Mr Mortgage’s Guide to the TRUTH!

Mr Mortgage is a 20-year residential mortgage banking veteran, specializing in wholesale and correspondent sales and sales/operations management and bringing financial institutions into new lending markets. Since 2006, his primary focus has been upon his work as an independent research analyst at his firm, The Field Check Group. His 20-years industry experience, extensive research and access to proprietary data few have available has led him to make an extraordinarily large number of early and accurate predictions about the ‘Great housing, mortgage and credit meltdown’ and company-specific events. His body of publicly released work can be found at


Mr Mortgage’s Guide to the TRUTH!

Week of – Feb 8th 2009

– Principal Balance Reductions Coming? I Have my Doubts

– The Permanent Solution – Principal Balance Reductions Targeting Income

– Mark-to-Market Chump Talk – You must be kidding me Steve Forbes

– No Appraisal Refinances May Come Soon – The Loan Mod Substitute with Consequences

– NINJA Loans are Back – The Loose Fannie

– Ratings Agencies Rip Apart Alt-A

NY Post Sunday Business Section – As a note, I was quoted in a story on the front page of business section of the Sunday NY Post this morning. Just to let you know I have not lost my mind – the quote they put in has nothing to do with the story, rather mark-to-market accounting. Apparently the quotes got mixed up. It probably left millions scratching their heads saying “that paragraph absolutely makes a whole lot of sense – just not in the context of this story”. Every time I think of that it makes me giggle my butt off. Sad to say most probably didn’t even think anything was off. Of note, I love the Post and the reporters there – class act. Especially Teri Buhl.

“One thing is for sure…after two years of spin, absolutely opaqueness by the banks and mind blowing losses, the last thing that can be good for this market is to allow the perpetrators to revert to the behavior that got us here in the first place. Marking assets to mythical price points in order to manipulate a balance sheet is not something that instills confidence in investors.”

2.8.09 – Principal Balance Reductions Coming? I Have my Doubts

Now for the quotes that were supposed to be in the story…the news is about Geithner and principal balance reductions but the numbers don’t make sense. According to the story, Geithner has hired a super-computer to perform principal balance reductions on 500k loans per month. This is so far out of the scope or practicality it makes no sense. I actually give the guy far more credit than this. But for the sake of this write-up let’s pretend this has some basis in reality.

The 21-day “Mo Mod” program works by structuring a new mortgage that more accurately reflects a home’s worth so that a troubled borrower no longer owes more on their home than the property is worth.

“Mo Mod” is an algorithmic mortgage processing program that can rewrite up to 500,000 loans a month, and will be a major part of Treasury’s plan to help repair tattered bank balance sheets.

As outlined, this plan will be much broader in scope than the Federal Deposit Insurance Corp.’s plan with IndyMac, which was initiated by FDIC Chairman Sheila Bair and has only been able to rework about 5,000 mortgages since last summer.

Targeting home prices in a rapidly declining market that has shown no signs of bottoming is fraught with problems. It can’t be done. It can’t be done with only $175 billion that’s for sure.

To make it clear starting out, I am against meddling in the housing market. The ‘Subprime Implosion’ is on the down slope all by itself. There was not one thing that anyone did to aid that sector – all prevention efforts were to address the symptoms not the cause and failed. But as you know the Alt-A, Pay Option, Jumbo Prime and Prime Implosions lie ahead and the sizes of these universes dwarf Subprime.

Unlike payment adjustments being the primary cause of default in the Subprime universe, negative equity is the leading cause of loan default across the higher grades. This has been denied vehemently by banks and regulators for the past year but this news confirms the fact that negative equity poses the primary threat going forward.

As a matter of fact Wilbur Ross was on CNBC last week boasting a 15% to 20% redefault rate against FDIC’s 50%+. He says point blank – ‘without principal balance reductions mortgage modifications will not work’. But all of you already knew this. Link below.

