Net Proceeds and thus increases the cost to Purchaser)

While I admire the government’s attempt at allieviating the small sale log jam, as usual, they overstep their bounds. The American people are being questioned to yet again foot the bill for the banks’ irresponsible lending practices to the tune of $3,000 per closing. Further, mandating that properties be listed with a real estate broker across the board is excessive and will, in effect, add to the buy price paid by the prospective buyer. The arm’s length rule eliminates family attempting to save the home and the 90 day prohibition against resale will chill real estate investor participation which plays a major role in moving houses (I find this restraint on alienation to be disturbing as well and question its enforceability). Lastly, I question how many second lienholders are going to participate with their payments limited to $3,000.00. Without their participation, it will be an exercise in futility as many of these homeowners have 2 loans.

Now You See It…Now You Don’t – is HUD Squashing Tax Credit as Down Payment Program????

Kathleen Scanlon — Mon, 18 May 2009 13:02:00 +0000

I blogged last week about FHA's new plot to allow prospective purchasers to monetize the first time Home Buyer's $8,000 tax credit and use it as a down payment on the buy of a home. The Secretary of HUD made statements at a NARS meeting about the revolutionary plot and HUD drafted a Mortgagee Letter (ML 09-15) describing the plot more in depth (which I personally viewed and read on their website).

But, ML 09-15 has disappeared from HUD's website and we are left wondering if HUD is already pulling the plug on this plot…

MBS Investors Sue Countrywide for Loan Modifications

Kathleen Scanlon — Wed, 03 Dec 2008 02:23:29 +0000

Carrie Bay 12/02/08
Investors of securities backed by Countrywide mortgages filed a lawsuit against the lender on Monday, alleging that Countrywide has no right to modify under-performing loans that were packaged and sold as securities.
In early October, Countrywide’s parent company, Bank of America, reached an agreement with 15 state attorneys general to settle claims against Countrywide regarding predatory lending practices. Under the deal, Bank of America agreed to modify as many as 400,000 Countrywide loans, reducing payments due on mortgages it services by as much as $8.4 billion.
Investors who now hold those loans are demanding that Countrywide buy back every mortgage it plans to modify under the multi-state settlement agreement. The lawsuit was filed by the law firm of Grais & Ellsworth LLP in the New York State Supreme Court, on behalf of Connecticut-based Greenwich Financial Services Distressed Mortgage Fund 3 LLC and QED LLC, which bought the mortgage-backed securities (MBS).
The complaint claims that Countrywide is shifting the $8.4 billion modification cost to 374 mortgage trusts, related to two series of securitizations known as CWL and CWALT. The plaintiffs say they do not oppose the settlement reached between the attorneys general and Countrywide, but are seeking resolution from the court that the lender “is required to buy any loan on which it agrees to reduce the payments.
“The complaint also said that if the trusts involved “are forced to absorb the reduction in payments occasioned by Countrywide’s settlement of the allegations against it, then the value of the securities that those trusts sold to investors will decline,” causing hurts to the bond investors.
According to lawyers for the plaintiffs in the complaint, Countrywide and Bank of America would be liable to pay hundreds of trusts a total of about 80 billion dollars for loans it has promised to modify, a Reuters report said. Countrywide has denied it is required to repurchase the loans it intends to modify, and said it was considering the interests of investors when it agreed to the October settlement. Bank of America said it was “disappointed in this attack on a program intended to keep at-risk families in their homes” and help stabilize the spiraling housing market.

DSNews.Com Default Servicing In Print and Online – Formerly REO Magazine

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Tags: subprime, loan modification, Countrywide, Bank of America, wall street, mortgage backed securities, real estate, mortgage

Treasury, Fed, FDIC Urge Banks to Start Lending

Kathleen Scanlon — Fri, 14 Nov 2008 02:36:38 +0000

These agencies issued a joint statement to place the pressure on banks to resume Lending again. “The statement calls on banks to step up and ensure that the needs of credit-worthy borrowers are met and to continue raising capital to support the nation’s financial system. It also calls on financial institutions to take on aggressive loss mitigation and foreclosure prevention strategies and said banks should reassess their incentive and compensation policies.” http://www.dsnews.biz/index.php/home/news_story/2174

The following is the full press release from the FDIC:

FDIC
For Immediate Release

November 12, 2008

Interagency Statement on Meeting the Needs of Creditworthy Borrowers

The Department of the Treasury, the Federal Deposit Insurance Corporation, and the Federal Reserve have recently place into place several programs designed to promote financial stability and to mitigate procyclical effects of the current market conditions. These programs make new capital widely available to U.S. financial institutions, broaden and increase the guarantees on bank deposit accounts and certain liabilities, and provide backup liquidity to U.S. banking organizations. These efforts are designed to strengthen the capital foundation of our financial system and improve the overall functioning of credit markets.

