You simply cannot make this stuff up. Reader Steve pointed us to a HousingWire post, which says that mortgage servicers may too come knocking on the Fed’s window for financial support, thanks to the housing bill just passed by Congress.
Now we’ve been told by mortgage counsellors involved in the Hope Now Alliance that servicers are hemmorhhaging cash, prime worse than subprime. Why? In default, servicers are required to advance the first 90 days of interest payments to the trust. Some agreements also require them to pay principal during that period. Even after the 90 days, the servicer has to continue to pay real estate taxes and insurance. The servicer can use any late payment or other penalties from the borrower to offset these costs.
The assumption was that if you were efficient at servicing, the overcollateralization would give servicers enough of a buffer to handle a reasonable level of defaults, But we are running vastly in excess of heretofore “reasonable” assumptions.
Here is the additional wrinkle from HousingWire:
Among the bill’s key centerpieces are provisions which would authorize the Federal Housing Administration to endorse up to $300 billion in new 30-year fixed rate mortgages for troubled subprime borrowers; lenders and investors must, however, first write-down principal loan balances to 90 percent of current appraisal value…
The bill will not go into effect until October 1, and on Friday House Financial Services Committee chairman Barney Frank (D-MA) warned servicers that they needed to halt foreclosure activity on qualifying loans until the new laws became effective…
But the delay could be much more than just a few months, according to a report Friday evening in American Banker, which cited HUD officials as saying that the provisions of the new housing bill wouldn’t like be effective until the middle of next year.
A HUD spokesperson told American Banker that it was “absolutely totally unlikely” that the new program would be ready by October 1, noting the process HUD must go through to implement new programs — including determining underwriting standards for the new loan program the housing bill would create.
Without those standards, which could take through the end of this year to finalize, servicers will have nothing to go on in terms of refinancing troubled borrowers under the new program.
Which means two things: servicers choosing to hold off on even some foreclosures now in the hopes that they’ll be able to write-down, write-off and refinance certain troubled loans face the uncertainty of not knowing which loans will actually qualify, as well as the unsavory likelihood that they’ll be self-imposing a moratorium that could last much longer than 60+ days.
It also means that Barney Frank is one ticked-off Congressman.
“The notion that this takes a normal bureaucratic response when you have this social and economic crisis is unacceptable. … that would be incompetence bordering on malfeasance,” he said in an interview with American Banker on Friday. “I cannot believe that this would wait.”
HW’s key sources have suggested that servicer advances are likely the most critical piece of the puzzle going forward, and that the housing bill — if anything — further puts pressure in this area.
“Servicers are being asked to put a voluntary moratorium on some unknown number of foreclosures, but nobody has addressed the servicer advances that must continue to be paid during this period,” said one industry consultant who asked not to be named. “And worse yet, nobody knows just how long servicers would need to keep advancing their money to a trust, since apparently there is a good chance the program wouldn’t be in place by October.”
A few servicing managers HW has spoken with have suggested that the only way many servicers can survive the current environment is by having access to the discount window or FHLB advances, to help keep servicing operations afloat — meaning that the servicing shop has to be within a bank, generally speaking.
And that’s exactly the sort of capital strain, BTW, that many of the nation’s already-limping banks can ill afford to take on right about now.
Let’s face it. Barney Frank is one Congressman. He can bluster all he wants to about servicers needing to hold off on foreclosures, but his words have no legal standing (admittedly, if a lot of other Congressmen pick up on his theme, that’s a different matter). And the vast majority of commentators see the bill as having perilous little impact.
However, Frank’s push to hold off on foreclosures might give the servicers air cover to seek relief. Lord help us. Who isn’t in line to get a bailout?
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dodd is also picking up the banner on this, see bloomberg article:
http://www.bloomberg.com/apps/news?pid=20601087&sid=ad1iF8nRjzh4&refer=home
I guess I find it hard to believe that Wilbur Ross, now
the second largest servicer(via recent acquisition) behind BAC’s countrywide (also by recent acquisition)
entered into these transactions without a plan to deal with these obligations. Also, the $300B to be refinanced under the new bill are only 2.5% of the 12 trillion in outstanding mortgages. If many of these loans are already 60 to 90 days delinquent, the only significant ongoing obligation caused by the delay is the tax escrow.
