"Applications for home loans more than doubled in the two weeks"

The FT with an interesting post:

"Mortgage activity surges at US banks

By Saskia Scholtes in New York

Published: December 22 2008 19:37 | Last updated: December 23 2008 00:48

US banks are having trouble handling a surge of mortgage applications spurred by dramatically lower interest rates, after record loan defaults and thousands of job cuts have stretched mortgage industry resources to the limit.

Applications for home loans more than doubled in the two weeks after the Federal Reserve said it would buy mortgage bonds to help stabilise the market, prompting mortgage rates to fall by more than three-quarters of a percentage point.

With average rates for a 30-year, fixed-rate mortgage now at about 5.2 per cent, growing numbers of borrowers have an incentive to refinance( IT'S MY UNDERSTANDING THAT MOST OF THIS ACTION IS REFIs ) to bring down their mortgage costs.

But tighter underwriting standards for prospective borrowers, combined with funding and staffing difficulties for mortgage originators, are likely to restrict the supply of new mortgages.

“The mortgage industry is collectively unprepared to deal with a cascade of business; staffs were pared to the bone as the market for mortgages shrank over the past year,” analysts at HSH Associates wrote in a note to clients.

Mahesh Swaminathan, mortgage analyst at Credit Suisse, said that as a result, lower rates would not necessarily create a wave of mortgage refinancing on the scale that was seen in 2003, when credit markets were healthy.

“There is a lot of pipeline congestion. Originators don’t have the staffing or the credit lines to fund a lot of loans,” said Mr Swaminathan. “You have more due diligence which requires more staffing. It is not something that can be changed overnight.”

Part of the problem is that banks have directed the bulk of their manpower toward their servicing arms in a bid to stem the tide of mortgage defaults and foreclosures.

While banks have pledged to use capital they have received from the US Treasury to boost consumer lending, they are also under intense political pressure to modify loan terms for struggling borrowers. Loan modifications have continued to grow more quickly than other strategies such as subsidy programmes or refinancing into government loans, according to the Office of the Comptroller of the Currency.

The number of new loan modifications grew 16 per cent in the third quarter to more than 133,000, said the OCC. The rate of loan modification is likely to be even higher in fourth-quarter data, say analysts, as a result of recent initiatives by Fannie Mae and Freddie Mac, the two large mortgage financiers."

This Refinancing will lower household debt. I should know, since I refinanced my own house twice. It's a good deal for homeowners.

"As if you couldn’t see this one coming a mile away"

Barbara Kiviat is where I first ran into this story:

"The big question looming over the push to rewrite the home loans of people struggling to make payments is whether or not such mortgage modifications keep folks in their houses for the long term. As I've mentioned before, there's a danger that loan modifications, at least the way they're currently done, don't solve the problem, just delay it.

This morning Comptroller of the Currency John Dugan gave a speech and shared some grim data: more than half of loans modified in the first quarter of 2008 fell 30 days delinquent within six months. Here's the graph he put up:

The data come from the largest national banks and thrifts and cover 35 million loans worth more than $6.1 trillion, or 60% of all first mortgages in the U.S.

Dugan called the results, part of his agency's new Mortgage Metrics report, "somewhat surprising, and not in a good way." He pointed out that a person could argue that 60-day delinquencies are a better indication of future foreclosure, but those figures aren't so good either—after six months, 35% of people were 60 or more days behind on their payments.

These are great numbers to have since historically we haven't—and problem solving often starts with data collection. Unfortunately, we're still not quite at the point of knowing what to make of it. As Dugan said this morning:

The question is, why is the number of re-defaults so high? Is it because the modifications did not reduce monthly payments enough to be truly affordable to the borrowers? Is it because consumers replaced lower mortgage payments with increased credit card debt? Is it because the mortgages were so badly underwritten that the borrowers simply could not afford them, even with reduced monthly payments? Or is it a combination of these and other factors? We don't know the answers yet, but these are the types of questions that we have begun asking our servicers in detail.

Godspeed on that.

