A couple of days ago I was reading an article about the mortgage investment process from a lender's perspective and thought: "no wonder these guys are so slow to respond, they don't know who owns the loan!". That's when I figured I should briefly discuss how we got to this point.
Back in the good old days, when you took out a mortgage at your local bank, the bank lent you the money and you gave them a mortgage on your home. The home was the collateral on the loan. They kept the loan in their portfolio. Whenever you ran into problems your local bank would contact you and try to help you resolve the situation, because they would rather lose a little bit of money than have to foreclose on your home and lose a lot.
Some banks would sell your loan to another bank or Fannie Mae or Freddie Mac and although things would be a little more difficult to resolve, they were still managable. However, someone came up with the bright idea of handling loans as a security (like stocks). Now, they would take your loan and combine (or pool) it with other loans of similar type and sell it off as a package. These are known as Mortgage Backed Securities (MBS's) because they were backed up by the mortgages on the homes. They weren't backed by the homes but by the mortgages on the homes.
Now it became more difficult to figure out who owns your loan. The bank which gave you the mortgage doesn't own it (it already sold the loan). The company which created the pool the mortgage backed security doesn't own it. It is just a middleman. The Mortgage backed security is owned by a bunch of investors, so how do you get a loan modification from a group of investors.
To make matters worse, that is not the end of it. These mortgage backed securities were then tranched (or divided) into new types of securities called: "Collateralized Mortgage Obligations" or CMO's. Tranching could be done in different ways (I'll discuss tranching in an upcoming article). These weren't backed up by the homes or even by the mortgages on those homes. These were backed up by the Mortgage Backed Securities mentioned above. Now who owns your loan? Hard enough to figure out? Well, the process could be repeated again. That's why when you try to get answers from your lender, you can never get a straight answer. The truth of the matter is, they probably don't know who owns your loan or your loan may be owned by a group of investors far removed from the loan process.
Thursday, February 5, 2009
Thursday, January 8, 2009
Bad news for lenders; good news for you.
It seems every day, we read about the crushing amount of foreclosures ocurring throughout the US. Courts in states like California, Nevada and Florida continue to be inundated with massive amouts of foreclosure filings. Take for example: Lee County, Florida an area that's near and dear to my heart. They are dealing with a caseload of over 20,000 foreclosures and more to come down the pike.
The massive amount of foreclosures back up the court system and put downward pressure on prices. Both of these things are good news for homeowners with mortgages in distress. Because the court system is backed up, the lender will have to spend over a year and a lot of money in court costs and lawyers fees to foreclose on an asset that is generating no revenue. Moreover, there is a massive downward pressure on prices. Depending on the market, a home today may be worth only half as much as what it was worth at the market's peak (sometime in 2006). All indications are that prices will continue to fall in the near future and will probably remain stagnant for quite a while after that.
Lenders are in the business of making money. So why would they want to spend a lot of money to take back an asset whose value declines on a daily basis. It is in their best interest to keep you in the home and find a way to allow you to make the payments. If they have to modify the interest and even the principal, it is a better deal for them than to foreclose. Most lenders have come to that realization. I believe that in the very near future, it will become a lot easier to avoid foreclosure. In the meantime, hang on as best you can and call your bank, you may be surprised at how much more friendly it has become.
The massive amount of foreclosures back up the court system and put downward pressure on prices. Both of these things are good news for homeowners with mortgages in distress. Because the court system is backed up, the lender will have to spend over a year and a lot of money in court costs and lawyers fees to foreclose on an asset that is generating no revenue. Moreover, there is a massive downward pressure on prices. Depending on the market, a home today may be worth only half as much as what it was worth at the market's peak (sometime in 2006). All indications are that prices will continue to fall in the near future and will probably remain stagnant for quite a while after that.
Lenders are in the business of making money. So why would they want to spend a lot of money to take back an asset whose value declines on a daily basis. It is in their best interest to keep you in the home and find a way to allow you to make the payments. If they have to modify the interest and even the principal, it is a better deal for them than to foreclose. Most lenders have come to that realization. I believe that in the very near future, it will become a lot easier to avoid foreclosure. In the meantime, hang on as best you can and call your bank, you may be surprised at how much more friendly it has become.
Thursday, December 18, 2008
Is there foreclosure help available locally?
A few days ago, I saw in our local newspaper an article about what our local government was attempting to do to help homeowners at risk of foreclosure and it made me think: "our local governments may be able to provide help where the federal government can't."
