by Tanta

Having done my share of griping about the FDIC's plan for modifying IndyMac loans, I feel obligated to point out that I didn't describe the program as fully and accurately as I might have. This is a problem I must rectify.

I'm not, apparently, the only one who missed the implications of the FDIC's use of the term "principal forbearance" in the context of this plan. An RBS research report on the potential impact of the plan for IMB securities that was published recently uses the terms "principal forbearance" and "principal reduction" interchangeably. A new JP Morgan report, however, which was recently updated and republished after someone spent some time asking the FDIC for further information (smart move), clarifies for us exactly what the FDIC means by "principal forbearance."

To remind everyone, the FDIC approach is to arrive at a total housing-payment-to-income ratio or HTI, which they confusingly call a "DTI," of 38%. This can be achieved by using one or more of the following restructuring approaches.

First, the interest rate is lowered to the current Freddie Mac survey rate for fixed rate mortgages, and fully amortized as a fixed rate loan. As far as I can tell, at this initial step, the loan is amortized over its remaining term, whatever that is.

If that is not enough to achieve 38% HTI, then the interest rate is "stepped" for up to five years. That means that the initial rate is set no lower than 3.00% for the first year, and increased each year by no more than 1.00% per year, until it hits the Freddie Mac survey rate (which was 6.50% at the time FDIC published). This does not make the loan an ARM or subject it to negative amortization; the payment is re-amortized each year after the interest rate "steps up" until it hits the permanent rate. That means that the loan is always paying some principal from the inception of the mod.

Remember that ARMs involve potential rate increases; whether they happen or not, and how far they go, depend on future (unknown) movements in the underlying index. A "step loan," which is what I understand these mods to be, has scheduled rate increases that are exactly specified in the modification agreement, and which are not subject to future market rate fluctuations: each loan will "step up" to the permanent rate, regardless of what happens in a year or four to market interest rates. So the borrower gets the same kind of long-term "rate lock" of a fixed rate loan--the rate will never be higher than 6.50% (or whatever the Freddie rate is on the day the mod is drawn up), and after the initial "step" period it will never be lower than that. The step period simply "ramps" the borrower into the fully-amortized payment at 6.50% by starting out with a fully-amortized payment at a lower rate and slowly increasing that rate each year until the final rate is achieved.

If the "rate stepping" all the way down to 3.00% isn't enough to hit a 38% DTI, then the whole thing is recalculated with a 40-year term, rather than with the remaining term of the loan. This part won't mean much if the loan was originally a 40-year term (and lots of OAs were) and it's only a year or two old. However, if the loan was originally a 30-year, extending the amortization term by another 10 years may reduce the payment enough to hit the 38% limit. The tricky part here for securitized loans, though, is that some and possibly most of these securities have a maximum loan maturity of 30 years written into the deal docs. So the modification will not actually extend the legal maturity date of the loan to 40 years; it will simply create a balloon loan (principal due in 30 years but payment calculated over 40 years).

If the term extension, added to the rate reduction, still doesn't hit the number, then and only then will the FDIC use "principal forbearance." The real issue I wanted to get to today was that part. What the FDIC apparently means by "principal forbearance" is not what most people think they mean by "principal reduction." The rate reduction on these loans, in contrast, is a true permanent reduction in the interest rate: the borrower is never in any scenario obligated to "make up" or pay back the difference between the original interest rate and the reduced rate.

However, with the principal, what the FDIC is doing is not forgiving principal but offering an interest-free forbearance of repayment of part of the principal. This means that the actual principal amount due and payable at maturity of the loan (or sale of the property) is the original unmodified principal amount, less any and all periodic principal payments the borrower makes until maturity or sale. However, the contractual payment the borrower makes is no longer "fully amortized," it is partially amortized, because a portion of the loan's principal is excluded from the amortization calculation, essentially making that portion a zero-interest balloon payment. (There may already be a balloon payment on this loan, if its original term was less than 40 years. But that balloon is not zero-interest. Confused yet?)

Here's an example: the remaining principal balance of the loan at modification is $100,000. We have already gotten down to a 3.00% first-step rate and a 40-year amortization, but the payment still results in an HTI greater than 38%. Therefore we take, say, 10% of the balance out of the amortization formula, meaning we calculate the payment on a $90,000 balance at 3.00% for 40 years. That would reduce the loan payment from $357.98 to $322.19. The remaining $10,000 in principal is still secured by the mortgage, so it would be due and payable in a lump sum (a "balloon payment") at the original maturity date of the loan. If the borrower sold the home or refinanced prior to maturity, the $10,000 is due and payable at the time, in addition to the remaining balance of the rest of the loan ($90,000 less amortized principal payments).

So "principal forbearance" does not mean principal "forgiveness." It certainly means that the effective interest rate on such loans is lower than the Freddie Mac survey rate, discounted for the stepping or not, because the contractual interest is not charged on the entire loan balance. It certainly means that the investor is going to have to write down the forborne principal when the modification is done, since this falls under the accounting rules that make you write down a loan to the amount considered collectible, and it is clear that a loan in this much trouble, with property values where they are, probably is not going to pay you back 100% of principal. But if, in fact, property values recover in the future and the home sells for at least the total loan amount due, the investor will receive that forborne principal back as a recovery.

This is not the same thing, technically, as a "shared appreciation" provision; it's rather more a compromise between shared appreciation and outright principal forgiveness. The borrower never has to pay the foregone interest on the forborne principal out of future sales proceeds or in any way "make the investor whole" for the rate reduction. But unlike outright forgiveness, the borrower does have to pay the full principal amount back out of sales (or refinance) proceeds.

Which, of course, leads us to wonder what happens if there's never enough sales proceeds to pull this off. My guess is that we're going through all this "principal forbearance" business, which isn't exactly easy for your average consumer to understand, because investors like it better than outright forgiveness and it's supposed to mitigate the "moral hazard" problem. But the other side is that the FDIC or whoever buys that portfolio of modified loans is going to face the possibility of being confronted with a cohort of loans needing short sales or short refis in a year or two, because some borrowers will always need to move on before home prices "recover."

At some level, it seems a bit odd to do this elaborate "forbearance" of principal in the original workout, only to have to cave in and do outright forgiveness of principal down the road in a second workout involving a short sale. The FDIC, I suspect, is making a rather different set of assumptions about how long-term the commitment to homeownership is likely to be in a portfolio like IndyMac's, and how long it will take for property values to recover, than I would. After all, this FDIC program is not--unlike, say, the new FHA short-refi program--reducing principal to achieve "above water" loans. It is forbearing principal only as a last resort, if the rate reduction and term extension doesn't work, and only enough to hit an "affordable" monthly payment. That means it is possible that loans could get a principal forbearance that still leaves them underwater; they just become "affordable" underwater loans. And that, unfortunately, is what puts you at risk of having to do a short sale down the road when the borrower needs to move or just can no longer handle having 38% of pre-tax income going to the house payment with all the other bills they have.