Targeting Property Values

Targeting the property ‘value’ as this story suggests won’t work. In the bubble states, where values are all over the map and because most of the sales are foreclosure-related, value has to do more with the loss severity of the selling institution or underlying loan amount owed by an individual than comparable sales. Within a one mile radius all over the state of CA there are nearly identical homes selling for 15% – 30% apart.

If they use AVM’s (automated models) to target prices, they will be off by at least 20% – how many AVM’s do you know to be remotely accurate in the bubble states? If they rely upon appraiser valuations there will be a lot of pressure by the home owners to come in as low as possible. If the appraiser is never seen hired by the Government — just wait until someone in a cubicle in Virginia tells a homeowner in a $275k home in the Central Valley CA who paid $700k that the house is worth $500k.

Is this $175 billion in new first mortgage money used to replace the old mortgage? There is no way at present to inject capital into a mortgage loan whereby it resets the payments for the remainder of the term – well unless it’s an interest only or Pay Option ARM. If this is to be used to buy down principal balances in order for the borrower to refi at a lesser loan amount, good luck getting a refi. There is no such thing as a short-refi (yet) and in 2009 the GSE’s and FHA became very tough on borrowers that have had any modification to principal or interest. If this is in fact $175 billion in new first mortgage loan money it will only be able to benefit one million home owners based upon a $175k loan amount.

What if values drop another 25% — which in is very possible. Are they going to spend more and do this again? What if after the principal reduction the borrower still can’t afford the payments? With stated income being over 80% of the Alt-A universe and 90% of all applicants overstating their income level, this may very well be the case.

Generally when there are this many questions about a specific bailout proposal, something is not right. This all seems a little sloppy for Geithner.

Will $175 billion be enough when targeting home values?

At the end of last year, Zillow estimates that one in six (17.6 percent) of all homeowners had negative equity; a number up from 14.3 percent at the end of Q3 2008.

The 17.6% figure tells me that over 17 million homeowners are in a negative equity position. If injecting principal, $175 billion would give them a little over $10k relief each. Since most of this will undoubtedly go to the bubble states where epidemic-negative equity runs into 6-figures commonly, $10k won’t cut it.

That is of course if Zillow estimates are correct. I also don’t know how Zillow estimates this and have messages in to figure it out. What we do know is that there roughly 118 million total housing units. Of this, approx 100 million are occupied properties of which 55 million have first mortgage loans attached.

What I have been told is that Zillow uses the purchase price to determine these statistics. The problem with this is during the bubble years nearly everyone refinanced with many pulling cash out. Additionally, from 2005-2007 millions of second mortgages were added to properties increasing the level the home owner is underwater.

If Zillow’s numbers are based upon the 100 million units and not the 55 million with loans attached that are in question the problem is likely much more severe than most think. If they are using purchase price and not refinance loan amounts and adding on second mortgages, the problem is greater yet. First American also has data out that I quote often showing between 20% ad 50% negative equity in the most heavily populated, heaviest foreclosure states, which leads me to believe that Zillow bases their 17.6% off of total housing units and the original purchase price. I will update you when I find out.

The Permanent Solution – Principal Balance Reductions Targeting Income

“With 28/36 DTI the home becomes a place to live again ad negative equity is much less of a reason to default.”

D-leveraging and recapitalizing financial institution had to be part of the plan. But, what about the consumer? When you force de-lever the home owner they are left to refi, sell, save and shop. Everything done to date has been to trickle-down. The great mortgage and housing meltdown that led to what is now likely a depression must be addressed through trickle-up tactics.

