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Wednesday, August 20, 2008
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11 comments:
Some Say Bailout of Housing Giants Is Inevitable
http://tinyurl.com/6qbs2d
I just hope they solve the problem when they bail them out. Take control of the companies and then sell them off in pieces.
It is pathetic that this situation was ever allowed to develop. Nobody can say the warning signs weren't there for years and years.
From Calculated Risk
Robert if you're reading, and would still like the principle write-offs under the Fed plan to be reflected in comps here's more news to boil your blood:
FDIC mods of Indymac mortgages
or the CR coverage
CR entry
What modification options will be available to borrowers?
Under the IndyMac Federal program, eligible mortgages would be modified into sustainable mortgages permanently capped at the current Freddie Mac survey rate for conforming mortgages (now about 6.5%). Modifications would be designed to achieve sustainable payments at a 38 percent debt-to-income (DTI) ratio of principal, interest, taxes and insurance. To reach this metric for affordable payments, modifications could adopt a combination of interest rate reductions, extended amortization, and principal forbearance.
If, consistent with maximizing the net present value of the mortgage, an interest rate reduction below the current Freddie Mac survey rate is necessary to achieve a 38% DTI, then IndyMac Federal could reduce the rate further for five years. After five years, the interest rate would increase by no more than 1% per year until it capped at the Freddie Mac survey rate where it would remain for the balance of the loan term. Other modification features could be combined with an interest rate reduction, as necessary and consistent with maximizing the value of the mortgage, to achieve sustainable payments.
It is important to remember that there are no fees or other charges for this modification. All unpaid late charges will be waived.
Cara said...
"modifications could adopt a combination of interest rate reductions, extended amortization, and principal forbearance. "
In the context of commercial real estate, it looks like the principal forbearance (or really deferral) has been the most popular option.
In these cases I have been taking a portion of the principal, say 15-20% and backloading it where it may or may not be forgiven.
Take for example a 1MM loan payable in 10 years at prime +2. We typically modify it such that the principal is now 800K (interest and payment period remain the same), with the remaining 200K backloaded.
As for the remaining 200K, the theory is that when the market comes back, that deferred amount will be repaid. Thus, say after 3 years the outstanding indebtedness is now 650K, and the sale price is 900K. In that case, the 650K + the 200K deferred are paid to the bank at closing, and the remaining 50K is payable to the owner. Thus far our re-default rate under this plan has been low so it seems to be working.
I will say this however - the whole reason I have been dismissing ALT-A resets is simple - my lender clients arent stupid - they know that foreclosure is usually by far more devastating loss for them than nearly any sort of workout program - our guys bend over backwards to avoid foreclosure at all costs.
Again though, this is commercial lending. I thus made the reasonable assumption that residential lending was doing the same thing - mitigating all their junk loans the whole time.
However, the mere fact that the residential lending must be told to do this common sense move by the FDIC makes me rethink my position - maybe they really are stupid! If so, the ALT A reset may have a bigger impact than I originally thought.
The Big Picture leads today with an interesting video from the Yahoo Finance site:
http://tinyurl.com/jupmz
Great comments about markets only reading headlines.
Cara said...
From Calculated Risk
Robert if you're reading, and would still like the principle write-offs under the Fed plan to be reflected in comps here's more news to boil your blood:
Yep. “Principal forbearance”. The purchase price was NOT the market price. The market could not/does not support the purchased price and needs to be advertised as such. Either in the tax records, MLS, somewhere to show that neighborhood X is at a lower price point.
CRT,
The Fed plan is similarly principle deferral, in that at sale, if there has been a price recovery then the Fed and the borrower split the gains up to the original amount of the loan. But it's not clear from the FDIC announcement alone how they would be structuring any principle reductions.
I think there are important differences between CRE and residential loans though, which might explain the greater reluctance towards modifications. Generally a commercial real estate loan is a lot shorter in time-frame, they make many of them over the course of decades long business, and thus are likely to develop a working relationship with a bank, and the builder or investor should be lacking the emotional attachment that prevents home-owners from making cut-throat decisions on when to cut their losses on one venture and move on to a more profitable one.
These of course are my guesses with no actual experience in the field, so, you would probably no better than I.
I think that while they let a larger percentage of sub-prime borrowers or pure spectulators go into foreclosure, lenders will be more strategic with the owner-occupant Alt-A borrowers, especially those who have been paying large sums of money (even when it's interest only) but won't be able to handle the recast. These are people that you obviously can still make a lot of money off of, and will be deemed worth keeping.
Good observations Cara...
I will say I have no professional experience with residential finance so there very well could be more nuances there that play into it.
Big picture, my experience is no one really wins with a foreclosure because the lawyers and trustees suck up so much of the value in transaction costs.
Then again, you are probably right about the banks being more strategic in their treatment of the ALT A crowd. Many of their ranks are the big liars (10X inflated income), but there are certainly small fibbers where they can keep them in the house and "squeeze the lemon" a little more.
Robert, from CR comments to the Tanta FDIC post:
Tanta writes:
Does a modified loan doc appear as a new title deed?
Old-fashioned lenders like me always record modifications (the original mortgage is recorded in the land records, so you record the document that modifies the terms of that original mortgage). But these days a lot of servicers are just doing "recordable" mods--they can be recorded if need be (usually if they fail and FC becomes necessary) but they don't have to be recorded until then.
Tanta | Homepage | 08.21.08 - 12:25 pm | #
So you were right!! Normally such modifications would have gone into the public record such that realtors could choose to use them as comps. I stand corrected! (well at least on how it should happen in principle, it sounds as if it doesn't have to happen that way anymore).
"Cara said
So you were right!! Normally such modifications would have gone into the public record such that realtors could choose to use them as comps. I stand corrected! (well at least on how it should happen in principle, it sounds as if it doesn't have to happen that way anymore)."
Its a little more nuanced than that - in large part it depends on what you are modifying. For example, if all I am doing is modifying the promissory note (typically known as an allonge), I do not record it because promissory notes are usually never recorded in the first place.
On the other hand, if I was modifying the mortgage (or depending upon the state - deed of trust) I am more likely to make the modification part of the public record in order to make sure the lender is fully secured to the extent of the new money or longer term - whatever the case may then be.
Yet, on the other hand, even if I am modifying a mortgage, if I am NOT increasing the term or the loan amount, then I almost never record it...mostly because the lender is already 100% secured and the re-recording may trigger additional taxes or fees - usually the last thing a stressed lender and or borrower wants to deal with.
So the real answer is sometimes you dont, but sometimes you do, unless you dont. Pretty clear right : )
Thanks CRT, actually that does make it clearer. When a bunch of us were arguing a couple weeks ago about how the Fed plan "should" effect comps, I couldn't see any way in which the mod would create a new "comp". But Tanta gave me a how, and you just gave the why (and why not).
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