They Could Do That?

A mortgage that is more than 60 days late might seem like an automatic disqualification for inclusion into a government-backed security. However, until last week, servicers were able to pool such loans into securities backed by the Government National Mortgage Association.

Now the agency has issued a memo informing issuers that they cannot pool loans that are delinquent by more than the monthly installment of principal and interest that is due on the issue date.

Fortunately for Ginnie Mae, issuers have not been taking advantage of the opportunity to dump delinquent loans. A Ginnie Mae review spotted fewer than 100 loans more than 60 days late that were put into pools sponsored by the agency within the last year.

"It was not something that was being abused," said Theodore W. Tozer, president of Ginnie Mae. "We were just closing a loophole."

The memo raised eyebrows slightly among some observers.

"Maybe the biggest predictor of loss on a loan is a first payment default, so if a loan has already been delinquent by more than one or two payments you really don't want that in a security," said Joe Garrett at the consulting firm, Garrett Watts & Co. "Back in the 1980s, if a loan had a delinquency, it couldn't go into any kind of security, Fannie Mae or Ginnie Mae."

Some see Ginnie Mae's rule tightening as a preemptive way to spot problem loan modifications before they turn into liabilities.

"Ginnie Mae has been pooling a lot of reperforming loans into their new issuance," said Wei Ang Lee, MBS analyst at Barclays Capital. "Those loans could conceivably be delinquent because, let's say they were just modified and put into a newly issued pool — they could become delinquent in the first month."

However, Ginnie Mae is no longer taking any chances. "A person has to be brought current whether it is a modification or a brand-new loan," Tozer said. "We expect the loans in the Ginnie Mae pool to be good quality."

Mad Ave. Mortgages

Servicers looking for creative ways to stem losses might consider giving hard-up borrowers some old advice: it pays to advertise. Pays the mortgage, that is.

Adzookie is offering to cover the loan payments of homeowners who allow the Orange, Calif., advertising firm to paint "billboards" with its logo and social media icons on the outside of their homes.

Romeo Mendoza, Adzookie's chief executive, told CNN last week that within hours of posting the offer on its website, the company received more than 1,000 applications. (Homes must meet Adzookie's criteria, which aren't spelled out on the site.)

"It really blew my mind," CNN quoted Mendoza as saying. "I knew the economy was tough, but it's sad to see how many homeowners are really struggling."

As part of the deal, a house must remain painted for at least three months and the billboards can stay up for up to a year, according to Adzookie's site. The company won't paint the roofs, windows or awnings, and "if, for any reason, you decide to cancel after three months or if we cancel the agreement with you, we'll repaint your house back to the original colors."

Adzookie acknowledges that those who take the deal will have to live with "bright colors and stares from neighbors." (And, as commenters on Consumerist.com pointed out, some homeowners associations and towns may not allow this kind of signage.)

But given mortgage delinquencies at 8% and an unemployment rate close to 9%, we at American Banker imagine there are at least a few borrowers out there who would gladly suffer some embarrassment in exchange for three to 12 months' mortgage payments.

Interested servicers and borrowers should act fast, since according to the CNN story, "Mendoza's budget for the entire program is $100,000, and he expects to spend about $8,000 per house on the painting alone."

No Trump Card

"That will raise the cost of credit and homeownership" is no longer the opponent-silencing, debate-ending, applause-guaranteeing argument it was 10 years ago.

In critiques of the recent industry-funded paper by Charles Calomiris, Eric Higgins and Joseph Mason warning that the mortgage servicing settlement proposed by state attorneys general and federal regulators would raise borrowing costs, two influential bloggers contend that some things are more important than minimizing interest rates.

On Rortybomb, Roosevelt Institute fellow Mike Konczal quipped that instead of calling banks' failure to invest in servicing operations "something regrettable, [the report's authors] celebrate it! By cutting all those corners with actually keeping track of documentation, etc. think of the savings that were passed onto consumers. [Emphasis Konczal's.] … By being incredibly irresponsible, by shoving the risks into the tail, the banks were able to lower the mortgage rate. Awesome except for the ravaged economy."

Adam Levitin, an associate law professor at Georgetown University, wrote on the blog CreditSlips.org that since the settlement would force servicers to ensure due process for borrowers in foreclosures, to argue against it on the grounds that it might increase mortgage rates suggests that "the rule of law is not even worth 20 basis points."

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