The JP Morgan analysts note that maximum principal forbearances on the IndyMac portfolio aren't likely to be that much: even a loan that originally had an HTI of 60% (which is extremely high even for stated income loans; remember that this isn't DTI or total debt-to-income ratio) and that got a 400 bps rate reduction plus a 10-year term extension would require only about a 17-18% principal forbearance to hit 38%. A loan that started out with a 45% HTI would be unlikely to need any principal forbearance at all, because the rate and term adjustments would be sufficient. The difficulty for analysts of the IndyMac-serviced loan pools, both securitized and unsecuritized, is that we don't really know what current (real) HTIs are. We have reported DTIs--total house payment plus all other monthly debt--but those were based on original reported income. We are pretty sure that actual current income for these borrowers is less than what was originally reported, but since databases stopped reporting HTI and DTI, relying solely on DTI alone, we don't know how many of these borrowers have high DTIs resulting from very high house payments and not much other debt, versus relatively reasonable house payments and a lot of other debt. The FDIC's approach will help the former but not the latter. While an 18% principal forbearance may sound like a lot, in terms of IndyMac's actual loan portfolio it may not work out to much if only a tiny sliver of loans have HTIs that high (and managed to make even the first payment). The real impact on investors will be the interest reductions and cash-flow changes resulting from slowing down the amortization to 40 years.

Bottom line: there just isn't a free lunch, not for anybody.

(Hat tip to Hoover for sending me the Morgan report. Hat tip to Morgan analysts for clarifying this subject. Note to Morgan analysts: the past tense of "forbear" is "forborne," not "forbeared." Y'all owe me a new keyboard.)

by Tanta

Loyal readers, or just people with too little mental stimulation in their lives, will remember a post I did way back in May on how not to write a hardship letter. In that post, I suggested, quite explicitly, that anyone writing a hardship letter to a servicer in aid of getting a workout proposal approved should:

*Focus on establishing that a workout is necessary, meaning establishing that you cannot afford to pay your mortgage under its original terms.

*Not focus on explaining why all this happened or seeking sympathy, since it doesn't matter why it happened--servicers do workouts when they make sense for the servicer, not when they are moved to feel sorry for anyone.

*Write in your own voice about your own situation, rather than relying on elegant form letters or rhetorical flourishes. Nobody cares about polish; they care about your verified monthly budget and the terms of the workout you are requesting. If the math is correct there, you can misspell most of the words and dangle all the modifiers and you'll still get your workout. This is not an essay contest.

*Present a proposal that will work. You may be the most sympathetic borrower ever to cross Loss Mit's desk, but if your proposal does not work out, it is not a "workout" (did you wonder where that term came from?).

So what did I find in my inbox this morning?

The following missive:

Hi, Tanta.

I read your article "How Not to Write a Hardship Letter" on the website Calculated risk. I am finding writing my hardship letter to be the most challenging part of my short-sale package. I can't help but laugh at that things that have led up to my hardship, and it seems that one thing leads to another and it's just a big can of messy worms that I've somehow opened and can't get cleaned up to figure out how to articulate concisely in the letter in a way that will make an impact in my favor to get the short-sale approved.

I need help, and am wondering if I could hire you to hear out my story and write mine? If not, do you have any advice on how I can go about finding someone to write it?

Thank you very much!!!

As I am committed to the notion that names should be changed to protect the unwary, I left that part off. We shall refer to my correspondent as Ms. Short Sale. Sure, I could have written the following to Ms. Short Sale personally, but apparently the public service message I was trying to get across in the original post didn't work for everyone, so as a public service I shall repeat some of it again in hopes that it will take this time.

Dear Ms. Short Sale:

I am happy to hear that you are in one of those hardship situations that is actually pretty amusing. Most people who write to Loss Mit aren't exactly chuckling.

However, if you had read my post with a bit more attention, you would have noticed that my advice is not to spend any time "explaining" your circumstances. Whether they are funny or not. I pointed out that your purpose in a hardship letter is to 1) document the financial necessity of a workout and 2) propose a plan that will work. You are caught up in the idea of making an "impact" on your servicer. You need to ditch that idea right now. This is not a resume cover letter. It is not a sales pitch. It is not an essay-writing contest. It is a business letter that needs to be concise and to the point.

Sadly, you could not possibly afford what I would charge to hear your story and write your letter. If you could, I suspect you could bring cash to closing to settle your loan for the full amount due. Since you are requesting a short sale, I must believe that you don't have that kind of money sitting around.

I will, however, once again give you some good free advice. It may not be what you want to hear, but this is a chronic problem in the advice-giving gig.

You want the servicer to approve a short sale. You therefore need to establish that:

1. You cannot afford to keep the home or you must move for some good reason and cannot afford to pay the difference between the sales proceeds and your loan amount. It does not really matter at this point why this situation has arisen. You simply need to document that it is what it is. Explain what your income is, what your expenses are, what savings you have, why you have to move, etc. If you are asking for a short sale because you have to move, simply say that. For example, say that you have been relocated by your employer or you need to move closer to family in order to reduce your expenses. This is not an invitation to open your funny can of worms and tell everyone all about your situation that is totally unique and high-impact and all that. If you cannot document that you cannot afford to repay your loan--and you don't actually have to move--then I don't know what business you have asking for a short sale.

2. Provide evidence that you have attempted to list your property at a price at least equal to your indebtedness, and that this has not been possible. Your realtor can supply your listing history, a price opinion, or other information to establish that you will have to list the property for less than the loan amount in order to get it sold. If you are not working with a realtor, your servicer will question how hard you are trying to sell this house.

3. Propose a sales price that you wish the servicer to approve. No one will give you "blanket approval" for a short sale as such; you will only get approved to sell at a specified minimum price. The servicer will not suggest this price; you have to. That is how negotiations work in this case. Do not expect the servicer to put any cards on the table until you have. They are not that stupid. Your requested price should be backed up by a broker price opinion. The servicer will probably get one, too, if it takes your request seriously.

4. If you already have an offer on your property, as long as this offer came out of some good-faith effort to market the property for as high a price as the market will bear, then request approval to execute a sales contract at this price. If you have never listed the property and the offer is from your brother-in-law, you are not likely to be approved. You need to demonstrate that you have made all practical attempts to fetch the highest sales price possible, in order to protect the lender's interests as much as possible. If you cannot demonstrate that, there's no point in writing your letter at all.

5. Explain clearly that either you have no subordinate liens on this property, or you are seeking approval from any second mortgage holder for the short sale as well. If the existence of a second lien is part of your "can of worms," you will have to address that. If you want your first mortgage servicer to negotiate on your behalf with your second mortgage servicer, you will need to say so. You will need to bear in mind that this negotiation may not be very successful if you are simply asking the second lien lender to wipe out its entire loan with no cost to you. Offering to pay the second lien lender a couple thousand dollars for its trouble--or to sign a note so that you can pay a couple thousand in installments--would be appropriate. If you cannot possibly afford to contribute anything to the junior lien, your first mortgage servicer may have to do that in order to get the deal approved. This will increase the first servicer's loss. You will have to take that into account when you propose your sales price.

6. If you must use exclamation points, one is sufficient.

It is possible that you are having trouble drafting your letter simply because you are not clear about the purpose of the letter. The above advice should help you get clear on that. It is also possible, of course, that you are having trouble drafting your letter because what you want doesn't actually make much sense or because you haven't actually tried listing your property or talking to a realtor and are just trying to float a trial balloon to see what the servicer will do. You want to be very honest with yourself if this is the case, because you won't get anywhere with your servicer if it is. As I said in my original post, you are writing a business letter with a business proposition in it, and you need to demonstrate that you are doing your part to resolve this situation.

Sadly, the world is full of people who would take your money to write a letter for you. You are actually probably quite fortunate that you asked someone who won't. If you have money to spend, get yourself an appraisal or a broker price opinion from a reputable RE agent who has experience with short sales. Once you have that, you'll know how to write your letter because you will have the basis for a concrete proposal. And that is all the "impact" you need to have on your lender.

Good luck and best wishes,

Tanta

I need to know this. What did you find in your inbox?

by Tanta

I'm going to go out on a limb here and suggest that the FDIC's plan for modifying IndyMac loans is, overall, a great thing. I am glad it is happening and I truly look forward to snickering over the results.

