Farewell Post – House Sales & Mortgage Loan Default/Foreclosure Round-Up

Posted on January 30th, 2009 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

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Farewell Post – House Sales & Mortgage Loan Default/Foreclosure Round-up

  • Endless Housing Inventory – Shadow Inventory
  • The Pay Option, Alt-A, Prime and Subprime Default Waves

Housing – ‘Shadow Inventory’ & Defaults Provide Endless Supply

‘Why do values keep falling when sales have picked up and there is less inventory?’ I get asked that question constantly. Part of the answer is ‘shadow inventory’, which real estate associations, banks and FDIC don’t count.

Shadow inventory is REO on the shelves of banks and servicers not listed with a real estate broker. Because the ‘months supply’ figures are given out by the real estate associations based upon listed homes and most REO is not listed, the supply figures have been incorrect for over a year. To accurately estimate supply you must track the foreclosure market and add back in foreclosures as supply, listed or not.

The real estate associations do not do not add back REO inventory into the supply. As a matter of fact they take the present month sales, multiply by 12 then divide by the amount of known listed inventory. They then throw on some magic ‘seasonal adjustments’ to make everything ‘alright’. This leads to press releases like the CA Assoc of Realtors put out this week citing 545k annual home sales and 5.6 months supply in CA. This is as far from reality as any report I have ever seen on housing.

On the REO front I have seen figures quoted by the FDIC many times that pins the total national bank REO in the low $20 billions. That number is light. This is because they only quote REO volume owned by the banks on balance sheet. They don’t count loans that they service. Given 65% +or- of all loans were securitized/sold relying on FDIC estimate of REO will also get you into trouble.

“The value of REO property on the books of FDIC-insured banks at the end of the third quarter surged 21 percent from the previous quarter, to $23 billion. That total — which includes single-family to four-family homes valued at $11.5 billion and another $1.5 billion in property purchased with FHA-backed loans securitized by Ginnie Mae — represents a 134 percent increase from a year ago, according to the latest quarterly report from the Federal Deposit Insurance Corp.”

I have kept a monthly chart with every aspect of the housing market including defaults and REO for two years. Below is annual summary info. When you look at the real data, you can see why housing prices keep falling and there seems to be endless supply – it is because there is!

CA REO Count and Dollar Amount

Below shows the annual and two-year REO totals by count and dollar amount. Based upon DataQuick data, which tracks the percentage of properties sold each month from the foreclosure stock, and our default and foreclosure data nearly half the 2008 REO is still in inventory somewhere.

CA Loan Default Count and Dollar Amount

In rough terms, CA makes up 35% of total loan defaults and 42.5% of the total dollar volume for the nation. Below shows annual and two year loan default totals by count and dollar amount. Over half of the 2008 defaults have not yet resulted in REO. There is a foreclosure/REO wave that was kept at sea due to SB1137, CA’s temporary foreclosure moratorium.

Defaults across the Pay Option, Prime, Alt-A and Subprime Universes

Below are several charts showing the Pay Option, Alt-A, Prime and Subprime default universes. If anything in which you invest is at all tied to the demographics in each loan type, knowing how each universe is performing in real-time is imperative. The following proxy charts are well ahead of ratings agency downgrades and have been a great predictor of many things other than bank implosions.

The charts show a two year default history for the respective loan types tracked through a method using proxy originators. These can be drilled down by originator even into individual securities in many cases. This is the closest and most real-time look you will get on the rate-of-change for each loan type.

Pay Option ARM Default Wave

Other than the SB1137 dip and despite many Pay Option holders on large-scale loan modification pushes, Pay Option defaults have not eased up.

Prime Default Wave

The same SB1137 dip is seen here and like the Pay Options, defaults are steadily rising.

Alt-A Default Wave

Unlike Pay Options and Prime, the Alt-A universe took a dip down in early spring but rebounded sharply mid-Summer. Since defaults have surged. The Alt-A default universe is absolutely unique. Moody’s released some interesting info this week.

“Moody’s noted that many loans were labeled Alt-A even though they were subprime. In addition, an increasing share of Alt-A loans included weaker documentation, non-owner occupied properties and two- to four-unit properties. Moody’s projects that cumulative losses will reach around 20 percent on 2006 vintage Alt-A RMBS and 24 percent on 2007 issuances.

While around 90 percent of Alt-A RMBS rated by Moody’s were downgraded last year, the New York-based ratings agency said it will again review its ratings on 2006 and 2007 vintages in light of its updated outlook. Transactions from 2005 will also be reviewed.”

Subprime Defaults

The power surge seen in 2007 eased off in early 2008, dropped late spring and has stayed flat. Other than redefaults on modified loans, I think the worst of Subprime is behind us. The problem is…’Subprime is such a small slice’. That is what they said two years ago when downplaying the entire mortgage/housing crisis. Now the same statement brings terror when such a small slice can do so much damage and the larger slices depicted above are acting much in the same way as Subprime did in 2007.

**If you are an investment fund looking for more information in our default/foreclosure related research including real-time mortgage default, foreclosure and loss tracking across large-named publicly traded companies, please email me at the address below. Looking ahead of the housing and mortgage market and into bank’s residential mortgage portfolios and balance sheets is now much clearer.

MrMortgageTruth@Gmail.com

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CA Housing Market -Beneath the Headlines / REO Surge to Hit

Posted on January 27th, 2009 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

Beneath the Headlines — the Housing Market is Languishing

The chart below shows a CA housing market languishing with ‘organic’ sales (pink) at an all-time low. This, while loan defaults (yellow) – a leading indicator of foreclosures, REO and home price depreciation – are at an all-time high. Note that organic sales in a part of total sales and not to be added together.

**PLEASE NOTE – I AM MOVING at month…I will be delivering reports via email for a couple of weeks until the new site is up.  Please ‘subscribe’ for email delivery of content so I have your address.  Just enter your email address in the box to the right and ’subscribe’. Note that you will get back a confirmation email that may go to your spam filter so be sure to look for it.

Existing Home Sales rose month-over-month in Dec. Everyone is giddy over the possible implications –signs of a robust reversal in the housing market leading the consumer and banks out of the devastating asset valuation nose dive. Of course, this will lead to asset price mark-ups and a ‘v’-shaped, full-blown economic recovery. That would be nice.

