Aug. 30: Thoughts & letters on volumes, foreclosure laws, lower credit standards, and DPAs

If I decided to sell my emergency cache of Thin Mints, I would first have to dig up my basement floor; secondly, I would need to establish some price point by estimating demand. If the quantity demanded was equal across different price points, demand for Thin Mints is said to be inelastic; I’ll sell just as many boxes at $1 as I would at $5. Now back to mortgage news…well, the agency 30-year rate has been declining since the start of the year, which according to Wells Fargo is “reflecting the observed trend in the 10-year Treasury yield“. Both rates have been influenced by economic factors and, to a greater extent, the current Federal Reserve policy environment. There are a number of factors which are contributing to the negative pressure on mortgage rates, however, two main variables still remain: the soft housing market, coupled with a short supply of mortgage backed securities. What is disconcerting to many is even with the incentive of low interest rates, it appears structural factors still persist in housing market demand. Welcome to inelasticity.


Should we blame the Fed, they’re an easy enough target? Maybe, but market structure is mostly the root cause. Let’s revisit QE and HARP which helped employ so many in the industry over the past few years. With the Fed’s Quantitative Easing programs, the Fed in essence synthetically limited the supply of MBS which effectively kept a cap on mortgage rates over the past few years. If we couple QE with HARP, we realize an almost perfect refinance environment. As Wells Fargo points out, new issuance is also a contributing factor, “The story today has changed as mortgage applications for refinancing have continued to decline ever since interest rates spiked in mid-2013 following the Fed’s first mention of tapering, while the number of new purchase mortgage applications has remained essentially flat. This slow rate of new mortgage issuance is also contributing to the tight supply of mortgage backed securities.” So, even as the Fed has begun to wind down their MBS purchasing, rates continue to improve given the tight supply of MBS and the amount of MBS purchases the Fed needs to make as part of its reinvestment of proceeds on these investments.


Why is new mortgage issuance so low? Let’s blame home sales. Although sales have shown a slight improvement recently, numbers coming out are far from exciting. There are a number of scenarios which have been thrown out there to explain this lack of demand. Consumer behavior is changing as more and more individuals are choosing to rent instead of buy, which is structurally changing market dynamics. First-time home buyers (and there are a lot of those individuals out there) are being drawn towards renting, as opposed to buying, and are willing to pay a premium in order to stay mobile (a factor of underemployment?). Student debt follows young adults well past their first job or two, coupled with modest job and income growth, which all contribute to rental market demand.  All of these factors lead many real estate “experts” to conclude that the housing market will improve modestly in the coming months, with mortgage rates remaining “modest” until structural factors are worked out.


A while back the commentary addressed how the servicing value of a loan is influenced by state laws. “One of the key determinants of the value of servicing is the method of foreclosure in a given state. That, in turn, often determines the length of time and amount of effort involved in foreclosing. Two and a half years: Connecticut ranks among the top ten states with the longest average delinquency for loans in foreclosure, with the average delinquency of 2 ½ years. That’s a long time no matter which side of the foreclosure you are on; however, a huge part of this story rests with the fact Connecticut is a judicial foreclosure process state; states governing their foreclosures process’ in such a manner account for 42% of all active mortgages, however, some 70% of loans in foreclosure are in these states as well. As some know, and many may not, judicial foreclosure proceedings are when a mortgage lacks the power of sale clause. In such an instance, many states require the foreclosure to be processed through the state’s courts. If the court confirms that the debt is in default, an auction is held for the sale of the property in order to acquire funds to repay the lender. Here are some stats: foreclosure inventory is 3.5X higher in judicial states than non-judicial, and more than 60% of these loans have been past due for two years or more, loans in foreclosure in judicial states have been delinquent an average of 1,084 days (compared to just 775 days in non-judicial states), and the states with the highest number of average days past due for loans in foreclosure….(dare to take a guess?) are all judicial states: New York and Hawaii are each above 1,300 days, while New Jersey and Florida both top 1,200 days.”


And I was reminded of a history lesson by a broker in Nevada. “As I recall, that is why the deed of trust came into being.  120 days to foreclose.  To get eastern money out here in the Wild West, the deed of trust and quick foreclosure was invented.  Late 1800s, I believe.  Each state does have its quirks in foreclosure law, but in essence very easy to foreclose. That is unless as a lender you totally disregard state law, and decide to do as you please with the trustee situation, and other requirements. In NV there are still a few properties that the owner is sitting rent free for over 2.5 years. The lender cannot foreclose as they don’t have the original documents, and there was no assignment of beneficial interest. Don’t know why the lenders don’t turn around and do judicial forecloses and move on, but many have not. The arrogance of the finance industry never ceases to amaze me.”