Housing Wire has a post up this morning encapsulating the main angry responses to the FDIC's plan. Plus one response voting for the "No Big Deal" option, which I think is really the wisest one (I'm sure it comes from an industry insider):

If the FDIC follows its stated plan, which is to maximize loan value or recovery value, a good chunk of these mods won’t go through anyway, despite the press given to it. The FDIC will find out what every other servicer already knows: for one thing, the majority of borrowers will simply ignore the offer. For another, those that do step up will give credible proof that they cannot afford their homes unless the FDIC were to undercut home value by 40 or 50 percent from current levels. And the FDIC didn’t say it was going to modify blindly here, so this is not a big deal.

The fact is that Sheila Bair has spent a lot of time and energy in the last year or so castigating mortgage servicers for not doing enough to modify loans and prevent foreclosures. So now, being the proud owner of the former IndyMac Bank, Bair has a great opportunity to show the rest of us how it's done.

And so what innovative plan did the FDIC think up that has so far eluded every other mortgage servicer out there?

The goal of this streamlined loan modification program is to achieve improved value for IndyMac Federal by turning troubled loans into performing loans and, thereby, avoiding unnecessary and costly foreclosures. Accomplishing this goal will reduce the costs to the FDIC of the failure of IndyMac Bank and provide improved returns to investors in securitized mortgages.

Some mortgages serviced by IndyMac Federal are subject to additional contractual terms governing loan modifications. While additional steps are necessary to comply with those contracts, IndyMac Federal will work to expedite approvals for modifications to help eligible homeowners keep their homes.

IndyMac Federal will only make modification offers to borrowers where doing so will achieve an improved value for IndyMac Federal or for investors in securitized or whole loans. Modification offers will be provided consistent with agreements governing servicing for loans serviced by IndyMac Federal for others. The modification program does not guarantee a modification offer for IndyMac Federal borrowers.

Translation: the FDIC has discovered no magic way to get around securitization rules or the basic calculus of maximizing recoveries to the investor (that is, doing a mod only when it is "less loss" to the investor compared to foreclosure). They will, however, "work to expedite" this process. Because of course no one else has tried that yet.

Oh, but the FDIC's program is "streamlined," you see. What does that mean?

Once a borrower has provided financial information to an IndyMac Federal customer service representative, IndyMac Federal will evaluate whether a loan modification may be available and, if so, provide a proposed offer to the borrower by mail.

Once a borrower has received a proposed modification offer, all it takes for them to bring their mortgage current and qualify for a final modified mortgage is to

1. sign and return the enclosed Modification Agreement along with a check for their modified monthly mortgage payment and

2. provide verification of their income to confirm that they qualify for the proposed modification.

The borrower must then continue to make timely payments at the modified monthly payment amount and comply with all other terms of their mortgage agreements. If the borrower’s verified income information demonstrates that they do not qualify for the proposed modification, IndyMac Federal will contact them to discuss alternatives that may help them keep their home.

This is a whole lot faster than the way servicers have been doing mods, you see, because the FDIC goes ahead and draws up the modification agreement based on "stated" income information given by the borrower. Then the mod is mailed out, and all the borrower has to do is sign it, write a check, and, um, finally provide the documentation of the income used to qualify for the mod. If it turns out there are some, um, issues with that, then the FDIC will, um, do something else. Does this mean that the FDIC risks wasting a bunch of time and energy drawing up modification agreements that it will be unable to accept because when it finally sees those income docs, it realizes that the borrowers still don't qualify? Well, yeah. But the borrowers won't be made to wait weeks and weeks for a mod offer, unlike with those lousy private mortgage servicers. The actual ratio of successfully executed mods might be more or less the same, but nobody had to spend three weeks listening to hold music.

Do I know where the FDIC is going to get the staff to do all this lickety-split? No. But you see, the FDIC wants to do mods, unlike those lousy private mortgage servicers who just don't care and are evil. As an empirical test of the belief that attitude trumps experience and headcount, this is a public service.

So I think everyone should just quit griping and let the FDIC rip on this one. Since they've promised to use the "maximize value" test here, if they actually manage to get more successful mods done than anyone else has, they will have minimized losses to the FDIC and private investors and we can all congratulate them for that. If, as I fully expect, they don't do any better at making a silk purse out of a sow's ear than anyone else can, maybe Sheila Bair will quit pontificating about a subject that remains a lot harder than she thinks it is. That, too, we could all get behind.

by Tanta

A few days ago we encountered the Pestanas, who are suing WaMu for failing to modify their loan. In that case, the Pestanas allege that WaMu told them they couldn't be considered for a modification because they had only missed one mortgage payment, so they tried again after having missed several payments, only to find WaMu initiating foreclosure.

Today we encounter the Harrises. In this case, the Harrises allege that Countrywide told them they couldn't be considered for a modification because they were never delinquent. Rather than going ahead and becoming delinquent, like the Pestanas, the Harrises called the Chicago Tribune to find out how they could join the Illinois Attorney General's fraud suit against Countrywide. It appears that it will not be necessary for the Harrises to allege in court that Countrywide defrauded them, since after the reporter called Countrywide, the borrowers were offered a rate reduction modification.

I wish to observe that I am of two minds about this phenomenon. On the one hand, this is the power of the press that we should all be in favor of: its ability to side with the little guy, threaten the big corporate interests with exposure and bad publicity, and get things done for the little guy. Afflict the comfortable, comfort the afflicted, mission accomplished.

On the other hand, any motivation that at least some little guys might have had to tell a complete and unvarnished story to a reporter has a tendency to disappear when the reporter is being used by the little guy as a negotiator with the big bad corporation. We all know the rules by now: the servicers cannot tell their side of the story, because of confidentiality rules that limit them to the ubiquitous "we cannot comment on the facts of this borrower's case." The borrowers, on the other hand, are free to tell as self-serving a story as they want to the reporter, sans rebuttal by the servicer. Unless the reporter displays a pretty good degree of skepticism and curiosity, the reporter (and hence the rest of us) is likely to get spun.

Here's the saga of the Harrises, per the Tribune. I know I have my unanswered questions about this. Does anyone else have a few?

The root of the Harrises' dilemma goes back to 2004, when they decided to refinance the home they bought in 1994.

Lisa Harris and her husband were entrepreneurs who had recently bought an Evanston laundromat and a Park Ridge tanning salon. They didn't have two years of regular income to report, but their credit score was a high 720, so they qualified for a low-documentation, 30-year adjustable-rate loan. The interest rate was 7.95 percent for the first three years.

The rate would then adjust every six months and could go as high as 14.95 percent. The Harrises borrowed $193,500, making their monthly payment roughly $1,800.

But the Harrises' businesses closed and Lonny went to work selling cars; he brought home only $30,000 in 2006 and $60,000 in 2007, not enough to allow them to refinance with another lender. Lisa Harris, 39, has a small business in her home that brings in about $500 a month. Their 6-year-old has special needs, making it difficult for her to work outside the home.

Their interest rate jumped in June 2007 and again in January 2008, reaching almost 11 percent. Lisa Harris called mortgage lender Countrywide's "home retention" department in January and asked to have the interest rate reduced and fixed.

She wrote a hardship statement. She faxed bank statements showing cash deposits from her in-laws. She filled out a detailed budget. After getting no answer for months, the Harrises were informed that they didn't qualify for the program because they aren't delinquent on their loan.

