Key Risk Benefit Pricing & Tax Reallocations. To effectuate a solution, risk and cost of risk mitigation must be shared more equally by all of the parties to the bargain. A comprehensive solution would also require:
New Tax Laws: Congress must extend and make permanent (beyond 2007) the new (2007) tax deduction for borrower paid MI. Congress must allow the borrower to deduct same if the cost of the MI was effectively transferred or absorbed by the borrower whether or not paid in cash by that party. New tax laws must allow borrowers to avoid forgiveness of debt on certain loan workouts, and the “uncertainty” of such taxes. Bulk rate MI should be implemented on a grand scale with shared tax deductions. Risk absorption should yield a tax deduction whether it’s cash based or not. These tax breaks are paid for by the taxes and liquidity concomitant in increased market wealth through new homeownership.
Friday, January 26, 2007
ONE SOLUTION: WE NEED MORE AFFORDABLE MORTGAGE INSURANCE!
Mortgage Insurance (Funds) (“MI”) Type Products: The costs of avoiding MI may be too high for market stability. The default and foreclosure rates prove that it is too high for the middle class, subprime borrowers and borrowers in high-priced market areas like California and the eastern seaboard. Is the investor and lending industry taking too much in fees without mitigating risk in the market especially on non-conforming second liens? Should all market participants pay for risk mitigation or MI type products? The “concept” of private mortgage insurance or “MI” (“PMI”) is a good one from a market standpoint because it insures and shares risk. Insuring or sharing risk is what makes markets work. It protects the mortgage holder (lender) from complete loss in the event of default. It hedges some risk inherent in the financial mortgage vehicle. Borrowers generally have a negative opinion about MI. They view it as too cash-expensive. Now that President Bush in late December 2006 signed into law allowing tax deductions for mortgage insurance the comparison of using MI or using piggyback loans without MI will change. Borrowers must always remember that piggybacks with adjustable high rate HELOCs can be deadly. Piggybacks and non-piggybacks are in need of MI type risk mitigation, and an overhaul or intelligent refinement that takes into account the borrower’s affordability. High rate second liens overload the borrower’s carrying burden. MI should insure such second liens, or better facilitate one-loan programs. The GSEs will have to change policies to meet this need as well.
TID, SHILO & MI Integration: We must integrate TID and the SHILO solutions with the new and existing MI solutions. This will allow for more price risk alignment and enhanced stability in loan products. Joseph Thomas of Retirement Networks (Florida), and the author suggest the following risk mitigation conceptual examples at a no or low cash cost basis to the borrower:
Foreclosure Mortgage Insurance™ (“FMI”) (TM) – FMI under certain conditions may cover certain cost burdens as well as return FRESH START money, credit or opportunities to the borrower. Remember, the wealthier the borrower, the less risk is introduced into the markets.
Default Mortgage Insurance™ (“DMI”) (TM)– DMI under certain conditions, may cover missed payments; up to12 months or more.
Investors Mortgage Insurance™ (“IMI”) (TM) – Second liens have been over priced from the borrower’s perspective; especially certain adjustable rate piggybacks with high rate seconds (HELOC). If piggybacks are to continue, the cumulative risks inherent must be mitigated without simply charging the borrower more cash-burdened money. Investors in such loans must be offered risk mitigation insurance benefits as a “substitute” or “equivalent” for increased price burdens on the borrower. The borrower alone can not afford to pay the price for this risk.
TID, SHILO & MI Integration: We must integrate TID and the SHILO solutions with the new and existing MI solutions. This will allow for more price risk alignment and enhanced stability in loan products. Joseph Thomas of Retirement Networks (Florida), and the author suggest the following risk mitigation conceptual examples at a no or low cash cost basis to the borrower:
Foreclosure Mortgage Insurance™ (“FMI”) (TM) – FMI under certain conditions may cover certain cost burdens as well as return FRESH START money, credit or opportunities to the borrower. Remember, the wealthier the borrower, the less risk is introduced into the markets.