It’s not a window anymore. It’s a widemouth cargo door.
When is it going to end?
when is this going to end indeed. This is getting absurd.
“Servicers are being asked to put a voluntary moratorium on some unknown number of foreclosures, but nobody has addressed the servicer advances that must continue to be paid during this period,”
Nobody’s asking the cheeky bastards to hold off. They may choose to do so. They should have anticipated that the deadbeat mortgages they knew they were writing would default enmasse. I guess they thought they would unload them on social security accounts by now. Excuse me while I puke.
My first response to the housing bill was that most foreclosures might be gone before it took real effect.
I’m surprised by the idea that servicers might hold mortgages until it rolls in.
Hello Toxic Covered Bonds!!
Treasury Secretary Henry Paulson and FDIC Chairman Sheila Bair have repeatedly given covered bonds their blessing, calling them a promising financing vehicle that could lower the cost of mortgage financing and boost home buying.
Sally Miller, director of the Center for Securities, Trust and Investments at the American Bankers Association, said she’s been hearing that other larger banks will start issuing covered bonds in the next couple months.
Regional and other smaller banks are expected to quickly follow suit once investors get more comfortable with the instruments, she said. “We’re just as anxious as everyone else to see this market grow,” Miller said.
Miller and Kohler think legislation on covered bonds is unnecessary to get the U.S. industry off the ground but Congress could help nurture the market by setting parameters for covered bond use.
Covered bonds that have received a legislative blessing could receive a favored capital position under the Basel II accord on capital standards for the world’s largest and most sophisticated banks.
Banks such as Barclays Capital, HSBC Holdings Plc and UniCredit SpA followed the recommendation of the European Covered Bond Council on Tuesday and suspended interbank market-making of covered bonds. ECBC Chairman Patrick Amat said the move, which choked off what had been one of the few sources of fresh liquidity for banks since the credit crunch hit, was needed to slow what he called a "deteriorating situation."
WaMu Shows Paulson Mortgage Rescue Plan Is Perilous (Update1)
http://www.bloomberg.com/apps/ne…g9O4& refer=home
This is absolutely not going to be an instant fix for the U.S. mortgage market if you see how tough it is and how expensive covered-bond funding currently is for established markets in Europe,'' said Florian Hillenbrand, an analyst who follows the securities in Munich for UniCredit SpA, Italy's largest bank.
Paulson says the $3.3 trillion covered-bond market, which dates back to 18th-century Prussia, is a remedy for the worst housing crash since the Great Depression. It offers “new sources of mortgage funding'' that will cut costs for homebuyers, he said at a forum in Washington on July 8.
Anon of 11:48 PM,
Thanks for the covered bond link. I’ve been silent on this topic because I cannot believe it is going forward, I had assumed Paulson had mentioned it off the cuff and would drop it once he understood what they were about.
This is a patently dumb idea. The effective capital costs to banks of “covering” the bonds make them not that much more attractive to issuers than retaining them on their balance sheets. This was meant to be an alternative to securitization and while it technically is, it does not deliver the bennies.
Some of the above commenters are missing a big point – the servicers are generally NOT the folks who did the origination. Servicing rights are bought and sold like anything else. Many servicers have zero to do with the orgination – they are standalone companies that simply collect money and handle default activities as needed. Sure, many originators (think CW) had their own servicing shops – but even they didn’t keep the ervicing rights on all of their originations. It’s alot more complicated that that (there’s master servicers, then sub servicers, then special servicers…etc., etc. etc.).
Like everything else, servicing contracts are bid on by the various servicers, with the white elephant being the allowables set by Fannie and Freddie. Basically, whatever Fannie and Freddie do, everyone else does.