It may or may not have made much sense for Countrywide to decline this mod request; I couldn't say because there's too much missing information, like how much misrepresentation the Harrises originally made on their original loan application. But I confess I am curious about what grounds the Harrises thought they had to sue Countrywide for "fraud."

I suspect the reporter doesn't explain that because . . . she got spun.

(Thanks, Gene!)

by Tanta

Now this ought to be a really interesting suit to follow. From the Boston Globe:

In their lawsuit, the Pestanas are seeking damages for their tarnished credit and are trying to reverse their eviction and foreclosure. Their Boston lawyer, Gary Klein, said their eviction has been delayed until late August.

The suit, filed one week ago, indicates the Pestanas would not have gone into foreclosure if they had reached someone at WaMu with authority to resolve their problem.

After the couple missed their August 2007 payment, Mark Pestana, a human resources specialist, and Lori Pestana, a business consultant whose work had slowed, still felt they could get current on their loan. One option might have been dipping into retirement savings, they said.

After reading on WaMu's website that it would assist distressed borrowers with loan modifications, Lori Pestana called and was told they could not qualify until their payments were 50 days late. To become eligible, they stopped paying and applied for help on Oct. 9, 2007.

It kind of sounds like these folks had the ability to make payments, but decided not to do so in order to induce WaMu to modify their loan. This ought to be interesting.

As it happens, the new FHA program authorized by the Foreclosure Prevention Act of 2008 requires borrowers to "provide certification to the Secretary that the mortgagor has not intentionally defaulted on the mortgage or any other debt." It looks like a court may be ruling on what exactly that might mean sooner than we thought.

(Hat tip to A.F.)

by Tanta

Well, yesterday was quite the odd day. I was having a late afternoon nap when I suddenly awoke, heart pounding and skin crawling, with that horrible spooky sense of being watched. I decided it was a bad dream, made a cup of tea, and wandered over to the computer, only to discover that my co-blogger had just a few minutes earlier put up a post letting us all know that the FDIC is going to be keeping its eyes on bloggers.

There's only one thing for it, then. If the FDIC is going to be worrying about the bloggers, the bloggers are going to have to be worrying about the insured depositories. I don't know that that's an ideal setup, exactly, but someone has to worry about the banks and thrifts, not just about bad PR for the FDIC, and if Sheila Bair is going to ruin my naps I'm going to have time on my hands.

Which brings us to Downey Financial, who visited the confessional this morning. It was pretty ugly. What we got, for the first time as far as I can remember (I nap a lot these days, you know, or at least I used to), is some post-modification performance information on the infamous "retention modifications."

If you remember, Downey got everybody a little fired up back in January when it announced that its auditor was making it restate its Non-Performing Asset (NPA) numbers for the second half of 2007. Downey had put in place a program to offer "market rate" modifications to performing borrowers in its loan portfolio. These were, apparently, mostly Option ARM borrowers whose rates had adjusted to pretty high levels. Downey modified them into amortizing ARM loans at the same interest rate that a new ARM borrower would have gotten. Because there was not a below-market rate given to these borrowers, and because they were current at the time of modification, Downey decided it did not need to count these loans as "troubled debt restructurings," which would mean including them in the NPA category. However, KPMG told Downey that the loans did indeed need to be considered "troubled debt restructurings," for a very specific reason: Downey did not re-underwrite these loans at the time of modification to verify and document that the "market rate" given to the borrowers was truly the rate that a new borrower of the same credit quality would have gotten. Downey agreed to count all of these "retention mods" as NPA until each borrower had made six consecutive payments under the new loan terms. Ever since then, Downey has been reporting separate numbers for total NPA including the retention mods, plus NPA without the retention mods. They clearly believe that having to include the retention mods in NPAs makes their NPA number look worse than it "really" is. Whatever that means.

In today's press release, we got some additional information about the performance of these loans:

To the extent borrowers whose loans were modified pursuant to the borrower retention program are current with their loan payments and included in non- performing assets, it is relevant to distinguish those from total non- performing assets because, unlike other loans classified as non-performing assets, these loans are paying interest at interest rates no less than those afforded new borrowers. At June 30, 2008, $548 million or 82% of such borrowers had made all loan payments due. Accordingly, the 15.50% ratio of non-performing assets to total assets includes 4.34% related to performing troubled debt restructurings, resulting in an adjusted ratio of 11.16%.

Through June 30, 2008, $347 million of loans modified pursuant to our borrower retention program have been removed from non-performing status because they met the six-month payment performance threshold. Of all loans modified pursuant to the borrower retention program, including both those classified as non-performing as well as those removed from non-performing status, 87% have made all payments due.

So. The "retention program" has been in place for one year now. If I am reading this correctly, a total of $1.015 billion in loans have been modified under this program. $347 million have made at least six consecutive on-time payments and are no longer included in NPA. Of the $668 million still in NPA, $548 million have made all payments due so far (that might be less than six, since some of these mods will be less than six months old).

This means that of a group of modified loans that are no more than one year old, 87% are performing. If you remove the oldest performing loans from that group--the ones that have had six payments actually due and have made those payments--you get 82% performing loans. A delinquency rate of 13-18% in the first year would probably be something to be proud of if these were "classic" troubled debt restructurings--namely, workouts of delinquent loans that required below-market interest rates to result in payments the borrower could afford.

But Downey tells us these "retention" mods were done for borrowers who were current on their loans at the time of modification, and who were given rates no better or worse than market. The very idea of a "retention" program, of course, is that (in theory at least) these are borrowers whom you don't want to refinance away from you with another lender, because they're good borrowers. You "retain" them by offering them a less expensive alternative to refinance, namely a modification that keeps the loan with the same lender and servicer.

And 13-18% of these "keepers" went bad within a year or less of a modification that supposedly improved their risk profile? Perhaps people are getting used to seeing such high delinquency rates on subprime and "worked out" loans that figures like this seem normal. But these are supposed to be prime loans, and that level of early delinquency or default in a book of "retention" mods is just awful. Downey says these borrowers got the same modified rate and terms that a new refinance borrower would have gotten. Were they expecting that 13-18% of their newly-originated refinance transactions would be delinquent in the first year?

If nothing else, I'd say this demonstrates a good call by KPMG. Downey called these "retention" mods--implying that they were the kind of high-quality borrowers you don't want to lose to the competition--and failed to re-underwrite the loans to verify that claim. The results of this program suggest to me that it was less a classic "retention" program than a pre-emptive strike: Downey made a big effort to modify as many of its then-current Option ARMs as it could into better loan terms, not because they were the kind of borrowers you necessarily want to "retain" but because they were probably not going to get a decent refi anywhere else and if they'd stayed in the Option ARM program the delinquency rate would likely have been worse than 13-18% a year later.

I don't actually think that a "proactive" modification program is necessarily a bad thing. But I think calling it a "retention" program is disingenuous at best, and I think that Downey's experience is proving the point that it really does matter whether you re-underwrite those loans before you modify them. But then, forcing outfits like Downey to call these programs "pre-delinquency workouts because letting them ride is too dangerous" programs rather than "retention" programs would probably spook people, and we know the FDIC doesn't want that.

by Tanta

Sez Bloomberg (thank you, Brian!):

July 14 (Bloomberg) -- More than two of every five subprime borrowers whose mortgages were reworked in the first half of 2007 are defaulting anyway, Moody's Investors Service said.

Among subprime adjustable-rate mortgages modified in the first half of last year, 42 percent were at least 90 days late on March 31, the ratings firm said in a report today.

