The Mortgage Foreclosure Crisis:
Causes and Solutions
Housing Washington September 29, 2009
Paul Leonard California Director (510) 379-5500
http://www.responsiblelending.org
Center for Responsible Lending
Promoting policies and practices that encourage fair access to credit for low-wealth families Durham, NC Washington, DC Oakland, CA
2
http://www.responsiblelending.org
I.
Foreclosures on the Rise
http://www.responsiblelending.org
A Grim National Picture of Foreclosures Rising foreclosures (Goldman Sachs: 13M) 1.3M new foreclosures since January 1st 2.4M foreclosures in 2009 will impact 69.5M neighboring homeowners, pushing home values down $502B 20% (and rising) of mortgages are underwater
http://www.responsiblelending.org 4
Washington Foreclosure Overview
25,095 new foreclosures in Washington since January 1, 2009 (Mortgage Bankers of America
Delinquency Survey)
34,626 Washington foreclosures in 2009 will impact 1.5M neighboring homeowners, pushing home values down $5.3B (most recent
Center for Responsible Lending analysis)
In Washington, over 1 in 5 borrowers are underwater (First America Core Logic: June 2009).
http://www.responsiblelending.org
5
New Foreclosures Increase
Washington vs. National Foreclosure Starts
1.60
Percent of Oustanding Loans
1.40 1.20
Washington Foreclosure Starts
National Foreclosure Starts
1.00 0.80 0.60 0.40 0.20 0.00
20 03
20 05
20 01
20 02
(Source: MBA National Delinquency Survey)
http://www.responsiblelending.org
20 07
20 04
20 06
20 08
20 09
6
Washington Concentrated Foreclosures
June 2007
Source: Lender Processing Services Inc. Applied Analytics & FRBSF Calculations
http://www.responsiblelending.org
7
Washington Concentrated Foreclosures
June 2008
Source: Lender Processing Services Inc. Applied Analytics & FRBSF Calculations
http://www.responsiblelending.org
8
Washington Concentrated Foreclosures
June 2009
Source: Lender Processing Services Inc. Applied Analytics & FRBSF Calculations
http://www.responsiblelending.org
9
More Trouble Brewing
http://www.responsiblelending.org
10
II.
How Did We Get Here?
http://www.responsiblelending.org
Mortgage Meltdown: Key Factors
Dangerous products and practices inflated the price bubble Wall Street securitization created fragmented market, demand for high cost loans Regulators and policymakers asleep at the switch Housing led-recession
http://www.responsiblelending.org 12
Dangerous Products and Practices Failure to assess borrower’s ability to repay Prepayment penalties Broker yield spread premiums (kickbacks) Predatory lending
http://www.responsiblelending.org
13
Dangerous Products and Practices: Increased Chance of Default
Loan Characteristic ARM
Increased Likelihood of Foreclosure1 72% (117% for 2003 vintage) 52% 29% (64% for 2003 vintage)
Prevalence in Market in 20072 77% (90% were to reset in 3 yrs) 70% 37%
Prepayment Penalty No or Low Documentation
1 - Losing Ground, Center for Responsible Lending, Dec. 2006. 2 - Average share of the feature in 10 mortgage backed securities offerings in the first half of 2007. For more details see Testimony of Mike Calhoun Before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, - Subcommittee on Housing, Transportation, and Community Development, June 26, 2007.
http://www.responsiblelending.org
14
Snapshot of WA Loans: Prevalence of Risky Loan Features
Washington Mortgage Loans (As Of May 2009): Types & Features
Subprime Loans Number Adjustable Rate Prepayment Penalty Negative Amortization Interest Only Low Doc/No Doc Late Pmt. Last 12 mos. 90+ Late or in Foreclosure Percent reset/recast already % Reset/Recast Next 24 mos. % Reset/Recast 24+ mos. 46,086 (1.7% of all 2.7m housing units) 67% 39,886 (87%) 18 7,918 (17%) 27% 59% 26% 23,763 (52%) 12% 4.9% Alt-A Loans 57,874 (2.1% of all housing units) 55% 17,458 (30%) 9,764 (30.12%) 18,610 (34.5%) 66% 27% 11% 9,258 (16%) 20% 38.8%
Snapshot of Washington Non-Prime Loans outstanding as of May 2009, LoanPerformance data provided by NY FRB, available at http://www.newyorkfed.org/regional/subprime.html
http://www.responsiblelending.org
15
Risky Lending Does Not Increase Homeownership
Subprime Lending: Projected Net Loss in U.S.: 930,000 Homes
500 250 # h o m e o w n e rs (0 0 0 s ) New Homeowners 0 98 -250 -500 -750 -1,000 99 00 01 02 03 04 05 06 Projected Foreclosures Cumulative Homeownership Gain or Loss
http://www.responsiblelending.org
16
Broken Regulatory System
Federal agencies’ failure to act Preemption of state law Federal interference with state regulatory enforcement
http://www.responsiblelending.org
17
Housing Led-Recession
Housing Bubble Bursts Unemployment
http://www.responsiblelending.org
18
Washington’s House Values Continue to Decline
FHFA House Price Index (formerly OFHEO)
190 180 170
(2000=100, quarterly)
Washington
FHFA House Price Index
160 150
United States
2000=100
140 130 120 110 100 90 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Federal Housing Finance Agency (formerly OFHEO)
http://www.responsiblelending.org
19
Most Metro Areas Also Experiencing Declines
FHFA House Price Index (formerly OFHEO)
210
(2000 = 100, quarterly)
Tacoma
190
Seattle
FHFA House Price Index
170
Spokane
2000=100
150
Yakima
130
110
90 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Federal Housing Finance Agency (formerly OFHEO)
