Experian Says Phenomenon of “Strategic Defaults” May Have Peaked

Link: http://www.dsnews.com/articles/phenomenon-of-strategic-defaults-may-have-peaked-experian-2010-06-28

Original Post Date: June 28, 2010

By: Carrie Bay

A new study released Monday by data service provider Experian finds that nearly 1 in 5 mortgage delinquencies during the second quarter of 2009, or 19 percent, was the result of a borrower intentionally, strategically defaulting.

The company called the share of walk-aways “high,” but said “there is reason to believe the phenomenon may have peaked, or be close to peaking.”

The study, developed in conjunction with the international business consulting firm Oliver Wyman, shows that the absolute number of strategic defaulters — which the companies define as those who miss six straight mortgage payments without missing payments on other consumer debts such as credit cards or car loans — totaled 355,000 during the first half of last year.

But the data shows that strategic defaults, as well as first-time mortgage delinquencies in general, declined in successive quarters in 2009, suggesting they may have crest in Q4 2008, the companies said.

“Both delinquency and strategic default — as we define these terms — continue at high levels, but in Q2 2009 we see the first evidence of a break in the upward trend,” explained Peter Carroll, partner at Oliver Wyman.

“After a seasonal reduction in both measures from Q4 2008 to Q1 2009, the Q2 numbers then declined further, breaking the historical trend of quarter-over-quarter increases,” Carroll said, but he noted that the companies will be extending the analysis to cover data from the third and fourth quarters of last year to validate their assumption that strategic default is on the decline.

The report also noted that the incidence of “cash-flow managers” rose from 20 percent in 2008 to 26 percent in the first half of 2009. The companies refer to the term cash-flow managers as temporarily distressed borrowers whose payment behavior closely mimics strategic defaulters. However, this group of borrowers continue to make occasional payments on their mortgage, perhaps indicating their intention to get out of delinquency.

“Cash-flow managers would be better candidates for loan modification programs than strategic defaulters,” said Charles Chung, Experian’s general manager of decision sciences. “They are likely to be in temporary distress and may also have financial resources which allow them to continue to pay their non-mortgage obligations. This clearly demonstrates a willingness to pay, and a loan modification that makes their mortgage payments more affordable is likely to be very effective.”

The Experian-Oliver Wyman study also pinpointed several common characteristics of strategic defaulters, some of which may be surprising.

Borrowers with multiple first mortgages — i.e., investors — show a higher incidence of strategic default, they concluded.

In addition, in the first half of 2009, 28 percent of what the companies called “super-prime delinquents,” meaning they possessed a VantageScore credit rating between 901 and 990, became strategic defaulters. That’s a 50 percent higher rate than the share of strategic defaulters when looking at the overall delinquent population.

Customers with higher mortgage origination balances are more likely to strategically default, the report said. The study also found that incidence of strategic default is largely concentrated in areas where home price declines have been the steepest, with strategic defaults running 80 times higher in California during the first half of 2009 than they did in 2005, and the ratio in Florida 53 times higher.

The report also honed in on counterintuitive home-equity line default behavior. The companies found that strategic defaulters who also have home-equity lines are more likely to stay current on those lines prior to mortgage default.

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Fannie Mae Adopts New Rules for Pre-Mod Income Verification


Original Post Date: June 28, 2010

By: Carrie Bay

A general practice of servicers today is to consider borrowers for a standard Fannie Mae mortgage modification based solely on the homeowners’ verbal statement of their financial information. But that’s about to change.

The GSE has issued new servicing guidelines stating that effective July 15, 2010, all servicers must verify the borrower’s income, liabilities, and monthly expenses before a loan modification can be offered.

“The servicer must not agree to change the terms of a mortgage loan until the servicer receives and evaluates the financial information required to verify that the borrower has a hardship, determines that a permanent standard Fannie Mae mortgage modification is the appropriate foreclosure prevention alternative, and obtains Fannie Mae’s prior written approval,” according to the newly issued guidelines.

Prior to granting a modification, the servicer must determine the borrower’s total assets. The liabilities provided by the borrower on financial forms must be compared to a recent credit report, and monthly gross income must be verified. Fannie says the servicer may rely on verbal information obtained from the borrower to document monthly living expenses in its servicing system.

The GSE also reiterated in its guidelines that servicers must require the borrower to make a cash contribution, if financially feasible, toward reducing the delinquency.

