HOUSING CRISIS: REACH OUT TO BORROWERS BEFORE THEY BECOME DELINQUENT

U.S. moves to prop up those at risk of foreclosure
Bush administration directs Fannie and Freddie to ease mortgage terms, hopes to set standard for lenders

BARRIE MCKENNA
With a report from Associated Press
November 12, 2008

WASHINGTON -- In a sign that the U.S. housing crisis is getting worse, not better, the Bush administration and the mortgage industry are moving to stop a fresh wave of Americans from losing their homes to foreclosure.

The government yesterday directed Fannie Mae and Freddie Mac to ease terms on hundreds of thousands of delinquent home loans. The announcement follows similar foreclosure prevention plans by major commercial banks, including Bank of America Corp., Citigroup Inc., and JPMorgan & Chase Co. The bank said that Citigroup's efforts, for example, would save as many as 130,000 homeowners from foreclosure.

"We need to stop the downward spiral," said James Lockhart, director of the U.S. Federal Housing Finance Agency.

This week's actions mark a renewed effort by the government and banks to tackle the heart of the mortgage crisis - the millions of American households losing their homes or threatened with foreclosure as the United States slides into recession. The various loan workout plans would touch roughly 1.6 million homeowners.

The move by Fannie Mae and Freddie Mac, which own or guarantee nearly 60 per cent of all U.S. home mortgages, should set a standard for the rest of the industry, Mr. Lockhart said.
Anything that keeps homeowners out of foreclosure is a good thing, agreed Celia Chen of Moody's Economy.com. But she said these programs "only nibble at the problem."

Some U.S. authorities also criticized the plan as inadequate. Federal Deposit Insurance Corp. head Sheila Bair said the plan "falls short of what is needed to achieve wide-scale modifications of distressed mortgages, particularly those held in private securitization trusts."
Those mortgages could prove much trickier to modify.

As many as 12 million homeowners are now "underwater" on their mortgages, meaning they owe more than their homes are worth, she said.

By the end of June, more than four million homeowners were behind on payments or in foreclosure, data from the Mortgage Bankers Association show. That represents 9 per cent of borrowers with a mortgage.

And Moody's Economy.com estimates that 8.5 million U.S. homeowners will default on their mortgages between 2008 and 2010. Roughly 5.2 million of them will lose their homes.

Troy Courtney, for example, left his Mill Valley, Calif., home after many attempts at a loan modification. Mr. Courtney had two loans on the house and could not persuade the loan manager to modify terms.

"I feel like I missed the boat," said the San Francisco police officer, 44.
Economist Nouriel Roubini of New York University said the underlying problem is that Americans have too much debt.

"You cannot grow yourself out of a debt problem," he said. "When debt to disposable income is too high, increasing the denominator with rebates is ineffective and only temporary. You need to reduce the debt."

The Fannie Mae and Freddie Mac plan targets homeowners most at risk - those who've missed at least three loan payments, live in their homes and haven't declared bankruptcy. Under the arrangement, Fannie Mae and Freddie Mac will pay loan service companies $800 for every homeowner for which they arrange more affordable monthly payments (defined as 38 per cent of gross household income), either by cutting interest rates, extending loan terms or deferring payment of principal.

The program is set to begin Dec. 15.

Citigroup said it would target borrowers at risk of foreclosure by cutting interest rates to as low as 3 per cent and stretching payment periods to as long as 40 years.

"With the unemployment rate rising and rising, more and more borrowers are getting into financial distress because of loss of income," said Sanjiv Das, chief executive of CitiMortgage. "It is a problem the country will face for some time to come, so it is very important to reach out to borrowers before they become delinquent."

Even U.S. authorities acknowledge the plan has limitations. The government is not stepping in to forgive all or part of any mortgages.

"There is no silver bullet to address the housing downturn," said Neel Kashkari, the Treasury's interim assistant secretary for financial stability.

