Arrearage Hitting Hard-to-Modify Prime Loans

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Alan Greenspan tells us today that he sees signs of the housing market bottoming.

The Financial Times tells us that delinquencies are increasing in prime mortgages, which are even harder to modify than subprime.

I am beginning to get tired of the new mortgage lingo, or rather, the slippage of old mortgage lingo. In the bad old days, when banks actually owned mortgages (what a thought!), a mod was often a principal writedown. If a bank is only going to recover 60% in a foreclosure after all the cost, and the borrower can make the payments at a reduction to 80%, both come out ahead.

But in the Brave New World of finance, securitization structures impede mods. Most of what are called mods are often payment catch up plans of various sorts rather than true changes to mortgage terms. Even the new Federal programs to encourage mods offered subsidies to servicers, but even then did not pave the way for principal reductions. Wilbur Ross, who owns the country’s biggest third party servicer, has a had a much better success rate with deep principal mods than other loan modification programs. His six month recidivism rate is below 20%, versus the 40% to 60% norm for the industry. Note also that redefault rates are rising.

So things were already not so hot in the world of largely subprime mods. Now as prime mortgage delinquency rates are rising, it appears it is even harder to rework them.

From the Financial Times:

The White House has thus thrown billions of dollars at the crisis, with programmes to modify troubled mortgages and others to help homeowners refinance into new loans even if their homes are worth less than they owe.

But as the economy has deteriorated and job losses have pushed new types of borrower into trouble, analysts warn that the current government programmes, dubbed Making Home Affordable, could still leave many struggling homeowners out in the cold.

“In general, loan-modification programmes have been designed to modify subprime adjustable-rate mortgages or tackle interest rate resets for other exotic home loans,” said Jay Brinkmann, chief economist at the Mortgage Bankers Association.

But the growth in problem loans is now migrating to prime borrowers and ordinary loans with 30-year terms and fixed interest rates. The rate of late payment on prime loans jumped 72 basis points to 5.06 per cent in the fourth quarter of last year, according to the MBA, while prime loans in foreclosure rose 30bps to 1.88 per cent.

“These are much more difficult situations to modify, because the problem is not the structure of the mortgage. The borrower is falling behind because of a job loss, a divorce, health problems or a broader debt burden,” said Mr Brinkmann.

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  1. Erick

    Anyone aware of efforts are out there to make principal reduction negotiation easier for people with securitized loans?

  2. Glen

    I’m surprised anyone takes any notice of Greenspan given his innate ability to create financial disasters.

  3. Brick

    The making Home Affordable program has been a success with I believe 52 mortgages modified of which 51 might be under investigation for fraud. Still the administration are pumping billions into Fannie and Freddie, whether it is directly or through buying agency debt. Is anybody questioning whether the tens of billions benefit mortgage holders get from using Fannie and Freddie loans is worth the hundreds of billions that are pumped into them? Freddie reports today that Falling prices are “significantly affecting behaviour by a broader segment of mortgage borrowers.”. In other words prime mortgage holders are beginning to walk away.

    Realtytrac reports today that there where around 340,000 foreclosure filings with 1 in 374 homes receiving foreclosure notices during April, the highest rate ever recorded. They report that many lenders and servicers are beginning foreclosure proceedings on delinquent loans that had been delayed by legislative and industry moratoria. Nevada has seen foreclosure rates rise by 111 percent since 2008 but was down 18 percent in April, Florida saw an increase of 37 percent in the last month. Bank repossessions are down while servicer foreclosures are up.

    While some areas may be bottoming due to bank leniency, foreclosures are accelerating in others as legislation has not really worked. Recent legislation protecting servicers from the legal rights of investors seems to have produced a perverse incentive to increase foreclosures, despite what the banks are doing.

  4. bobo bobo

    I’m surprised anyone takes any notice of Greenspan given his innate ability to create financial disasters.


    I like Greenspan to make public predictions. He has a terrible track record, so he is a good contrary indicator.

  5. frances snoot

    The NOD number is not mentioned. The number of houses on the market is lower because banks are sending out NOD and sitting on the houses. Greenspan called this the “seeds” of the bottom of the market. Guess green shoots start with seeds!

    The government cooks every statistic they release.

  6. FairEconomist

    I wonder what percentage of these are “walkaways” where the homeowner has given up on the home for any of a number of reasons. Those are going to be pretty much impossible to modify, even if mods are reasonable.

  7. Kelli K

    You are confusing the failed Orwellian “Hope for Homeowners” (1 helped nationwide) with the newer, soon to be discredited “Making Home Affordable” program.

    It’s important that we suckers/taxpayers/homeowners keep our farcical Washington kabuki dramas straight, don’t you think?

  8. Brick

    Thanks for the correction I knew it was one of the schemes. There is still a lot of unsold new build inventory to clear as well.

  9. Doc Holiday

    Although it would be stupid to call Greenspan a whore, that would be accurate, but what an ugly thought and an ugly mental image of Greenspan sitting on Yun's lap, with his pants stuffed with graft.

    See: “We are finally beginning to see the seeds of a bottoming” in the housing industry, Greenspan said today during a conference of the National Association of Realtors in Washington.

    I find it hard to believe that this shill has to take cash from NAR and pump that same old agenda, but yah know, in for a penny in for a pound…

    Earlier this year, high-flying hedge fund Paulson & Co. retained [former Federal Reserve chief Alan Greenspan] for its “advisory board.” The firm is a noted “short seller” of banks and financial stocks – meaning it makes money when these companies’ shares fall.

    The thing is, Greenspan is making public comments that inevitably influence public policy and the markets – and some of those comments may well have led to his clients making a nice profit.

    > This old crook needs to share a cell with Madoff!

  10. killsonjatrauss

    for Erick:

    Yes the BANKRUPTCY CRAMDOWN BILL. Durbin has proposed it like 3 times! It keeps getting defeated! It is free to to the Federal gov’t! I am so pissed.

  11. Kelli K

    Erick and others who want to know if anyone (besides Durbin) is calling for serious principal reduction,

    I think this is very interesting (from Institutional Risk Analyst via MortgageFanatic):

    If you want to learn more about the problems in the non-bank sector and how products like ARMs are about to push the US economy into a meltdown, take a look at the presentation from the PRMIA event on Monday by Alan Boyce, the former CFC executive and now chief executive officer of Absalon, a joint venture between George Soros and the Danish financial system that is assisting in the organization of a standardized mortgage-backed securities market for Mexico.

  12. Kelli K

    Also, this from Mark Hanson (aka Mr. Mortgage) from Fieldcheck Group:

    Bottom Line — after seeing these latest figures I am more convinced than ever that the next step is wide-spread principal balance reductions that will reduce the massive negative equity burden in America and be a first-step to solving the mortgage and housing crisis once and for all.

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