But it can’t happen this way and accepting the existing home sales data without looking inside the numbers will lead to incorrect assumptions about the housing market and subsequent losses if you make bets according to the faulty data.

Yes, on a national basis existing home sales were up 6.5 over November but also down 3.5% from Dec of last year. This is just one blip up like four or five others we have seen in the past year – they are always greeted the same way. A large percentage of this came from CA so let’s focus there because other bubble states are very similar. The overall month-over-month rise was a function of crashing prices, lower rates and the CA law SB1137 keeping a flood of REO inventory off of the market. This is all good stuff…or is it.

It’s All About Organic Sales

Organic sales - me selling a home to you – gauges to true health of the housing and mortgage markets and are at record lows. Two years ago organic sales were 95% of all sales and in Dec they made up 42.5% of all sales in CA. Foreclosure-related sales make up the rest. Nationally in December, only 55% of all sales were organic. The foreclosure market is now the housing market crowding out Ma and Pa Homeowner who can’t compete against banks and servicers ‘dumping’ properties.

Organic sales plummeting means that home owners are not freely able to transact. This tells me a few things a) that home owners are stuck upside down in their home and can’t sell b) the all-important move up buyer is non-existent and can’t even afford to buy the home they presently live in given present-day sensible lending guidelines c) home owners with equity can’t sell their home in order to get the down payment for the new home. Organic sales plummeting is a leading indicator to foreclosures that most have not put together yet.

Are Falling Values Good for Housing?

The pundits preach that falling values are great for housing because more people can buy. That is not the whole story. In this market after such a devastating past year and a half for home prices, lower prices are a leading indicator of two things – more loan defaults and more zombie home owners ‘stuck’ in their home unable to sell or refi.

Both of these are a leading indicator of future home price depreciation. Thus, the negative feedback loop in housing that has devastated the sector.

Show me a month where a) organic sales rise b) values stay flat or rise and c) new loan defaults and foreclosures stay flat or drop d) foreclosure related sales rise – that would be a positive. At present, ‘d)’ is the only factor in place.

Those citing a drop in inventories as the ‘mustard seed of hope’ forget that from Dec through Feb many that had no luck selling the prior year keep their homes from the MLS awaiting the Spring selling season. Inventory always surged from Mar to May.  Additionally, they also forget about ‘shadow inventory’ in the form of REO that is not listed.  Realty Trac said in a recent story that they show that only about a third of all REO is listed and trackable as inventory. The rest is sitting rotting at the banks/servicers. These numbers are very close to numbers I have quoted in the past through independent research.

A Flood of REO Properties About to Hit

Looking forward a few months, the REO inventory ‘wave’ that has built up in the past 12-months is about to hit hard. In CA, the SB1137 law exacted on Sept 5th forced a 60-day moratorium on Notice-of-Defaults and Notice-of-Trustee Sales. A Notice-of-Trustee Sale is needed before an insti can take a home to foreclosure. The law essentially kicked the can down the road where all of the inventory will hit as the Spring/Summer selling season kick off. In this respect, the plan worked.

Below is a chart of monthly chart of monthly Notice-of-Defaults, the first stage of foreclosure. NOD’s are filed after three to four missed monthly payments. NOD’s are a very leading indicator to foreclosures by 4-6 months in addition to an indicator of future supply/price depreciation. The massive wave of NOD’s from Jan to Aug and then again in Dec (post-SB117) is still out there waiting to turn into REO beginning soon.

The chart below shows monthly Notice-of-Trustee Sales, the second stage of foreclosure, which follow NOD’s by 4-6 months. At this stage the date and time of the actual foreclosure sale is given – foreclosure typically follows by 21 to 60-days. If you look at all of the NOD’s above from Jan to Aug in the chart above, where are all of the corresponding NTS? From Aug – Dec, NTS would have remained at that 37-40k level if not for SB1137 in addition to select full-moratoria by banks such as Countrywide. This just delays the inevitable. Despite that, NTS are growing and the chart below will look much like the chart above in the near-term – NTS will be back at all-time highs.

The chart below shows the monthly REO taken back by banks — 93-97% of all foreclosures go back to the bank as REO. Like the other two charts the numbers nose-dived as a result of SB1137. So where is all the REO??? The answer is it was delayed and coming quickly to the NTS phase. Additionally, Fannie and Freddie are on full foreclosure moratorium.

From the NTS phase properties are quickly taken back as REO. Supply coming out the other side is all dependent upon each institution, their capacity and willingness to take the associated hit. But as you can surmise from the charts above their dams are overflowing.

Note – at Field Check Group, my research firm, we track all of this by bank and servicer daily. Drilling down into each insti independently reveals that their actions are all over the map. Some do try hard to make this process smooth and transparent. Others are experts at playing ‘hide the REO’.

Who is Left to Buy?

Despite prices and rates coming down there are just not enough available buyers to sop up the entire present and future inventory. Remember, we went into this with about a 69% homeownership rate.

Move-up Buyer

Although purchases always accounted for a small portion of all mortgage loans and still do, move-up buyers were the largest segment of buyers during the bubble years. Easy lending made it a no-brainer for folks to always get something newer and bigger in a better location. Each quarter brought about new and innovative loan programs designed by the investment banks to bring payments and down-payments lower making homes more affordable.

With very little to no down payment required and housing rising double-digit percentages per year it was easy to sell, pocket the profit and buy the new home with little expense and even a lower payment if you chose a Pay Option ARM!. The new home was furnished on easy credit terms from their favorite furniture chain.

EVERYONE qualified due to stated income, no ratio and no doc loans. Now, the move-up buyer is virtually non-existent because most can’t sell for what they owe; can’t sell for what is needed to extract the large down payment needed to buy the new home given today’s sensible financing; can’t get good financing above $417k; or can’t qualify for a mortgage without an exotic or liar loan. The move-up buyer segment is not a driving force.