Barbara!"

Here was my comment:

1. donthelibertariandemocrat Says:
   Monday, December 8, 2008 at 5:07 pm

   I think that the data is interesting, and leads me to believe that these negotiations are a bit tougher on the borrowers than we had imagined. In other words, the lenders are willing to bend a bit, but only a bit. There are limits to their willingness to negotiate a new monthly payment. They're not willing to accept any amount that people can obviously pay, but are pushing that amount as high as they can.

   I would say that 50 %, in that scenario, is reasonable, if it wouldn't be worse for the borrowers. But Barbara is asking the correct question: How realistic are these renegotiated payments? And how much do they differ from what was being paid before?

   After all, a 50 % rate might be fine if what you're really trying to do is stabilize prices, not really end foreclosures.

I then ran across it on Alphaville by Stacy-Marie Ishmael:

"There has been a growing chorus of voices calling for measures to stem foreclosures in the United States. Just last week, Ben Bernanke unveiled a fairly aggressive set of proposals, including the government buying “delinquent or at-risk mortgages in bulk” and refinancing them under federal programmes such as Hope for Homeowners.

But recent comments from John Dugan, the Comptroller of the Currency, should give advocates of loan modification programs (and similar efforts) a moment’s pause.

Data released by Dugan’s office show that more than half of loans modified in the first quarter of 2008 fell delinquent within six months:

After three months, nearly 36 percent of the borrowers had re-defaulted by being more than 30 days past due. After six months, the rate was nearly 53 percent, and after eight months, 58 percent

over half of mortgage modifications seemed not to be working after six months

Not all redefaulted mortgages go to foreclosure, and some have suggested that 60 days past due is a better indicator of ultimate failure to pay than 30 days – but even using that measure, the rate of increase in re-defaults was remarkably high, exceeding 35 percent after six months.

Dugan did not offer a reason for the high (and accelerating) rate of borrower re-defaults, but he did ask the right questions:

Is it because the modifications did not reduce monthly payments enough to be truly affordable to the borrowers? Is it because consumers replaced lower mortgage payments with increased credit card debt? Is it because the mortgages were so badly underwritten that the borrowers simply could not afford them, even with reduced monthly payments? Or is it a combination of these and other factors?

The answers to those questions will have “important ramifications for the foreclosure crisis and how policymakers should address loan modifications, as they surely will in the coming weeks and months,” he added.

Dugan said he had posed those questions to mortgage servicers and was awaiting their responses.

FT Alphaville hopes more light will be shed on the matter when the OCC, in conjuction with the Office of Thrift Supervision, releases its Mortgage Metrics Report later this month."

Here was my comment:

Don the Libertarian Democrat Dec 8 22:38

I would say that the 50 % figure might well be correct, because the lenders are being tougher on the borrowers than many people thought they would be. There is only so much room to renegotiate from the lenders point of view.

I also feel that this rate might help stabilize prices, which is really what these lenders want, not necessarily to stop all or even most foreclosures.

So, I made basically the same point. Then Yves Smith:

"The stock market is staging a very peppy rally on the hopes for the Obama infrastructure plan and the auto bailout, but key bits of news point to the stubbornness of some of the underlying economic stresses.

We have long advocated mortgage modifications as a remedy that banks used fairly freely in the stone ages when they held the paper. While we have also been told that the mods being offered these days are often too shallow to give the homeowners sufficient relief (ie, the bank could offer a reduction in principal, rather than the more common, and lower effective reduction of merely providing interest rate relief, and still come out ahead compared to a foreclosure). However, the latest report from the Office of the Comptroller of the Currency may put a dent in efforts to find ways to offer viable borrowers sufficient changes in terms."

Next, Felix Salmon:

"An even more key question is why on earth Mr Dugan is surprised by this number. As Paul Jackson points out, loan mods normally have a 50% failure rate. On top of that, there are two key points which Dugan seems to have missed:

• The single most important factor underlying mortgage defaults is falling house prices.
• House prices have continued to fall throughout 2008.