The only way to ‘fix’ the housing and mortgage markets and consumer’s balance sheet is to undo 2003-2007. To ‘undo’ means to:

  • a) force de-lever the home owner/consumer through mortgage principal balance reductions based upon what the borrower really earns using market-rate financing
  • b) make it so home owners can freely refinance and sell their homes
  • c) make it so the vitally important move-up buyer comes back
  • d) significantly reduce defaults and foreclosures without making home owners underwater, fully-leveraged, renters for the rest of their life as the present FDIC, Fannie/Freddie and bank mortgage modification plans do
  • e) allow home prices to fall to attractive multiples of rents and incomes without exotic loan programs or artificial, temporarily, government induced low mortgage rates

Making the Home a Place to Live Again

I think that some time in 2009 someone at a high place with realize that the only permanent solution is to re-underwrite every loan originated between 2003 and 2007 using prudent underwriting guidelines. When I say ‘every loan’ I mean it – even 30-year fixed ‘Prime’ loans were allowed to got o 50% DTI and higher during the bubble years and are at-risk. Then reduce the principal balance for anyone that wishes to participate according to the real income using time-tested 28% housing and 36% total debt-to-income ratio. Market-rate 30-year fixed loans can be used when going this route.

When home owners are levered to 28/36 DTI they are able to save money and live a decent lifestyle. If they go upside down in their property it is less consequential – they are still able to save money and live the lifestyle their income level allows.  At 28/36, their home once again becomes a place to live.

We have already spent and committed trillions and the banks will take a couple trillion more in hits. If this was spent re-underwriting residential mortgage loans to 28/36 (undoing 03-07) much of the housing implosion caused by loan defaults could have been contained.

The Cost and Benefits

From 2003-2007 there were $12 trillion in originations of which about $7.5 trillion stuck and are still on the books today. Of those about 80% are owner occupied, primary residences worth $6 trillion. If the amount of debt that needed to be crammed-down to achieve 28/36 was 25-30%, is less that $2 trillion to permanently ‘fix’ the housing market. A fancy super computer that re-assigned loan amounts based on tax returns, current pay stubs and credit report total debt could do the lion’s share of the work quickly.

When a mortgage loan is re-underwritten under sensible terms that can be repaid, the value of the loan will increase, as the risk of default lessens. Entire securities of loans could conceivably gain in value as mortgage defaults nationally wane. But write-ups are only possible if the financial institution has written them down to present value, which is highly unlikely across mortgage universe. Even underwater, worthless HELOC’s are still carried at face value by most of the nations leading banks.

If reducing the principal balance to 28/36 on a market rate 30-year fixed loan winds up being considerably lower than the present value of the home, the bank should receive the differential through an equity warrant to 90% of the value of the property. This way the home owner is not upside down in the home, they can freely sell or refi, they are not getting anything more than they deserve and the bank is still protected.  But the home owner should get all of the upside. Anything less and the program will fail. If the distressed borrower can’t prove income or significant reserves through bank statements at the very least, then they need to leave the house and rent. They should have been renters all along.

For the small percentage of folks who can afford the payments just fine with DTI’s under 28/36 but are underwater solely due to house price depreciation, principal balance reductions to 90% of the present value of the property is likely in order WITH a full-recourse provision to thwart fraud.

The minority with equity who may owe $200k on a $400k home or have no mortgage at all get a multi-year tax break and a lollipop.  Many already have 5% to 5.5% rates obtained 5-years ago. Additionally, they are benefited because as this de-leverages and stabilizes the consumer, house prices will stabilize much faster. Left unchecked or pushed out through bad loan modification initiatives, the consumer de-leveraging and housing price depreciation will continue for years, which brings every home down.

These things will not prevent housing prices from coming down over the next few years to reach a level of affordability consistent with present mortgage rates and lending guidelines. But at least it would be the best way to begin to undo the irresponsibility of the past five years and get back to basics where house prices and affordability are based primarily on traditional factors such as rents, incomes, interest rates, macroeconomic conditions and sentiment. –Best Mr Mortgage

2.5.08 Mark-to-Market Chump Talk – You must be kidding me Steve Forbes

Many, including Steve Forbes, have been very vocally blaming mark-to-market as the leading contributor to the financial crisis for a year now. Most make comparisons to residential real estate that go to show that they do not live in the real world. The fact is that residential real estate, especially in the bubble states, is one of the purest forms of M2M.