First-Time Buyer

First time home buyers in their early to mid 20’s are a group that can benefit from lower rates and prices at the lower end of the price range. However, historically they were one of the smallest housing market segments. Now the question is, how many 20-something’s have a large enough down payment, 2-year job history, very little debt and good enough credit score to take advantage of the low base rates available?

This group as a whole will not be able to get the low base-rates being thrown around because they are not seasoned borrowers with large cash positions. An LTV and credit score that was considered ‘Super-Prime’ two years ago can result in a 1.5% hit to the rate bringing them from 5.5% to 7% very quickly.  While the 7% rate may fall further, I believe that this group is more price-sensitive and looking for a ‘great deal’ on a foreclosure-related property vs waiting for rates to drop to buy. This seems to be the case with most buyers given over half of all home sales in the bubble states come from the foreclosure stock. The first-time buyer segment is not a driving force.

Renters

Renters can also benefit from lower rates but the same rules apply as with First-Time Buyers. This segment also has historically been one of the weakest, as many are renters for a reason. In many cases those reasons prohibit them from buying. The renter segment is not a driving force.

Second Home/Investment Buyer

Once again, it is more about getting a ‘great deal’ on a foreclosure related sale vs hitting an interest rate level that prompts a purchase for this group. For those not paying cash, most investors have significant interest rate adjustments on their loan taking the rate up substantially over 5.5%. For investment properties, the 3-point hit for LTV’s above 75% alone takes the 5.5% to 6.75% – most will have multiple hits.

The second/vacation home buyer can get more aggressive rates than investment buyers, but I sure hope that economists are not staking their reputation on vacation home buyers saving the housing market. The investment buyer is one of the driving forces in the purchase market today but that cannot be sustained over time.

**PLEASE NOTE – I AM MOVING at month end…I will be delivering reports via email for a couple of weeks until the new site is up.  Please ‘subscribe’ for email delivery of content so I have your address. Just enter your email address in the box to the right and ’subscribe’. Note that you will get back a confirmation email that may go to your spam filter so be sure to look for it.

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Mr Mortgage Reports to be Delivered by Email

Posted on January 26th, 2009 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

I am moving – until my new site is up, I will only be send research via email. As always I provide this information at no charge.

SUBSCRIBE: Please look to the right, enter your email address in the box and ‘subscribe’.

VERY IMPORTANT NOTE - that the responder sends back a verification email that may go into your spam folder…it will be coming from MrMortgageTruth@gmail.com.

The last day my site will be hosted at the one and only Mortgage Lender Implode-O-Meter will be at the of the month. I will be changing my site address but may not have it up by then so if I do not have you as an email subscriber, you may not know how to find me.  Feel free to add as many email addresses as you want my information delivered to. Your email address will never be sold or used by anyone other than me in order to get research out to you. – Best, Mr. Mortgage

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Mortgage Rates Soar – Fed Better Buy More

Posted on January 24th, 2009 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

Rates have shot up considerably in the past week and a half from roughly 5% at 1 point to 5.5%-5.625% at 1 point to the borrower. This was despite the Fed in the market buying $19 billion in Agency MBS last week. In the months leading up to the Fed announcing their QE plans, rates got under 6% several times — the mid’s 5%’s really is not that great. One would hope that with the Fed in there buying Agency MBS at the pace it is, rates could hold — but they have not been able to. This spike in rates will have a serious impact on the weekly MBA mortgage applications data that come out each Wednesday. My guess is that they are down this Wed and plunge the Wed after next.

Who is the Fed Really Trying to Help

The rate spike goes along with the thinking many (guilty!) have that the only reason the Fed is in there buying MBS in the first place was not to give you and I the gift of lower rates — rather to provide a bid for the Foreign Central Banks and Bill Gross to hit. Agency MBS are time bombs with the underlying loans imploding like private label. Most think that Fannie/Freddie loans are the cream of the crop…the truth is far from it.

As a matter of fact Housing Wire did a great story on it today. If their 90-day delinquencies are rising at 20bps per month and they are in full loan mod mode catching most prior to the 90-day mark, we got big troubles ahead.

The number of mortgages 90 or more days delinquent continued to rise at Freddie Mac (FRE: 0.68 +3.03%) during December 2008, reaching 1.72 percent of the GSE’s total single-family mortgage portfolio, the company reported Friday morning. That’s a jump of 62.2 percent from year-ago levels, and up 20 basis points from a 1.52 percent level reported for November 2008 — not surprisingly, as the nation’s housing woes have spread, Freddie Mac has posted a monthly rise in delinquencies throughout the entirety of last year.

FCB’s and Gross are the very players needed to buy Treasuries. How does the Treasury make it easy for them to sell their Agency holdings and hopefully buy more Treasuries…the Fed comes in the market with a multi-quarter perma-bid — others front-run or try to chase the Fed — and large MBS holders lighten up into the action. We know they were sellers before the Fed jumped in the market. Now we have made it easy for them.

Agency MBS are still not ‘explicitly’ guaranteed rather ‘effectively’ guaranteed while the firms are in conservatorship. This presents a problem especially with the new cramdown legislation on tap. Large Agency MBS holders better hope that .gov takes a firmer stance because if not, this market could see some considerable widening in short order. Remember, present backing is only $100 billion per GSE. Funny, but if they do stand up and back the entire $4.5 trillion GSE MBS enchilada and the cramdown legislation comes through, .gov (taxpayer) will be cramming themselves. Just think the Treasury yield action if .gov decides to ‘explicitly’ back trillions in Agency MBS.

Wholesale (Broker) Mortgage Rate Expo

Below are wholesale Agency =<$417k conforming rates from a few select large-named lenders. Boxed is the rate level that would cost the home owner 1 point in fee. The numbers next to the rate are the ‘cost’ or ‘rebate’ at that particular rate level. For example from Citi at 5.5% for 30-days, the broker gets paid .109% of the loan amount as a fee.On a $400k loan, that would be a little over $400 to be used as commission, to pay closing costs etc.

To get a popular no-point loan, rates are back over 6%. Remember, the rates below are for a perfect 80% LTV, 740 credit score, full-doc borrower. If the borrower has a second mortgage behind the first, a lower score, is pulling cash-out etc the rate can shoot up considerably.