http://www.responsiblelending.org
20
Unemployment Rate in Washington Mirrors National Trends
10.0 9.0 8.0
Unemployment Rate
7.0
Washington
6.0 5.0 4.0 3.0 2.0 1.0 0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
United States
Recession
Source: Bureau of Labor Statistics
http://www.responsiblelending.org
21
III. Loan Modification Efforts to Date Come Up Short
http://www.responsiblelending.org
Nationally, Loan Mods Dwarfed By Homes at Risk
http://www.responsiblelending.org
23
Similar Pattern in Washington
80,000 Foreclosure Starts 60+ Days Delinquent 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0
Q1 Q1 Q4 Q3 Q1 09 20 20 Q2 Q3 Q2 Q4 07 08 08 07 07 07 20 20 20 08 20 20 20 20 20 08 09 Q2
N um ber of H om e Loans
Loan Modifications Completed
Sources: MBA National Delinquency Survey, Hope Now
http://www.responsiblelending.org
24
Servicers Slow to Reduce Payments
OCC/OTS Mortgage Metrics Report 2009Q1
http://www.responsiblelending.org
25
“Better” Mods Reduce Redefaults
Re-Default Rates of Loans Modified in 2008 by Changes in Payment (60 or More Days Delinquent)
3 mos. after Modification Decreased by 20% or More 14.7% Decreased by 10% to Less than 20% Decreased by Less than 10% Unchanged Increased 17.3% 19.9% 43.7% 30.8% 6 mos. after Modification 24.3% 28.8% 36.1% 54.4% 50.0% 9 mos. after Modification 27.7% 35.2% 43.0% 55.3% 57.7% 12 mos. after Modification 37.6% 42.1% 47.4% 58.8% 56.2%
Source: OCC and OTS Mortgage Metrics Report, First Quarter 2009 at 32.
http://www.responsiblelending.org
26
Existing Obstacles to Voluntary Modifications Insufficient Servicer Staffing/Technology Lack of servicer regulation and leverage Misaligned Financial Incentives for Servicer Limits of Pooling and Servicing Agreements/Risk of Investor Lawsuits Piggyback Seconds Pre-emption (servicing is highly concentrated)
http://www.responsiblelending.org
27
IV. Obama: Making Home Affordable Program
http://www.responsiblelending.org
Making Home Affordable Programs
Designed Combination of Carrots & Sticks Modifications
Voluntary Incentive-Based Modification Program Bankruptcy Reform Refinance Program
http://www.responsiblelending.org
29
Making Home Affordable Modifications
Eligibility
Loans originated on or before January 1, 2009. First-lien loans [later added parallel program for 2nd lien loans] Verified owner-occupied properties Loan balance ≤ $729,750 (higher for 2-4 unit properties). Must fully document income, and sign affidavit of financial hardship. In default or at imminent risk of default. Now thru December 31, 2012 (one mod only per loan)
http://www.responsiblelending.org
30
Making Home Affordable Modification
Affordability Standard: 31% of Gross Income Incentives
Servicer Incentives (after 90-day trial period): up to $3,500 Borrower Incentives: monthly payments, up to $1,000/year for 5 years if current; goes to pay principal Lender/Investor Incentives: $1,500 payment for each modification made prior to a delinquency and payments to offset probable losses from home price declines
No Sticks
http://www.responsiblelending.org
31
Slow Start to MHA Mods
as of August, 2009
Goals: 3-4 Million total; 500K by Nov 1. Results:
360,165 trial mods, only 12% of eligibles Most from GSEs
Broad performance disparity among servicers: Leaders: – JP Morgan Chase: 33% – CitiMortgage: 31% Laggards: – Wells Fargo: 11% – Bank of America: 7% Participation: 47 servicers covering 85% of market.
http://www.responsiblelending.org 32
Home Affordable Refinance Program (HARP) Eligibility
Owned or Insured by Fannie or Freddie Current on mortgage payments Refinance up to 125% of current value
Results:
Refinance boom since February: 3 million Limited activity under HARP
http://www.responsiblelending.org
33
V.
What Else Can Be Done?
http://www.responsiblelending.org
More Foreclosure Relief: Federal Options Federal Bankruptcy Reform
Level Playing Field for Primary Residence Mortgage
Consistent treatment for 2nd homes, yachts but not for primary residences
Zero cost to taxpayers Narrowly targeted; limited judicial discretion Structured to prevent attractiveness: can only be the last option for homeowners Incentive to servicers to modify outside bankruptcy
http://www.responsiblelending.org
35
More Foreclosure Relief: State Options
States control foreclosure process States regulate servicers Bring legal actions: State Attorneys General have track record of aggressive mortgage enforcement
http://www.responsiblelending.org
36
Preventing Another Crisis: Needed Federal Reforms Create strong, independent Consumer Financial Protection Agency
Consolidate Consumer Rulemaking and Enforcement Eliminate Federal Preemption Standards for Clear Disclosures
Strong Predatory Lending Reforms Secondary Market Safeguards Credit Rating Agencies
http://www.responsiblelending.org 37
Preventing Another Crisis: State Reform
Require careful underwriting for all home loans Ban predatory practices Prepayment Penalties Yield Spread Premiums Steering Establish common sense duties for mortgage brokers Maximize state enforcement resources
http://www.responsiblelending.org 38
Contact
Paul Leonard California Director Center for Responsible Lending Paul.Leonard@responsiblelending.org 510-379-5500 www.responsiblelending.org
http://www.responsiblelending.org
39