Another day, another glossy flyer from Grover Norquist in my P.O. box reminding me that the President supposedly promised to staunch the foreclosure flood in Nevada. Better information and analysis can be found in the Las Vegas Sun article on the faltering foreclosure reduction plans in the Silver State. The article makes some important points, and falls nicely into the Must Read List.
One of the advantages of blogging is that there is no length limit to articles, and some areas can be explicated in greater specificity. No surprise, here come’s additional information on the securitization issues related to the foreclosure processes.
Not only were banks administratively unprepared to deal with failing home loans, the system devised in the Securitization Boom wasn’t helpful either. The New York Times produced some of the better graphics to illustrate what was going on during the Housing Bubble.
At this point we should recall that those mortgages being pooled were not being held by the banks that issued them. First, some weren’t even properly registered. The MERC mess was created by bankers who didn’t think county recorders were working fast enough to satisfy the financier’s demand for more mortgages to pack into the pools. [DB]
“The mortgage industry created MERS to allow financial institutions to evade county recording fees, avoid the need to publicly record mortgage transfers and facilitate the rapid sale and securitization of mortgages en masse,” Mr. Schneiderman said. By creating this “bizarre and complex end-around of the traditional public recording system,” Mr. Schneiderman’s lawsuit asserts, the banks saved $2 billion in recording fees.” [NYT]
It might have saved the banks some $2 billion in recording fees, but when it became obvious some of those hybrid adjustable rate monstrosities were going into default, one thorny question arose — Who owned the mortgage? When trying to determine how to re-negotiate an individual mortgage it is helpful to know who owns it. On the other end of the scale, investors who purchased mortgage backed securities were told that all the loans were just fine and dandy — some, specifically Bear Stearns, told investors the firm would repurchase defective loans — that wasn’t what happened. [NYT]
Now let’s look at the next step in the diagram. The mortgage backed securities shown in the first part of the diagram were used to create another layer of investment products called CDOs. This isn’t as much of a problem for the homeowner facing the possibility of robo-signing and ‘who owns the mortgage’ MERC related issues, but it does illustrate how the faulty or defective mortages contaminated the system when pumped into Wall Street Casino.
One Size Doesn’t Fit All
In addition to the problems associated with the Securitization Boom, homeowners faced a situation in which not all regional housing markets were created equally. David McGrath Schwartz’s article mentions this crucial point. One map from 2010 illustrates the point:
The “hottest” real estate markets in the Housing Bubble were those most likely to see the creation of the now infamous no-doc hybrid adjustable rate mortgages which were designed from the outset to encourage refinancing NOT repayment. However, federal statutes must address national problems, so the initial programs were devised with the national — not the Nevada — issues in mind.
HAMP: “The program was built as collaboration with lenders, investors, securities, mortgage servicers, the FHA, the VA, FHLMC, FNMA, and the Federal Housing Finance Agency, to create standard loan modification guidelines for lenders to take into consideration when evaluating a borrower for a potential loan modification.” [source] Problems for Nevada emerged immediately. Many home loans in the state weren’t part of any of the eligible agencies. Some didn’t meet the first lien qualification standard. How to calculate the >31% of available income became problematic. Worse still the American Bankers Association in conjunction with the Mortgage Twins (Fannie & Freddie) were adamant in their objections to any mention of reducing the principal of the loans to prevent homeowners from going any further underwater. [ Examiner]
The notion of bankers being unwilling to accept any reduction in the principal in order to prevent foreclosures doesn’t seem to make sense, unless we remember that the banks didn’t have enough skin in the game. Too many banks securitized too many mortgages while retaining too little ownership of them.
HARP: The Home Affordable Refinance Program — “To be eligible, you must have a mortgage owned or guaranteed by Fannie Mae or Freddie Mac, sold to those agencies on or before May 31, 2009. The current loan-to-value ratio on the mortgage must be greater than 80 percent. Having a mortgage that was previously refinanced under the program disqualifies you from the program. Borrowers cannot not have missed any mortgage payments in the past six months and cannot have had more than one missed payment in the past 12 months.” [WaPo]
Here we go again — if the loan was owned or guaranteed by one of the mortgage twins, then a homeowner would be eligible. If not — good luck.
“This is a big deal because, although the Fannie Mae-Freddie Mac-FHA triumvirate controls more than 90% of today’s new mortgage originations, that wasn’t the case from 2001-2007. Last decade, non-GSE lending was a major part of the U.S. housing market.
For example, Alt-A mortgages accounted for 27.5% of mortgage originations in 2005. Today, each of these homeowners is locked out from HARP. HARP 3.0 would allow these Alt-A customers to (finally!) refinance their home loans.” [TMR]
HARP 3.0 is still on the drawing boards. The situation as of June, 2012?
Although at least one Senate Republican shows interest in a plan to expand the Home Affordable Refinance Program, the outlook for Congressional action remains doubtful and House Democrats are pushing the Federal Housing Finance Agency to make further HARP changes administratively. During a Senate Banking, Housing and Urban Affairs Committee hearing last week on legislation to expand HARP, Sen. Bob Corker, R-TN, said he was open to the proposal. “I hope that we’ll have a real mark-up on this bill,” he said.” [IMF]
A HARP 3 bill was introduced by Senators Boxer (D-CA) and Menendez (D-NJ) in September 2012. S.3522 “Responsible Homeowner Refinancing Act of 2012,” was placed on the Senate’s legislative calendar on September 12, 2012 and no action has been taken since.
In short, the two major programs have been limited because (1) of the opposition of banks and the mortgage finance industry to any suggestion that the principal of the mortgages be reduced; and, (2) the fact that a full 27% of the mortgages issued during the Housing Bubble were not from government guarantors over whom the Federal government has any current jurisdiction.
Instead of bemoaning the slow pace and limited reach of home mortgage modification in Nevada, we should be demanding that the 112th Congress take action on bills like Menendez’s S. 3522 which would expand the reach of federal services to those holding non-GSE or FHA loans.