**PLEASE NOTE – I AM MOVING…please look to the right at the top of this site. Enter your email address in the box above ‘subscribe’ or I may not be able to find you after the end of the month.

Below are the adjusters for anything other than a perfect borrower/loan. If the borrower fits within the outlined red box there are no adjustments. Everyone else gets hit. ‘A’ through ‘H’ are cumulative so it is obvious how quickly the rate and fees can get out of control. Two years ago 80% of these adjusters did not exist.

Below are Agency Jumbo to $625k pricing in the mid 6%. Citi has the best pricing but at 1.5 points, it is likely cost prohibitive for most.

The chart below is the past eight months mortgage rates. The last three months show what happens when a market loses its integrity and the government jumps in. And you thought stocks were volatile. This is a perfect shot of one of the reasons lenders are pulling their hair out – rates are so volatile borrowers keep re-applying with lender after lender trying to get the best rate. They better close one quickly – rates are going up.

**PLEASE NOTE – I AM MOVING…please look to the right at the top of this site. Enter your email address in the box above ‘subscribe’.

The last day my site will be hosted at the one and only ‘Mortgage Lender Implode-O-Meter will be at the end of the month. I will be changing my site address but may not have it up by then so if I do not have your address as a subscriber, you may not be able to find me. Feel free to add as many email address as you want my information delivered to.  Your address will never be sold or used by anyone other than me in order to get research out to you.- Best, Mr Mortgage.

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Citi Wholesale Update 1-23

Posted on January 24th, 2009 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

1-23-09 Story Update – while Citi was the headline my alert on Thursday ( link below), the report was more about the demise of large bank wholesale lending showing how Chase and others are leaving or significantly scaling back leaving a wide open playing field for regional and local mortgage bankers to flourish.

I got word from my contact on Friday that the wholesale channel will remain open but cut back the numbers of brokers they have approved by 80%+-.  Wells Fargo just did the same – word is 90% of brokers will be cut off due to ‘performance’ issues. They will implement strict controls over their brokers closely monitoring locking, pull-through and quality. This is all about getting back in control of their deal flow.

As I outlined in many reports over the past two months — as the sector got busy again,  wholesale lending emerged a sloppy, risky mess with a pull through rate of 25-35% across the large name lenders.  This scaling back and focusing on the top 10-20% of brokers action will reduce Citi’s wholesale volume significantly but improve margins over time.  Because of this they may be able to offer better pricing to their remaining approved ‘special children’ brokers.

In theory this will result in more volume out of each broker mitigating the loss of a large percentage of their brokers today.  In a perfect world that is how it is supposed to work — the 80/20 rule…you get 80% of your business from 20% of your brokers so focus on the 20%. The problem with this is that good brokers, those that could become part of the 20% with a little work, and high volume brokers that are sloppy but could change with a little work get cut off.

But in reality lenders do this because they are out of control and losing money. They want to downsize and lay off staff but can’t come out and say that.  Once the volume eases up and they are back in control of their flow, what typically happens is the lender just pockets the extra margin, which upsets their loan officers and brokers.  Then the loan officers quit and take their brokers with them to their new job.  Ultimately the wholesale division shuts down out of frustration going out blaming the loan officers and brokers. I have never seen it happen any other way. – Best, Mr Mortgage

For those of you that did not catch my Chase report and take on where the mortgage industry is headed over the near-term, please see…

What ‘Boom’ is Fannie Gearing up for?

For those of you who think I am crazy with my calls that…the mortgage money is not getting to those who need it; rates really are not that great for most; most can’t qualify due to negative-equity, tightened guidelines and no Jumbo product; ‘funding’ volume is light despite ‘applications’ soaring; pull-through rates are abysmal; and mortgage lending is a mess check out this story that came out last night. Is Fannie Mae gearing up for a refi-boom or foreclosure-boom?

Fannie Mae cutting local jobs

Friday, January 23, 2009, 12:42pm EST  |  Modified: Friday, January 23, 2009, 1:02pm

Fannie Mae, seized by the government last fall, is cutting hundreds of jobs locally.

“We are realigning the company to focus on our primary objectives,” said Fannie Mae spokesman Brian Faith. “We will actually be increasing on personnel and resources in areas that have to do with preventing foreclosures and loss mitigation.”

The company will likely end the year with the same number of employees it currently has, he said.

Many of the new hires will likely be in the Dallas area, where Fannie Mae’s foreclosure prevention efforts are centralized.

Fannie Mae (NYSE: FNM) has about 6,000 employees companywide, the vast majority of which work at its headquarters in the District and two other Washington-area locations.

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Urgent – Information Needed

Posted on January 23rd, 2009 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

I am moving – until my new site is up, I will only be send research via email.

Please look to the right, enter your email address in the box and ‘subscribe’.

NOTE – that the responder sends back a verification email that may go into your spam folder…it will be coming from MrMortgageTruth@gmail.com.

The last day my site will be hosted at the one and only Mortgage Lender Implode-O-Meter will be at the of the month. I will be changing my site address but may not have it up by then so if I do not have you as an email subscriber, you may not know how to find me.  Feel free to add as many email addresses as you want my information delivered to. Your email address will never be sold or used by anyone other than me in order to get research out to you. – Best, Mr. Mortgage

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Citi to Follow Chase out of Wholesale – The ‘Rest’ Are Next

Posted on January 23rd, 2009 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

1-23-09 Story Update – while Citi was the headline of this piece, this report was more about the demise of large bank wholesale lending showing how Chase and others are leaving or significantly scaling back leaving a wide open playing field for regional and local mortgage bankers to flourish.

I got word from my contact that Citi still will keep the wholesale channel open but cut back the numbers of brokers they have approved by 80%+-.  They will also implement strict controls over their brokers closely monitoring locking, pull-through and quality. This is all about getting back in control of their deal flow.

As I outlined in the reports below, wholesale lending is a sloppy, risky mess right now with a pull through rate of 25-35% across the large name lenders  This action will reduce Citi’s wholesale volume significantly but improve margins over time.  Because of this they may be able to offer better pricing to their remaining approved ‘special children’ brokers.