Modifying loans granted to consumers with poor credit records has gained favor as record numbers fail to keep up with payments and home prices tumble. Loans reworked more recently may perform better than ones modified in early 2007 because lenders are increasingly lowering interest rates and offering changes to consumers with fewer missed payments, Moody's said. That's different from 2007, when lenders focused on enforcing repayment plans.

I have not yet gotten my hands on the detailed Moody's report on this subject. However, I did look at Moody's press release, and it doesn't exactly attribute the issue for the early 2007 modifications to repayment plans. Per the press release (no free link), the majority of modifications done in the first half of 2007 involved simple deferral of principal/capitalization of past-due interest (that is, the borrower got "brought current" by having past-due interest added to the loan balance) without other changes in the loan terms. Modifications like that result in the same or even a slightly higher monthly payment than under the original loan terms.

If modifications processed in the second half of 2007 and later mostly involve 1) significantly lowered payments and 2) significantly less delinquent loans, then certainly theory predicts they will have a better re-default rate. On the other hand, it's early to be confident that the 40% redefault rate on the earlier mods will hold; generally speaking you need at least two years of "seasoning" on a group of modifications before you get useful numbers on re-default. That said, Moody's servicer survey from last year predicted a redefault rate of around 35% based on past experience of the servicers. It will be curious to see how high that redefault rate can go before the "least loss" models tip back toward foreclosure. So far Moody's is simply saying that the impact on cumulative losses of the early modifications has been "modest." That suggests to me that it may not take a much higher redefault rate for this "modest" lowering of cumulative losses to disappear.

I know that I for one am looking forward to Hope Now and the OCC to start reporting on re-defaults in their metrics (although I'm not going to hold my breath). Moody's is reporting strictly on subprime ARMs; while these have been the focus of modification efforts, we still need to know what's happening in the prime and Alt-A segments.

Otherwise, Moody's reports that as of March 2008, nearly ten percent of subprime ARMs with a reset date in the preceding 15 months had been modified.

by Tanta

The Washington Post picks up the brewing controversy over the rather significant mis-match between the foreclosure and loss mitigation statistics reported in the new OCC Mortgage Metrics Report and the Hope Now reports we've been seeing since January. Of course they got seriously scooped on this by Housing Wire, who had this story on Wednesday, but I guess now that it's in the newspapers it's got legs:

John C. Dugan, comptroller of the currency, which oversees national banks, said his agency found "significant limitations with the mortgage performance data reported by other organizations and trade associations."

"Virtually none of the data had been subjected to a rigorous process to check for consistency and completeness -- they were typically responses to surveys that produced aggregate, unverified results from individual firms," Dugan said in a speech in New York on Wednesday. "That lack of loan-level validation raised real questions about the precision of the data, at least for our supervisory purposes."

Dugan said in an interview that he was referring to information provided by groups such as the Mortgage Bankers Association, which reports a foreclosure rate widely cited by regulators and the media. A report by the Office of the Comptroller of the Currency calculated that the rate was higher based on raw data it collected from nine of the country's largest banks.

Dugan's comments also raised questions about the accuracy of the reporting from Hope Now, an alliance of mortgage firms and banks that was formed to help financially troubled holders of subprime mortgages. Leaders of the coalition, which was put together by the Bush administration, contend they have aided more than 1 million homeowners. Those figures were self-reported by lenders in response to the kind of surveys Dugan has faulted. . . .

In an interview yesterday, Dugan tempered the strong language he used in his speech. "It was not intended to be a criticism of what they are doing," he said of MBA and other industry associations. Their figures, he added, "get you in the ballpark . . . but we wanted to have a much more specific level of detail."

Banks and mortgage firms have widely varying definitions for what constitutes a loan modification for a struggling borrower and even define subprime mortgages differently. The lack of standards leave the data open for interpretation or manipulation.

I have already gone on record accusing Hope Now of using "weird numbers," and I hope the OCC eventually comes up with a clean enough database (the OCC database currently has 20% of loans classified for credit quality as "other" because they're missing FICO scores) and better definition of credit quality (currently they're using FICO only, not such things as documentation type or LTV/CLTV) that its numbers can provide a better baseline for measuring loss mit activities. I am also willing to observe that if the OCC is only noticing here in Q2 2008 that big bank databases are sloppy and inconsistent, the OCC certainly should "temper the strong language" a touch.

Ultimately, this is going to come down to new regulatory rules on data reporting and management for supervised institutions, as it should. The industry will whine about regulatory burdens, as it always does, but it will be hard to avoid the conclusion that "voluntary" reporting via the MBA or Hope Now is not producing reliable numbers. It will of course also occur to some of us that the OCC's supervision of these banks over the last several years has apparently been based in part on data that it never until now seemed to realize needed some cleaning up.

by Tanta

The OCC has inaugurated a new report, which will be issued quarterly, on mortgage delinquency, loss mitigation, and foreclosure activity drawn from the servicing databases of nine large banks:

The report analyzes data submitted on each of the more than 23 million loans held or serviced by these nine banks from October 2007 through March 2008. The $3.8 trillion portfolio represents 90 percent of mortgages held by national banks and about 40 percent of mortgages overall. The participating national banks are Bank of America, Citibank, First Horizon, HSBC, JPMorgan Chase, National City, USBank, Wachovia, and Wells Fargo.

Of this aggregated servicing portfolio, about 90% of loans are securitized either through the GSEs or private label issuers. The mix is 62% prime, 9% Alt-A, and 9% subprime, with the remaining 20% "other" being largely loans with insufficient or missing data that does not allow assignment into one of the three categories. The OCC indicates that data scrubbing will continue, and hopefully future reports will have a smaller "other" bucket.

It's a big database, and the OCC has made a real effort to standardize its own definitions, based on reported data elements rather than servicer descriptions, so that the credit and loss mitigation categories are consistent across all nine servicers.

The full report is available here. From the summary:

• The proportion of mortgages in the total portfolio that was current and performing remained relatively constant during the reporting period at approximately 94 percent.
• Serious delinquencies, defined as bankrupt borrowers who are 30 days delinquent and all delinquencies greater than 60 days, increased just one-tenth of a percentage point during the period, from 2.1 percent to about 2.2 percent.
• As in other studies, the report confirms that foreclosures in process are plainly on the rise, with the total number increasing steadily and significantly through the reporting period from 0.9 percent of the portfolio to 1.23 percent. Interestingly, the number of new foreclosures has been quite variable. While one month does not make a trend, new foreclosures in March declined to 45,696, down 21 percent from January’s high and down about 4.5 percent from the start of the reporting period last October.
• The majority of serious delinquencies was concentrated in the highest risk segment – subprime mortgages. Though these mortgages constituted less than 9 percent of the total portfolio, they sustained twice as many delinquencies as either prime or Alt-A
mortgages.
• Consistent with other reports, payment plans predominated, outnumbering loan modifications in March by more than four to one. But loan modifications increased at a much faster rate during the period.
• Although subprime mortgages constituted less than 9 percent of the total portfolio, subprime loss mitigation actions constituted 43 percent of all loss mitigation actions in March.
• The emphasis on loss mitigation for subprime mortgages corresponds to the nationwide focus on this higher risk sector. Total loss mitigation actions exceeded newly initiated foreclosure proceedings by a margin of nearly 2 to 1.

by Tanta

Our soberer readers (I know we have them) will remember California Congresswoman Laura Richardson (D-Speculator), who is facing foreclosure proceedings on three homes. The uproar began with the foreclosure of sale her unoccupied "second home" in Sacramento, which Richardson claimed was an "error" on WaMu's part, since (she claimed) she had worked out a last-minute modification agreement with WaMu the week before the sale. According to the Daily Breeze, WaMu has filed paperwork to rescind the foreclosure sale, and the man who bought the home is not happy:

The real estate broker who bought Rep. Laura Richardson's house at a foreclosure sale last month is accusing her of receiving preferential treatment because her lender has issued a notice to rescind the sale.