In addition, Fannie Mae says if a borrower becomes 60 or more days delinquent within the first 12 months of receiving a modified loan, then the servicer must immediately work with the borrower to pursue either a short sale or deed-in-lieu, or commence foreclosure proceedings. If the servicer determines that another modification is appropriate for the borrower, the servicer must first obtain Fannie Mae’s written approval to try a new loan restructuring.

Servicers may continue to process modifications that were previously evaluated based on stated income prior to July 15. Mortgage loans that are eligible for Fannie Mae’s Alternative Modification program are not subject to the new “hardship” documentation requirements.

The new income verification rules come just days after Fannie Mae announced new policy changes intended to deter financially competent homeowners from strategically defaulting on their mortgage.

Borrowers who walk away from their loan obligation and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie Mae-backed mortgage for a period of seven years from the day of foreclosure. The GSE says it will also take legal action to recoup the outstanding mortgage debt from strategic defaulters in jurisdictions that allow deficiency judgments.

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Mortgages Face New Rules: Some Worry About Higher Costs, Fewer Choices for Borrowers


Original Post Date: June 28, 2010

By Nick Timiraos and James R. Hagerty

The Dodd-Frank financial-regulatory overhaul, which Democrats hope will win final Congressional approval this week, offers greater protections for consumers against riskier and more complicated types of home mortgages. But some in the industry warn the legislation also may lead to higher costs and fewer choices for consumers.

“The kinds of mortgages you see today—fixed-rate loans [or] if it’s an adjustable rate, it’s pretty conservative in its terms—those are going to be the loans you see for a long time in the future,” said Glen Corso, managing director of the Community Mortgage Banking Project, which represents small, independent mortgage lenders. “There’s not going to be any room for experimentation or trotting out loans that have new features.”

The mortgage rules are part of the most extensive remapping of U.S. financial rules since the 1930s, which would put U.S. banks and markets under tighter government control for years to come.

The bill is expected to pass the House this week, with a vote anticipated as soon as Tuesday. But Democrats are running into unexpected problems securing 60 votes in the Senate.

Sen. Scott Brown (R., Mass.) supported the bill when an earlier version passed the Senate floor in May, but he said on Friday he has major concerns with a provision adding assessments on large banks. The deteriorating health of Sen. Robert Byrd (D., W.Va.) is also a factor, because if he remains hospitalized this week he won’t be able to vote for the bill.

Complex loans that allowed borrowers to make low initial payments that adjust sharply higher later helped to fuel the housing bubble and lead to today’s foreclosure crisis.

The lending industry already has moved away from option adjustable-rate loans, or option ARMs, which allow borrowers to defer principal and interest payments to keep initial costs low.

Julia Gordon, a senior policy counsel at the Center for Responsible Lending, a nonprofit research group that has long campaigned against what it sees as predatory mortgage-lending practices, says borrowers “are still going to have to be careful that they understand all the terms of their loans” but “there are going to be fewer moving parts.”

The bill requires lenders to have “skin in the game” on riskier types of loans—such as option ARMs or loans that don’t require full documentation of income—that are bundled and sold to investors as securities. The provision requires lenders to retain at least a 5% stake on such loans that are securitized.

But the mortgage industry won a provision that directs regulators to exempt certain lower-risk mortgages, such as those backed by government agencies and those that involve verification of the borrower’s financial situation and don’t allow deferral of principal payments.

The bill sets stricter limits on prepayment penalties, fees for paying off a loan early. The legislation also forces lenders to ensure that borrowers have the ability to repay loans and gives borrowers greater scope to seek damages or contest a foreclosure if they are given a loan that they can’t afford.

Banks say that potential for greater legal liability could lead to higher costs for borrowers, but consumer advocates say the legal rights are narrowly tailored so worries are exaggerated.

Provisions that require stricter checks on a borrowers’ ability to pay could make it harder or more expensive for self-employed borrowers or those who rely on commission or seasonal income to qualify for loans.

Another key provision of the bill tries to make compensation of mortgage brokers and loan officers more transparent. It bans any sort of payment based on steering the consumer to a particular type of loan or rate. During the housing bubble, loan officers and mortgage brokers often could get higher compensation if they persuaded borrowers to go with option ARMs or subprime loans.

