Double Dip Ahead?
The Home Affordable Modification Program has succeeded in limiting the supply of distressed properties to hit the market and, as a result, has helped stabilize prices. That success may be short-lived.
Laurie Goodman, a senior managing director at Amherst Holdings LLC's Amherst Securities Group LP, warned in a research note this week that the massive shadow inventory of homes waiting to go into foreclosure will inevitably lead to a double dip in home prices.
Three recent enhancements to the modification program — the Federal Housing Administration's short refinancing option, a principal-reduction alternative and second-lien modifications — will not result in significant numbers of homeowners getting permanent modifications, Goodman predicted.
"If the modification programs do not succeed, the huge amount of shadow inventory will produce an inevitable double dip in home prices," she wrote. "Our concern is that the programs announced so far will be less successful than hoped and home prices will begin to fall."
At some point, Goodman said, the Obama administration will be forced to make principal reductions "more mandatory."
She estimated that fewer than 35% of defaulted borrowers who apply under Hamp will get permanent loan mods that do not redefault. Worse, Goodman said, Hamp will be less successful "than old-style modifications with a similar payment reduction."
Drowning in Debt
Critics of Hamp are blaming the Treasury for failing to take into account the massive debt of defaulted mortgage borrowers.
In a four-page letter to the Treasury Department this week, Chris Katopis, the executive director of the Association of Mortgage Investors, asserts that Hamp has largely been a "disappointment" because its default probability model failed to consider the total debt burdens, including credit cards, auto loans and second liens, of defaulted borrowers.
The trade group represents institutional investors holding a combined $300 billion of asset-backed securities at June 30.
Using a front-end debt-to-income ratio "is useless outside the given context" of a borrower's overall debt obligations, Katopis wrote. Another massive problem with Hamp: The model considers the loan-to-value ratio of the first lien but ignores the second.
That "is a critical oversight that was a significant problem in the securitization process that created the financial crisis," he wrote. "The ongoing foreclosure crisis reflects many factors, including an underlying consumer credit crisis."
As the crisis drags on, troubled borrowers' debt loads grow. The Treasury's monthly reports show that the back-end debt-to-income ratio of the average Hamp borrower jumped to 79.9% in June before a loan modification, up from 76.1% in January. After a modification, the average borrower had a 63.7% back-end debt-to-income ratio, up from 59.7% in January.
The faster a home is resold after a short sale, the more likely it is that the lender was duped into accepting too little and suffering unnecessary losses, a study says.
Lenders by definition lose money in a short sale, since the borrower agrees to sell the home for less than the amount owed on the mortgage. But the study released Tuesday by CoreLogic Inc. indicated that even more money stands to be lost due to fraud. It estimated that the industry loses $310 million annually, or roughly $41,500 per transaction, on fraudulent short sales.
Despite lenders' lingering reluctance to do short sales, the number of such transactions has been on the rise.
CoreLogic estimated that short sales have tripled since the beginning of 2008, to about 400,000 annually.
As the number of short sales has risen in the past two years, so, too, have incidents of fraud, and the subsequent unnecessary losses to lenders.
"Lenders have done a lot to curb origination fraud, but in doing that they've pushed fraud to other types of things," said Frank McKenna, the vice president of fraud strategy at CoreLogic. "Fraud's adapting to the market and what the lenders are doing."
CoreLogic defines short-sale fraud as a transaction "where parties involved in the process manipulate the short sale transaction and/or subsequent transaction for a profit."
For example, fraud would occur when a real estate agent deliberately withheld from the lender the highest bid on a home, after lining up an investor and negotiating a resale of the property from the investor to a third party for the higher price.
Not all short sales with a subsequent, profitable resale are fraudulent, CoreLogic said. "Lenders must be careful not to judge all such transactions the exact same way," the report said.
After analyzing more than 250,000 short sales in the past two years, CoreLogic estimated that about one in 53, or roughly 1.9%, are part of "an egregious flip."
Some lenders have been averse to short sales — especially second-lien holders, who stand to collect nothing if the first mortgage gets a discounted payoff. McKenna said the growing occurrence of fraud has also discouraged lenders from allowing short sales.