Default Mortgage Insurance™ (“DMI”) (TM)– DMI under certain conditions, may cover missed payments; up to12 months or more.
Investors Mortgage Insurance™ (“IMI”) (TM) – Second liens have been over priced from the borrower’s perspective; especially certain adjustable rate piggybacks with high rate seconds (HELOC). If piggybacks are to continue, the cumulative risks inherent must be mitigated without simply charging the borrower more cash-burdened money. Investors in such loans must be offered risk mitigation insurance benefits as a “substitute” or “equivalent” for increased price burdens on the borrower. The borrower alone can not afford to pay the price for this risk.
COMMON BANK LOSS MITIGATION LOAN WORKOUTS FOR DEFAULT & FORECLOSURE SOLUTIONS!
(1) Forebearance with Reinstatement Or Repayment Plan Agreement, (2) Loan Modification, (3) Short Refinance, (4) Short Sale, (5) Market Sale, (6) Investor Sale, (7) Investor Sale And Lease Back, (8) Deed In Lieu Of Foreclosure (9) Reverse Mortgage, (10) Bankruptcy, (11) Hand In Keys & Walk Away Clean, (12) Walk Away Dirty, (13) FHA Partial Claim (14) Gift Equity Transfer, Etc.
ONE SOLUTION: “Safe Harbor Intelligent Loan Options” (“SHILO”) (TM)
A. RISK MITIGATION TECHNIQUES
“Safe Harbor Intelligent Loan Options” (“SHILO”) (TM). We can and should foresee delinquency, default and foreclosure contingencies and handle them in the loan agreements at origination. Why wait for the effect of costly defaults and foreclosures until we handle the solution? We are creating a sub-industry based on failed attempts at the American Dream which cause further economic market uncertainty, economic ruin, and human disgrace. Is that what we want? If not, why not build-in some contractual remedies to enhance certainty in the marketplace and help save people at the same time? I recommend that we consider contractual risk mitigation techniques in the loan agreements at origination. I call this concept:
Safe Harbor Intelligent Loan Options or “SHILO”
“SHILO” is a minimum set of borrower (lender, insurer, or government) loan option rights concerning issues of payment, default, and foreclosure including forbearance or deferment options, loan modification or conversion rights, refinance rights, short refinance rights, short sale rights, and/or exit options contained in the loan agreements that may or must be used in the event of pre-default or foreclosures circumstances. The Lender and the Borrower may also negotiate for additional SHILO. These provisions directly benefit the borrower, but on many levels also directly and indirectly benefit the lender, the local State and Federal governments, investors, and the economy. Presently the borrower in trouble has a lack of exit options available. This causes “liquidation type forced sales" and creates a feeding frenzy in the foreclosure markets. This often causes great loss to the borrower, lender, local State and Federal government, investors, and the economy. When a borrower is in trouble and in need for loan modifications, he is generally experiencing financial, medical or market distress, or has a specific economic or other reason for wanting same. We need contractual remedies that offer relief from the foreseeable financial and personal problems that we know will occur and unforeseeable contingencies as well. Obviously persons in financial trouble will not be able to qualify for many of the current extra-contractual options. It creates another set of problems. The current loan agreements create RAhD and RAhC risk. Substituting predefined contractual solutions (SHILO) for those unknown and known potential problems would reduce the size of the foreclosure marketplace and help stabilize the risk benefit pricing structure. SHILO would cause real estate markets to experience or realize less extreme risks. This would reduce the risk, costs and losses to all participants in the marketplace. The SHILO solutions are the current concepts used by the foreclosure industry including but not limited to:
(1) Forebearance with Reinstatement Or Repayment Plan Agreement, (2) Loan Modification, (3) Short Refinance, (4) Short Sale, (5) Market Sale, (6) Investor Sale, (7) Investor Sale And Lease Back, (8) Deed In Lieu Of Foreclosure (9) Reverse Mortgage, (10) Bankruptcy, (11) Hand In Keys & Walk Away Clean, (12) Walk Away Dirty, (13) FHA Partial Claim (14) Gift Equity Transfer, Etc. The key is to allow a borrower when in financial trouble to access prescribed contractual payment or exit solutions without requiring good credit standards. We must stop kidding ourselves; we all know that the borrower who is in trouble will not have good credit or feasible foreclosure market solutions. We may see $164 billion in equity loss over the next few years. In an optimal or evolving economic society, we must refine this market inefficiency with what I call non-cash substitutes or equivalent risk-pricing (“ERP”) with MI.