Home appraisers, who have complained that downward pressure on their fees has hurt quality, may get some help from the bill. It stipulates that lenders must compensate appraisers “at a rate that is customary and reasonable.”

The bill also mandates regulation of appraisal-management companies, firms that order appraisals on behalf of lenders. Lenders often own stakes in these firms, allowing the lenders to get a cut of the fee that borrowers pay for appraisals. Appraisals are value estimates designed to ensure that there is enough collateral behind loans to protect lenders.

Mortgage brokers pushed for a provision that would allow consumers to use the same appraisal in applying for loans from more than one lender. That would reduce the risk that borrowers might have to pay for more than one appraisal if they switch from one lender to another while shopping for a loan.

But the bill says only that regulators “may” issue regulations on the “portability” of appraisals from one lender to another. The rule would make it easier for brokers to compete with retail banks as they rely on customers shopping around for rates.

The legislation includes $1 billion to establish a program that would offer short-term loans to unemployed homeowners at risk of foreclosure. Even borrowers who didn’t accept high-risk loans now frequently are in danger of losing homes to foreclosure because of job losses or reduced income. The bill also provides an additional $1 billion in funding for the Neighborhood Stabilization Program, which helps local organizations buy and repair foreclosed and vacant homes.

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Race Is on to Grab Housing Tax Break


Original Post Date: June 28, 2010

By: Nick Timiraos

Home buyers who signed contracts two months ago are racing to close sales ahead of Wednesday’s deadline to claim a federal tax credit as banks and title companies deal with a crush of closings.

Congress last fall extended a tax credit, worth as much as $8,000, to buyers that signed contracts by April 30 and closed on transactions by June 30. The real-estate industry stepped up calls for an extension of the closing deadline in recent weeks amid concerns that some buyers might miss the deadline after a last-minute home-buying rush led to bottlenecks at banks, appraisal firms and title insurers.

But a Senate bill that included the extension failed to secure enough votes last week and has been shelved.

The National Association of Realtors said that as many as 180,000 contracts that were signed by April 30 might miss the June 30 closing deadline. But it is unclear how many of those sales won’t happen as a result of missing the tax credit.

Homebuilders Lennar Corp. and KB Home said last week that they don’t expect trouble closing tax-credit eligible sales by Wednesday.

Problems are more likely to develop around loans that require added documentation and short sales, where a lender approves a sale for less than the amount owed. Those are more time-consuming affairs because note holders, and not just the buyer and seller, must agree on price. Loan delays have also become more common as lenders adjust to new disclosure and appraisal rules.

“We’re expecting sizeable fallout,” said Stephen Adamo, president of Weichert Financial Services, a division of real-estate brokerage Weichert Realtors. He contended that many deals wouldn’t be completed in time.

A spokeswoman for Wells Fargo & Co. said the company, which has added staff to deal with a rush of loan applications, has prioritized all loans that need to be closed by June 30.

A Bank of America Corp. spokesman said loans that are waiting on approvals or materials from third parties are most problematic. “We’re working around the clock,” says spokesman Terry Francisco. “For the situations we can control, we’re feeling very good about our ability to close most of those,” said spokesman Terry Francisco.

Kevin Malvey, a first-time buyer, had planned to put his tax credit toward badly-needed repairs on the $100,000 home in Charlton, Mass., that he plans to buy with his fiancé. They signed a contract days before the April 30 deadline in order to qualify, and he said that if he missed out on the tax credit, he wouldn’t buy the house unless the seller reduced the asking price.

“If he can’t work with me, I will have to back out of the deal,” said the 27-year-old facilities maintenance worker.

Some won’t have a choice but to go ahead with the sale because walking away would mean giving up a deposit.

Beth Maeyer went into contract in March on a new one-bedroom condominium in Queens, N.Y., with her fiancé. But after a low home-appraisal threatened to scuttle the deal, she changed lenders and restarted the loan process.

Ms. Maeyer, 33, says she won’t walk away from the deal because she has already made a $15,000 deposit and spent thousands more on legal fees. Now, she is anxiously responding to requests for more documentation from her lender. “It’s like being interviewed to work for the CIA.”

Gina Peterson went into contract on a short sale in Orlando, Fla., in February and while the lender has agreed to take a loss on the home, the mortgage insurance company is negotiating with the sellers for a settlement. Ms. Peterson, 53, says she took $8,000 from her retirement savings to make the purchase and had planned to use the tax credit to pay herself back.

