As foreclosure rates continue to rise and loan modifications fall short of projections, pressure is intensifying on the Obama Administration — to push lenders and servicers harder — and on lenders and servicers (from several directions) to do more than they have done and are doing to help struggling borrowers avoid foreclosure.
The Administration is feeling the heat not only from consumer advocates, who say homeowners aren’t getting the assistance promised, but also more recently from legislators, who agree that the Administration’s foreclosure prevention centerpiece – the Home Affordable Modification Program – is lagging.
In a June 24 letter to Treasury Secretary Timothy Geithner, 20 Senate Democrats, led by Senate Banking Committee Chairman Christopher Dodd (D-CT) and Sen. Jack Reed (D-RI), chairman of the Subcommittee on Financial Institutions, urge Geithner to use “the full measure of your authority” to ensure that servicers participating in the modification program “move quickly and effectively” to respond to borrowers seeking assistance.
The letter cites reports that borrowers face long delays in obtaining modifications, or even getting responses to inquiries about their eligibility. “Statistics from the National Foreclosure Mitigation Counseling Program indicate that homeowners are waiting, on average, 45 to 60 days for a response,” the letter notes. “It is also our understanding that as servicers take a triage approach to responding to inquiries, homeowners who are still current on their payments but at risk of foreclosure are being told to wait for assistance, even as their economic conditions worsen.”
Recent statistics highlight the basis for complaints about the modification program: According to one estimate, only 130,000 loans have been modified so far on the three-month trial basis the program requires, against the more than 3.5 million potential foreclosures projected for this year.
Geithner, the point man for the Administration’s housing assistance efforts, has responded to Congressional pressure by turning up the heat on loan servicers. In a July 10 letter to the 25 mortgage servicing companies that have volunteered to participate in the modification program, Geithner said the Administration sees “a general need for servicers to devote substantially more resources to this program for it to fully succeed.” Lest there be any question about exactly what that means, the letter, co-signed by Shaun Donovan, Secretary of the Department of Housing and Urban Development, adds: “We are asking that all servicers expand servicing capacity and improve the execution quality of loan modifications in order to help the sizable number of homeowners at risk of foreclosure and eligible for the program.” Those improvements, the letter says, will require, among other measures : “Adding more staff than previously planned, expanding call centers beyond their current size, providing an escalation path for borrowers dissatisfied with the service they have received,” bolstering staff training programs and intensifying outreach efforts to reach eligible borrowers.
Indicating that the Administration intends to do more than simply encourage servicers to do a better job, Geithner’s letter directs servicers to designate a “senior liaison” with decision-making power to attend a July 28thmeeting with officials from Treasury and HUD “to discuss full implementation” of the modification program, and asks them to provide a letter prior to that meeting “detailing the specific steps your organization will take toward effective implementation and compliance.”
The letter describes three steps the Administration intends to take to produce better modification results:
- Publishing monthly reports detailing the modification effort of servicers. The purpose, the letter explains is “to provide a transparent and public accounting of individual servicer performance” as well as a gauge of the program’s overall success.
- Creating “more exacting” standards for evaluating the program, looking at among other factors, servicer response times to borrower inquiries and processing times for modification decisions.
- Implementing a “second look” program, enlisting Freddie Mac to audit a sample of denied modification applications “to minimize the likelihood that borrower applications are overlooked or that applicants are inadvertently denied a modification.”
TIGHT, TIGHTER, TIGHTER STILL
Freddie Mac has announced new guidelines for seller-servicers, designed to correct the underwriting weaknesses that contributed to the financial crisis from which the economy is still struggling to recover. While acknowledging that credit quality has improved in recent months, agency officials note “a number of deficiencies in the underwriting process,” specifically in the areas of “income calculation, asset verification, liability calculation, and misrepresentation of occupancy and appraisal quality.” The new guidelines, outlined in a July 10 bulletin, make a few changes in Freddie’s underwriting requirements, but mainly emphasize the need for close scrutiny of borrower qualifications for the loans they receive and of the appraisals supporting the loans
The guidance targets income verifications particularly, emphasizing the need for lenders to consider “income trends and the consistency of the income” used to qualify borrowers. One major change is the requirement that borrowers now provide two years of tax returns rather than one in most cases, with exceptions for borrowers who were previously enrolled in school or a training program and for those re-entering the work force, who have been employed for at least six months and can document their previous employment history. Freddie will also now require lenders to provide a written analysis of how a borrower’s qualifying income was calculated and to provide more detailed documentation of commissions, bonuses, overtime, secondary and seasonal employment, and other additional income sources included in the qualifying calculations.
The new guidelines also call for more rigorous review and documentation of borrower assets and require verbal verification of the borrower’s income within 10 days of the note date along with specific evidence of the source of funds for the borrower’s down payment and closing costs.