“Safe Harbor Intelligent Loan Options” (“SHILO”) (TM). We can and should foresee delinquency, default and foreclosure contingencies and handle them in the loan agreements at origination. Why wait for the effect of costly defaults and foreclosures until we handle the solution? We are creating a sub-industry based on failed attempts at the American Dream which cause further economic market uncertainty, economic ruin, and human disgrace. Is that what we want? If not, why not build-in some contractual remedies to enhance certainty in the marketplace and help save people at the same time? I recommend that we consider contractual risk mitigation techniques in the loan agreements at origination. I call this concept:
Safe Harbor Intelligent Loan Options or “SHILO”
“SHILO” is a minimum set of borrower (lender, insurer, or government) loan option rights concerning issues of payment, default, and foreclosure including forbearance or deferment options, loan modification or conversion rights, refinance rights, short refinance rights, short sale rights, and/or exit options contained in the loan agreements that may or must be used in the event of pre-default or foreclosures circumstances. The Lender and the Borrower may also negotiate for additional SHILO. These provisions directly benefit the borrower, but on many levels also directly and indirectly benefit the lender, the local State and Federal governments, investors, and the economy. Presently the borrower in trouble has a lack of exit options available. This causes “liquidation type forced sales" and creates a feeding frenzy in the foreclosure markets. This often causes great loss to the borrower, lender, local State and Federal government, investors, and the economy. When a borrower is in trouble and in need for loan modifications, he is generally experiencing financial, medical or market distress, or has a specific economic or other reason for wanting same. We need contractual remedies that offer relief from the foreseeable financial and personal problems that we know will occur and unforeseeable contingencies as well. Obviously persons in financial trouble will not be able to qualify for many of the current extra-contractual options. It creates another set of problems. The current loan agreements create RAhD and RAhC risk. Substituting predefined contractual solutions (SHILO) for those unknown and known potential problems would reduce the size of the foreclosure marketplace and help stabilize the risk benefit pricing structure. SHILO would cause real estate markets to experience or realize less extreme risks. This would reduce the risk, costs and losses to all participants in the marketplace. The SHILO solutions are the current concepts used by the foreclosure industry including but not limited to:
(1) Forebearance with Reinstatement Or Repayment Plan Agreement, (2) Loan Modification, (3) Short Refinance, (4) Short Sale, (5) Market Sale, (6) Investor Sale, (7) Investor Sale And Lease Back, (8) Deed In Lieu Of Foreclosure (9) Reverse Mortgage, (10) Bankruptcy, (11) Hand In Keys & Walk Away Clean, (12) Walk Away Dirty, (13) FHA Partial Claim (14) Gift Equity Transfer, Etc. The key is to allow a borrower when in financial trouble to access prescribed contractual payment or exit solutions without requiring good credit standards. We must stop kidding ourselves; we all know that the borrower who is in trouble will not have good credit or feasible foreclosure market solutions. We may see $164 billion in equity loss over the next few years. In an optimal or evolving economic society, we must refine this market inefficiency with what I call non-cash substitutes or equivalent risk-pricing (“ERP”) with MI.