While her contract for the home expires on Wednesday, she says she likes the house and hopes to be able to purchase it even without the tax credit. “I’m really on the fence about that one, because I could ride it out, let the bank foreclose, and buy it for $8,000 less on the other side,” she says.

Corrections & Amplifications The tax break applies to home buyers, not mortgages. An earlier headline, “Race Is on to Grab Mortgage Tax Break,” was change

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Deeds-in-lieu gain favor with lenders as alternative to foreclosure

Link: http://www.latimes.com/business/realestate/la-fi-harney-20100627-5,0,370257.story

Original Post Date: June 27, 2010

By Keneth R. Harney

Reporting from Washington —

Short sales have been the hot solution for financially stressed homeowners and their lenders for the last year, but here’s another potent foreclosure alternative that’s about to take center stage: deeds-in-lieu.

Some of the largest mortgage servicers and lenders in the country are gearing up campaigns to reach out to borrowers who owe more on their mortgages than their homes are worth with cash incentives that sometimes range into five figures, plus a simple message: Let’s bypass all the time-consuming hassles of short sales and foreclosures. Just deed us the title to your underwater home and we’ll call it a deal. We won’t come after you to collect any deficiency between what you owe us on the mortgage and what we obtain from the home sale. We might even be able to wrap up the whole transaction in as little as 30 to 45 days. How about it?

Mortgage companies say troubled borrowers increasingly are signing up. One of the largest servicers, Bank of America, has mailed out 100,000 deed-in-lieu solicitations to customers in the last 60 days, and its volume of completed transactions is breaking company records, according to officials.

What precisely are deeds-in-lieu? The full name is deeds-in-lieu-of-foreclosure. They are voluntary transfers of property ownership from borrowers to creditors that make court-directed foreclosures unnecessary.

The concept is one of the oldest in real estate, but it got a boost this year when the Obama administration included it as an option in its Home Affordable Foreclosure Alternatives program, and mortgage giant Fannie Mae cut the penalty-box time for homeowners who use the technique from four years to two before they can qualify for another home mortgage.

Deeds-in-lieu also are surging because they provide a win-win for borrowers and mortgage investors that short sales often cannot match. Tops on the list: speed. Travis Hamel Olsen, chief operating officer of Loan Resolution Corp., a Scottsdale, Ariz., firm that works with lenders to solve troubled borrowers’ problems, said deeds-in-lieu represented “a very expeditious way to move on” for underwater borrowers who are facing potential foreclosure.

“A lot of owners just want to be finished with it, now,” he said. “They don’t want to deal with [the house] anymore.”

They don’t want to deal with real estate agents or signs on the front lawn that reveal their financial squeeze to neighbors. They don’t want to haggle with potential buyers coming in with low-ball prices. But they also don’t want to simply walk away because that will affect their credit files and scores for as long as seven years.

A key motivation for lenders is that they are stuck with massive backlogs of underwater homes that haven’t yet gone through foreclosure and been put on the market — the so-called shadow inventory, said Greg Hebner, president of MOS Group Inc. of San Diego, which works with banks and investors across the country to resolve defaulting borrowers’ situations.

Not only is it cheaper for lenders to do deeds-in-lieu to gain control of those properties, but with current mortgage rates below 5%, they’re likely to be able to resell the properties faster and on potentially more favorable terms in the summer and fall.

“If you can get a lot of inventory moving in the next couple of months” of prime home-buying season, Hebner said, “you are solving a lot of problems.”

Matt Vernon, Bank of America’s top short sale and deed-in-lieu executive, said the technique worked so well for both borrowers and mortgage owners that his company was running pilot programs in major housing markets to alert borrowers who might benefit but are not familiar with deeds-in-lieu.

To sweeten the pot, Bank of America is offering cash incentives that range from $3,000 to $15,000 — and is getting a strong response, Vernon said.

What are the downsides or limitations of deeds-in-lieu for homeowners? Probably the most important, experts said, is that they don’t work for every situation involving serious mortgage default. For example, if you have equity in the property, you’ll probably want to pursue a loan modification first, rather than hand over your equity stake to the lender.

Deeds-in-lieu usually don’t work when there are multiple mortgages from different creditors encumbering the property. Also, though deeds-in-lieu do less damage to borrowers’ credit histories than foreclosures or bankruptcies, they definitely leave a mark. Fair Isaac, developer of the widely used FICO credit score, says on its MyFico website that deeds-in-lieu and short sales are both treated as “not paid as agreed” accounts, and are treated the same by the FICO scoring model.

