$10 billion down, $490 billion to go! So goes the Fed’s program to buy $500 billion in securities backed by mortgages. It has certainly helped conforming conventional rates “tighten” to Treasury pricing. Jumbo conforming, and jumbo loans in general, is another story. That being said, GMAC, for example, has no adjustments for jumbo conforming pricing versus that of “regular” conforming, which is helping many originators. For jumbo loans it seems that most brokers are relying on small regional wholesalers, and hoping that their clients don’t wander in to a local branch of BofA, Chase, Wells, etc.
Whether you spell it cramdown, cram down, cram-down, or CramDown, the subject was in the news last week. Basically Citigroup reached a compromise with lawmakers to allow bankruptcy judges to modify terms of existing mortgages, and industry-wide legislation is probable. Both houses introduced bills allowing bankruptcy judges to permanently reduce mortgage balances to the property’s fair value on principal residences, among other measures. Citigroup’s agreement, in addition to addressing existing mortgages and not future loans, permits bankruptcy modifications as long as filers previously contacted their lender in an attempt to secure a loan modification prior to filing (for new filers) or requesting the mortgage be modified in bankruptcy (for existing filers).
The Mortgage Bankers Association, and others, opposes the issue, due to the many issues that are unresolved and the destabilizing affect on the market. The industry’s concerns are well based. Losses from bankruptcy cram downs could be significantly larger than servicer-driven modifications, and the potential for high plan failure rates could further increase losses and charge-offs without stemming foreclosures or accelerating a housing recovery. Bankruptcy filings could double or more, increasing credit card charge-offs. Some fear a massive sell-off that would worsen valuations, threatening further balance sheet write-downs. Although it is believed that less than 1% of existing mortgages would be impacted, industry experts feel that cram-downs lower whole loan valuations. Since mortgage and home equity loans are, on average, 40% of large banks’ loan books, CramDowns of principal would lower that value, hurting bank equity. Home equity loans are in the first loss position in a cramdown scenario, and it is believed that for many borrowers bankruptcy could become a more attractive option, accelerating default rates.
Switching topics, Fannie Mae has issued Lender Letter 01-2009 to temporarily extend their halt to foreclosures and evictions. The original expiration of the halt was Friday, January 9th, and it was moved out to January 31st. The temporary foreclosure halt now applies to all single-family properties (whether a property is occupied or vacant), secured by a conventional mortgage loan, which have or will have a foreclosure sale date scheduled through January 31, 2009. This extension gives mortgage servicers additional time to begin modifying mortgage loans under the Streamlined Modification Program (SMP), which began on December 15, 2008.
Fannie Mae has also begun testing short sales as an alternative to foreclosures in an effort to reduce that delay and spur sales by agreeing on a price for a home even before a buyer has been found. They have started two pilot projects, which will last 3 months, in Phoenix and Orlando. The test run is limited to properties secured by a Fannie Mae mortgage and serviced by Bank of America’s Countrywide. Only homes already listed at less than the unpaid balance on the mortgage are eligible for the pilot.
Getting back to the current market, Friday’s unemployment data came in about as expected, but certainly confirmed that the jobs market in the United States is grim. The market traded lower immediately following the number but regained its footing and closed at the highs of the week in every issue except the long bond. The Fed can’t lower short rates anymore, and may need to raise upwards of $2 trillion in 2009. “That is a lot of money” would be the understatement of the day. For economic news, we have nothing today or tomorrow, but then December’s Retail Sales data comes early Wednesday morning and is expected -1.1%. Thursday we have the Labor Department’s Producer Price Index (PPI), expected -1.9%, and on Friday we have Consumer Price Index, Industrial Production, and the preliminary reading to the University of Michigan’s Index of Consumer Sentiment. Currently mortgage prices are worse by about .250, and the 10-yr is at 2.42%.