ONE SOLUTION: “Safe Harbor Intelligent Loan Options” (“SHILO”) (TM)
A. RISK MITIGATION TECHNIQUES
“Safe Harbor Intelligent Loan Options” (“SHILO”) (TM). We can and should foresee delinquency, default and foreclosure contingencies and handle them in the loan agreements at origination. Why wait for the effect of costly defaults and foreclosures until we handle the solution? We are creating a sub-industry based on failed attempts at the American Dream which cause further economic market uncertainty, economic ruin, and human disgrace. Is that what we want? If not, why not build-in some contractual remedies to enhance certainty in the marketplace and help save people at the same time? I recommend that we consider contractual risk mitigation techniques in the loan agreements at origination. I call this concept:
Safe Harbor Intelligent Loan Options or “SHILO”
“SHILO” is a minimum set of borrower (lender, insurer, or government) loan option rights concerning issues of payment, default, and foreclosure including forbearance or deferment options, loan modification or conversion rights, refinance rights, short refinance rights, short sale rights, and/or exit options contained in the loan agreements that may or must be used in the event of pre-default or foreclosures circumstances. The Lender and the Borrower may also negotiate for additional SHILO. These provisions directly benefit the borrower, but on many levels also directly and indirectly benefit the lender, the local State and Federal governments, investors, and the economy. Presently the borrower in trouble has a lack of exit options available. This causes “liquidation type forced sales" and creates a feeding frenzy in the foreclosure markets. This often causes great loss to the borrower, lender, local State and Federal government, investors, and the economy. When a borrower is in trouble and in need for loan modifications, he is generally experiencing financial, medical or market distress, or has a specific economic or other reason for wanting same. We need contractual remedies that offer relief from the foreseeable financial and personal problems that we know will occur and unforeseeable contingencies as well. Obviously persons in financial trouble will not be able to qualify for many of the current extra-contractual options. It creates another set of problems. The current loan agreements create RAhD and RAhC risk. Substituting predefined contractual solutions (SHILO) for those unknown and known potential problems would reduce the size of the foreclosure marketplace and help stabilize the risk benefit pricing structure. SHILO would cause real estate markets to experience or realize less extreme risks. This would reduce the risk, costs and losses to all participants in the marketplace. The SHILO solutions are the current concepts used by the foreclosure industry including but not limited to:
(1) Forebearance with Reinstatement Or Repayment Plan Agreement, (2) Loan Modification, (3) Short Refinance, (4) Short Sale, (5) Market Sale, (6) Investor Sale, (7) Investor Sale And Lease Back, (8) Deed In Lieu Of Foreclosure (9) Reverse Mortgage, (10) Bankruptcy, (11) Hand In Keys & Walk Away Clean, (12) Walk Away Dirty, (13) FHA Partial Claim (14) Gift Equity Transfer, Etc. The key is to allow a borrower when in financial trouble to access prescribed contractual payment or exit solutions without requiring good credit standards. We must stop kidding ourselves; we all know that the borrower who is in trouble will not have good credit or feasible foreclosure market solutions. We may see $164 billion in equity loss over the next few years. In an optimal or evolving economic society, we must refine this market inefficiency with what I call non-cash substitutes or equivalent risk-pricing (“ERP”) with MI.
