The Mortgage Foreclosure Crisis Causes and Solutions

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					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

                http://www.responsiblelending.org             2
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

                              1.40
Percent of Oustanding Loans




                                        Washington Foreclosure Starts

                              1.20
                                        National Foreclosure Starts
                              1.00

                              0.80

                              0.60

                              0.40

                              0.20

                              0.00
                                                 03




                                                                           05




                                                                                                           07



                                                                                                                  08



                                                                                                                         09
                                01



                                       02




                                                             04




                                                                                          06




                                                                                                                       20
                                     20



                                               20



                                                           20



                                                                         20



                                                                                        20



                                                                                                         20



                                                                                                                20
                              20




                                                             (Source: MBA National Delinquency Survey)




                                                      http://www.responsiblelending.org                                       6
Washington Concentrated Foreclosures
                                      June 2007




                                    http://www.responsiblelending.org
    Source: Lender Processing Services Inc. Applied Analytics & FRBSF Calculations
                                                                                     7
Washington Concentrated Foreclosures
                                   June 2008




                                   http://www.responsiblelending.org
   Source: Lender Processing Services Inc. Applied Analytics & FRBSF Calculations
                                                                                    8
Washington Concentrated Foreclosures
                                   June 2009




                                   http://www.responsiblelending.org
   Source: Lender Processing Services Inc. Applied Analytics & FRBSF Calculations
                                                                                    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                        Increased Likelihood of                        Prevalence in Market in
                                                   Foreclosure1                                      20072
ARM                                                     72%                                           77%
                                               (117% for 2003 vintage)                        (90% were to reset in 3
                                                                                                      yrs)
Prepayment Penalty                                              52%                                           70%
No or Low                                                29%                                                  37%
Documentation                                   (64% for 2003 vintage)

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                                   Alt-A Loans
            Number                           46,086 (1.7% of all 2.7m                 57,874 (2.1% of all housing units)
                                                  housing units)
       Adjustable Rate                                    67%                                           55%
     Prepayment Penalty                             39,886 (87%)                                  17,458 (30%)
    Negative Amortization                                  18                                    9,764 (30.12%)
         Interest Only                               7,918 (17%)                                 18,610 (34.5%)
       Low Doc/No Doc                                     27%                                           66%
   Late Pmt. Last 12 mos.                                 59%                                           27%
  90+ Late or in Foreclosure                              26%                                           11%
 Percent reset/recast already                       23,763 (52%)                                   9,258 (16%)
 % Reset/Recast Next 24 mos.                              12%                                          20%
  % Reset/Recast 24+ mos.                                4.9%                                          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   99   00   01   02   03   04   05   06
                                                                                              Projected Foreclosures
                                   -250

                                   -500                                                       Cumulative
                                                                                              Homeownership Gain or
                                                                                              Loss
                                   -750

                                  -1,000


                                                          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
                                                                                     (2000=100, quarterly)
                                    180
                                                                                                              Washington

                                    170
FHFA House Price Index




                                    160
                                                                                                                        United States
                                    150
                         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)
                                                                                (2000 = 100, quarterly)
                                    210



                                    190                                                               Tacoma     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

                     7.0
Unemployment Rate




                                                                   Washington
                     6.0

                     5.0

                     4.0                                                     United States

                     3.0

                     2.0

                     1.0

                     0.0
                           2000   2001    2002    2003      2004      2005       2006        2007   2008   2009

                                                              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
                                                      Foreclosure Starts
                             80,000
  N um ber of H om e Loans


                                                      60+ Days Delinquent
                             70,000
                                                      Loan Modifications
                                                      Completed
                             60,000

                             50,000

                             40,000

                             30,000

                             20,000

                             10,000

                                 0
                                       Q1


                                                 Q2


                                                           Q3


                                                                     Q4


                                                                               Q1


                                                                                         Q2


                                                                                                   Q3


                                                                                                             Q4


                                                                                                                       Q1


                                                                                                                                 Q2
                                             07
                                      07




                                                        07


                                                                 07


                                                                           08


                                                                                     08


                                                                                               08


                                                                                                         08


                                                                                                                   09


                                                                                                                             09
                                            20
                                  20




                                                      20


                                                                20


                                                                          20


                                                                                    20


                                                                                              20


                                                                                                        20


                                                                                                                  20


                                                                                                                            20
                                                           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      6 mos. after      9 mos. after   12 mos.
                                      Modification      Modification      Modification   after
                                                                                         Modification
  Decreased by 20% or More 14.7%                        24.3%             27.7%          37.6%
  Decreased by 10% to                 17.3%             28.8%             35.2%          42.1%
  Less than 20%
  Decreased by Less than              19.9%             36.1%             43.0%          47.4%
  10%
  Unchanged                           43.7%             54.4%             55.3%          58.8%
  Increased                           30.8%             50.0%             57.7%          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