$300 Billion in Exotic Mortgages Now Available

Posted on November 20th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage - News Picks of the Day!

FHA is now New Century, IndyMac, Wamu, Lehman and Countrywide all rolled up into one.

The failed $300 Billion Hope For Homeowners (H4H) program that the markets heralded when it was announced this summer is getting revamped. This is because it was a bad idea in the first place – only 100 applications have been submitted as of Oct 1st. Hear that?!? 100 applications. 100 freaking applications! Its no wonder why there is no faith in the solons actions.

Remember Dodd and Schumer pumping this with all they had?  If they would have just called me, I would have told them it was fundamentally flawed – I wrote about it several time.  Now this is just more tax payer money already ear-marked that they will spend however they want. Their choice is to spend the money on more bad loans. Remember, borrowers who participate in this program are in default already at other banks.

Part of the new plan is to buy worthless second mortgage paper from the banks. This is because part of the reason H4H was not successful is because second mortgage holders don’t want to write down their loans in order to make the new first mortgage work. Humm – so how do they fix this little problem??? You got it – pay off the banks.

Second mortgages are basically unsecured credit cards and widely unsecured by virtue of the home prices falling below the amounts of the total first and second loan amounts. I am sure the banks love this one especially if FHA pays face value. Even Bernanke told the House these loans are worth as little as a nickel. FHA buying second mortgages from banks balance sheets opens the doors right up for massive problems.

The reasons for the H4H failure are simple – banks do not want to participate because they have to write first mortgage principal balances down too much and waive second mortgage liens. Getting a bank to waive principal is next to impossible as you know. That is the primary reason that every foreclosure prevention plan brought forth has failed thus far. Additionally, borrowers simply don’t qualify without exotic-type loan programs.

FHA WILL NOW BE THE BIGGEST EXOTIC, HIGH LTV and HIGH DEBT-TO-INCOME RATIO lender around.

Actually folks, because FHA is a government agency you and I are taking the hits for all the losses to come from this program.  If this style of lending caused the great mortgage and housing meltdown in the first place, why would issuing new loans in the same manner to previously defaulted borrowers have a different outcome?

Once again the government is changing the rules to bailout the banks – see underlined sentences in bold below. This program does waive principal which I condone, but with high housing debt-to-income ratios, 40-year terms, and near 100% LTV’s allowed, borrowers are better off renting.  When the value of their homes drop another 25-50% in the next two years, they will walk away and rent anyway.

The mortgage and housing crisis can be solved. It will be a painful and expensive process but it is far better than the alternative and throwing $300 billion of sh** against the wall every month to see if it sticks. I write about it in yesterday’s The Great Mortgage Modification PUMP – GOD SAVE US ALL – Best Mr Mortgage

FHA Help for Homeowners Changes:

Source: Housing Wire

“Clearly, meaningful changes were needed,” Preston said. “These modifications should increase lender participation and help more families who are having difficulty paying their existing mortgages, but can afford a new affordable loan insured by HUD’s Federal Housing Administration.”

“Expanding the eligibility criteria and making the program less expensive for both the borrower and the lenders will allow us help more borrowers,”

“These changes, including increasing the loan to value ratio, extending the term to 40 years, and allowing for upfront payments to subordinate lien holders, are all improvements which should make the program more accessible and attractive,”

  • changes include increasing the loan to value ratio (LTV) from 90 to 96.5 percent
  • reduces the gap between the existing loan balances and the new H4H loan and decrease losses to the existing primary lienholders (banks)
  • Another change to the program involves simplifying the process to remove subordinate liens by permitting upfront payments to lienholders (buying second mortgages from banks)
  • change will allow lenders to extend mortgage terms from 30 to 40 years, possibly reducing borrowers’ monthly payments enough to make it possible for them to qualify

More Mr Mortgage

19 Responses to “$300 Billion in Exotic Mortgages Now Available”

  1. Mr. Mortgage u get no credit for Knowing more than Dodd and Schumer, 2 of the biggest frauds in Congress

  2. From the article on Housing Wire:

    “Expanding the eligibility criteria and making the program less expensive for both the borrower and the lenders will allow us help more borrowers,” said John Courson, COO of the Mortgage Bankers Association, in a media statement Wednesday. “By agreeing to immediately compensate subordinate lienholders, HUD is providing additional incentive for those lienholders to release their liens, which will free more borrowers to access the Hope for Homeowners Program.”

