The pressure is mounting on Freddie and Fannie to perform Principal Reduction

  3 Responses to “The pressure is mounting on Freddie and Fannie to perform Principal Reduction”

1. IrvineRenter says:

   March 27, 2012 at 6:14 am

   Lawler on possible Fannie and Freddie Principal Reductions

   From housing economist Tom Lawler:

   Several media stories, including one from NPR/ProPublica, suggest that new analysis by folks at Fannie and Freddie indicate that engaging in some principal reduction modifications may be cost effective to the GSEs.

   At least one of these stories, however, made what appears to be a “most erroneous” statement. E.g. a ProPublica reporter, in a follow-up article to the original NPR/ProPublica article on this issue, wrote that the GSE’s analysis suggested that “(s)uch loan forgiveness wouldn’t just help hundreds of thousands of families (stay) in their homes,” but “it would help save Freddie and Fannie money,” which “would help taxpayers…”

   That latter statement, however, appears to be incorrect. Other reports, including an interview with Freddie’s CEO, indicate that the GSEs’ analysis finds that principal reductions would be “cost effective” for the GSEs ONLY after factoring in the new, turbo-charged incentives Treasury would pay to the GSEs (and other lenders/investors) for doing a principal reduction under HAMP. Such incentives — which were recently tripled, and which the administration recently agreed would be paid to the GSEs as well as other HAMP participants (the GSEs didn’t use to get any HAMP incentives) – are obviously paid for by the government/taxpayers.

   HousingWire reported on Friday, e.g., that Freddie CEO “Ed” Haldeman said the following at a symposium:

   “I have to say recently the Treasury sweetened the program and tremendously increased the incentive payments in their offer to us. We will reevaluate that to see what may be in our economic best interest. If there are very large incentive payments — which could be 50% of what you could write down — it may be in our economic self-interest to participate in that.”

   So here’s the “taxpayer” scoop: as best as I can tell, the GSEs’ analysis (which, to be fair, some have questioned) suggests that principal reductions would NOT make sense for them (or, implicitly, for taxpayers) without any Treasury/taxpayer incentive payments. However, IF the GSEs receive hefty incentive payments from Treasury/taxpayers to engage in principal reductions, then in some cases doing so WOULD make sense to the GSEs – but NOT to taxpayers!

   CR Note: Hopefully the analysis will be released!
2. IrvineRenter says:

   March 27, 2012 at 6:21 am

   Pending Home Sales Index Extremely Weak in February

   The Pending Home Sales Index (PHSI) edged down February to 96.5 from January’s 97, which had been the highest level since April 2010, the National Association of Realtors reported Monday.

   The index slipped for just the second time in the last five months, but was 9.2 percent ahead of the level in February 2011. It remains down 26 percent from the April 2005 level. The index began in March 2005.

   Pending home sales are counted when sales contracts are signed, and are viewed as a leading indicator of existing home sales; recent reports suggest that home re-sales should be a bit stronger over the next couple of months but at a level that is still fairly subdued.

   The PHSI has been drifting upward, albeit modestly for most of the past two years but remains lackluster. A substantial number of sales contracts are failing to meet underwriting standards and/or other loan criterion as sales contract cancellations remain elevated. Although a hopeful movement, home sales still appear to be searching for a sustainable level and continue to be subject to conflicting trends in labor markets, house,hold formation, mortgage interest rates and underwriting standards.

   The PHSI in the Northeast slipped 0.6 percent to 77.7 in February but is 18.4 percent above a year ago. In the Midwest, the index jumped 6.5 percent to 93.8 and is 19 percent higher than February 2011. Pending home sales in the South fell 3 percent to an index of 105.8 in February but are 7.8 percent above a year ago. In the West, the index declined 2.6 percent in February to 99.3 and is 1.8 percent below February 2011.

   The index is based on a large national sample, representing about 20 percent of transactions for existing-home sales. An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined as well as the first of five consecutive record years for existing-home sales; it coincides with a level that is historically healthy.

   The dip in the index was consistent with declines in mortgage purchase applications edged down in January and with the month-over-month drop in new home sales, which are also tracked by contract signings.
3. Mike says:

   March 27, 2012 at 10:31 am

   FHA Bailout Risk Looming Larger After Guarantee Binge: Mortgages

   By Bob Ivry – Mar 27, 2012

   The Federal Housing Administration won’t be able to earn its way to financial health this year, increasing the chance it will need a taxpayer bailout, based on an updated forecast from Moody’s Analytics, which provides the agency’s housing-market analysis.

   The U.S. government mortgage-insurer, which guarantees $1.1 trillion in home loans, had been counting on “robust growth” in home prices to help rebuild its insurance fund after paying out $37 billion to cover defaults the past three years, according to its annual report to Congress, filed in November.

   It won’t get that growth until 2014, according to the latest outlook from Moody’s Analytics. Prices will fall 3 percent in fiscal 2012 before growing 1.4 percent in 2013 and 6.5 percent in 2014, said Celia Chen, a Moody’s Analytics housing economist who updated her estimate after providing the housing-market forecast for the FHA’s annual actuarial report.