The financial television circuit anti-157 crowd’s primary argument against M2M is how wrong it would be that ‘if just because someone had to fire sale their home it made yours worth less’. What are you talking about Steve? That is called a ‘comparable sale’. That is how appraisers evaluate real estate.

When a property is foreclosed upon (sells) at Trustee/Sheriff’s Sale it is not generally counted as a comparable sale for the purposes of a residential real estate appraisal. However, if it goes back to the bank as REO and sold through a traditional Realtor channel like 95% of foreclosures are, it is a comparable sale that directly effects the valuation of my home. When 60% of all sales in the bubble states are foreclosure-related, then the foreclosure market is the real estate market and values are based according.

Since I know this to be true and banks have loans and securities backed by loans on homes that are ‘marked-to-market’ in this fashion, why is there even an argument about this? In a nutshell – in a declining real estate market with increasing loan defaults and foreclosures, pricing real estate related assets by any measure other than at a discount to the underlying collateral value is irresponsible. How many really stay in their home or mortgage for 30-years?

I don’t think there is any argument as to why home prices are falling – they are too expensive relative to income and rents given present sensible lending standards. Additionally, supply is everywhere in the form of foreclosures and REO. None of this is outside the scope of econ 101. Then why is there an argument as to why the loans and securities backing housing have declined in value? Why is everyone so befuddled over investors not wanting to pay up for loans and securities underwritten during the bubble years when there were no standards and everyone with a heartbeat got a loan?

As I have said many times, there is a booming market for distressed notes and real estate just not at the prices the banks can take. That is not the market’s problem. The market is what the market is and I think the housing market is performing quite well considering the massive de-leveraging the sector has gone through in the past year and a half. Remember, in summer of 2007 home prices were at an all-time high and you could still get a 100% interest only, stated income, piggy-back with a 620 credit score. An $85k per year household with 5% down could buy a $750k home with ease. Without the easy financing and exotic loans or salaries that triple, there is no way for home prices to ‘come back’ to anywhere remotely near the bubble years. The loans and securities that back residential real estate will be permanently impaired.

One thing is for sure…after two years of spin, absolutely opaqueness by the banks and mind blowing losses, the last thing that can be good for this market is to allow the perpetrators to revert to the behavior that got us here in the first place. Marking assets to mythical price points in order to manipulate a balance sheet is not something that instills confidence in investors.

I can’t believe I just wrote seven paragraphs based upon on the assumption that assets are really being marked-to-market today. – Best, Mr Mortgage

2.3.08 No Appraisal Refinances May Come Soon – The Loan Mod Substitute with Consequences

Remember, it is not about what Fannie or Freddie will do, it is about what the lenders and mortgage insurance companies will do. For example, Fannie and Freddie do 95% loans but in the bubble states the MI companies won’t insure it. The Hope-For-Homeowners refinance program that Dodd sponsored is another perfect example – they were supple to help 1.5 million borrowers and to date less than 200 loans have been done. Additionally, banks are tightening guidelines unilaterally – Wells Fargo did this week when it made the minimum credit score for an FHA loan at 620.

Actually, mortgage lending is a mess. Large bank wholesale lenders are dropping out of the space weekly while others unilaterally are tighten guidelines beyond what Fannie, Freddie and FHA require. This week Wells made the following announcement on FHA it funds raising credit score requirements to 620. ‘Tightening’ and ‘FHA’ typically don’t go together in the same sentence. In relative terms, a 620 score a year and a half ago was considered ‘Prime’ at Wells Fargo on a Jumbo interest only, full-doc 5/1 Interest Only.

Wells Fargo Wholesale Lending group will require two new requirements for FHA and VA transactions: a minimum loan score of 620 is required, regardless of any automated underwriting system (AUS) decision, and a payment history for FHA streamline refinances and VA interest rate reduction refi loans. (No 30-day or greater mortgage lates in the most recent 12 months will be allowed for FHA Streamline Refinances and VA IRRRLs.)