And this from a broker in New Jersey rate versus return: “I hate that term, ‘lowering the standards’. It should simply be that you are willing to accept greater risk. If you accept greater risk without greater reward THEN you’re a fool. Greater risk should yield greater return, that’s why people open businesses. What happened, and we all questioned it at some point; the people who paid the highest rates are the ones who least could afford the highest rates. This concept is what held the borrower to a level of responsibility. When the consumer was no longer responsible, the market was doomed to fail.


And this note on the lack of variety in the market place. “You noted Option ARMS. Almost all option ARMs were prime loans. I only recall one that went with low FICOs and it was at the very end. Option ARMs, and I think NIVs, really came out of the Alternative Mortgage Transaction Parity Act of 1982, although it actually started being written in 78-79. But without Alternative Mortgages, this economy is going to be in the doldrums. We still have numerous ethnic groups that are cash only, or have funds they put into to help newlyweds buy homes, etc., and few meet the F&F guidelines, yet most are top flight loans.


“Politics is another major factor. Look at the current issue at FHFA. Many want principal reductions from Mel Watt. I’m fine with it under the following circumstance: the loan has to have been current for 12 months. Borrowers have to show a radical downward change in household income since the mortgage was originated. Sadly, this is not politically expedient, but it would help out those that made the effort to maintain their homes mortgage.”


Derek B opines, “I can’t take it anymore.  All the talk about how the big bad banks and mortgage companies did all these bad loans on purpose and out of greed is lacking in some fundamental facts.  It is not to say that there haven’t been some bad players, because there were (and are, I’m sure), but please remember the primary driver of lowered credit standards was the FEDERAL GOVERNMENT.  Under the Community Reinvestment Act (CRA) Congress pushed Fannie and Freddie to do more and more Low to Moderate Income (LMI) loans and the only way for the Agencies to comply with the Congressional Mandates was to encourage the lenders to sell them more LMI loans by continually lowering the standards.  If the Agencies wanted to buy these loans, someone was going to originate them thus filling the demand. On the subject of the huge settlements with B of A, et al, the Federal Government and the CFPB are using the banking system as their own private ATM machine.  When they want some more money they simply file some more lawsuits and then enter into settlement talks. This is called “sue and settle” a long used tactic of lawyers. It has little to do with criminal wrongdoing or intent.  Why do you think getting a straight answer out of the regulators is so difficult?  If it was black and white then there is no room for all the attorneys and lawsuits. The banks assume it is cheaper to settle than to fight and have their reputation in the marketplace destroyed by the Government. Lastly, the investors who purchased the securities should have the right to sue if they were in fact defrauded.  Only problem with that is the Government wouldn’t get any of the money so they do not support such actions.  As in all things, follow the money it will take you directly to the source.”


Changing topics to down payment assistance programs, Ken chimes in, “My observation is this: there are so many state and city down payment assistance programs out there that it looks like there are bales of money just waiting to be given away as a forgivable second mortgages and MCCs to whoever will stand in line with their hand out. I have buyers seek me out and say, ‘I want every program available.’ In many states the income limit max for the state program is $85,000. That is certainly not low income. We have the state program and then there are the local housing programs that do the same thing. I am not a huge fan of these programs.  What happened to making sure everyone is qualified based on income? When you use a state based MCC (Mortgage Credit Certificate) to boost income to qualify your borrower are you repeating the sins of the past and throttling up the potential for default?


“What about the battle cry from years past: ‘The consumer was tricked into a loan and had very little skin in the game.’ What is different about that now with these programs? Why can a state agency charge a higher interest rate when using their Down Payment Assistance? My rate is 3.75% for FHA. The state program is 4.0% with DPA. Isn’t that gouging the consumer? Most of the DPA’s are silent seconds that will have to be paid back if the house is sold in less than 11 years. Isn’t that just like a balloon mortgage from the past? It’s funny: when a loan officer does it, that is predatory lending. But when state DPA’s and NACA do it, that’s okay because they are exempt from most licensing requirements. Is that progress? I think not. Where does the money come from to fuel this ridiculous behavior? It comes from bonds, a collection of fines from lending institutions, and the federal government. In other words: Us. If you can’t provide it for everyone, you should not provide at all. America used to be one body inclusive of all. Now it is carved up into little groups with neat little titles and we are all fighting each other.”



Instead of a joke, we have the Napa earthquake damage via drone. Worth about 60 seconds.





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Rob Chrisman