James York, owner of Red Rock Mortgage, said he would file a lawsuit against Richardson and her lender, Washington Mutual, by the end of the week, and has every intention of keeping the house.

"I'm just amazed they've done this," York said. "They never would have done this for anybody else."

York bought the Sacramento home at a foreclosure auction on May 7 for $388,000. Richardson had not been making payments on the property for nearly a year, and had also gone into default on her two other houses in Long Beach and San Pedro.

Richardson, D-Long Beach, has said that the auction should never have been held, because she had worked out a loan modification agreement with her lender beforehand and had begun making payments.

Richardson continues to refuse to authorize WaMu to release any information on her case, although frankly I'm not sure if I were WaMu I'd want to talk about it. This smells terrible, indeed. Perhaps reporters could simply ask some general questions of WaMu about its foreclosure workout policies. Like:

• How often are modifications or repayment plans offered to owners of vacant investment properties with no or negative equity that have never been listed or rented?
• How often are modifications offered to borrowers with two other properties currently in foreclosure?
• How often are modifications arranged in the week before the scheduled trustee's sale, following nearly a year of no contact?
• Does WaMu's policy on modifications make any reference to requiring a "commitment to homeownership" on the borrower's part? How, normally, is that established?
• Does WaMu's policy on modifications make any reference to establishing that the borrower does not display a "disregard for debt obligations"? How, normally, is that established?

If, for instance, we had some evidence that stiffing creditors and getting the taxpayers to subsidize her financial imprudence was, like, a pattern of Richardson's long before the house payments went into default, would that, like, indicate that her mortgage problems may not have much to do with "extenuating circumstances"? WaMu may not be able to read a credit report, but the Press-Telegram ferreted this out:

In 2005, when she was still on the Long Beach City Council, she left one mechanic in a lurch with an unpaid bill, then later had her badly damaged BMW towed to an auto body shop but didn't pay for any work and abandoned the car there, owners of the businesses said this week.

The next day, Richardson began using a city-owned vehicle - putting almost 31,000 miles on it in about a year - and continued driving the car five days after she had left the council to serve in the state Assembly, city records show. . . .

Labreche said he spent months leaving messages on Richardson's cell phone voice mail, then he got a collection agency involved, but still the bill went unpaid. . . .

In December 2005, Lillegard filed for a mechanic's lien on Richardson's car to pay the towing, storage and administrative costs, he said. Lillegard said the lien was finalized in February 2006 and he sold the car to a junkyard, though a few days later - too late - Richardson sent him money to put toward the bill.

So in January of 2007, WaMu gave Richardson a 100% loan to purchase a second home, when her credit report would have shown recent derogatories related to the car repair bills, plus the payments on two other homes, on a State Assembly salary that I can't quite see being equal to her existing debts, let alone a new house payment. In other words, she got your basic subprime loan that relied on nothing other than a fervent belief in endless house price appreciation--in January of 2007. Or else she got a loan because she's a VIP.

I continue to want to know why WaMu is bailing out a deadbeat and a speculator at the expense of a good-faith buyer of a foreclosure property, and wasting operational capacity on a deal like this instead of working with struggling owner-occupants who might actually pay back the modified loan. I will leave it to the citizens of California to explain why you want this woman anywhere near fiscal, budgetary, or housing policy power.

(Hat tip to Brian!)

by Tanta

The Chicago Tribune has a lengthy article out on HSBC's loan workout efforts. This is all rather confusing because HSBC uses the term "modification" the way everyone else I know uses the term "repayment plan," and then uses the term "restructuring" for what everybody else calls a "modification." With that in mind:

HSBC quickly stopped offering some of the riskiest loans, including stated-income mortgages, which require little documentation, and those generated by brokers, a channel where it had less control.

But trying to help homeowners stave off foreclosures through loan modifications or restructurings is taking longer than expected, McDonagh said.

A modification is generally temporary; after the end of a certain period, the loan resets to its original terms. A restructuring is a permanent redoing of the contract, including new terms and conditions.

"We typically would do six- to nine-month modifications" for troubled homeowners, he said. "Now we're looking out two to three years because, with the severity of the issues they've got, they need longer than six months to work things out."

The number of modifications and restructurings have been rising and represent 22 percent of its mortgage book, or about $18 billion.

Of that, $1.9 billion in modifications, in 11,900 loans, has occurred since late 2006 as part of a program to address the interest rate resets of adjustable-rate mortgages. . . .

HSBC Finance, which typically holds its mortgages on its books, ended 2007 with 9,627 foreclosed properties, up from 8,809 at the end of the third quarter, company records show. While the average number of days to sell a foreclosed property has dipped from 186 to 183 in the same time period, HSBC's losses on the sale of foreclosed real estate have climbed, losing 14 percent of their value in the fourth quarter, up from a 9 percent loss in the third quarter.

Every modification or restructuring is a full re-underwriting, with customers' latest financial situations reviewed.

"To make it work, they have to be upfront about their debts and sources of income," he said.

To a degree, HSBC relies on computerized analysis to decide whether a customer is suited to a mortgage modification.

But "at the end of the day, it's a personal negotiation because every customer's situation is different," he said. "It requires skilled" employees.

I periodically hear people wondering if servicers of securities are doing modifications they wouldn't do on their own mortgage portfolio. I have believed all along that in fact portfolio lenders are much more aggressive about working out loans. They are also, I suspect, much faster at offloading REO quickly and taking the loss.

The question becomes whether the securitization rules or trustees themselves are hindering servicer efforts to work out loans, or whether servicers prioritize their workload with their portfolio loans first, then the securitized loans. I would guess it's a combination in a lot of cases.

by Tanta

Our colleague P.J. at Housing Wire is being a shill for Countrywide again. I intend to pile on before Gretchen Morgenson gets on the case.

***************

Says Housing Wire:

Last week’s Investor’s Business Daily painted a pretty rough picture of everyone’s favorite industry whipping post Countrywide Financial Corp., after getting wind of a servicing policy that requires some delinquent borrowers to pay 30 percent of arrearages before the lender will begin discussing loan modification options — fees that the reporter, Kathleen Doler, called “a steep entrance fee.” . . .

It’s not a blanket policy, as Doler notes, but some borrowers are seeing this policy while others are not. And, of course, Doler finds a few consumer advocates more than willing to demonize the policy, and Countrywide as well. Not hard to do these days.

For its part, Countrywide told IBD that the policy was intended to be a good-faith demonstration, and suggested that the 30 percent policy is only applicable to borrowers staring down a scheduled foreclosure auction. . . .

Allow us to paraphrase what we think the nicely-worded press statement really says: look, if we’ve tried and wasted our resources trying to contact a borrower anywhere from the past 8 to 12 months and they don’t bother to return any of our calls, read any of their mail, or answer the door when we send countless loss mit specialists out there in person, you’ll have to forgive us for calling bullshit when they decide to call asking for a loan mod the day before the foreclosure sale.

I'm pretty sure Angelo was in favor of using "bullshit" in the statement but his PR people told him he's already in enough trouble over "disgusting."