“Safe Harbor Intelligent Loan Options” (“SHILO”) (TM). We can and should foresee delinquency, default and foreclosure contingencies and handle them in the loan agreements at origination. Why wait for the effect of costly defaults and foreclosures until we handle the solution? We are creating a sub-industry based on failed attempts at the American Dream which cause further economic market uncertainty, economic ruin, and human disgrace. Is that what we want? If not, why not build-in some contractual remedies to enhance certainty in the marketplace and help save people at the same time? I recommend that we consider contractual risk mitigation techniques in the loan agreements at origination. I call this concept:
Safe Harbor Intelligent Loan Options or “SHILO”
“SHILO” is a minimum set of borrower (lender, insurer, or government) loan option rights concerning issues of payment, default, and foreclosure including forbearance or deferment options, loan modification or conversion rights, refinance rights, short refinance rights, short sale rights, and/or exit options contained in the loan agreements that may or must be used in the event of pre-default or foreclosures circumstances. The Lender and the Borrower may also negotiate for additional SHILO. These provisions directly benefit the borrower, but on many levels also directly and indirectly benefit the lender, the local State and Federal governments, investors, and the economy. Presently the borrower in trouble has a lack of exit options available. This causes “liquidation type forced sales" and creates a feeding frenzy in the foreclosure markets. This often causes great loss to the borrower, lender, local State and Federal government, investors, and the economy. When a borrower is in trouble and in need for loan modifications, he is generally experiencing financial, medical or market distress, or has a specific economic or other reason for wanting same. We need contractual remedies that offer relief from the foreseeable financial and personal problems that we know will occur and unforeseeable contingencies as well. Obviously persons in financial trouble will not be able to qualify for many of the current extra-contractual options. It creates another set of problems. The current loan agreements create RAhD and RAhC risk. Substituting predefined contractual solutions (SHILO) for those unknown and known potential problems would reduce the size of the foreclosure marketplace and help stabilize the risk benefit pricing structure. SHILO would cause real estate markets to experience or realize less extreme risks. This would reduce the risk, costs and losses to all participants in the marketplace. The SHILO solutions are the current concepts used by the foreclosure industry including but not limited to:
(1) Forebearance with Reinstatement Or Repayment Plan Agreement, (2) Loan Modification, (3) Short Refinance, (4) Short Sale, (5) Market Sale, (6) Investor Sale, (7) Investor Sale And Lease Back, (8) Deed In Lieu Of Foreclosure (9) Reverse Mortgage, (10) Bankruptcy, (11) Hand In Keys & Walk Away Clean, (12) Walk Away Dirty, (13) FHA Partial Claim (14) Gift Equity Transfer, Etc. The key is to allow a borrower when in financial trouble to access prescribed contractual payment or exit solutions without requiring good credit standards. We must stop kidding ourselves; we all know that the borrower who is in trouble will not have good credit or feasible foreclosure market solutions. We may see $164 billion in equity loss over the next few years. In an optimal or evolving economic society, we must refine this market inefficiency with what I call non-cash substitutes or equivalent risk-pricing (“ERP”) with MI.
ONE SOLUTION: Borrower DISCLOSURES: "TIDS" (TM) ** “BORROWER’S CONSENT ON SUITABILITY”
Failed Disclosures To The Borrowers
We know any loan may go into default or foreclosure due to known or unknown reasons. A borrower may lose a job, get sick, become disabled, die, get divorced, lose a lawsuit, incur an underinsured or uninsured event from a hurricane, tornado, water damage, auto accident, environmental and mold burden, etc. Creative or adjustable loans have added another layer of risk (RAhD, RAhC) to the borrower especially if the borrower didn’t understand or can’t afford the risk of paying the monthly burden as loans adjust or reset. These loans may in fact hold the answer, but we need better disclosures.
a. “Truly Intelligent Disclosures” (“TID”)(TM). Creative or exotic loan products and easy credit are not the problem per se, but in fact may be part of the answer per se. However, in any case, a truly uninformed borrower or misinformed borrower is truly a problem. If the system of fulfilling the American Dream includes a broker gatekeeper who holds all of the cards by virtue of the borrower’s non existent relationship with the “unknown lender” who is motivated to keep costs, fees, and more shockingly interest rates, higher (Losing Ground: Foreclosure Sub-prime Market/Cost to Homeowners, citing Jackson, Berry, Kickbacks or Compensation: Yield Spread Premiums, Harvard (Jan 8, 2002)), then the borrower has little chance to obtain the most effective or “suitable” loan package for his/her needs. Effectively, market competition may not have fully prevailed in this round of mortgage lending. In such event, we all suffer. We must refine the relationship, and better share risk and price. We should expand, not limit creative loans and available credit. However, creative loan products should require what I call: “truly intelligent disclosures” (“TID”). However, we do not need more disclosures for disclosures sake. We truly have enough paper for paper’s sake. Maybe we need less of that. We need (1) more accurate, meaningful and easy to understand disclosures, and (2) additional borrower disclosures with intelligent “underwriting business type analytics” (of the borrowers’ risks and analytical probabilities in changing and projected conditions such as the effect of declining property values on his particular loan especially with rising interest rates). Those risks need to be clearly disclosed to the borrower in a summary format. Over the last 10 years numerous third party computer information services have gathered and computerized relevant information needed to supply the borrower with an intelligent short summary form disclosure (in real time) sufficient to enhance real issue warnings and “suitability” concerns (First American, Experian, Equifax, TransUnion, PMI Group, CUNA Mutual/CMG, Mortgage Bankers Association, DataQuick, DataTree, RealtyTrack, DataPlace, Risk Profiler, GAO, FDIC, CRL, HUD, Fannie Mae (GSEs), MassHousing, BankRate.Com, HSH, etc.) If Congress or the industry mandated truly intelligent numeric summary disclosure formats (TID), I would estimate that the industry could be ready to operate with same within 18 months or so. The partial (summary) list below is a list of disclosures that were commonly insufficient in the last lending cycle (also couched as TIDs), in addition to newly suggested TIDs:
1. Lack of TID re accurate (or industry consistent) calculations of loan characteristics such as ANNUAL PERCENTAGE RATE (APR), and relevant instruction or examples on how to use or evaluate such information.