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Does the Housing Market Need a Pep Rally?

 Link: http://blogs.wsj.com/developments/2010/06/21/does-the-housing-market-need-a-pep-rally/

Original Post Date: June 21, 2010

 By: James R. Hagerty

 When he was mayor of New York, Ed Koch was famous for asking anyone he met, “How am I doing?”

 Perhaps not wishing to hear the answer to that question, the Obama administration’s top housing and mortgage officials on Monday gave their own reply: We’re doing great!

 The Treasury and the Department of Housing and Urban Development released a new monthly “housing scorecard” in an attempt to show that the administration is making progress in its efforts to heal the market.

 It’s mainly a rehash of statistics released by a variety of sources, and many of them can be read as signs of stabilization. What the statistics can’t show is whether that stabilization is only a temporary reprieve brought about by tax credits, very low interest rates and other forms of government intervention.

 “Today’s housing market is in significantly better shape than anyone expected 18 months ago,” HUD Secretary Shaun Donovan told reporters. Despite alarming forecasts back then, he said, “the world didn’t end.” After ticking off lots of hopeful indicators, Mr. Donovan slipped in what may have been the day’s most important point: “Obviously, we are not out of the woods. Our housing market remains fragile, and we still may see further declines.”

 We already have seen evidence of very steep declines in newly contracted home sales since April 30, the deadline for home buyers to qualify for tax credits of up to $8,000.

 But that drop won’t show up in Tuesday’s report from the National Association of Realtors on May home sales because that will reflect sales that were completed in May, not new contracts signed.

 The Treasury also released its monthly update on the administration’s $50 billion drive to prevent foreclosures, known as the Home Affordable Modification Program, or HAMP.

 The report shows that 340,459 households at the end of May were benefiting from long-term reductions in their mortgage payments under HAMP. That was up 15% from a month earlier. Since the program started in the spring of 2009, about 1.2 million households have been given “trial” modifications. To convert those trials to long-term relief, the households must make at least three payments and provide documents showing that they qualify for the program. HAMP provides financial incentives to borrowers, loan servicers and investors.

 The number of people crashing out of HAMP remains huge, largely because until recently loan servicers weren’t required to verify borrowers’ eligibility before starting them on trials. By the end of May, 429,696 trials had been canceled, up from 277,640 a month before.

 Nearly 468,000 households are still in trials, and 190,000 of them have been in that limbo stage for at least six months, as loan servicers slowly work through their huge backlogs of unresolved cases.

 Another big problem remains: Even after HAMP modifications, many borrowers still face crushing overall debt burdens, when credit cards, car loans, student loans and other obligations are considered. For those granted HAMP mods, the median ratio of overall debt payments to pretax income is 64%. That means the typical borrower has little left over for food, clothing and other expenses and may be just one surprise medical bill or car repair away from another default.

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Home-Buyer Tax Credit Update: Senate Moves to Extend Closing Deadline

Link: http://blogs.wsj.com/developments/2010/06/16/home-buyer-tax-credit-update-senate-moves-to-extend-closing-deadline/

Original Post Date: June 16, 2010

By: Emily Peck

As the real-estate industry rushes to help buyers close in time to get its $8,000 tax credit, it may get some (more) help from Uncle Sam.

On Wednesday, the Senate approved a proposal to extend the closing deadline on the tax credit of up to $8,000 for home buyers.

Under the measure, buyers would have until Sept. 30 to close on sales that went into contract by April 30. The current closing deadline is June 30.

We’ve heard from many readers who are struggling to meet that deadline; we’ve also written about attempts by some buyers to pretend they were under contract in April by backdating documents. (See Tax Credit Extension Could Help Tax Cheaters)

The extension measure is part of a wide-ranging bill of tax policy extensions and federal program renewals. The Senate will likely vote on the larger measure later this week or next, then it heads to the House. We’ll be following developments. Stay tuned.

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Housing Revival Is Built on Real Jobs Growth

Link: http://online.wsj.com/article/SB10001424052748703280004575309122356171904.html?mod=WSJ_RealEstate_LeftTopNews

Original Post Date: June 16, 2010

By David Reilly

The latest dose of government-administered adrenalin has worn off, and the housing market is again flagging.