Given all that, we should be thankful that loan modification programs have managed to keep half of formerly-delinquent homeowners out of default.

We should also understand why, from a bank's point of view, it's silly to modify loans by reducing the principal amount outstanding. It makes sense to reduce interest payments -- to something well below the bank's own cost of funds, if necessary. But the bank will also want to protect itself if that doesn't work, by keeping the total amount owed high. The problem there is that the homeowner will remain underwater -- and having an underwater loan is a strong incentive for any homeowner to walk away.

As ever, there are no easy answers. But maybe it really takes a year's worth of re-default data to persuade the OCC of that."

I think that we should understand that these are not normal times. That's why people are surprised. They were hoping that the lenders would bend over backward to modify these loans so that people could afford to stay in them. Obviously, and I agree with Felix Salmon here, the banks are going to go only so far.

However, I believe that it is in the lenders interest for home prices to stabilize. After all, they're left with an asset after foreclosure that they lost money on, and it doesn't help them if the assets they are getting back are cheaper and cheaper. So, I think that they've taken a middle road. Be lenient enough to slow the rate of foreclosures down, but don't bend over backwards to avoid foreclosures. I believe that this makes sense.

The borrowers can walk away, but, if they do, they will also lose money. So, it is in their interest to remain in the home if they can. Unless, of course, they believe that they could walk away and buy a home later on much better terms. I have no idea how wise this idea is, since I'm dubious about predicting future mortgage rates in the next few years.

As well, whatever people say about housing prices, I suspect that they'll end up higher much faster than most people believe. However, there are some areas that are in very bad shape because building homes or condos in some areas did get way out of control. But that's not everywhere.

Here's the Paul Jackson post on Housingwire:

"As if you couldn’t see this one coming a mile away: more than half of the loans modified in the first quarter of 2008 had redefaulted within six months of modification, according to statistics released Monday by the Office of the Comptroller of the Currency.

“After three months, nearly 36 percent of the borrowers had re-defaulted by being more than 30 days past due,” Comptroller John Dugan said in a statement. “After six months, the rate was nearly 53 percent, and after eight months, 58 percent.”

In other words, recidivism rates are right where they historically have been, despite growing pressure to “do something” about a growing number of foreclosures. Dugan characterized the results, however, as “surprising” for regulators.

Dugan’s remarks came during a panel discussion with Office of Thrift Supervision director John Reich, Federal Reserve Board chairman Donald Kohn, Federal Deposit Insurance Corp. chairman Sheila Bair, and Federal Housing Finance Agency Director James Lockhart.

Dugan suggested that regulators weren’t sure why redefault rates were so high. “Is it because the modifications did not reduce monthly payments enough to be truly affordable to the borrowers? Is it because consumers replaced lower mortgage payments with increased credit card debt? Is it because the mortgages were so badly underwritten that the borrowers simply could not afford them, even with reduced monthly payments? Or is it a combination of these and other factors?”

His remarks provided a preview of the data contained in the OCC and OTS Mortgage Metrics report, set to be released later this month. But the fact that regulators have been surprised by recidivism rates that are, frankly, about par for the course is telling insofar as it suggests that regulators have yet to really understand the crisis they are trying to solve.

“I want to know why Dugan and others are surprised by 50 percent redefaults,” said one servicing manager that spoke with HousingWire. “We’d have told them to expect it, if they’d asked.”

Anyone with experience in this space expects roughly 50 percent recidivism on loan modifications, various sources in the servicing side of the business said, give or take some wiggle room with differences in vintage and product type.

The fact that regulators were blindsided by these numbers seems likely to generate more cries for aggressive loan modifications, especially of the principal-forgiveness variety, from consumer groups and the government officials; but doing so entails huge moral hazard for lenders, and the very real risk that other borrowers currently performing on their notes will seek to default in order to lower their own mortgage balances.

Read Dugan’s full remarks here."