During the housing runup, Fannie and Freddie slashed the hell out of their servicing minimums. That, my friends, is the problem here. The servicing industry is stuck with pricing set when defaults were nearly non-existent – which just wasn’t sustainable. I remember more than a few industry folks questioning the wisdom of gutting servicing minimums at the time; but, no one really cared. Housing only went up (at that time), and the Fannie/Freddie execs made thie bonuses (by cutting overhead).
Now the chickens come home to roost, and everyone’s surprised. Trust me, anyone in servicing before 2000 isn’t surprised at all. Defaults aren’t less expensive now than they were in the past (if anything, loss severity is much, much worse). But, the revenue side for servicers is much lower than it used to be.
This is a huge problem, and no one is really talking about it, primarily because so few understand the servicing industry. I, for one, am not at all surprised by the horror stories from servicers these days. You get what you pay for; and, servicing has always been about loading your loans into the lowest cost servicer with sufficient enough ratings to clear the particular RMBS deal’s requirements.
The kicker is that the consumer can’t choose their servicer, even if they would be willing to pay for additional services (like US based support, or a dedicated loss mit person, etc.)
Yves,
I’ve been watching covered bonds for years and they are very toxic IMHO, because they are not regulated! This is a way for SIFMA to get below the Fed Utters and to take in all the milk that Paulson can offer, while he is still there; this is criminal!!
Covered bonds are backed by mortgage or public sector loans which remain on the borrower’s balance sheet. They have historically been highly liquid and typically rated triple-A by ratings agencies thanks to the quality of the assets and legal support, making them appear a surrogate for government bonds.
Quasi-fiscal scoundrels 4: helping banks
http://marketpipeline.blogspot.com/2008/04/quasi-fiscal-scoundrels-4-helping-banks.html
(Willem Buiter in the FT) When I hear or read the words ‘off-balance-sheet financing’ or ’special purpose vehicle’, warning lights begin to flash and I grab for my obfuscatometer. Off-balance-sheet financing is any form of funding that avoids placing the owners’ equity, liabilities or assets on the balance sheet of a firm or other legal entity. The most common way to achieve this is by placing those items on some other entity’s balance sheet. A standard approach is to create a special purpose vehicle (SPV) and place assets and liabilities on its balance sheet. An SPV is a firm or other legal entity established to perform some narrowly-defined or temporary purpose.
I don't want to bring down the wrath of anymore of your readers, today at least, so here is a link not to my blog but directly to a Bloomberg article on a Friday meeting of Barney Frank's committee. http://www.bloomberg.com/apps/news?pid=20601087&sid=aPSvhHzsqaxo&refer=home.
As you can see, Rep. Frank is suggesting that if the servicers don't get their act together Congress may act to abrogate their contracts in order to move things along.
cont…
The Brady bonds were completely redundant in this arrangement. The debtor governments could simply have exchanged the (discounted) non-performing loans directly for the US Treasury securities they had purchased. Indeed, since US Treasury securities are nearly perfectly liquid, the debtor governments could simply have bought back their discounted non-performing loans at the agreed discount, using US dollars (or indeed any convertible currency), leaving the decision on how to invest the money (in US Treasury securities or anything else) to the creditor banks. So the Brady bond experiment was just another example of complicating something fundamentally very simple, without changing its economic substance.
In the Brady bond scheme the creditor banks took a hit relative to their original valuation – at par – of the loans they made; the borrowing emerging market governments (mainly Latin American) made a matching gain. There was no fiscal subsidy to anyone, assuming the borrowing governments paid fair market prices for the Treasury debt they put in escrow at the Fed.
Tom,
Thanks for highlighting that point, I did see it in the Bloomberg piece (it was an item in Links) but didn’t take it seriously.
Remember all the hoopla during Hope Now about not meddling in securitization agreements. If there are any constitutional law experts in the house, I’d enjoy getting their views.
Servicing agreements are contracts. They are governed by state law. I am not clear on what if any theory the Feds could use to interfere in the agreements (and in this case, it’s at least two sets of agreements: the agreement between the servicer and the legal vehicle, usually a trust, that holds the mortgages on behalf of the investors, and the legal agreements between the investors and the trust).