In Q4 when speculation was that the Gov’t would bring rates to 4.5% and the ensuing refi wave would save housing it was obvious to those following home prices indices that a large percentage of those that really needed to refi would not be able to due to loss of equity. I jested that the only way to get the money where it is needed most was to ‘bring back stated income and to waive appraisals’.

Shortly thereafter, Lockhart talked about a new program being discussed that would in fact waive appraisals for GSE loans that are currently owned by the GSE and are current on payments. Who needs an asset appraisal when making an asset backed loan anyway! I guess Lockhart forgot to read the multiple reports on his desk about how negative equity is now a leading cause of loan default. As unemployment surges it will be ‘the’ leading cause.

“If they refinance someone, rather than doing a loan mod, do they need a new appraisal if they already have the credit?” Federal Housing Finance Agency Director James Lockhart told reporters after a speech in Washington today. “That’s an issue that’s being discussed

This is a mortgage-related wildcard that could come prior to any meaningful Obama stimulus …and we thought stated income/stated asset was risky. Not even in the bubble years did anyone allow this.

People will say ‘FHA has a streamlined refi program that has been around for years and it works great’. It does for originators – but FHA has a near 20% default rate the last I checked.

This program will be branded as the ‘new and improved streamlined refi’. We know now that instead of dealing with the pain, leveraging back up is the only way out of this so why not let the consumer lever back up too. A move like this is highly risky making the tax payer the ultimate owner of billions of underwater mortgages that no right-minded investor would ever buy. They will sit on the tax-payer’s balance sheet indefinitely.

The GSE’s already have a streamlined refi program in place where the lender certifies the value has not fallen. This program has not done much because most lenders don’t even offer it. The program requires that the borrower go back to the original mortgagor. Many lenders are out of business but the ones that are still around have little incentive to offer it. Why should they when they already have a performing loan on the books at a higher rate – why give a lower rate away just to do it.

Many of these borrowers have second mortgages in place. There is not a second mortgage holder in the nation that will re-subordinate behind a 150% loan-to-value refi. These loans are also likely to be made to be full recourse loans. If the borrowers are made aware of this up- front and are smart they will think more than twice.

Committing to owing 150% of your house value with no recourse in a declining market is suicide. While this program will get everyone excited and help get money lent at the margin, this must be viewed as just another small effort in putting Humpty-Dumpty back together again. This is nothing more than a loan mod substitute and will not start some major long lasting refi-wave despite what they will say when released.

Perversely, it may cause more defaults as home owners apply for this program and they realize just how underwater they really are – most still think their house is the most expensive on the block. The realization that you are hopelessly underwater in your home unable to sell is a leading contributor to loan default. – Best, Mr Mortgage

2.5.08 NINJA Loans are Back – The Loose Fannie

Again, it is not about what Fannie or Freddie will do, it is about what the lenders and mortgage insurance companies will do. This came out after the report written above. The GSE’s are probably thinking ‘hey, we own it anyway what the heck’. That is an easy call when the tax payer is backing it. In my opinion, those that are sitting pretty right now, which are not the ones who need help, will do great by taking this deal. Some may balk if these comes with serious non-recourse provisions. The ones ready to default because they are so far underwater will take the deal – this kicks the can down the road like a mortgage mod. A large percentage of these will ultimately default due to negative equity.

The new lose Fannie – this makes IndyMac look like Hudson City:

Ø Drop some credit-score requirements

Ø Reduce income-documentation standards

Ø Waive the need for appraisals

By the way, there was never anything that mortgage folk called a ‘NINJA’ loan. ‘J’ refers to ‘job’ and although many without jobs got loans, it was not something that many lenders offered or advertised. –Best, Mr Mortgage

2.3.08 Ratings Agencies Rip Apart Alt-A

Below is a recent story from a fellow mortgage and housing fool, Paul Jackson owner of . The story is so well written and thorough, I just pasted the entire thing below. The on-balance sheet mortgage-related assets have been under fire from the raters for some time and pressure is building as defaults increase. –Best Mr Mortgage

“Here We Go Again: S&P Slashes Thousands of RMBS Ratings

February 3, 2009

There’s a saying about death by a thousand paper cuts, and that’s clearly been taking place for most of the private mortgage-backed securities market over the course of the past twelve months. On Monday, Standard & Poor’s Ratings Services lowered the boom — again — on thousands of Alt-A and subprime RMBS, moving them all to a ‘D’ rating, as well as cutting hundreds of formerly AAA-rated securities multiple notches from their previous perch atop the ratings heap. The agency also began cutting ratings on prime deals, as well.