I think, again, that people are being disingenuous here. These are not normal times. Do we expect this percentage of foreclosures in normal times or this percentage of decrease in the price of houses in normal times or the tough terms for lending now in general in normal times? Why would you expect this percentage to be to the same?

"US federal banking regulators have created a national charter system"

Here's an interesting FDIC program on FT. It's a bit like a pre-approved loan:

"US federal banking regulators have created a national charter system to allow private equity groups and other investors to buy troubled or failed institutions.

The move comes as regulators brace for a growing number of bank collapses following 20 failures so far this year.

The Federal Deposit Insurance Corporation, which insures customer deposits, brokers the sale of failed banks to other banks or savings and loan institutions.

Under a “shelf charter” system, the Office of the Comptroller of the Currency would grant conditional preliminary approval of a national bank charter to non-bank investors, thereby expanding the pool of potential qualified buyers available.

The 18-month conditional charter would remain inactive or “on the shelf” until an investor group is in a position to acquire a troubled bank. It would allow the group access to the FDIC’s list of failed or troubled banks and let it bid for them. A final charter approval can be granted once a bid is accepted.

Julie Williams, OCC’s chief counsel, said: “The big picture here is that we have taken a look at the situation and decided that this new charter system will enable transactions that get new capital into the banking industry.”

“But not just anybody can come in and get a charter ... We are looking for management that has the capacity and experience to manage a bank safely and soundly, has the ability to inject a substantial amount of capital into the troubled institution and will be subject to significant regulatory oversight.”

I guess that I just can't walk in and say, "I'd like to get a charter".

"The OCC said on Friday that it had granted the first such preliminary approval to a management and investor group led by a 30-year banking veteran, Gerald Ford.

The group, backed by investors including three private equity funds, has about $1.38bn in capital to invest in troubled institutions, according to a letter from the OCC. The banking regulator is considering other applications for preliminary approvals."

This seems to make sense. It's a good idea to have buyers ready who can step right in and facilitate and make easier a rather dicey financial transition. Surely it should help things move faster for investors.

"Separately, the FDIC on Friday strengthened its guarantee programme for bank-issued debt to address concerns the scheme would fall short of restoring confidence in bank lending markets unless further safeguards were in place.

The revised terms of the programmes, finalised on Friday, will allow financial institutions to tap debt investors for funds backed by the “full faith and credit” of the US government.

The FDIC will insure that if a bank defaults, investors will receive timely payment of interest and principal on senior unsecured debt issued by the bank.

The FDIC also replaced a flat 75 basis point fee on each debt issue with a tiered pricing system that would charge different fees for the insurance depending on the maturity of the bond issued.

Banks had argued that the original system was prohibitively expensive for short-term debt in particular and could undermine the market for overnight interbank loans. Loans with maturities of less than 30 days are now excluded."

The problem of investors getting their money in a timely fashion during an economic downturn is important to address.

"But I'm starting to think I could make the case with more conviction if Hank Paulson would just stop talking."

Justin Fox, who's been defending Paulson, tells him to shut up ( Although he does have to testify before congress like today ):

"Judy Biggert, a Republican from Illinois, had a question for Hank Paulson at today's House Financial Services Committee hearing: What ever happened to that plan to insure troubled mortgages assets that we included in the bailout bill?

This insurance plan was a bad idea, seemingly ginned up on the fly by Eric Cantor so it would at least seem like House Republicans had an alternative to Paulson's Troubled Asset Relief Program. It would expose taxpayers to even greater liabilities than the TARP, be harder to administer, and it would do little or nothing to jumpstart credit markets. My bet is that nobody at Treasury has given it a second's thought since the bill passed.

But Paulson felt he couldn't say any of that, so instead he gave a deeply unconvincing answer about how Treasury was studying all possible alternatives but he couldn't talk about any specifics and yada yada yada. He seemed to give a lot of those non-answers today. Ohio Republican Steve LaTourette wanted to know why Treasury and the Office of the Comptroller of the Currency had put the squeeze on Cleveland-based National City and effectively forced it to sell out to PNC. Paulson was a little bit more forthcoming there, refusing to comment on the specifics but saying that Treasury wanted struggling banks to get bought by healthy ones, and that capital ratios (LaTourette kept pointing out that Nat City's were pretty high) were not always the best measure of a bank's health. But he still came across as evasive.