As far as the policy itself, of dealing with eleventh-hour workout requests from borrowers who have been blowing you off until the week before the trustee's sale? I have two words to respond to that: Laura Richardson. You will recall that the good Congresswoman let three homes go into the foreclosure process--and she has admitted that she made no attempts to work with the servicer until all three foreclosures were well advanced and the legal fees had started piling up--and then got all righteous with WaMu because her request for a modification the week before the scheduled sale didn't magically make everything go away. I am not suggesting that Richardson is a "typical American borrower," but she suggested that, so there. Would I make her put cash down on the table before bothering to start a last-minute workout with her? You bet your sweet eclair I would.

What really frustrates me about the criticisms of this specific policy is the complaint that it's "inconsistent": it is exactly a policy that is applied only in certain circumstances. On a case-by-case basis. When appropriate. (I am not affirming excessive faith in Countrywide's ability to determine what is and is not "appropriate" in all situations. But saying they need to do better at that is not to say the policy is wrong.) But as I have argued since the "Hope Now" thing first emerged last year, one-size-fits-all paint-by-numbers workout strategies are doomed to fail.

The fact of the matter is that not all borrowers are the same, and not all circumstances are the same. I am reminded of this article from the Washington Post we looked at several weeks ago, which contained some pretty level-headed advice from Diane Cipollone, of the Sustainable Homeownership Project:

Then, said Cipollone, contact a nonprofit housing counseling agency or an attorney. Avoid any unsolicited offers from people who say they can save your house. Do not avoid mail or phone calls from your lender. And if your lender stops accepting payments because it is moving toward foreclosure, save that money for a contribution toward the loan workout. "If you've missed eight mortgage payments and have spent all that money because the lender stopped accepting payments, that is not a good outcome [nor] a good way to start negotiations," said Cipollone.

The article then describes the successful modification workout that a couple named Ramsey received, after having made a $3000 "down payment" to the servicer.

The fact of the matter is that no one is going to modify your mortgage payments down to zero in any scenario. If you have made no payments for months on end, and have made no attempt to contact your servicer to request a repayment plan or anything else during those months, and at the last minute before foreclosure you do not have any money in savings--the equivalent of several months' worth of a reasonably modified payment--why should the lender bother with you? You can try telling the lender that for the last six months or more your other expenses were so high that you could not set aside even two or three hundred dollars a month that would otherwise have gone toward the mortgage payment, but in that case, how will you afford the modified payments? If you can document a "temporary" financial hardship, why haven't you contacted the servicer until now?

I am personally willing to bet that if Countrywide asked you for 30% of back payments, late fees, and legal charges, and you were only able to scrape up 20%, they'd probably play ball with you, assuming you have a good story about why there is reason to believe that you can and will make the modified payments. Workouts are a process of negotiation; that's the point. And I'll eat my blog if it turns out that Countrywide is the only servicer with a policy similar to this for late-stage modification requests. My sense is that the animus here is against Countrywide, not any coherent objection to a policy of asking borrowers to put down some "earnest money" before being given a deal that may be in everyone's financial best interest, but which is inevitably beset by moral hazard.

I Want To Know How CFC Is Screwing Borrowers This Time.

by Tanta

My day started with my inability to understand a series of statistics reported in Bloomberg this morning.

Housing Wire follows up on the "methodology change" that purportedly caused the new defaults and cured loan reporting for April to surge and plummet, respectively, in the Mortgage Insurance Companies of America's most recent report. I share HW's sources' skepticism about the explanation given for this change. It simply sounds like a very large lender has been allowed--heretofore--to report fewer delinquencies and more cures than everyone else does, by using different definitions. As that is not something that sounds very good, I would suggest that MICA needs to come up with a better explanation.

Meanwhile, the Hope Now folks released a pathetic set of data charts on mortgage loss mitigation through April 2008. For heaven's sake, we're the financial industry, people. We're supposed to be able to use Excel properly.

There are some really puzzling features of this data, like why the total loan counts have not changed since October (see the first page). Since those loan counts are used to calculate the 60+ day delinquency percentage, the failure to update the total count makes those numbers rather dubious. On page two, I found myself unable to make sense of the completed FC sales/FC starts calculation using any possible definition of "five months" I can think of. Perhaps I am misreading the footnote. In any event, I gave up on my ambition to put this data into a more sensible format for you, after I lost confidence in the data integrity.

So here's from the press release, instead:

The April report from HOPE NOW estimates that on an industry-wide basis:
• Mortgage servicers provided loan workouts for approximately 183,000 at-risk borrowers in April. This is an increase of 23,000 from the number of workouts in March 2008 and is the largest number of workouts completed in any month since HOPE NOW’s inception.
• The total number of loan workouts provided by mortgage servicers since July 2007 has risen to 1,558,854.
• Approximately 106,000 of the prime and subprime loan workouts conducted by mortgage servicers in April were repayment plans, while approximately 77,000 were loan modifications.

Maybe next month the report will be cleaned up a little and we can look in more detail at these numbers. If we can shame Hope Now into issuing something readable.

Harrumph. Is it Happy Hour yet?

by Tanta

Forgive me for once again falling into despair over the media's inability to report sensibly and critically on foreclosure and delinquency numbers. I should be immune by now. If you are wiser than I, just skip to the next post. If you still cradle to your wounded heart the battered but indomitable belief that even media outlets like Bloomberg can learn to spot the flaws in a reported statistic, and that there is a point to doing this, click the link below.

***********

The headline: "New Overdue Home Loans Swamp Effort to Fix Mortgages in Default." We will take this as a promise that the article is going to demonstrate something about the relationship between newly delinquent loans and workout efforts.

The lede:

May 30 (Bloomberg) -- Newly delinquent mortgage borrowers outnumbered people who caught up on their overdue payments by two to one last month, a sign that nationwide efforts to help homeowners avoid default may be failing.

In April, 73,880 homeowners with privately insured mortgages fell more than 60 days late on payments, compared with 39,584 who got back on track, a report today from the Washington-based Mortgage Insurance Companies of America said.

The last of eighteen paragraphs:

Last month's 54 percent "cure ratio" among defaulted mortgages compares with 80 percent a year earlier and 87 percent in March. The comparison may not be valid because one lender changed the way it calculated defaults and cures reported to the insurers.

So we start with an eye-popping number, and then only at the very end do we note that this number may mean much less than meets the eye. This is, in fact, what MICA said in its data release:

WASHINGTON, D.C. May 30, 2008 – Mortgage Insurance Companies of America (MICA) today released its monthly statistical report for April which includes a one-time adjustment to the number of defaults and cures and also notes an 11.7% increase in new insurance written year-over-year.

As a result of a major lender’s change to its methodology for recording delinquencies, and to how it reports them to MICA’s members, there was a sharp increase, to 73,880, in reported defaults in April. The increase includes both newly reported defaults for the month, as well as previously unreported defaults by this lender.

MICA’s members reported 39,584 cures in April. This statistic also reflects the above noted change in reporting defaults.

I assumed when I read this that somebody--a large somebody, since it significantly impacts the data--switched over from the OTS method to the MBA method of delinquency reporting. I do not know if this is the case or not. Before I published this article, however, I might have called MICA for a comment. In any case I might have been more cautious with headlining a number that is described as a "one-time adjustment" to the data collection. Burying that in the last paragraph is . . . disingenuous.

I'm also a touch troubled by the statement that "Last month's 54 percent 'cure ratio' among defaulted mortgages compares with 80 percent a year earlier and 87 percent in March." That is literally true. However, the cure rate in December of 2007 was 54.1% and in January of 2008 was 51.4%. Could there be some seasonality in these numbers? Another confounding factor besides new delinquencies?

So what about the second half of the claim?

"Modifications are not occurring nearly at the numbers necessary to stem the foreclosure crisis," Allen Fishbein, housing director for the Consumer Federation of America in Washington, said in a May 19 interview. "People are still going into foreclosure when, with a writedown on existing principal, they could still stay in their homes."