In theory this will result in more volume out of each of them mitigating the loss of a large percentage of their brokers today.  In a perfect world that is how it is supposed to work but in reality what typically happens is the lender just pockets the extra margin, which upsets their loan officers and brokers.  Then the loan officers quit and take their brokers with them.  Ultimately the wholesale division shuts down out of frustration going out blaming the loan officers and brokers. – Best, Mr Mortgage

1-22-09 The word is that Citi is following Chase’s lead and is shutting down their wholesale lending (broker) and much of their correspondent (banker) divisions (not verified by Citi).  My source got word earlier this morning. Chase kept open correspondent by the way.  For those of you that did not catch my Chase report and take on where the mortgage industry is headed over the near-term, please see…

This does not surprise me. This move may not necessarily be a statement about Citi’s health, rather the mess that is the mortgage market. On the other hand, this could also be a sign of something bigger coming than Citi simply exiting the highly unstable wholesale space. Chatter has it that the Obama administration will announce something big this weekend. Some think this ‘something’ is the nationalization of some of the nation’s most troubled financial institutions vs. letting them suck every penny thrown their way into their black liquidity trap holes. Some are saying that Obama will increase the size of the stimulus plan in addition to announcing TARP 2.

There is even speculation that the National ‘Bad Bank’ of the USA will be brought to life to buy up distressed assets from the balance sheets of the nation’s most important banks. However, the latter would likely require much deeper pockets than most think…and I only track the residential side! Additionally, a bad bank buying distressed assets at ‘fair value’ as Sheila Bair said this week could do serious damage to the very distressed asset prices that they are buying and hit hard already battered balance sheets.

Stay tuned. More banks will be shutting down wholesale lending over the near-term which will put a strain on the mortgage market. There is just not the excess capacity through retail or correspondent channels to absorb everyone ‘trying’ to refinance now. There isn’t the warehouse capacity on the mortgage banker side to make a dent either.

At present, application to funding rates (pull-through) is being reported to range between 25% – 35% for the wholesale channel and not better than 50% for the retail channel. Large banks getting out of wholesale will cause all of the applicants who are submitting multiple applications in hopes of getting the best rate; ‘shooting’ for a refi as a last ditch effort before a mortgage mod or defaulting; don’t have a chance of qualifying due to the new sensible underwriting standards; do not have the value necessary to qualify; or think rates are lower than they really are to rush into bank branches swamping them. It will be so it takes three months to get a mortgage done. Already it can take 5-8 weeks when dealing with a well-priced lender.

Mortgage money is not getting to those who need it. For the past couple of months, I have focused on negative-equity, not being able to qualify, lack of Jumbo programs, rates not really being what home owners hear being quoted by the press etc as the reasons why. Now I have to add in…there are not enough loan officers to physically take the loan applications or robust enough processing centers to underwrite and fund the loans. -Best Mr Mortgage

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The End of Large-Bank Wholesale Lending – Time For the Mortgage Banker

Posted on January 16th, 2009 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

The End of Large Bank Wholesale Lending – A Resurgence of Middle Market Mortgage Banking – Chase…a Leading Indicator

This week, Chase shut down wholesale mortgage lending while keeping retail and correspondent lending alive. I believe this hasty move is a result of terrible performance (low pull-though rates and low margin), despite a soaring loan application volume. This may be the first visible sign of how tough the mortgage industry really is right now and how little of this recent surge in loan applications are actually resulting in profitably funded loans.  As a matter of fact, significant losses can occur when a mortgage bank can’t effectively manage its pipeline of locked and in-process loans. Of note, Credit Suisse recently shut down their wholesale division (Lime) in December. The announcement came out of the blue. This was a new operation formed in 2008 and they only handled Fannie, Freddie and FHA loans with no baggage.

This story just out by National Mortgage News points to the gist of this story – just because rates fall and ‘applications’ are up does not mean loans are ‘funding’ banks are making money.  Moves like this are to get better clarity about what in the pipeline is real and what may actually fund. This way they can manage and hedge their pipelines better and potentially pass better rates onto the borrower. I can’t post the entire story because NMN is subscription – sorry:

“As the refinancing boom gathers steam selected residential funders are beginning to charge “rate lock” fees to both consumers and loan brokers, according to industry participants.”

Wholesale is priced better than retail because it is supposed to be easier on the lender by leveraging an army of mortgage brokers to aggregate the necessary paperwork and qualify the borrowers prior to the wholesale lender ever seeing it. Because this makes the loan process for the wholesale lender much quicker and more efficient, they offer below market rates to the broker. This allows the broker to add in their fees while still offering a market rate to the borrower, but wholesale has turned into a very expensive origination channel since rates turned down in late Nov.

The mortgage application/rate lock fall-out, especially on the wholesale side, is extreme due to a) brokers locking and submitting with multiple lenders, trying to get the best rate and the largest commissions; b) appraisals coming in too low and killing the deal; c) borrowers not qualifying for today’s sensible underwriting standards; d) turn-around times being so long that borrowers switch lenders for better rates/quicker funding, creating even longer turn-times;  e) rates not really being what borrowers hear quoted in the news or up-front by the loan officer; f) lack of reasonably priced Jumbo money. Many of these ‘challenges’ also effect the retail channel as well.

If fall out and profitability in wholesale were not a problem, then why not ramp up that division? It is not like they are lending their own money – all loans now are Fannie, Freddie and FHA and sold/securitized post-haste. The primary cost of doing wholesale loans comes from overhead and risk from hedging and buybacks – much of the same as with retail.

We know that based upon primary vs secondary market prices, many banks are not passing through to the home owner all that they could. Instead, they are choosing to make a great deal of money on each loan. Hey, more power to them. But when up to 75% of all wholesale loan applications fall out after submission by the broker, a major problem is affecting the lender’s ability to perform profitably across their entire mortgage platform.

Of course, not all lenders are running a 75% fall out rate, but three that I track closely have relayed to me that they expect wholesale pull-through rates in the bubble states to be about 25-30% in January. Back during the boom when literally anyone could qualify,  pull-through rates were 75-80%. Now even the best lenders are not running greater than 50%. This is one of the greatest challenges affecting the mortgage space in general, with the worst performance coming from the mortgage broker/wholesale side.