In other words, I think this is bluster. The House Financial Services Committee may find clever ways to make servicers’ lives miserable, but interfering in the servicing arrangements looks to be a nuclear option.
I don’t want to over do this but:
July 1 (Reuters) – Shinsei Bank Ltd (8303.T: Quote, Profile, Research) said on Tuesday it had scrapped plans to issue a 30 billion yen ($280 million) covered bond this month, which would have been the first offering of its kind in Japan.
The mid-size lender said in a statement that “changes in its corporate calendar and internal considerations” had forced it to reschedule the pricing of the bond.
Also see: http://europe.pimco.com/LeftNav/Bond+Basics/2006/Covered+Bond+Basics.htm
December 2006
Bond Basics: Covered Bonds
Ok,
I’m in panic mode about Covered Bonds!
The FDIC (Bair), Treasury (Paulson) and Bernanke, this is BAD!!!! I appreciate your response above, because this issue really needs to be clarified ASAP and the more stories the better! I strognly feel this is SIFMA marketing and lobbying and that this is not good for American taxpayers!
Re: Federal Reserve Chairman Ben Bernanke said he supports an alternative to mortgage-backed securities to increase the financing pool for home loans. But Congress may first need to clarify how covered bonds would be treated in case of a bank failure, he said. Covered bonds are a primary source of financing from home and public-sector lenders in Europe. They have been used in the U.S. for about two years
Covered bonds are definitely not a surrogate for government bonds. They are financial institution debt with the added security of a dedicated, overcollateralised mortgage pool. Even at the peak of the market they traded much wider than government debt from the same jurisdiction. They’re also (in Europe, anyway) floating rate.
Now it’s true that they have traditionally been a defensive bond in the same way that government bonds are, because of their stability and liquidity, but by their nature they can’t be true surrogates. If you’re bearish about a given housing market, you’re going to buy government bonds rather than covered bonds.
How about cutting out all the middle-men and let ANY mortgagee that has reached the point of 60 days delinquent tap the Fed’s lending facility until such time as their property value has gone up 50% and they can sell out for a profit as well as pay the Fed back out of what was borrowed in the meantime. Simple :-)
wintermute:
You are absolutely right. It is the middlemen who caused this problem in the first place, and now they are preventing the recovery. In point of fact, I read recently that the Fed can lend to anyone if it deems it beneficial for the economy, or avoids economic deterioration. Lines of people approaching the Discount window, with their toxic mortgages as collateral, would be Bernanke’s silver bullet to cure our economic ills. They could do no worse than the banks. When the Banks overextend themselves, they get cash. When the homeowners overextend themselves, they get counseling.
“Lines of people approaching the Discount window, with their toxic mortgages as collateral, would be Bernanke’s silver bullet to cure our economic ills.”
People don’t own their mortgages, so they can’t use it as collateral for anything. The lender/investor does.
Was it just me, or did Anonymous12:13am sound a lot like Tanta? Could it have been? :)
ECONOMISTA NON GRATA to Ask for Access to Discount Window.
Best regards,
Econolicious
“Let’s face it. Barney Frank is one Congressman. He can bluster all he wants to about servicers needing to hold off on foreclosures, but his words have no legal standing (admittedly, if a lot of other Congressmen pick up on his theme, that’s a different matter). And the vast majority of commentators see the bill as having perilous little impact.”
At worst, the bill will let us see whether mortgage holders intend to do anything but stand by and watch the value of the homes fall. Here is an opportunity for them to take 85 cents on the dollar, rather than 50 cents and a raft of hassle.
At best, it puts a floor under prices, good for the market, and supports people with mortgages they can afford. It does not let speculators skate, or help people keep homes they cannot afford.
As for the “vast majority of commentators….,” some who have supported the concept are Nouriel Roubini, PIMCO’s Bill Gross, and EPI’s Robert Kuttner.
Demand Side,
The CBO’s own cost estimates assume low uptake. That’s why its estimate of the damage is less than $5 billion despite the $300 billion headline number. And I am told the CBO actually does solid analysis based on the provisions of the legislation.