In the first two months of 2008, lenders modified loans for 114,000 borrowers while starting 346,000 foreclosures, according to a study by the Durham, North Carolina-based Center for Responsible Lending. In April, 22 percent of the homes in the foreclosure process had been taken over by lending banks; a year earlier, that figure was 15 percent, according to Irvine, California-based data provider RealtyTrac.

Did you assume, when you read that second paragraph, that the 114,000 modifications were exclusive of (not the same loans as) the 346,000 foreclosure starts? It seems you were supposed to assume that. But is is true? "Foreclosure start" simply means that a legally-required preliminary filing (a Notice of Default, Notice of Intent, or Lis Pendens, depending on the state and the type (judicial or non-judicial) of foreclosure) has been made. That is a "start" because in most jurisdictions it will be another 90 to 180 days, or even more in some states, until the auction can be scheduled, the home sold, and the foreclosure "completed." My own view is that the "best practice" is to work hard to negotiate a modification, if possible, in the early days of delinquency before starting the foreclosure process. However, that is not always possible, and it is also "best practice" to continue to attempt reasonable workouts during the foreclosure process all the way up the day before sale, if necessary. There are certainly cases in which a borrower simply cannot be brought to talk to the servicer until the initial FC filing galvanizes him into it. All of this means that it is impossible to look simply at modifications completed in a period compared to foreclosures started in a period and conclude that the starts will never get a mod or that the mods were not effected after the FC start.

Besides that, where is the data to back up the idea that a 30% ratio of modifications to foreclosure starts is poor performance? I am personally not sure that much more than 30% of recent vintage loans can be saved. Back out fraud, flippers and speculators, and borrowers whose loan balances would have to be reduced by half in order to get a workable payment--which would most likely exceed the cost to the investor of a foreclosure--and 30% doesn't sound so shabby.

As far as the second claim--the increase from 15% to 22% of homes in foreclosure "taken over by lending banks," I'm prepared to read that literally. There is no jurisdiction in which a foreclosed home must be purchased by the lender at the foreclosure sale; all jurisdictions require public auctions in which third parties can bid. An increase in REO (lenders "winning" the auction) does not necessarily mean an increase in completed foreclosures; it can mean that fewer third parties care to bid on foreclosed homes. All the data I have seen recently suggests that this is the case: buyers are still wary of further price declines, and lenders are still bidding higher than potential RE investors. One therefore expects the FC-to-REO numbers to increase. But they can do that even in the absence of an increase in total foreclosures. In order for this statistic to mean much, we have to know how much of the increase is due to more foreclosures, and how much due to fewer third-party bidders.

So put these dubious statistics together--the rest of the Bloomberg article is basically filler--and you get anomalous data on new delinquencies, ambiguous data on modification-to-foreclosure-starts, and a claim about REO rates substituting for a claim about foreclosure completion rates. How about taking back that headline, Bloomberg?

You know, last year I might have had some more sympathy for these reporters. We were just newly into the whole problem and a lot of concepts--delinquency reporting methodology, foreclosure processes, various ways of reporting "cures" and "starts"--were all new to everybody except industry insiders and a handful of totally Nerdly blog readers. But surely by now we can have moved the ball forward a couple of yards? I am here to affirm that if you have been reporting on "the foreclosure crisis" for a year or more and you still can't ask basic questions about the press releases you read, you aren't doing your job.

I, Too, Need To Know Why These Numbers Are So Squirrelly

by Tanta

It is inevitable that we would join the mirth all over the rest of the toobz regarding The Tanned One's unfortunate use of the "reply" rather than "forward" button in the process of registering his "disgust" with a borrower who emailed some 20 Countrywide executives (including the press office) with a request for a mortgage modification based on a form letter he found on the net. Moe Bedard, whose advice on approaching his servicer this borrower faithfully followed, wasted not a moment in "reaching out to the media" with this story, managing to land it in the LAT yesterday.

As a PR stunt, there's not much you can criticize here about Mr. Bailey's letter or Moe's media-savvy frothing in response. Angelo just handed these folks a dose of self-righteousness that will keep them stoned for weeks. The problem here, of course, is that if you are a borrower in distress trying to work something out with your servicer--Countrywide or anyone else--your primary need is not sympathy from the senior execs or attention from the press office or a flap in the newspaper. Your primary need is to reach a person in default servicing who can do something about your problem. This person needs to understand very clearly what your problem is and what can, practically, be done about it. At the risk, therefore, of sounding like a shill for Countrywide (this is a blog in-joke; every time I write something insufficiently hostile to CFC I get accused of being an "industry shill"), I offer to use what insight I have into the minds of loss mitigation specialists who deal with these things to offer some advice on how to write a letter that runs much less of a risk of being dismissed as just another sympathy-seeking form-letter.

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First of all, your goal is not to convince the servicer that you deserve a loan modification. Some people can't quite get a handle on this point, but you need to. Your goal is to convince the servicer that what you are asking for--in this case, a modification, although it could be a deed-in-lieu or a short sale or just a temporary repayment plan--is 1) necessary given your financial situation and 2) going to work. The biggest problem I have with Mr. Bailey's letter is that it does not ask for anything specific and it does not help me see why a modification would actually work in his case. In fact, it makes the mistake of suggesting that a modification would only allow Mr. Bailey's shaky income situation to continue or get worse. That being the case, it doesn't really matter if the person reading your letter feels sympathy for you or believes that the situation was truly beyond your control.

Let's start at the beginning:

To Whom It May Concern:

I am writing this letter to explain my unfortunate set of circumstances that have caused me to become delinquent on my mortgage. I have done everything in my power to make ends meet but unfortunately I have fallen short and would like you to consider working with me to modify my loan. My number one goal is to keep my home that I have lived in for sixteen years, remodeled with my own sweat equity and I would really appreciate the opportunity to do that. My home is not large or in an upscale neighborhood, it is a “shotgun” bungalow style of only 900 sq. ft. built in 1921. I moved into this home in May of 1992…this was the same year I got clean and sober from drugs and alcohol, and have been ever since, this home means the world to me.

The first sentence of this letter encapsulates what's wrong with it: it is going to be about "explaining" "unfortunate circumstances." The fact is that every letter every Loss Mit specialist in the universe gets from borrowers is about "unfortunate circumstances." It is quite rare to get a letter from someone that says "Look, I'm a selfish irresponsible pig, but I want more from you than I already have." Trust me on this. Everyone who talks to the Loss Mit department has "unfortunate circumstances." That is what the Loss Mit department is designed to deal with.

It is very hard for people in financial distress not to focus on their own misery, or to imagine that the "uniqueness" of their misery is not really the point. You need to get beyond that. You may think it is "unfair" that your story sounds more or less like everyone else's. Life is unfair. Servicers do not modify loans because they feel sorry for you. They modify loans because you have convinced them that you will be able to make payments that way.

A much better first paragraph would be: "I am writing to request that you consider a modification of my delinquent mortgage loan so that I can continue to make payments. I have tried to analyze my own situation objectively, and I believe that a monthly mortgage payment of no more than $xxx would allow to me to keep current on my mortgage and my other necessary obligations. I am a long-time homeowner and am committed to staying in my home if we can work out terms that are practical for both of us."

Starting out by addressing head-on what payment you need in order for this to work accomplishes a couple of things: it shows that you are, indeed, thinking practically about your situation. It gives the Loss Mit people a clearer idea of what you want. And it (hopefully) sets a tone that keeps