2. Lack of TID of CLEARLY LABELED FEES AND COSTS including broker yield interest rate spread compensation and junk or inflated loan costs including points or buy downs. These figures should be shown along side applicable industry norms or legally permissible charges so the borrower can make intelligent decisions concerning the cost/benefit bargain of the loan offer.
3. Lack of TID re the lender’s ACCEPTABLE MINIMUM INTEREST RATE REQUIREMENT PER APPLICABLE CREDIT SCORE for this particular loan. This would allow the borrower to know and negotiate to avoid (abusive) interest rates hikes caused by broker yield-rate spread compensation. This is not a suggestion to totally eliminate such compensation, but such compensation must be justified, the effect on the borrower must be disclosed, and it must be subject to the borrower’s rejection of those terms (or the loan offer based on those terms).
4. Lack of TID re BORROWER’S CONSENT ON SUITABILITY based on a numeric summary sheet disclosure including the EFFECT ON THE BORROWER AND PROPOSED LOAN PROGRAM(S) WHEN THE MARKET AND PROPERTY VALUATIONS CHANGE (i.e.: decline) as related to INTEREST RATE CHANGES (i.e.: rise), including but not limited to the change in monthly payment amounts, potential (non)eligibility of alternative loan payment options, loan modifications or common market loan programs, all indicating applicable Loan to Value (LTV, CLTV) and Income to Debt ratios, prepayment penalty burdens, negative amortization loans, the effect on other key eligibility barometers and LACK OF (EXIT, SALE or REFINANCE) OPTIONS over a projected 1, 3, 5 and 15 year period. Many borrowers may have a perfectly good reason to choose a negative amortization loan, interest only loan, option arm loan or other variation of them, and may in fact realize true financial and related benefits therefrom. But the borrower needs to understand them to make a proper suitability decision. Lenders and brokers must have a duty to disclose and obtain the borrower’s consent on suitability.
CRITICAL: Loan Comparison Summary Sheet Disclosure With All Common Or Applicable Loan Programs, With Mortgage Insurance & Tax Analysis: The TID re “BORROWER’S CONSENT ON SUITABILITY” must include a COMPARISON OF ELIGIBLE LOAN PROGRAMS WITH AND WITHOUT MORTGAGE INSURANCE including a COSTS/BENEFITS/LOSS analysis with PRE-TAX and AFTER-TAX EXAMPLES (showing legally deductible amounts based on tax assumptions developed by the actual numbers reported to underwriting of the borrower. For example the borrower should be able to quickly look at a summary sheet and see the estimated total loss to borrower and lender due to limited default and foreclosure, MI coverage and projected payout amounts, lender exposure and other projected Need-To-Know and What-If relationships. More importantly the borrower would be able to confirm or object to the broker’s representation that a Piggyback (80/20) loan is less expensive than a single loan with MI. Now these loan programs and concepts can truly compete because the borrower will have intelligent summary comparisons to use in making his/her decisions. Note – PMI GROUP has a computerized disclosure model that I have tested. Other mortgage insurance companies may as well. It does much of what I am concerned with, not all however. Also we need a more advanced version for professionals and a simple summary version for consumers to enhance understandability and allow a meaningful decision to be made by the borrower on “suitability”.