The ongoing financial and economic stress has highlighted the crucial role that prudent bank lending practices play in promoting the nation’s economic welfare. The recent policy actions are designed to help support responsible lending activities of banking organizations, enhance their ability to fund such lending, and enable banking organizations to better meet the credit needs of households and business. At this critical time, it is imperative that all banking organizations and their regulators work together to ensure that the needs of creditworthy borrowers are met. As discussed below, to support this objective, consistent with safety and soundness principles and existing supervisory standards, each individual banking organization needs to ensure the adequacy of its capital base, engage in appropriate loss mitigation strategies and foreclosure prevention, and reassess the incentive implications of its compensation policies.

Lending to creditworthy borrowers
The agencies expect all banking organizations to fulfill their fundamental role in the economy as intermediaries of credit to businesses, consumers, and other creditworthy borrowers. Moreover, as a result of problems in financial markets, the economy will likely become increasingly reliant on banking organizations to provide credit formerly provided or facilitated by purchasers of securities. Lending to creditworthy borrowers provides sustainable returns for the lending organization and is constructive for the economy as a whole.

It is essential that banking organizations provide credit in a manner consistent with prudent lending practices and continue to ensure that they consider new lending opportunities on the basis of realistic asset valuations and a balanced assessment of borrowers’ repayment capacities. But, if underwriting standards tighten excessively or banking organizations retreat from making sound credit decisions, the current market conditions may be exacerbated, leading to slower growth and potential hurt to the economy as well as the long-term interests and profitability of individual banking organizations. Banking organizations should strive to maintain healthy credit relationships with businesses, consumers, and other creditworthy borrowers to enhance their own financial well-being as well as to promote a sound economy. The agencies have directed supervisory staffs to be mindful of the procyclical effects of an excessive tightening of credit availability and to encourage banking organizations to practice economically viable and appropriate lending activities.

Strengthening capital
Maintaining a strong capital position complements and facilitates a banking organization’s capacity and willingness to lend and bolsters its ability to withstand uncertain market conditions. Banking organizations should focus on effective and efficient capital plotting and longer-term capital maintenance. An effective capital plotting process requires a banking organization to assess both the risks to which it is exposed and the risk management processes in place to manage and mitigate those risks; evaluate its capital adequacy relative to its risks; and consider the potential impact on earnings and capital from economic downturns. Further, an effective capital plotting process requires a banking organization to recognize losses on bank assets and activities in a timely manner; maintain adequate loan loss provisions; and adhere to prudent dividend policies.

In particular, in setting dividend levels, a banking organization should consider its ongoing earnings capacity, the adequacy of its loan loss allowance, and the overall effect that a dividend payout would have on its cost of funding, its capital position, and, consequently, its ability to serve the expected needs of creditworthy borrowers,. Banking organizations should not maintain a level of cash dividends that is inconsistent with the organization’s capital position, that could weaken the organization’s overall financial health, or that could impair its ability to meet the needs of creditworthy borrowers. Supervisors will continue to review the dividend policies of individual banking organizations and will take action when dividend policies are found to be inconsistent with sound capital and lending policies.

Working with mortgage borrowers
The agencies expect banking organizations to work with existing borrowers to avoid preventable foreclosures, which can be costly to both the organizations and to the communities they serve, and to mitigate other potential mortgage-related losses. To this end, banking organizations need to ensure that their mortgage servicing operations are sufficiently funded and staffed to work with borrowers while implementing effective risk-mitigation measures.

Given escalating mortgage foreclosures, the agencies urge all lenders and servicers to adopt systematic, proactive, and streamlined mortgage loan modification protocols and to review troubled loans using these protocols. Lenders and servicers should first determine whether a loan modification would enhance the net present value of the loan before proceeding to foreclosure, and they should ensure that loans currently in foreclosure have been subject to such analysis. Such practices are not only consistent with sound risk management but are also in the long-term interests of lenders and servicers, as well as borrowers.

Systematic efforts to address delinquent mortgages should seek to achieve modifications that result in mortgages that borrowers will be able to sustain over the remaining maturity of their loan. Supervisors will fully support banking organizations as they work to implement effective and sound loan modification programs. Banking organizations that experience challenges in implementing loss mitigation efforts on their mortgage portfolios or in making new loans to borrowers should work with their primary supervisors to address specific situations.

Structuring compensation
Poorly-designed management compensation policies can make perverse incentives that can ultimately jeopardize the health of the banking organization. Management compensation policies should be aligned with the long-term prudential interests of the institution, should provide appropriate incentives for safe and sound behavior, and should structure compensation to prevent small-term payments for transactions with long-term horizons. Management compensation practices should balance the ongoing earnings capacity and financial resources of the banking organization, such as capital levels and reserves, with the need to retain and provide proper incentives for strong management. Further, it is vital for banking organizations to have independent risk management and control functions.

The agencies expect banking organizations to regularly review their management compensation policies to ensure they are consistent with the longer-run objectives of the organization and sound lending and risk management practices.

The agencies will continue to take steps to promote programs that foster financial stability and mitigate procyclical effects of the current market conditions. But, regardless of their participation in particular programs, all banking organizations are expected to adhere to the principles in this statement. We will work with banking organizations to facilitate their active participation in those programs, consistent with safe and sound banking practices, and thus to support their central role in providing credit to support the health of the U.S. economy.

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Tags: FDIC, Fed, Credit, Lending, Banks, Mortgage