   “The FHA’s economic projections are surreal,” said Andrew Caplin, a New York University economics professor who has testified to Congress on the agency’s finances. “They must believe there will be very few readers in Congress able to critically review such a complex report.”

   In their annual review, the FHA’s actuaries — risk analysts who specialize in insurance — used earlier projections that called for increases of 1.2 percent in 2012 and 3.8 percent in 2013. The agency, which backs mortgages that cover as much as 96.5 percent of a home’s value, is sensitive to changes in home prices. While the insurance fund’s 2012 outlook called for net growth of about $9 billion, that will drop if home prices decline, according to the FHA’s November report.

   By law, the fund is supposed to hold 2 percent of its portfolio in reserve; as of Sept. 30, it held only 0.24 percent, or $2.6 billion, according to the report.
   ‘Best Available Data’

   While the FHA issues an annual report and hasn’t updated its outlook since the new Moody’s forecast, Carol J. Galante, the acting FHA commissioner, says there’s no indication that home prices will fall to a level where the agency would need help from the U.S. Treasury.

   “The independent actuaries rely on the best available data that most closely reflects our portfolio to estimate how the market will behave in the future,” Galante said in a statement yesterday. “All things considered, we’re doing everything we can to remain in positive territory and to avoid needing additional support from the Treasury.”
   Deeper Than Predicted

   Losses will be deeper than the FHA predicts, in part because the agency uses a home-price index that excludes distressed sales, Caplin said. Distressed sales, which refer to sales at prices lower than what borrowers owe on their mortgages, will make up 40 percent of transactions this year, Chen said. Excluding them produces a rosier forecast on sale prices and may mean the agency is underestimating potential claims, Caplin said.

   “They can’t even track their data correctly,” Caplin said in an interview. “Not knowing how to measure the performance of your borrowers is tragic and profoundly wrong.”

   The White House submitted a budget plan to Congress this year that would have provided the FHA as much as $688 million from the U.S. Treasury, the first bailout in the agency’s 78- year history. The money wasn’t needed because the FHA will get almost $1 billion from the government’s $26 billion settlement with the five biggest U.S. mortgage servicers over alleged foreclosure abuses, according to Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, which oversees the FHA. Mortgage servicers collect monthly payments and manage the foreclosure process.
   Business Tripled

   As the FHA tripled its home-loan insurance to $1.1 trillion since 2007, defaults and expected defaults drained its cash reserve below the 2 percent legal threshold the last three years. The reserve is a cushion to offset possible future losses and is held in addition to $29 billion the agency has set aside to pay expected claims.

   Caplin and others say the FHA’s plan to grow out of its cash squeeze amid rising property values won’t work. Taxpayers will be on the hook for between $50 billion and $100 billion “over many years,” says Joe Gyourko of the University of Pennsylvania’s Wharton School.

   FHA officials dispute that conclusion, and note that they’ve taken steps to improve the credit quality of borrowers and to increase premiums and fees. The agency’s role in U.S. housing grew as private mortgage insurers retreated after the credit contraction of 2008. The FHA, created in 1934 to help low- and moderate-income people buy homes and to stabilize credit markets, insured 30 percent of U.S. house purchases last year, up from 4.5 percent in 2006. It charges lenders and borrowers a fee to guarantee that mortgages will be paid.

   “To be clear, FHA is not broke,” Galante told a House Financial Services subcommittee hearing on Feb. 28.
   Premium Increase

   To help bring in more money, the FHA will increase the premiums it charges most borrowers by 0.10 percentage points, starting April 9. For borrowers with homes worth more than $625,500, the hike will be an additional 0.25 percentage points, as of June 11. Upfront fees will also rise, to 1.75 percent of the loan from 1 percent, effective April 9.

   President Barack Obama said Feb. 1 he wants to reduce rates on FHA refinancings for about 3.4 million eligible FHA homeowners. Their upfront fee would drop to 0.01 percent from about 0.55 percent and their annual premiums would be cut to 0.55 percent from 1.2 percent.
   Net Effect

   The net effect of the hikes and proposed discounts would add a total of $1 billion to FHA receipts in fiscal years 2012 and 2013, Galante told a Senate subcommittee March 8.

   The agency’s reserve fund — the amount held back after making provision for expected claims — declined from 0.53 percent of its total portfolio in 2009, to 0.5 percent in 2010 and 0.24 percent last year. For single-family mortgages, which make up 94 percent of the portfolio, the 2011 reserve was just 0.12 percent.

   “The FHA clearly didn’t allocate enough capital to the loans it insured from 2007 to 2010,” said Morris A. Davis, a professor of real estate and urban land economics at the University of Wisconsin-Madison’s School of Business.

   Apart from the reserve account, the FHA had budgeted $29 billion for expected claims at the end of fiscal 2011, about $900 million less than the agency will need, according to its actuary’s estimates. The FHA said in November it wouldn’t set aside the additional $900 million, an action that would have reduced its capital reserve further.