Lack of TID to the borrower concerning the HISTORY OR DESIRABILITY OF THE LOAN SERVICER.
Lack of TID on the truth that certain GOOD FAITH ESTIMATES may not at all be accurate and the reasons why. The industry must move to more comprehensive and automated information system with accurate estimated TIME TABLES in the loan processing itself and related parties must respond with info (payoff demands, etc.) within short legal deadlines.
HUD AMENDMENTS: Lack of TID on the HUD-1 disclosure forms reflecting and incorporating the above TIDs. The GOOD FAITH ESTIMATES and the HUD-1 disclosure should be amended to include the appropriate TIDs or appropriate summary material therefrom.
We know any loan may go into default or foreclosure due to known or unknown reasons. A borrower may lose a job, get sick, become disabled, die, get divorced, lose a lawsuit, incur an underinsured or uninsured event from a hurricane, tornado, water damage, auto accident, environmental and mold burden, etc. Creative or adjustable loans have added another layer of risk (RAhD, RAhC) to the borrower especially if the borrower didn’t understand or can’t afford the risk of paying the monthly burden as loans adjust or reset. These loans may in fact hold the answer, but we need better disclosures.
a. “Truly Intelligent Disclosures” (“TID”)(TM). Creative or exotic loan products and easy credit are not the problem per se, but in fact may be part of the answer per se. However, in any case, a truly uninformed borrower or misinformed borrower is truly a problem. If the system of fulfilling the American Dream includes a broker gatekeeper who holds all of the cards by virtue of the borrower’s non existent relationship with the “unknown lender” who is motivated to keep costs, fees, and more shockingly interest rates, higher (Losing Ground: Foreclosure Sub-prime Market/Cost to Homeowners, citing Jackson, Berry, Kickbacks or Compensation: Yield Spread Premiums, Harvard (Jan 8, 2002)), then the borrower has little chance to obtain the most effective or “suitable” loan package for his/her needs. Effectively, market competition may not have fully prevailed in this round of mortgage lending. In such event, we all suffer. We must refine the relationship, and better share risk and price. We should expand, not limit creative loans and available credit. However, creative loan products should require what I call: “truly intelligent disclosures” (“TID”). However, we do not need more disclosures for disclosures sake. We truly have enough paper for paper’s sake. Maybe we need less of that. We need (1) more accurate, meaningful and easy to understand disclosures, and (2) additional borrower disclosures with intelligent “underwriting business type analytics” (of the borrowers’ risks and analytical probabilities in changing and projected conditions such as the effect of declining property values on his particular loan especially with rising interest rates). Those risks need to be clearly disclosed to the borrower in a summary format. Over the last 10 years numerous third party computer information services have gathered and computerized relevant information needed to supply the borrower with an intelligent short summary form disclosure (in real time) sufficient to enhance real issue warnings and “suitability” concerns (First American, Experian, Equifax, TransUnion, PMI Group, CUNA Mutual/CMG, Mortgage Bankers Association, DataQuick, DataTree, RealtyTrack, DataPlace, Risk Profiler, GAO, FDIC, CRL, HUD, Fannie Mae (GSEs), MassHousing, BankRate.Com, HSH, etc.) If Congress or the industry mandated truly intelligent numeric summary disclosure formats (TID), I would estimate that the industry could be ready to operate with same within 18 months or so. The partial (summary) list below is a list of disclosures that were commonly insufficient in the last lending cycle (also couched as TIDs), in addition to newly suggested TIDs:
1. Lack of TID re accurate (or industry consistent) calculations of loan characteristics such as ANNUAL PERCENTAGE RATE (APR), and relevant instruction or examples on how to use or evaluate such information.
