Government Modification

Executives of two of the nation’s largest banks, Chase and Bank of America, testified in Congress this morning that as many as 85 percent of delinquent mortgages are failing the Administration’s loan modification process because homeowners haven’t made trial payments or have failed to supply the necessary documentation to support their claims.

In the case of Chase, as few as two percent of eligible homeowners have received permanent reductions in their mortgage payments to help them stave off foreclosure.

“We are now working very hard to convert homeowners to permanent HAMP modifications, but we are facing challenges with borrowers completing documentation or making trial plan payments as agreed,” said Molly Sheehan Senior Vice President for Housing Policy, JPMorgan Chase. Chase has offer to modify 199,033 loans, 16,131 are approved for permanent modifications but only 4302, or two percent, have been permanently modified

Of every 100 Chase borrowers accepted for the program, only 15 will receive lowered monthly payments. 29 borrowers did not make all required payments under their trial plan, 20 borrowers did not submit all documents required for underwriting; 31 customers submitted all required documents but the documents do not meet HAMP underwriting standards which could be due to missing signatures or documents that are not current under the HAMP rules; and 20 borrowers completed all required documents and are eligible for underwriting.

Of the 20 borrowers who made all payments and correctly supplied documentation, four borrowers have been or likely will be denied a permanent HAMP loan modification, but may be qualified for other modification programs through Chase or the GSEs; 16 borrowers are or likely will be approved for a HAMP modification; and of those 16, 15 have or will likely receive a payment reduction, she said.

Documentation required for the program may include household income from several people, tax returns or tax transcripts from the IRS, credit reports, property valuations, divorce decrees, death certificates, and overtime or bonus information from employers.

Jack Shackett, credit loss mitigation strategies executive for Bank of America, said that 50,000 of the 65,000 Bank of America customers in the program have failed to provide documentation. The 15,000 who supplied correct documentation are experiencing a good conversion rate.

Shackett urged the government to find a way to accommodate borrowers who have their applications in by the program’s December 31 deadline but who have not yet signed the final modification document or who are still responding to questions about their applications.

“While there have been stories of servicers making it difficult for borrowers to submit the necessary documentation, one has to consider the flip side of the argument. Borrowers may claim servicers are making it difficult to obtain documentation when, in fact, they may just simply be hoping that the permanent modification will be approved without full documentation,” said Anthony Sanders, professor of real estate finance
at George Mason University.

An explosion of foreclosures will result from option ARMs set to reset to higher payments.

NEW YORK (CNNMoney.com) — Option-ARMs: File under, “It sounded good at the time.”

These exotic mortgages allowed homebuyers to come to closing with little cash and choose, monthly, how much to pay: interest and principal, interest only, or a minimum amount less than the interest due.

Of course, the last option is the one 93% of option-ARM buyers selected, according to a new report released this week by Standard & Poors.

But eventually, everyone has to pay the piper.

Nearly all of the 350,000 option-ARM borrowers owe more than when they first bought their homes thanks to the unpaid interest accumulating. And many loans written during the first big wave, which started in 2004, are getting ready for their five-year reset, when they become standard amortizing loans. Additionally, some newer loans will reset early if the accumulated interest has pushed the loan-to-value ratio above 110% to 125%.

That means borrowers are about to start paying very hefty prices for their homes. In one scenario outlined in the S&P report, the payment on a $400,000 mortgage jumps from $1,287 to $2,593.
25% default rate

But that doesn’t just spell bad news for borrowers. Some industry pessimists say the looming default problem could have the power to derail the nascent housing market recovery. “The crux of the matter is that as soon as these mortgages recast, the history is that they will default,” said Brian Grow, one of the S&P report’s coauthors.

And the newer the loans, the worse they will perform, the report said. The last year that any option-ARMs were issued was 2007. In the first 20 months after issuance, this vintage of option-ARMs had an average default rate of just over 22%.

That includes all option-ARMs issued in 2007. But if you calculate default rates for only 2007 option-ARM borrowers who are now underwater, the default rate jumps to 25% after just 20 months, according to S&P.

So, while there may not be an awful lot of these loans out there, their high default rates will have an outsized influence on housing markets, adding to already bloated foreclosure inventories and driving prices down further.
Bubble markets

And the markets where they’ll produce the most foreclosures are still among the most vulnerable in the nation.

Option ARMs were most popular in bubble markets — California, Nevada, Florida and Arizona — where double digit home annual price increases put the cost of buying a home out of reach.

In fact, 60% of these loans went to residents of California and other Western states, places where prices have fallen the most, according to report coauthor Diane Westerback. “The geography is negative for these products,” she said.

Many borrowers in these places could only afford a home if they chose the option ARM. Many counted on continued hot market conditions to add value to their homes. The extra equity could then be tapped to pay their bills.

We all know how that worked out.

Home prices in many of the markets where option ARMs are most concentrated have fallen 30%, 40% or more. When the loans recast, most borrowers will find themselves severely underwater.

“Because borrowers of [options ARMs] are in a much worse position,” said Westerback. “You’ll see defaults rising very rapidly.”

And most option ARM borrowers will not be good candidates for refinancing or mortgage modifications because their loan-to-value ratios will be far too high. Under the administration’s Making Home Affordable program, for example, mortgages with balances that exceed 125% of the home’s value are not eligible for help.
Not so white lies

There is another little problem that many option-ARM borrowers seeking refinancing would face: “Upwards of 80% of were stated-income loans,” said Westerback.

These are the so-called “liar loans” in which lenders did not verify that borrowers earned as much money as they said they did. Lenders may not be able to modify mortgages because many of the borrowers’ income could not stand up to the scrutiny. Borrowers may also not want to go through underwriting again because they could be held legally liable for deliberate inaccuracies on their original applications.

Add to those conditions the still fragile economy and high unemployment rates, and you have a recipe for disaster. To top of page