Don't get me wrong, the federal government has its mind in the right place; it's just too big and inefficient to get much done. Helping homeowners in distress is a job that must be done one homeowner at a time.
Let me give you an example. In July of 2008, the federal government passed the government rescue bill, which was supposed to help 250,000 families. Estimates vary, but we hear that the number of people helped so far, falls in the hundreds not the thousands. Why? There are many reasons: 1. the government bureaucracy is good for major projects that can be handled in bulk but not projects that have to be done one piece at a time. 2. The lenders are slow to respond because they are not set up to handle loan workout plans for loans which don't even belong to them. 3. Homeowners feel overwhelmed because up to this point the only representatives fo the lenders they've dealt with are the collectors harassing them every month to pay the mortgage.
In contrast take a look at what our county government is going to do here in Lee County, Florida. With $900,000 in State money set aside for that purpose, they will offer up to $8000 to homeowners with moderate, low or very low incomes. Any homeowner who's had a major hardship such as job loss, medical illness, weather event related property damage, or unforeseen home repair bill will be able to qualify for this money. How simple can it get: if you qualify, they will give you enough money to get your loan caught up and stave off the foreclosure. In combination with all the foreclosure counseling that's offered, this will give the homeowner the best hope of finding a permanent solution to his/her foreclosure problem.
Just like this example, there are plenty of communities taking matters into their own hands to help stop this wave of foreclosures which is threatening to ruin the nation's economy. Keep your eyes open, you may see that the solution to your problem is not with the federal government but right there in front of you.
Don't get me wrong, the federal government has its mind in the right place; it's just too big and inefficient to get much done. Helping homeowners in distress is a job that must be done one homeowner at a time.
Let me give you an example. In July of 2008, the federal government passed the government rescue bill, which was supposed to help 250,000 families. Estimates vary, but we hear that the number of people helped so far, falls in the hundreds not the thousands. Why? There are many reasons: 1. the government bureaucracy is good for major projects that can be handled in bulk but not projects that have to be done one piece at a time. 2. The lenders are slow to respond because they are not set up to handle loan workout plans for loans which don't even belong to them. 3. Homeowners feel overwhelmed because up to this point the only representatives fo the lenders they've dealt with are the collectors harassing them every month to pay the mortgage.
In contrast take a look at what our county government is going to do here in Lee County, Florida. With $900,000 in State money set aside for that purpose, they will offer up to $8000 to homeowners with moderate, low or very low incomes. Any homeowner who's had a major hardship such as job loss, medical illness, weather event related property damage, or unforeseen home repair bill will be able to qualify for this money. How simple can it get: if you qualify, they will give you enough money to get your loan caught up and stave off the foreclosure. In combination with all the foreclosure counseling that's offered, this will give the homeowner the best hope of finding a permanent solution to his/her foreclosure problem.
Just like this example, there are plenty of communities taking matters into their own hands to help stop this wave of foreclosures which is threatening to ruin the nation's economy. Keep your eyes open, you may see that the solution to your problem is not with the federal government but right there in front of you.
Saturday, November 29, 2008
More hope for homeowners at risk of foreclosure.
Lately, there have been moves by both the Federal Government and individual banks to provide relief for homeowners who are at risk of going into foreclosure. When the FDIC took over Indymac bank, with no fanfare, they did something which is a breakthrough which until now has been greatly resisted: they started rewriting loans.
Borrowers who are at risk of foreclosure are getting letters offering to cut their payments to just 38 percent of their incomes. They do this by offering modifications that can include: lower interest rates, longer term loans and possibly reductions in principal. The FDIC under chairman Sheila Bair wants to take this program nationwide by offering this program to all Fannie Mae and Freddie Mac customers.
Now, three banks have joined in on the process by offering modifications similar to these. The three banks are: Bank of America, J. P. Morgan and Citigroup. They came about through different circumstances but they've finally arrived at the same junction: homeowner relief. Bank of America was forced into this when it purchased Countrywide. To settle a lawsuit against Countrywide, Bank of America agreed to rework the loans of homeowner in foreclosure who meet certain criteria (sub-prime or adjustable rate mortgages) in the following eleven states: Arizona, California, Connecticut, Florida, Illinois, Iowa, Michigan, North Carolina, Ohio, Texas and Washington. Citigroup decided to do a similar thing on its own for homeowners in similar distress. JP Morgan the purcharser of Washington Mutual, decided to put a halt on all foreclosures for the next 90 days beginning November 1st. It will use that time to work with the homeowners in providing relief to them.