The rating agency said it had lowered its ratings to ‘D’ on 1,078 classes of mortgage pass-through certificates from 650 U.S. Alt-A RMBS transactions from various issuers, while also placing 2,111 ratings from 143 of the affected transactions on CreditWatch with negative implications. Approximately 81.82 percent of the ratings on the 1,078 defaulted classes were lowered from the ‘CCC’ or ‘CC’ rating categories, and approximately 98.98 percent of the ratings were lowered from a speculative-grade rating, S&P said in a statement.

Outside of Alt-A, S&P also hammered its ratings on subprime securities, dropping 737 classes of mortgage pass-through certificates from 516 U.S. subprime issuances to a ‘D’ rating as well. Roughly 97 percent of the ratings on the 737 defaulted classes were lowered from the ‘CCC’ or ‘CC’ rating categories, S&P said. See the statement.

That was just for starters, apparently. S&P also lowered its ratings to ‘D’ on 117 classes from 94 different prime jumbo deals, 89 classes from 68 U.S. closed-end second-lien deals, as well as 73 classes from from 48 U.S. scratch-and-dent deals.

AAA pain mounts

Despite all of the cuts to securities that were already considered speculative grade, it’s perhaps more telling that S&P also took the hatchet to AAA-rated classes — an example of a few Wells Fargo deals involving 32 classes is here, but there are others. These downgrades weren’t to a ‘D’ level, of course, but a fall from the AAA perch is likely to be comparatively far more painful for an investor.

And for those really, really geeked out by this sort of stuff: some of the 2007 deals being downgraded here now have cumulative loss projections exceeding 20 percent. For the ENTIRE issue. That’s nearly unheard of outside of the subprime space.

The bottom line here is this: for all of the pain felt in this area already, plenty of banks large and small are still generally carrying securities on their books at a level justifiable against current ratings levels, which is partly why trades in this space have been frozen. Buyers know the securities aren’t worth the AAA rating they’ve got, and frankly so too do any would-be sellers, but nobody can sell a security still at AAA at C-level prices and then justify the hit that so doing would have on the rest of their books.

With many of these AAA high-fliers falling officially off their perch, expect two things to take place: one, further mark-downs to portfolio holdings among those institutions that hold a good amount of private-party Alt-A and other RMBS. Second, you might actually see some trades materialize as the number of AAA downgrades pick up and would-be sellers can no longer justify their ridiculous marks.

There is a reason there is so much discussion — heated discussion — around a bad bank right now. Financial institutions are quite aware these downgrades are coming in waves, and are trying to figure out how to get out from underneath the second wave of soon-to-be bad debt as fast as they possibly can. Because there is still plenty of bad debt hiding on the books at most companies that were players in the private party mortgage market; and even before this round of downgrades, most of the TARP capital that has been doled out was done to offset the first round of write-downs.

I tend to think Oppenheimer’s Meredith Whitney hit the nail on the head in suggesting last month that banks are going to need far more capital than what’s been committed to weather this mess.

Moody’s also joins the party – slashing ALMOST ALL Alt-A deals.

“Moody’s Warns it Will Downgrade Almost All Alt-A MBS, Sector Now Worse than Subprime

Moody’s Investors Service last week quadrupled its projected cumulative loss expectations for Alt A mortgage-backed securities and warned that most deals will be downgraded, many to below investment-grade. The actions confirm that Alt A MBS will perform worse, ratings-wise, than already battered subprime MBS.”

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