Yves,
Nobody knows what the utilization will be, because nobody knows how far prices will fall.
And re the cost, on the other hand, the bill prior to the tacking on of the Fannie-Freddie bailout provided revenue to cover the CBO’s cost estimate. And the taxpayer’s exposure to Fannie-Freddie is far greater, you must admit, than to the short refi section. That bailout is like extreme life support for a failing patient.
Short refi is not the whole answer to the housing problem, but it is an opportunity to create an island of half a million 30-year fixed and affordable mortgages in a sea of toxicity.
The Home Owners Loan Corp., the New Deal agency which is a first cousin to this proposal, actually turned a small profit for the taxpayer by the time it was liquidated in the early 1950s.
Another supporter, I probably should not cite, is Jamie Dimon.
Demand Side,
If you don’t buy my take, I suggest you read Calculated Risk, which has said more than once that the bill will have little impact.
This situation is not even remotely comparable to the one in the Depression. so comparisons to HOLC are misleading. Mortgages in the 1920s were short maturity, typically five years, with high downpayments, typically 50% or more. Even with a very large decline in housing prices, many people still had equity in their homes.
The reason the math worked for HOLC was first, it was implemented AFTER the housing market had hit bottom and AFTER many people had already lost their homes. The weakest borrowers had been flushed out. Second, it could extend maturities from 5 or fewer years to 30, creating a big reduction in payments without affecting principal.
That also happened to match homeownership patterns. People were not as mobile then as now, indeed you often saw homes passed from one generation to the next. How many people under say, 50, expect to own a home for 30 years?
Conversely, extending mortgages from 30 to, say, 50 years would not have much effect on payments (the additional interest substantially offsets the increase in maturity).
Dumb question … what are they going to have for credit qualifications for this 300 Billion worth of sub-prime qualifications?
FHA won’t provide financing for anyone with 90 day lates and if the consumer is facing foreclosure they’re already down 120 days….
So who qualifies and who doesn’t?
Rather than taxpayer bailouts, why not have a government facilitated market solution: Get rid of all variable rate mortgages, even home equity lines of credit and mandate only fixed rate loans for specific amounts. It worked fine for decades, and will work again. Lenders, investors, borrowers, buyers & sellers all enjoy stability. When inflation rises, rates can rise to stop it without wiping out those with existing mortgages, as only new loans were affected. Rates need to rise to slow inflation and save the dollar, but can’t because households and businesses rely on all manner of variable rate debt. If the dollar sinks foreigners won’t loan us money and we go under.
Government bailouts just loan more money to lenders & borrowers who messed up and are headed towards structural insolvency. You’d have to print money to wipe out debt and induce high inflation & a bigger crash later. Why bother?
The government facilitated market solution is to force all variable rate mortgages above, or resetting above free market fixed rates to convert to fixed free market rates. Waiting for mortgages to be renegotiated or refinanced one at a time will take far to long, and many mortgages are held by entities that can’t renegotiate anyway. There is no point denying marginal borrowers a new fixed market rate, because if they can’t pay more the lenders/investors will lose when they all fold. Far fewer will fold if rates & payments are reasonable. Those who fail at market rates would have folded anyway. Best there be less of them and get past the pain sooner. Lenders/investors will just have to give up the high returns they expected in return for not losing much of their principle. Exotic mortgage paper would, with some repackaging, turn into more stable modest yielding marketable investments. Overzealous or uneducated lenders, investors & borrowers will suffer through some years of pain and emerge a bit wiser.
Henceforth, all new loans would be conservative, fixed rate, adequately documented loans with minimum down payments. Lower rates would be awarded for more money down and better credit. Home equity could only be borrowed for fixed sums at fixed rates, not like a credit card.
We’d learn not to overborrow & overspend. Interest rates on new loans might be a bit high, but after a few years of pain the economy and inflation would stabilize. The alternatives are a crash, or a hyperinflationary bailout and big crash later. Any better ideas? If not, let’s get on with it!