Now, back to Chase… Chase’s decision to exit wholesale was simply a choice to do fewer loans more profitably by focusing on retail and correspondent business. On the retail side, banks have better control of their loan officers because they can fire them if they do a bad job with respect to quality and pull through. In addition, most bank loan officers do not broker their loans out so the bank has a better idea of what will actually get funded. This is unlike wholesale, where the bank is always guessing as to what is real, but still has to hedge the deals. On the correspondent side, banks also have better control than with wholesale because their middle market mortgage banker clients must deliver what they commit to and the bank has recourse to make the mortgage banker buy back the bad loans.

I believe other large banks will follow Chase’s lead out of wholesale over the near-term. This will prove bad for the mortgage and housing industry as a whole, as there will be less competition in the mortgage finance arena. When fewer players control the market, rates will suffer as profitability is focused upon.

However, as large banks exit wholesale and focus on retail and correspondent, it will provide a playing field in which local and regional middle market mortgage bankers can flourish. That is, of course, if they can get the warehouse capacity. Fewer banks and more local and regional middle market mortgage bankers slugging it out on their home turf is great for mortgage and housing. -Best, Mr. Mortgage

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Mr. Mortgage: Dec CA Foreclosure Report – Defaults up 100%

Posted on January 14th, 2009 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

December CA Mortgage Defaults Up 100% month-over-month, nearly reach record high

It’s that time again…the monthly foreclosure reports will soon come pouring out and confuse everyone. Later this week, the popular reports from RealtyTrac will come out and show that activity increased, but few will be able to tell you why. Well, here’s the explanation.

By the way, try not to pay attention to anything that is written by anyone other than Diana Olick at CNBC. She does a great job and is one of the few in the mainstream media that live on the same planet as the rest of us.

The mortgage Notice-of-Default (first stage of foreclosure) problem is worsening without doubt. Even with Countrywide and a few others in nearly full moratorium, most banks doing whatever they can to modify pre-existing mortgages and Dec being shortened by the holidays, defaults were still near record highs.

CA’s default jump was so strong that it will lift the national report significantly when it comes out next week.

Monthly Loan Default and Foreclosure Report

The chart below shows monthly aggregate default (NOD) activity from January 2007. This is the first stage of foreclosure. The drop in Sept and Oct was due to CA law SB1137 enacted on Sept 5. It essentially kicked the can down the road 60-days, like all foreclosure moratoria do.

In Dec, NOD’s reached near 42k (up 100%), despite the factors mentioned in the previous paragraph. This does not play well for January, especially if Countrywide and others come out of moratorium.

The chart above shows that Countrywide remains on an NOD moratorium. Add their summer month totals of 6k per month and total CA NOD’s would have been at a record high in the Holiday shortened month of December.

The NOD chart below is the same as above, but by dollar amount. In CA alone, there were $15 BILLION in NOD’s, an increase of more that 90% over the preceding month. This translates into roughly $35 billion nationally. No second mortgages are included here.  Adding Countrywide’s missing $1.5 billion, the default dollar amount would have been at an all-time high.

The chart below shows the actual Trustee Sales that turned into bank REOs. This is the final stage of foreclosure, when the home is seized. Over the past year, at least 95% of all foreclosures have been bought back by the foreclosing entity due to lack of third party interest at the opening bid price.

The drop in Sept was due to SB1137 and wide-spread modification efforts. The number would have spiked in Dec like NOD’s did if FNM and FRE had not gone on Trustee Sale moratorium. Adding back CFC, FNM and FRE, foreclosure counts would have been near record highs like NOD’s.

Additionally, January is typically a big month for Trustee Sales, as banks go to sell the properties they held over from Dec.  Many think banks hold properties from foreclosure in Dec in order to help boost quarterly and year-end earnings. Others think it is a holiday gesture to the home owners. I think the former.  It is not uncommon to see a double digit increase in this data point in Jan.

The chart below shows the number of properties sold to third parties at Trustee Sale on a monthly basis. In Dec, only 830 foreclosures in the entire state were sold at Trustee Sale, with the rest reverting back to the banks as the REOs shown above.  With sales waning, banks’ shelves will start getting packed with REO properties, likely forcing them to price aggressively. This will put further pressure on CA real estate prices.

Best, Mr. Mortgage

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Effective Immediately – No Refi’s For Borrowers with Modified Loans

Posted on January 12th, 2009 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

1/5/09 – EFFECTIVE IMMEDIATELY - Modified Loans are Ineligible For Fannie/Freddie Refi’s, while FHA MAY Be Eligible.

I have not verified this with the GSE’s personally. I have second-hand verification from the GSE’s and first-hand verification from three national Fannie/Freddie seller-servicers in the past week.

In an interesting move that GMAC announced early last week to select correspondents, they will not be accepting any Fannie/Freddie refi’s that have been previously modified/restructured. In my experience, most mods result in one of more of their definitions of ‘restructured.’

A restructured loan or short payoff is a mortgage loan in which the terms of the original transaction have been changed, resulting in either absolute forgiveness of debt or restructuring the debt through either a modification of the original loan or origination of a new loan that results in:

  • Forgiveness of a portion of principal and/or interest on either the first or second mortgage;
  • Application of a principal curtailment by or on behalf of the investor to simulate principal forgiveness;
  • Conversion of any portion of the original mortgage debt to a “soft” subordinate mortgage; or
  • Conversion of any portion of the original mortgage debt from secured to unsecured debt

At first I thought this was a GMAC specific event, but in their note they specifically say “Fannie Mae and Freddie Mac will not purchase or accept delivery of a restructured loan refinance. Therefore, all restructured loans are ineligible for conforming loan financing.”

All Sorts of Consequences

This has all sorts of consequences for homeowners, banks, distressed loan and debt investors, broader refinancing, future loan defaults, walk-aways and foreclosures. It may even give us a glimpse of where this is all going – towards principal balance reductions as the best method of quickly forcing home owners to de-leverage. The intent is to make them free to go sell, buy, refi, save and shop.

As soon as I received this announcement, I immediately inquired with two other large-named Fannie/Freddie seller/servicers last week as to their position. They both told me that they are discouraging originating and underwriting modified loans and that they will only approve modifications in certain instances. They are both planning to make formal announcements shortly.