The end of April marked the expiration, for contract-signing purposes, of the government’s home-buyer tax credit. The hope was that this program, originally slated to end last fall, would add oomph to home sales, particularly during the spring season.

This momentum would then help lift the market through the rest of the year. That doesn’t seem to be working. The National Association of Home Builders on Tuesday said its confidence index fell sharply in June, to 17 from 22, as builders’ pessimism grew.

On Wednesday, the Census Bureau reports May housing starts. Credit Suisse expects an annualized pace of 575,000 units, a 14% decline from April. The Mortgage Bankers Association, meanwhile, is likely to report that activity for purchase loans remains downbeat. These loans, as measured by the mortgage purchase applications index, have fallen 42% since April.

This bodes ill for investors expecting housing to revive further in the second half of 2010. Instead, it suggests the market will merely trudge along, dogged by still-high foreclosure and inventory levels.

While that is better than sharp declines, it is disheartening given how much support the government has provided to housing. Besides the tax break, the government has propped up banks, troubled homeowners and mortgage giants Fannie Mae and Freddie Mac. The Federal Reserve, for its part, has kept short-term rates near zero, while its purchases of $1.25 trillion in mortgage-backed securities engineered decades-low lending rates.

So what is the real housing antidote? The creation of permanent, private-sector jobs. But that isn’t what the economy has delivered this year. Of nearly a million jobs created in 2010, more than half have been Census spots. And in May, a paltry private-sector employment gain of 41,000 included the creation of 31,000 temporary jobs.

These short-term spots, analysts at CreditSights said in a report last week, don’t “provide the security necessary to take on large purchases, such as a home, or even foster a greater chance of being approved on loan applications.”

So while the government has been able to stabilize housing, anything short of real jobs growth won’t allow the market to thrive.

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High Default Rate Seen for Modified Mortgages

Link: http://online.wsj.com/article/SB10001424052748703280004575308992258809442.html?mod=WSJ_RealEstate_LeftTopNews

Original Post Date: June 16, 2010

By: James R. Hagerty

Fitch Ratings Ltd. forecasts that most borrowers who get lower mortgage payments under a federal government program will default within 12 months.

Among those with loans that aren’t backed by any federal agency, the redefault rate within a year is likely to be 65% to 75% under the Obama administration’s Home Affordable Modification Program, or HAMP, according to a report to be released Wednesday by Fitch, a New York-based credit-rating firm. Almost all of those who got loan modifications have already defaulted once.

Diane Pendley, a managing director at Fitch, said the failure rate was likely to be high largely because most of these borrowers were mired in credit-card debt, car loans and other obligations.

The Treasury Department has said that among people who have been given loan modifications under HAMP, the median ratio of total debt payments to pretax income is still 64%. That often means little money is left over for food, clothing or such emergency expenses as medical care and car repairs.

“The borrower remains in a very high-risk situation,” Ms. Pendley said in an interview. “The other debts don’t go away.”

A Treasury official said HAMP “is making a real difference in the lives of hundreds of thousands of homeowners.” He said the government has reduced the risk of redefault by offering financial incentives to borrowers who remain current on loan payments.

Fitch based the redefault forecast on the performance of loans that were modified in the first quarter of 2009. Those modifications were done outside of HAMP, which took effect later in the year. But Ms. Pendley doesn’t expect a major difference between the results of HAMP modifications and those made under lenders’ programs.

Even if two-thirds of the loan modifications fail, Ms. Pendley said, that doesn’t mean HAMP is a failure. “If you can save one-third of the borrowers, I think it is worth the exercise,” she said. She also said the HAMP program, announced in early 2009, had provided a basic outline for loan servicers to follow in modifying loans. Loan servicers, often owned by banks, collect payments and handle foreclosures. Previously they were “all over the place” in their methods for dealing with foreclosures, Ms. Pendley said.

At the end of April, about 295,000 households were benefiting from long-term modifications under HAMP, which typically involves cutting the interest rate as low as 2%, according to the Treasury. Another 637,000 households were in trial modifications, under which they need to show they can make their new, lower payments consistently and provide documents proving they are eligible. Under the $50 billion HAMP program, the federal government provides financial incentives to borrowers, loan servicers and mortgage investors for modifying loans.