This provides hope to homeowners currently in distress and who have managed to hold on this long that other banks will either decide to follow these banks on their own or will follow suit under the threat of lawsuit. If you are at risk of being foreclosed on, there is reason for hope, but do not bury your head in the sand and hope that something will happen automatically, call your lender and start to make it happen.
Borrowers who are at risk of foreclosure are getting letters offering to cut their payments to just 38 percent of their incomes. They do this by offering modifications that can include: lower interest rates, longer term loans and possibly reductions in principal. The FDIC under chairman Sheila Bair wants to take this program nationwide by offering this program to all Fannie Mae and Freddie Mac customers.
Now, three banks have joined in on the process by offering modifications similar to these. The three banks are: Bank of America, J. P. Morgan and Citigroup. They came about through different circumstances but they've finally arrived at the same junction: homeowner relief. Bank of America was forced into this when it purchased Countrywide. To settle a lawsuit against Countrywide, Bank of America agreed to rework the loans of homeowner in foreclosure who meet certain criteria (sub-prime or adjustable rate mortgages) in the following eleven states: Arizona, California, Connecticut, Florida, Illinois, Iowa, Michigan, North Carolina, Ohio, Texas and Washington. Citigroup decided to do a similar thing on its own for homeowners in similar distress. JP Morgan the purcharser of Washington Mutual, decided to put a halt on all foreclosures for the next 90 days beginning November 1st. It will use that time to work with the homeowners in providing relief to them.
This provides hope to homeowners currently in distress and who have managed to hold on this long that other banks will either decide to follow these banks on their own or will follow suit under the threat of lawsuit. If you are at risk of being foreclosed on, there is reason for hope, but do not bury your head in the sand and hope that something will happen automatically, call your lender and start to make it happen.
Tuesday, August 12, 2008
Will the Housing Rescue bill of 2008 help?
Recently, Congress passed and President Bush signed the Housing Rescue Bill of 2008. On the post of July 26, 2008, I listed the highlights of the bill. Now, I want to take this opportunity to offer my views on it.
It's most prominent feature is the one allowing homeowners in distress not only the ability to refinance their loan, but also at a better rate and for a lower loan amount. This will be a win-win situation all the way around. The owner will be able to refinance to an affordable loan, the lender will have to cut the loan amount by approximately 15%, but the loss incurred will be a lot less than if it foreclosed on the loan. Finally, the neighborhood will benefit because this'll mean one less house to fall into disrepair and to add blight to the neighborhood.
The 3.9 billion dollars that will be provided to neighborhoods to buy foreclosed homes, fix them up and sell them should help neighborhoods which are already inundated with blight caused by massive amounts of foreclosures in certain areas. What I think might cause problems is the distribution. How will they decide who to give the money to? We'll have to wait and see how this is handled. It could turn out to be a godsend or a nightmare.
As far as helping out Freddie Mac and Fannie Mae, the jury is still out. Sure, they are so big that if they were to fail, they could cause a collapse of the housing market, but they are not a government entity and they have taken advantage of the implicit guarantee by the government to pass on as high grade bonds what were really junk bonds. I say, if the government is going to implicitly guarantee their investments they should subject them to a lot more regulation. They should carry the same reserves as banks. This should greatly reduce their chance of failing.
Last but not least, it's great that the bill will offer a $7500 tax credit to first time homebuyers. This should help get the housing market jumpstarted.
It's most prominent feature is the one allowing homeowners in distress not only the ability to refinance their loan, but also at a better rate and for a lower loan amount. This will be a win-win situation all the way around. The owner will be able to refinance to an affordable loan, the lender will have to cut the loan amount by approximately 15%, but the loss incurred will be a lot less than if it foreclosed on the loan. Finally, the neighborhood will benefit because this'll mean one less house to fall into disrepair and to add blight to the neighborhood.
The 3.9 billion dollars that will be provided to neighborhoods to buy foreclosed homes, fix them up and sell them should help neighborhoods which are already inundated with blight caused by massive amounts of foreclosures in certain areas. What I think might cause problems is the distribution. How will they decide who to give the money to? We'll have to wait and see how this is handled. It could turn out to be a godsend or a nightmare.