    The first part of this quote is confusing. How does increasing the DTI ratio required to qualify make this program less expensive for the borrower? And I don’t understand what is meant by “agreeing to immediately compensate subordinate lienholders”? Were subordinate lienholders NOT allowed to be immediately compensated before? Who pays the junior lienholder? Was the junior lienholder not accepting money previously?

    Robert Davis of the American Bankers Association said, “Both HUD and the Congress, which authorized these changes, are to be commended for acting quickly to address borrower and industry concerns and to make these improvements to the program in such a timely manner.”

    When a member of the ABA publicly endorses the plan, you can pretty much guarentee that this is a change which helps the banks, not the homeowners. Proceed with caution.

  3. Does this still require a realistic appraisal? Is face getting paid for 2nds? If so–outrageous! I guess the Buffett connection is paying off for Wells.

    “Disgusting”, as Mozilo might say.

  4. Is there any way to short FHA?

  5. Oh, and don’t forget that the usual suspects are rushing to revive 100% financing, subprime lending at FHA, with HR 6694.

    Do people ever learn (especially Congress)?

  6. This is really an outrage. It is another gift to the banks being delivered in the shadows, even larger than the gift last month when Treasury gave banks who acquire other banks with losses on their books a big fat tax break. It is ironic that this latest $300B restyled give-away is being delivered in the same week that the Congress exhibited so much angst over the question of whether to give the auto industry a paltry (!) $25B.

  7. MM, keep it up. The your insight and analysis is numero uno!!

  8. Mr. M.

    Thanks for yesterday’s ‘revisit’ chart, and for this. This new rule change mostly speaks to the miserable state of the banks.

    JAllen

  9. The solution to all of this relatively simple, if they would modify the first loan program to allow the refinance in a bankrupcty, the consumer could file a chapter 13, strip the lien off as wholly unsecured and then put the new refinance first in as part of the plan. It is about working within the current system and making allowances for the current system. Chapter 13’s are reorganizations and FHA needs to adapt. It is just flat out dumb to pay off the seconds when their lien is easily stripped in a Chapter 13 bankruptcy and they get zero.

  10. The ability of “upside down” borrowers to walk away must depend somewhat upon whether they reside in a state with recourse or non-recourse loans. Even California permits lenders to seek a default judgement in some circumstances, depending upon how the lender proceeds.

    This is why I always have believed that the bankruptcy “cram down” is essential for avoiding some of the terrible economic inefficiencies of foreclosure. We have to endure the pain of deleveraging, but some foreclosures may be avoidable. The threat of a bankrupcy could help many borrowers, even if they don’t actually file. The servicers, as we have seen, will be unwilling to get serious about workouts unless they are compelled.

    Can you comment on the recourse vs. non-recourse situation? What fraction of US mortgages are recourse loans? Are California lenders making attempts to proceed in such a way that they can obtain default judgements when proceeds are inefficient?

  11. What is the impact of many ARMs actually resetting lower? Not all ARMs were tied to LIBOR many were tieed to Treasury notes.

  12. FDIC-Opinion November 2008

    http://www.fdic.gov/news/news/press/2008/pr08117a.pdf

    Ok-Here goes the facts:
    Remember these are just a limited few of the golden nuggets this thing includes.

    1) FDIC states banking institutions can set their own guidelines on LTV’s, as to which collateral valuation method they are required to use. Approved methods are Appraisal, AVM, or Tax Assessors Opinion.

    2) FDIC states qualifications for thos performing collateral evaluations can be lendding professionals, real estate salespeople, and forresters. PDF p.32

    3) Although NOT REQUIRED, an institution may use a state certified or licensed appraiser to perform evaluations.