Appraisal requirements (already a source of considerable and growing concern stemming from the Home Valuation Code of Conduct Fannie and Freddie adopted recently) also get some attention in Freddie’s new seller-servicer guidance, which outlines a number of recommended appraisal “best practices” for lenders, among them:
- Review appraiser licensing credentials and performance “at least once each licensing cycle.”
- Ensure that staff members have the training required to “properly underwrite” appraisals and asses their quality.
- Perform “random and targeted reviews” of appraisals.
- Review mortgage files “thoroughly” with an eye for appraisal “red flags,” such as: The failure to verify comparable sales; values that aren’t supported by comparable sales; comparables that aren’t appropriate for the subject property; and evidence that appraisers aren’t familiar with the market in which the property is located.
- While acknowledging the “challenges” of estimating values in the current market, the Freddie Mac guidance reminds seller-servicers that they are, nonetheless “accountable for the quality, integrity, and accuracy” of their appraisals and “other collateral documentation” supporting the loans they sell.
MORE TO COME
Some analysts are describing it as “the next shoe”; others call it a “ticking time bomb.” Whatever the image, the underlying message about the commercial real estate market is clear, and it’s not good: The lack of available credit is threatening to send thousands of loans into foreclosure, further depressing commercial property values and creating a new wave of losses for lenders. “The size of the problem is large…and, if not addressed, could become large enough to undermine the positive economic growth signs that are starting to appear,” Jeffrey Deboer, president of the Real Estate Roundtable, told Financial Times recently.
According to some estimates, $700 billion in commercial mortgages will have to be refinanced before the end of next year, in a still-constricted credit market in which financing prospects range from limited to nonexistent.
Real Capital Analytics tallied 5,315 commercial properties in default, foreclosure or bankruptcy at the end of June, while other analysts have projected that losses on commercial mortgage-backed securities will total as much as $90 billion – about 12 percent of that market. Most agree that relief, in the form of a significant recovery in the commercial real estate sector, is far from imminent and may be as much as two years away, according to Richard Parkus, a research analyst for Deutsche bank Securities in New York, who told Bloomberg News, “It is hard to imagine fundamentals improving in an environment where we are beginning to see massive increases in defaults.”
This shouldn’t’ come as a surprise to anyone who has not been comatose for the past six months, but the payment performance on option adjustable rate mortgages is even worse than on the subprime mortgages widely blamed for triggering the financial melt-down. Bad as they were on several levels, subprime loans assumed that borrower would make the required payments, at least for some (albeit short) period of time. Option ARMs, as the name suggests, let borrowers decide how much and sometimes whether to make a payment each month. Unpaid interest on those loans — and it appears there was a lot of it — was simply added to the loan balance, with predictably dismal results as home values have declined and the unemployment rate has soared.
A report by First American CoreLogic estimates that nearly 37 percent of these loans were at least 60 days past due in April and nearly 20 percent were in foreclosure. Those figures compare with a 14.5 percent foreclosure rate and a 33.5 percent delinquency rate for subprime loans.
The legislators urging Treasury Secretary Timothy Geithner to press servicers on loan modifications (see related item) also expressed concern about “the large number of option adjustable rate mortgages” scheduled for rate adjustments over the next four years. “Without servicers taking proactive steps to reach these homeowners and careful vigilance on the part of the [Treasury Department] and authors, to ensure that outreach translates into real relief,” the legislators warned, “efforts to stabilize the housing market could be undermined.”
BUYERS ON THE SIDELINES
Falling home prices, a weak economy, tighter mortgage underwriting requirements, and new appraisal standards all may be impeding home sales, but an equal and possibly larger problem is the reluctance of buyers to enter the market, even if they have the financial ability (at least in theory), to do so. More than 50 percent of the consumers responding to a recent poll said they were thinking about buying a home in the future —but had no plans to do so any time soon. Concern about selling an existing home was the primary obstacle for 16 percent of the prospective buyers responding to the Realtor.com survey, but nearly one-third cited concern about losing their job as their reason for hanging back. Only 8 percent said they fear that home values will continue to fall.
Of the prospective buyers who are planning to make a move soon, 15 percent said they are motivated by the $8,000 tax credit Congress has approved, while 20 percent said they are interested in the “good deals” available on foreclosed homes.
A larger Realtor survey — the annual National Housing Pulse Survey conducted by the National Association of Realtors — found that the lack of a down payment remains the largest obstacle for most first-time buyers, cited by 82 percent of the respondents. Two-thirds pointed to job security concerns, while 7 in 10 said they are unsure of their ability to obtain a loan.
“Home buyers need protection from risky lending products,” NAR President Charles McMillan said in a press statement, “but they also need access to mortgages at a reasonable cost. “ While credit conditions have improved in many markets, he noted, “the availability of credit continues to be an issue for many qualified home buyers.”