   Over the last three years, the agency paid out $37 billion in claims — more than it expected and more than double the preceding three years — and “has not yet seen the peak of claim expenses,” which could come this year, according to the annual report.
   Negative Equity

   Property values are important to the FHA insurance fund. Negative equity — homeowners owing more on their mortgages than their houses are worth — is one of the most important triggers of defaults, Gyourko wrote in a November 2011 paper, “Is FHA the Next Housing Bailout?” published by the American Enterprise Institute, a Washington think tank that advocates for limited government.

   The FHA will lose at least $10 billion more than it projects on 2009 and 2010 loans to first-time homebuyers who also took advantage of an $8,000 tax credit, Gyourko says. The credit was offered as part of Obama’s $787 billion economic stimulus package.

   Gyourko called the credit a form of down-payment assistance, and noted that borrowers who receive such assistance are more likely to quit paying their mortgages.
   ‘False and Irresponsible’

   Raphael Bostic, HUD’s assistant secretary for policy development and research, called Gyourko’s assessment “completely false and irresponsible” in the agency’s blog, The HUDdle. About 1 million first-time buyers used FHA insurance during the 13 months the tax credit was available, and their “failure rate” is less than 1 percent, he wrote.

   The FHA was more accepting of arguments raised by Caplin and others, who say its actuary wasn’t correctly estimating risk for so-called streamline refinancing. The program moves borrowers from one FHA loan to another and doesn’t require updated property appraisals.

   Caplin and six other researchers estimated that as many as 71 percent of FHA borrowers who streamline-refinanced in Los Angeles County, California, in 2009 owed more than their houses were worth, according to a February 2010 paper. Using the FHA actuary’s methodology, only 1.5 percent of the streamline refinanced borrowers would have had negative equity, Caplin said.
   Capturing Values

   For its 2011 estimates, the FHA’s actuary, Integrated Financial Engineering Inc. of Rockville, Maryland, changed its approach to try to capture home values after the refinancings, said Barry Dennis, the firm’s president. The change was one of several that increased the insurance fund’s potential payouts as of Sept. 30 by about $6 billion.

   “Some borrowers have streamline-refinanced 10 times,” Dennis said.

   Caplin said the change didn’t go far enough. The actuary counts each refinancing as a “successfully terminated mortgage,” he said. If a borrower refinances three times, the FHA counts that as three successful payoffs, Caplin said. That makes the agency’s performance look better — and that history helps shape estimates of future losses, he said.

   “The refinance is just a rate reduction, it’s not a successfully terminated mortgage,” Caplin said. “Ask yourself if we’re creating sustainable homeownership. How many borrowers are ending their reliance on FHA?”
   Handling Risk

   Dennis said his firm’s approach uses FHA performance data to determine whether loans have had trouble in the past. While a refinancing removes risk from one year’s projections — the year in which the original loan was made — it adds risk in the year of the new loan, he said.

   “It’s the same risk in the portfolio; it’s just in a different year,” Dennis said. “We’ve continued to improve our modeling.”

   Caplin, Gyourko and others also question how the FHA gauges the condition of the housing market. The agency uses the Federal Housing Finance Agency index, which shows that home prices have declined 15 percent from a March 2007 peak. Another measure, the S&P Case-Shiller Home Price Index, shows that values have declined 34 percent since a July 2006 peak.

   The FHFA index is more appropriate because the properties it tracks tend to be in the same geographic areas where the FHA insures mortgages, according to the agency’s annual report to Congress. Also, it said the Case-Shiller index “includes concentrations of properties subjected to subprime loans, and those sold in distress sales,” which aren’t in the FHFA index.
   ‘Appear Better’

   Distressed sales tend to drive down home prices. Using the FHFA index “is just one of the many choices FHA makes that are completely unjustified and that coincidentally make the situation appear better than it is,” Caplin said in an interview.

   Integrated Financial Engineering’s Dennis said he “wouldn’t argue that the FHFA index is perfect.”

   “Some have suggested that the FHA use an FHA-specific home-price index,” he said.

   One change in the FHA’s approach this year may help improve the quality of its mortgages. It will spend more time and money checking for potential wrongdoing by mortgage originators, said Helen R. Kanovsky, HUD’s general counsel.
   ‘Limited Resources’

   Until recently, FHA officials chose to direct their “limited resources” to examining loan servicing rather than loan origination, Kanovsky said. In general, the agency trusts lenders to certify the quality of mortgages it guarantees and to report paperwork flaws or possible fraud.

   On Feb. 9, Charlotte, North Carolina-based Bank of America Corp. agreed to pay $1 billion to settle claims it failed to do so, while on Feb. 15 Citigroup Inc. (C) admitted it certified loans for FHA insurance that didn’t qualify and will forfeit $158 million. Some of that money will compensate the FHA for claims it paid for defaulted home loans certified by Citigroup and Bank of America’s Countrywide mortgage unit.

   The FHA can negotiate indemnification agreements in which the loan originator reimburses the agency for losses to its insurance fund. It typically requests indemnifications after a loan goes bad or when there are basic underwriting problems with the mortgage, such as missing paperwork or fraud.

   Over the last seven years, the agency has averaged 1,282 indemnification agreements a year out of an annual average of 993,355 total loans guaranteed — a little more than 0.1 percent.