    Conclusion: The new requirements and lending guidelines are being put into the banks hands for their own internal evaluation methodology and quality control. Firrea was changed to eliminate the requirement that ALL real estate transactions would require an appraisal completed by a state licensed/certified professional. Add all these new statements, opinions, and the current lending environment changes together and I will let you draw your own conclusions. Accurate appraisals will only hurt this program and will be eliminated totally in the next 6 months. See HVCC agreement between Fannie and Freddie. this whole mess came on us by banksters putting the screws to honest appraisers and now you get 3rd party appraisal vendors ordering ALL appraisals as of Jan. 1,2009. These 3rd party vendors keep 50% of the appraisal fee and now you will have the least qualified professionals evaluating your biggest asset. Honest appraisers cannot make a living at $125 per order. Honest appraisers cannot do more than 1 appraisal per day and do a good thorough job. Thats $15 per hour with NO subsidized office lease, NO 401K, and NO Benefits. Most appraisers have to make $15-20K just to cover the cost of data, E&O/Health Insurance, and the IRS. Thats 160 orders out of 300 working days. That leaves 140 days to make $17,500 in profit. I will be finding a new career and the Gov’t and banks will be getting what they are willing to pay for. $hit Work…..That’s what they have been wanting for the past 10 years anyways. See Country Wide, Golden West, Indy Mac, and more at Mortgage Lender Implode-O-Meter.

  13. Here is the irony of it all.

    We get a huge wasteful package like this 300 billion mortgage bailout that provides no jobs and ensures that we will be kicking asset recovery down the road at depression price bottoms. At the same time, they wont throw 25 billion at the auto industry. Granted that throwing 25 billion at the auto industry is kicking THAT CAN down the road, but in this instance, kicking and giving the a time out could have been the head and shoulders play. Congress might be taking the right approach to the auto industry, but not at this critical moment in history. Here is why.

    This is what is on the American mind: Am I going to have a job? Am I going to get a pay cut? Is everything going to be OK?

    This is the American economy: Consumerism is 70% The economy is thus determined by the buying mood of the public.

    The right play in this situation then is not whether bailing out the auto industry has merit in the business sense, but which choice will boost consumer confidence. The right decision in my mind is which choice puts us closer to “Everything is going to be OK”. In this sense congress failed by pushing off for a decision to December 8th….and maybe if then.

    Why is stalling a decision right now wrong from a timing perspective? We have now negatively impacted the start of the Christmas shopping season. Not only is it the start of the shopping season, but it includes Black Friday, often the busiest shopping day of the year. Now why is that important? Because right now people are paying close attention to the economy. People, the actually really important people in American society (consumers and business people) will be judging this critical first week to evaluate the future of the Christmas season. That my friends means how much money people will spend and whether employers should follow through with layoff plans.

    What is Wall Street going to do? Wall Street is going to look at first week numbers and say Sell!, Sell!, Sell!, Sell!, Sell!. What is the consumer going to do? They are going to look at Wall Street numbers and say OMG, things are even worse than we thought, and then they are going to tighten their wallets further! Is this what we need in these tough economic times? Are we not creating and snowballing our own fate? Instead of plugging a hole in the dyke, Congress just inadvertently strafed the face of the dyke with a 50 caliber machine gun.

    While Congress has suddenly zeroed in on a tree to show “tough on spending taxpayer dollars” and mircroing in on tin cup and private jet issues, they inadvertently just tossed a dozen incendiaries onto the forest! This is the part where I stand back in amazement. They could have chosen this critical moment to throw some water on the fire of the US economy. Instead, they just fanned the flames of negative US consumer sentiment.

    So while we have these issues that US auto makers make crappy cars, that auto workers are overpaid, that the big three will fail anyway, there is the other side to the issue. The other side is millions of jobs, how consumers feel about future, employment prospects, how that translates into consumer spending and the American economic engine. If the American economy was running on six out of eight cylinders, we might have just started a chain reaction that is going to chop it to five.

    Americans would have probably have been OK with it if congress had recognized this “critical slice of time”, agreed to fund the autos into the Obama administration and thrown that onto Obama’s first 100 days.

    Now lets go back to the tough stance on spending tax dollars on the autos (real jobs and lots of them) verses the no jobs and mortgage help banker plan. The banker plan includes other liens to get paid off, seconds. Does this also include equity tap credit cards? If it does, I am really pissed! What about those no down payment 20% seconds that the banks FOOLISHLY did? If we are going to do that, lets wipe out 100% of the common shareholder of the banks first. After all, the shareholders elect the BOD who elect the CEO’s of the banks. If the shareholders did not elect the right BOD that was going to look out for their interest, too bad for the shareholders. Is Wells Fargo a Buffet play? Too bad for Buffet huh?