As far as helping out Freddie Mac and Fannie Mae, the jury is still out. Sure, they are so big that if they were to fail, they could cause a collapse of the housing market, but they are not a government entity and they have taken advantage of the implicit guarantee by the government to pass on as high grade bonds what were really junk bonds. I say, if the government is going to implicitly guarantee their investments they should subject them to a lot more regulation. They should carry the same reserves as banks. This should greatly reduce their chance of failing.
Last but not least, it's great that the bill will offer a $7500 tax credit to first time homebuyers. This should help get the housing market jumpstarted.
Saturday, July 26, 2008
Today, Congress passed the Housing Rescue Bill.
Today, the Senate passed the Housing Rescue bill passed by the House on Wednesday (7/23/08). The main goal of the bill is to allow up to 400,000 homeowners facing foreclosure to refinance to new loans backed by FHA. The bill will allow homeowners who are already behind on the mortgage the ability to refinance to a new more affordable loan if they can demonstrate that they'll be able to make the new payment. The new loan will be for a lower amount, because the current lender will be required to take a loss to offset the home's loss of equity.
Besides helping homeowners, there are a few other things that this bill will do to help the home market:
1) Raise the loan limit for Fannie Mae, Freddie Mac and FHA to 625, 000 (15% higher in high cost areas). These loans are known as conforming loans and come at much lower rates than loans for higher amounts (known as jumbo loans). Raising the limits in effect lowers the interest rates charged for loans within the new limits.
2) Provide 3.9 billion to neighborhoods that they can use to fight blight by buying and fixing up foreclosed properties.
3) Will require lenders to demonstrate to buyers how high their payment can go during the life of the loan.
4) Gives the Treasury unlimited power to lend money to Freddie Mac and Fannie Mae and to buy their stock.
5) Provides tax credits of up to $7500 to first time home buyers.
Besides helping homeowners, there are a few other things that this bill will do to help the home market:
1) Raise the loan limit for Fannie Mae, Freddie Mac and FHA to 625, 000 (15% higher in high cost areas). These loans are known as conforming loans and come at much lower rates than loans for higher amounts (known as jumbo loans). Raising the limits in effect lowers the interest rates charged for loans within the new limits.
2) Provide 3.9 billion to neighborhoods that they can use to fight blight by buying and fixing up foreclosed properties.
3) Will require lenders to demonstrate to buyers how high their payment can go during the life of the loan.
4) Gives the Treasury unlimited power to lend money to Freddie Mac and Fannie Mae and to buy their stock.
5) Provides tax credits of up to $7500 to first time home buyers.
Saturday, July 5, 2008
State of the Housing rescue bill.
As of today, July 5th, 2008, it looks like the Housing Rescue Bill is set to pass both the House and Senate and that President Bush will be willing to sign it (see post from June 10th for more info). It looks like they might add a provision championed by Senator Chris Dodd of Connecticut, which should be particularly helpful for people who have already fallen behind on their payments and for whom foreclosure is imminent.
What's great about it is that not only will it allow people with sub-prime loans that are at risk of having their interest rates resetting to much higher rates, but it will also: 1) be allowed for people who are already behind on their payments and 2) will attempt to get the lenders to accept a payoff of their loan with much less than is owed to them. So let's say you owe $250,000 on house that is worth $180,000. Then, they'll try to refinance your loan at $180,000 and have the prior lender accept the $180,000 as payment in full. Your monthly payment will be much lower because your interest rate will be lower and your loan amount will be much lower.
Things you'll need to keep in mind, it hasn't been approved yet. Also, you'll have to prove that you can make the new payment in order to be accepted. Finally, you will have to be willing to share any future profits that you get once the market improves. I'll keep you posted.
What's great about it is that not only will it allow people with sub-prime loans that are at risk of having their interest rates resetting to much higher rates, but it will also: 1) be allowed for people who are already behind on their payments and 2) will attempt to get the lenders to accept a payoff of their loan with much less than is owed to them. So let's say you owe $250,000 on house that is worth $180,000. Then, they'll try to refinance your loan at $180,000 and have the prior lender accept the $180,000 as payment in full. Your monthly payment will be much lower because your interest rate will be lower and your loan amount will be much lower.
Things you'll need to keep in mind, it hasn't been approved yet. Also, you'll have to prove that you can make the new payment in order to be accepted. Finally, you will have to be willing to share any future profits that you get once the market improves. I'll keep you posted.
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