Paulson probably didn't have much choice but to be evasive about those two questions, and he can't say no to a Congressional request to testify. So he's stuck there. But he is also in the middle of a big-time media campaign to defend his actions--just today there's an op-ed by him in the NYT, a long article about him in the WaPo, and an interview with him in the WSJ. And none of it makes him look any better than he did yesterday. He's unwilling for various reasons to be completely frank about his decisions, yet seems constitutionally incapable of sticking to a couple of talking points and leaving it at that. More than ever, he comes across as revisionist, impulsive, and inadequately prepared."

And this indecision, combined with his actual poor decisions, has been a nightmare. However, here's my comment:

donthelibertariandemocrat Says:
Tuesday, November 18, 2008 at 2:39 pm

First, there's this today from Paulson:

http://blogs.wsj.com/economics/2008/11/18/paulsons-testimony-tarp-isnt-an-economic-stimulus/

"We needed the financial rescue package so we could intervene, stabilize our financial system, and minimize further damage to our economy. The rescue package was not intended to be an economic stimulus or an economic recovery package; it was intended to shore up the foundation of our economy by stabilizing the financial system, and it is unrealistic to expect it to reverse the damage that had already been inflicted by the severity of the crisis."

Before:

http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=a4N8DULfg0Sw

"Oct. 14 (Bloomberg) -- Treasury Secretary Henry Paulson urged banks getting $250 billion of taxpayer funds to channel the money to customers quickly to halt a credit freeze that's threatening to bankrupt companies and hammer the job market.

``Leaving businesses and consumers without access to financing is totally unacceptable,'' Paulson said in Washington. He rolled out the emergency program after a crisis of confidence in the financial system last week spurred the biggest stock sell- off since 1933. Paulson told companies getting the government funds to ``deploy'' the money in loans. "

And this:

http://www.bloomberg.com/apps/news?pid=20601087&sid=amZ3uCIUB8GQ&refer=home

Oct. 15 (Bloomberg) -- Treasury Secretary Henry Paulson persuaded nine major U.S. banks to accept $125 billion in government investment. Getting them to lend it out may prove a tougher sell.

The equity stakes the government is purchasing in Citigroup Inc., Morgan Stanley and seven other big institutions come with no guarantee that the investments will spur lending and unfreeze credit markets. Nor do they give the government board seats or any other leverage to demand that that the firms actually use the money to help the economy.

``The truth of the matter is, they can't put a gun to their head and say you have to lend this money,'' said Charles Horn, a former official at the Office of the Comptroller of the Currency, part of the Treasury Department, and now a partner at the Mayer Brown law firm in Washington.

Treasury officials acknowledge they can't force banks to get the taxpayer money into the hands of their customers. Instead, officials are betting that the government's investment will create conditions where banks have a greater incentive to earn profits from lending than to hoard money to shore up their balance sheets.

``It's in their economic interest,'' said David Nason, the Treasury's assistant secretary for financial institutions, in an interview with Bloomberg Television. ``When you give them a stronger capital position and you also provide a certain amount of government backstop to their funding sources, it's incumbent upon them to go out and continue to lend.''

Now, I see deploying the money as a credit stimulus plan.

And this:

Monday, November 17, 2008
What Happened To The Stigma Problem?
Here's my cognitive dissonance for today, from John Carney on Clusterstock:

"No wonder thousands are lining up for TARP money. It's now one of the only signs of financial health the markets trust these days.

From the Wall Street Journal: The Treasury Department doesn't disclose to the public which banks have applied, have been approved or have been rejected for capital. Publicly traded institutions are supposed to get an answer from the government by Dec. 31, with closely held banks told later.