Andrew Jakabovics, an associate director at the Center for American Progress, a Washington think tank with ties to the Obama administration, said results of HAMP so far were mixed. Borrowers continue to complain that it often takes months, and sometimes more than a year, to get decisions from servicers on whether a loan can be modified on a long-term basis. Mr. Jakabovics said the program would work better if the government dealt directly with applicants for HAMP and decided which ones qualified, rather than delegating that function to servicers.

But Mr. Jakabovics said he didn’t expect major changes in HAMP, which is scheduled to remain in effect through 2012. “For better or worse,” he said, “what we’ve got now is what we’re going to go with.”

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Home shortages could develop as recovery unfolds

Link: http://www.latimes.com/business/realestate/la-fi-lew-20100613,0,7268736.story

Original Post Date: June 13, 2010

By: Lew Sichelman

Reporting from Washington —

Sooner or later, the economy will rebound, jobs will return and new households will form. When that time comes, however, there might not be enough housing to accommodate all the new family formations.

At a time when millions of foreclosures have flooded the market, and millions more are said to be in the pipeline, talk of a possible housing shortage may seem ludicrous. Nevertheless, as the recovery unfolds and vast numbers of echo boomers begin to enter and reenter the market, there may not be enough roofs to put over their heads.

A housing deficiency isn’t a sure thing, but the potential is certainly there, says David Crowe, chief economist at the National Assn. of Home Builders, who paints a rather ominous scenario in which house and apartment builders won’t be able to keep up with the demand.

Wherever the new households come from — adult children moving out for the first time or leaving the nest a second or third time after returning to Mom and Dad’s to weather the economic storm, roommates uncoupling and going their separate ways or young couples starting families — most of them are typically renters.

Therefore, the multifamily sector is apt to feel the pinch first, if only because it takes so much longer to build apartments than houses. Not that the timeline to build houses isn’t long; it is. But, Crowe says, it tends to be even longer for apartments.

The apartment sector could find itself stretched for other reasons, too. One is that many wannabe owners no longer could qualify for a mortgage. Maybe they’ve lost a job, perhaps their credit is dinged, or maybe they haven’t been able to squirrel away enough cash for a down payment. Whatever the reason, they may be relegated to renter status for longer than normal.

But Crowe believes that “even those who want to buy and can qualify for a loan will be less inclined to buy” in the short term because there’s no longer any guarantee that their investment in a house will appreciate, at least not as it has in years gone by.

The reluctance to buy “won’t take the complete wind out of everyone’s sails,” the economist says, “but it’s one more element in the scheme of things that now has a different flavor to it.”

Shortages could develop in the for-sale sector for multiple reasons, as well. For one thing, builders are having a hard time borrowing the money they need to buy land, develop lots and construct houses, Crowe says. “Home buyers aren’t the only ones who are facing stricter credit requirements.”

In larger markets where the big public builders tend to dominate, the lack of construction financing may not be as much of a problem. Public builders go directly to Wall Street for their funding, whereas small and mid-size local and regional builders most often go hat in hand to local banks.

But big or small, most builders aren’t starting houses today until they either have nothing else to sell or buyers present themselves with an approved mortgage application. “If a builder can get credit today,” Crowe says, “he’s more likely to get it if he has a solid contract from someone who has a mortgage and doesn’t have another house to sell.”

Don’t be fooled by statistics that show housing starts were up in April. The more important benchmark is permits.

A housing start is recorded when a builder sticks a shovel into the ground. Starts were strongly higher in April largely because builders began the push to move buyers who want to take advantage of the federal tax credits into their homes by the June 30 deadline.

A permit, on the other hand, is an OK from the local authorities to erect a house or begin a subdivision. And permits in April were down, not up, which means that builders are not planning for the next batch of houses like they normally would.

Add to that the fact that the inventory of finished but unsold new houses is at the lowest level since 1971 and the shortage scenario takes on even greater credence.

Some inventory is necessary to take care of buyers who, for one reason or another, need to move in right away. Maybe they’ve just been transferred, or perhaps they’re not terribly picky and want to get the buying ordeal out of the way.

It takes from one to five years to gain approval from local regulators to start a new community, depending on the jurisdiction, and five to six months on top of that to build a house. But given current market conditions, there still may be enough time for home builders to get ahead of the curve.

But apartment builders? They “need to start now,” Crowe says, “if their projects are to be ready when the demand is there.”

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