    If we are going to be paying off stupid banker seconds, OK but wipe out the common holder of the banks first, wipe out the bond holders second, and then after everyone who foolishly invested in a bank has been exhausted, then handle second payouts in a mortgage mod plan. If the bankers took that risk, the cost has to be 100% passed off to the bank until all avenues are exhausted and then tap the pocket of the taxpayers, not before.

    If I could draw a cartoon right now this is what it would be. A burning forest in the background labeled “economy”, three autos with a tree growing out of the roof, and three blindfolded congressmen throwing buckets of water on the autos. A fourth congressman would be chopping down the tree labeled consumer sentiment.

    Thus we conclude yet another chapter of the way things are, as viewed from the eyes of Bertdilbert.

  14. Is there a resource on the net (like from Mr. Mortgage) that shows real world examples of how this effects the people under water? And how this affects taxpayers “helping” these people who are under water?

    Scenario:
    Family of 5, total annual income of family is $100,000
    Family bought a 2700 sq ft home in Northern California for $565,000 (2005 or 2006’ish)
    10/1 I/O @ 6.25% for $435,000 on the 1st – $2800 /mnth (Interest & escrow)
    P&I 15yr balloon @ 7.25% for $100,000 on the 2nd – $675 / mnth (P & I)

    $535,00 outstanding in mortgages

    Total monthly payment about $3475

    Now say there is $40K in CC debt – $950 / mnth payment(s)
    Lease payment on a bimmer: $450 / mnth
    Monthly unsecure debt: $1400

    Monthly Income: 8333
    Monthly combined debt (Mortgage / Unsecure): 4875

    DTI: 58%
    Mortgage DTI: 41%

    Scenario: House is only worth $385,000 as of today, value still in decline

    What resources on the Net are available to explicity explain what the outcome of this family will be?

    Knowing that the family should contact a CPA, lawyer and possibly the cali gov assistance program(s) for help.

    Also, are the outcome for this family different if the family lived in Florida, Nevada, Washington State, New York or Arizona?

    By my made up statistics, there are at least 450,000 families in this scenario at this moment in time across our nation. That is 2.25 million people that the lies have affected over the last 8 years and that us taxpayers are forced to bailout.

  15. It is happy to see your posting. Yes really informative article. I will tell this information again to my friend, oh yes I suggest you to check my blog on http://www.top-mortgage.blogspot.com , I hope the article on my blog will be usefull for you… and we can share each other. thank you… 😉

  16. To sorta paraphrase something I’ve heard before…

    Isn’t it insanity to keep doing the same thing over & over and expect a different outcome?

    This time it’s different…;)

  17. Love your insightful reporting and analysis.

    If you have a chance to do some more videos, that would be great!

    Thanks,

    Darrell

    http://www.AlwaysMakingMoney.com
    ——————
    Learn From Experts, Increase Your Wealth

  18. Wow….Just read the article on Counterpunch.org–titled, “The TWO TRILLION DOLLAR BLACK HOLE”…

    Thought it was an excellent breakdown of the bailout madness, although after reading it, I am so angry that our govt. is continually lying to us about the true state of the financial system!!

    WHY is no one in Congress asking these questions and DEMANDING ACCOUNTABILITY, especially regarding the crapp collateral accepted??

    Mr. Mtg., do you care to comment?? Would love to get your two cents….

    Here is a snippet–

    Outcome 3 is the most fascinating area of departure from the classic Ponzi scheme. Legal authorities have, indeed, examined the books of these firms, except for one area we’ll discuss later. They found worthless assets along with debts hidden off the balance sheet instead of real depositor funds. Instead of arresting the perpetrators and shutting down the schemes, Federal authorities have developed their own new schemes and pumped over $2 trillion of taxpayer money into propping up the firms while leaving the schemers in place.

    Equally astonishing, Congress has not held any meaningful investigations. This has left many Wall Street veterans wondering if the problem isn’t that the firms are “too big to fail” but rather “too Ponzi-like to prosecute.” Imagine the worldwide reaction to learning that all the claptrap coming from U.S. think-tanks and ivy-league academics over the last decade about efficient market theory and deregulation and trickle down was merely a ruse for a Ponzi scheme now being propped up by a U.S. Treasury Department bailout and loans from our central bank, the Federal Reserve.

  19. Check the link out, which reflects Citi’s off balance sheet assets.
    http://www.bloomberg.com/apps/data?pid=avimage&iid=iotLcq3doU6I

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