The word I received second-hand regarding the GSE’s stance is that they will buy these loans as part of large bulk packages from very solvent seller-servicers as part of ‘the greater good.’ This does not matter, however. Knowing that the GSE’s frown upon modified loans, originators will not write these loans out of fear that they could get stuck with them. The last thing they want is to have their pipelines peppered with modified loans and little way of identifying them for bulk sale. The banks will just use the GSE’s ‘greater good’ purchases as a way of dumping toxic loans already in the system.

The GSE’s are now treating loan modifications as toxic, just like they treat a recent bankruptcy or foreclosure. This is happening, of course, as they push their new loan mod initiative that they say will ‘help’ millions of home owners. I would hate to see what they could do if they were out to get you. FHA may insure these borrowers only under certain circumstances, and at extreme risk to the lender’s FHA scorecard (SEE FHA EXAMPLE BELOW). With a 50%+ post-mod recidivism rate being reported, it is not surprising this is happening.

‘Mods in a Box’

As I have written many times before, the ‘mods in a box’ from FDIC and the GSE’s keep borrowers over-leveraged, underwater, renters for life. This is because of the way they are structured with teaser rates, lengthened terms, deferred principal and interest and large balloons. This move from the GSE adds to the pain.  Now, for every loan mod that is done, a homeowner is taken out of the housing and US economic equation for a long time. This is especially bad for those in otherwise good shape with equity in their homes and good credit who only got a loan mod to assist with a large reset etc.  This is just another group in addition to the negative-equity crowd (the majority in the bubble states), who can’t benefit from low rates.

This could also be a big blow to the booming loan modification sector. When home owners are told they have very little choice for financing in the future if they accept the mod, they may think more than twice about it. With few ‘post-mod’ options available, walking away and renting may become a much better solution than being trapped upside down in a home with no hopes of future financing. Remember, many mortgage mods are sold as a way of ‘getting straight’ for a year or two, waiting for the housing market to ‘come back’ and then refinancing into a low-rate prime loan.

Adding insult to injury, most mods also come with pro-lender non-recourse provisions, which keep the borrower from getting rid of the mortgage debt through foreclosure. Add to this that the borrower loses the right to sue the originating lender for predatory lending violations.

Whole Loan or MBS Owners

Banks or other entities that own whole loans or securities derived from them may learn really quickly that old vintage loans are going to stay on the balance sheet for a long time, especially if they go delinquent or default and get modified.  The liquidation or vulture investment strategy of ‘buy distressed loan, modify, label it ‘re-performing,’ then refi or sell’ may not work any longer because the buyers on the other end may not want to hold a mortgage loan in which the borrowers are trapped.

Proactive loan mods that do not re-underwrite the borrower according to what they really earn using time-tested 28/36 debt-to-income ratios, market-rate financing and principal balance reductions just kick the can down the road in the majority of cases.

Loan owners may now find it better to foreclosure quickly and sell the property at today’s prices. This sure seems more prudent to me than collecting years of monthly payments from trapped borrowers with modified mortgages and teaser rates. This is especially true if the loan owner thinks he might have to foreclose years from now when prices may have fallen by double-digit percentages. Banks may realize all of this soon enough and either curtail loan mod initiatives or start liquidating these assets at values consistent with the known risks. There is a thriving market for distressed mortgage assets, including whole loans, REO and MBS, but not at the price points most owners think their assets are worth.

Principal Balance Reductions

Do not be surprised that if over the short-term, the movement goes towards large scale principal balance reductions – partly due to this and partly due to bank-unfriendly cram down legislation that might be passed. Partly due to common sense… it is quickly becoming apparent to the banks and MBS holders what they already knew for a long time — the only way to quickly and permanently ‘fix’ the housing and mortgage markets and consumers’ balance sheets is to undo the bad years of 2003-2007. To ‘undo’ means to:

  • a) force home owner/consumer to de-leverage through mortgage principal balance reductions based upon time-tested 28/36 DTI and what the borrower really earns using market-rate financing
  • b) make it so home owners can freely refinance and sell their homes
  • c) make it so the vitally important move-up buyer comes back
  • d) significantly reduce defaults and foreclosures without making home owners underwater, fully-leveraged, renters for the rest of their life as the present FDIC, Fannie/Freddie and bank mortgage modification plans do
  • e) allow home prices to fall to attractive multiples of rents and incomes without exotic loan programs or artificial, temporarily, government induced low mortgage rates

I am still a big fan of mortgage mods done the right way, as I have written many times.  Some borrower’s may even benefit from the FDIC’s and GSE’s ‘mods in a box.’  There are many private mortgage mod firms out there that do get great results for borrowers. But this sector may quickly turn into an unregulateable nightmare that will hurt thousands of homeowners.

FHA May Not Even be Able to Help

Lastly, most borrowers that are late or in trouble can’t even get traditional FHA financing. Below, GMAC published their rules for funding a modified loan through FHA. Note that many lenders also must have a 580 minimum credit score requirement for an FHA loan. Typically, when homeowners are having mortgage trouble, their score falls below 580.

Best, Mr. Mortgage

 

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FHA Financing Rules for Modified Mortgages

    • The rate and term refinancing of a restructured loan using FHA financing is eligible when any of the following apply:
    • Forgiveness of a portion of principal and/or interest on either the first or second mortgage;
    • Application of a principal curtailment by or on behalf of the investor to simulate principal forgiveness; or;
    • Conversion of any portion of the original mortgage debt to a “soft” subordinate mortgage

Restructured loans in compliance with all FHA eligibility and product guidelines may refinance using any eligible FHA product. The loan may not currently be delinquent and there can be no late payments in the last 12 months unless the Total Scorecard decision is Approve/eligible. The current mortgage lender must provide a letter stating that they will not file a deficiency judgment.

Cash out refinance transactions are not eligible if the loan being paid off is a restructured loan.

GMAC will only provide FHA financing for eligible restructured loans not currently being serviced by GMAC.