Until then, U.S. banks will continue to be whipsawed by rumors of who will get money and who won't, analysts say. Those who can't say they have been approved could face pressure to sell to another bank or line up additional capital from private investors."

Here's my comment:

Don the libertarian Democrat (URL) said:
Nov. 17, 5:32 PM
"A rejection under TARP means "failure within maybe a day, maybe a couple of days," Rodgin Cohen, chairman of law firm Sullivan & Cromwell LLP, said at a banking conference earlier this month. "It's hard for me to see how a bank survives if the regulators have said it is not sufficiently viable to be in these programs."

Assistant Treasury Secretary Neel Kashkari, head of the federal aid program, said Friday it isn't "a good use of taxpayer money to put taxpayer capital into a financial institution that is going to fail."

Wait a second, isn't this the opposite of the Stigma Problem? Before, it was a problem if you did join, but others didn't. Now, it's a problem if you're not in the program? What's Up?

Friday, October 17, 2008
One More Try On The Stigma Problem
William Poole in the WSJ tries to explain to me the stigma problem:

"Treasury's argument, as I understand it, is that it needs to require some participation in the capital-infusion program to avoid stigma. Because participation carries terms objectionable to banks, such as limits on executive compensation, only weak banks will want to participate willingly. If some banks participated and others did not, those who did would be in effect declaring they were weak and scaring away depositors and investors.

The stigma argument does carry some weight. But the way to deal with it is for participating banks to raise private capital as well as Treasury capital -- so that they can demonstrate that they are unquestionably solvent and strong. One way to demonstrate strength would be to hold capital clearly in excess of the regulatory minimum."

I still don't get it. They have to publicly post their statements.

And that's what I've come up with just after your reading your post.

So, having had a very negative opinion of Paulson, I have to agree with him here:

http://blogs.wsj.com/economics/2008/11/18/frank-irritation-over-paulson-stance-on-foreclosures/

"That plan was rejected by Mr. Paulson, however, over his concerns that the TARP is meant to be an investment – not a direct spending – vehicle. At today's hearing, Mr. Paulson said he hasn't ruled out using TARP to mitigate foreclosures but that he's looking “for programs that protect the taxpayers and are effective. In designing a broad-based program there's a balance in getting money to those who need it as opposed to those who don't need it.”

I was starting to waver on this, but he is doing what I said had to be done. Namely, make sure the taxpayers can possibly get paid back. So, I guess I'm starting to like him more.

"I distinctly remember that, while writing this, I feared criticism for gratuitous alarmism. "

Robert Shiller in the NY Times:

"Speculative bubbles are caused by contagious excitement about investment prospects. I find that in casual conversation, many of my mainstream economist friends tell me that they are aware of such excitement, too. But very few will talk about it professionally.

Why do professional economists always seem to find that concerns with bubbles are overblown or unsubstantiated? I have wondered about this for years, and still do not quite have an answer. It must have something to do with the tool kit given to economists (as opposed to psychologists) and perhaps even with the self-selection of those attracted to the technical, mathematical field of economics. Economists aren’t generally trained in psychology, and so want to divert the subject of discussion to things they understand well. They pride themselves on being rational. The notion that people are making huge errors in judgment is not appealing."

Fine. People get carried away.

"I gave talks in 2005 at both the Office of the Comptroller of the Currency and at the Federal Deposit Insurance Corporation, in which I argued that we were in the middle of a dangerous housing bubble. I urged these mortgage regulators to impose suitability requirements on mortgage lenders, to assure that the loans were appropriate for the people taking them."

Great. Suggestions:

The lenders should make sure that the borrowers can repay the loans.

That's it. Brilliant. And the answer is that people get carried away. Sorry. Not buying it.

You need to assess what allowed people to make serious errors in judgment. I would argue the system of implicit and explicit government guarantees underlying our system, and they way that they were structured. Too many people are getting a free pass appearing far sillier than they really are. They took risk, but it was not totally insane, given that our government always comes to the rescue. You can only determine suitability against the risk taken, and the risk is what needs to be clarified.