"We are experiencing a necessary correction and the sooner we work through it, the sooner housing can again contribute to our economic growth."

The scope of the problem is much larger than the relatively small part of the problem that is in the hands of Freddie Mac or Fannie Mae.

The dismal shape of the housing market is making loan modifications increasingly tricky. As U.S. home prices continue falling, a growing number of homeowners are underwater on their mortgages.

These homeowners have little incentive to honour their debts, and many of them will choose to simply walk away from their homes.

And U.S. officials said most troubled mortgages are held by entities other than Fannie and Freddie.

Mr. Lockhart urged those lenders to follow Fannie Mae and Freddie Mac's lead. Beyond moral suasion, the government can't make that happen.

Economist Ed Yardeni said Fannie and Freddie remain "hobbled" by inadequate capital and so they are unable to vastly grow their mortgage portfolios. He urged the government to nationalize the two agencies, and let them lend as much as $2-trillion at a heavily discounted rate of 4 per cent.

"That would be a much more effective way to bail out the financial system, the housing market, and the economy," Mr. Yardeni said.

The Treasury Department seized the two government-created entities in early September because of their ailing finances.

A break for homeowners

Some of the biggest U.S. banks and mortgage companies plan to cut home-loan payments for borrowers facing foreclosures. Here are some of the current and planned initiatives to help homeowners avoid foreclosure:

Citigroup
Will reach out to about 500,000 homeowners with $20-billion in new mortgages during the next six months. Helped about 370,000 people with $35-billion in mortgages avoid foreclosure since 2007. Restructured more than 120,000 mortgages, including granting extensions, during the first half of 2008.

JPMorgan Chase
Will halt foreclosure on some loans as it works to make payments easier on $110-billion of problem mortgages. Plans to assist 400,000 families with $70-billion in mortgage loans in the next two years. Helped an additional 250,000 families with $40-billion in mortgages under existing loan-modification programs.

Bank of America
Will cover more than $120-billion in unpaid loan balances. Announced two plans this year to help reduce customers' loan payments by as much as $11-billion. Modified 226,000 loans this year.

Fannie Mae, Freddie Mac
Will reduce principal or interest rates on some loans and extend terms of others.
Programs won't include money from the Treasury's $700-billion bank rescue package.

Source: Bloomberg

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HECM (Reverse Mortgage) Numbers Rising

— But Rising Enough?


by Peter G. Miller
November 4th, 2008

The new year has begun early — at least for the federal government which starts its fiscal year each October 1st. For reverse mortgage borrowers the results for the first two weeks of the new year look like this:

___6,232 HECM applications to date. This is down 11.1 percent from the same period last year.

___4,921 reverse mortgage approvals — up 28.2 percent over last year.

___HUD is planning on 210,000 FHA reverse mortgages during the next 12 months, that’s up from the 112,154 HECMs actually insured last year.

It’s too early in the game to see how reverse mortgage demand will actually pan out during the coming year. Logically it seems reasonable to believe that FHA HECM numbers should go up for two reasons:

First, origination fees have been reduced from a 2 percent flat rate to 2 percent of the first $200,000 of the loan amount, 1 percent of the balance and not more than $6,000.

Second, the maximum reverse mortgage amount has been raised to $417,000 from $200,160 in low-cost areas to $362,790 in high-cost areas.

That said, an increase from 112,154 reverse loans to 210,000 HECMs is quite a one-year jump. The current rate of 118,104 HECMs per year (24 reporting periods x 4,921 loans) won’t come close.

Part of the problem is that while origination fees are down and loan limits are up — that’s the good news, property values in most markets have fallen. That means less equity to finance or refinance with a reverse mortgage.

Alternatively, what other financing is available to people age 62 and above? Lenders have tighten standards for forward loans to the point where even people with good credit are having trouble getting a mortgage.

In an environment where private-sector loans are drying up it may well be that reverse mortgages will find a new level of popularity.