Example of an Eligible Scenario – (PRINCIPAL BALANCE WRITE DOWNS)

Example 1

Property Value 2 years ago:

$200,000

Current Property Value:

$150,000

Existing Loan Balance:

$175,000

Restructured Loan Balance:

$125,000

Current mortgage lender wrote off $50,000 of the existing loan balance restructuring the loan. Loan is eligible for FHA rate and term refinance.

This is the closest I have seen to date of a large financial institution endorsing something close to the Hope for Homeowners FHA refi program that requires banks to significantly write down the principal balance in order to qualify. The H4H program was recently changed to allow for 96.5% LTV’s vs the original 90% in hopes it will give note holders extra incentive to write-down the debt. But most lenders don’t want to originate H4H loans because modified borrowers have such a high re-default rate, it puts their FHA scorecard at serious risk. – Best, Mr Mortgage

 

 

1/5 GMAC MEMO TO CORRESPODENTS

A GMAC Bank Correspondent Funding Announcement

CL08-289 Restructured Loan / Short Payoff Policy

 


Overview

GMAC Bank Correspondent Funding (GMACB) Approved Correspondents please take notice; this announcement provides clarification on GMAC Bank’s policy regarding refinancing of loans that have been restructured (short payoff).

 


 

Effective Date

Effective immediately

Definition of Restructured Loan/Short Payoff

A restructured loan or short payoff is a mortgage loan in which the terms of the original transaction have been changed resulting in either absolute forgiveness of debt or a restructure of debt through either a modification of the original loan or origination of a new loan that results in:

Forgiveness of a portion of principal and/or interest on either the first or second mortgage;

Application of a principal curtailment by or on behalf of the investor to simulate principal forgiveness;

Conversion of any portion of the original mortgage debt to a “soft” subordinate mortgage; or

Conversion of any portion of the original mortgage debt from secured to unsecured debt

In many cases, a borrower may not disclose that their existing mortgage loan has been restructured. The credit report may show a restructured loan as “settled for less than owed”. If the credit report does not specify “settled for less than owed”, scrutinize the mortgage balance reported on the credit report versus the payoff balance. If the two balances do not match and the difference is more than unpaid interest or prepayment penalties, the loan may have been restructured

 


 

Agency Loans

Fannie Mae and Freddie Mac will not purchase or accept delivery of a restructured loan refinance. Therefore, all restructured loans are ineligible for conforming loan financing.

 


 

Non-Conforming Loans

Restructured loans are ineligible for non-conforming loan financing.

 


 

FHA Loans

The rate and term refinancing of a restructured loan using FHA financing is eligible when any of the following apply:

  • Forgiveness of a portion of principal and/or interest on either the first or second mortgage;
  • Application of a principal curtailment by or on behalf of the investor to simulate principal forgiveness; or
  • Conversion of any portion of the original mortgage debt to a “soft” subordinate mortgage

Restructured loans in compliance with all FHA eligibility and product guidelines may refinance using any eligible FHA product. The loan may not currently be delinquent and there can be no late payments in the last 12 months unless the Total Scorecard decision is Approve/eligible. The current mortgage lender must provide a letter stating that they will not file a deficiency judgment.

Cash out refinance transactions are not eligible if the loan being paid off is a restructured loan.

GMAC will only provide FHA financing for eligible restructured loans not currently being serviced by GMAC.

Example of an Eligible Scenario

Example 1

Property Value 2 years ago:

$200,000

Current Property Value:

$150,000

Existing Loan Balance:

$175,000

Restructured Loan Balance:

$125,000

Current mortgage lender wrote off $50,000 of the existing loan balance restructuring the loan. Loan is eligible for FHA rate and term refinance.

 

 


 

VA Loans

Restructured loans are not eligible for VA financing.

Questions and Answers

1.    Will this policy apply to buyers acquiring a property through a short sale (original borrower’s mortgage payoff was less than owed)?

No, situations where the property is changing title are not included in this policy and are therefore eligible for Conventional, FHA and VA financing. Whether the borrower for the loan that is being financed through GMAC was through a foreclosure action or short sale has nothing to do with the new borrower.

2.    What if the borrower is selling their current residence with a short payoff and buying a new property? Are there any special underwriting considerations for the new purchase?

Assuming that the credit report shows “paid as agreed” and there is no outstanding balance due, the loan may be underwritten as usual, through Desktop Underwriter.

If the credit report is showing the mortgage loan as delinquent, Desktop Underwriter will take the delinquency into account when underwriting the loan. If Desktop Underwriter approves the loan, you must confirm that the entire lien is paid off and there is no outstanding balance.

Remember, the borrower is financing a new loan, which is not impacted by their previous loan. If Desktop Underwriter approves the loan, the loan is eligible for sale to Fannie Mae.

The same philosophy will apply to manually underwritten loans. If the credit report is showing the mortgage loan as delinquent, the underwriter should take the delinquency into account when underwriting the loan and applying the Comprehensive Risk Assessment. Again, it must be confirmed that the entire lien is paid off and there is no outstanding balance.

3.    What if the credit report and payoff statement don’t match?

A reasonable tolerance between the credit report and the payoff statement is acceptable to allow for such factors as the lag in reporting by the servicer to the repositories, unpaid interest, and prepayment penalties. A payoff statement that is significantly lower than what was taken into consideration at time of underwriting must be reexamined.

4.  What if the borrower discloses a restructured loan, but it is not on the credit report?

If the borrower discloses a restructured loan, regardless of whether it is messaged on the credit report is only eligible for FHA financing.

5.    If a restructured loan is not shown on the credit report as “settled for less than owed” or similar language with the same meaning is the loan eligible for financing?

The loan may only be eligible for FHA financing.

6.     What is the definition of a “soft” subordinate second?

A “soft” second is typically deferred and either forgiven or to be paid at the end of the term or when the home is sold.

Some soft second have a balloon in certain situations, such as if the borrower sells the property. That sort of provision could be construed somewhat like a prepayment penalty – a lender is willing to forgive a portion of the original loan amount, but only with the confidence that the borrower will remain in the property.

The most common examples of soft seconds are employer-sponsored programs (employer-assisted housing), or other programs that meet Fannie Mae’s Community Seconds requirements.

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