2. Lack of TID of CLEARLY LABELED FEES AND COSTS including broker yield interest rate spread compensation and junk or inflated loan costs including points or buy downs. These figures should be shown along side applicable industry norms or legally permissible charges so the borrower can make intelligent decisions concerning the cost/benefit bargain of the loan offer.
3. Lack of TID re the lender’s ACCEPTABLE MINIMUM INTEREST RATE REQUIREMENT PER APPLICABLE CREDIT SCORE for this particular loan. This would allow the borrower to know and negotiate to avoid (abusive) interest rates hikes caused by broker yield-rate spread compensation. This is not a suggestion to totally eliminate such compensation, but such compensation must be justified, the effect on the borrower must be disclosed, and it must be subject to the borrower’s rejection of those terms (or the loan offer based on those terms).
4. Lack of TID re BORROWER’S CONSENT ON SUITABILITY based on a numeric summary sheet disclosure including the EFFECT ON THE BORROWER AND PROPOSED LOAN PROGRAM(S) WHEN THE MARKET AND PROPERTY VALUATIONS CHANGE (i.e.: decline) as related to INTEREST RATE CHANGES (i.e.: rise), including but not limited to the change in monthly payment amounts, potential (non)eligibility of alternative loan payment options, loan modifications or common market loan programs, all indicating applicable Loan to Value (LTV, CLTV) and Income to Debt ratios, prepayment penalty burdens, negative amortization loans, the effect on other key eligibility barometers and LACK OF (EXIT, SALE or REFINANCE) OPTIONS over a projected 1, 3, 5 and 15 year period. Many borrowers may have a perfectly good reason to choose a negative amortization loan, interest only loan, option arm loan or other variation of them, and may in fact realize true financial and related benefits therefrom. But the borrower needs to understand them to make a proper suitability decision. Lenders and brokers must have a duty to disclose and obtain the borrower’s consent on suitability.
CRITICAL: Loan Comparison Summary Sheet Disclosure With All Common Or Applicable Loan Programs, With Mortgage Insurance & Tax Analysis: The TID re “BORROWER’S CONSENT ON SUITABILITY” must include a COMPARISON OF ELIGIBLE LOAN PROGRAMS WITH AND WITHOUT MORTGAGE INSURANCE including a COSTS/BENEFITS/LOSS analysis with PRE-TAX and AFTER-TAX EXAMPLES (showing legally deductible amounts based on tax assumptions developed by the actual numbers reported to underwriting of the borrower. For example the borrower should be able to quickly look at a summary sheet and see the estimated total loss to borrower and lender due to limited default and foreclosure, MI coverage and projected payout amounts, lender exposure and other projected Need-To-Know and What-If relationships. More importantly the borrower would be able to confirm or object to the broker’s representation that a Piggyback (80/20) loan is less expensive than a single loan with MI. Now these loan programs and concepts can truly compete because the borrower will have intelligent summary comparisons to use in making his/her decisions. Note – PMI GROUP has a computerized disclosure model that I have tested. Other mortgage insurance companies may as well. It does much of what I am concerned with, not all however. Also we need a more advanced version for professionals and a simple summary version for consumers to enhance understandability and allow a meaningful decision to be made by the borrower on “suitability”.
Lack of TID to the borrower concerning the HISTORY OR DESIRABILITY OF THE LOAN SERVICER.
Lack of TID on the truth that certain GOOD FAITH ESTIMATES may not at all be accurate and the reasons why. The industry must move to more comprehensive and automated information system with accurate estimated TIME TABLES in the loan processing itself and related parties must respond with info (payoff demands, etc.) within short legal deadlines.
HUD AMENDMENTS: Lack of TID on the HUD-1 disclosure forms reflecting and incorporating the above TIDs. The GOOD FAITH ESTIMATES and the HUD-1 disclosure should be amended to include the appropriate TIDs or appropriate summary material therefrom.
Uninsured Risk of Secret Second Piggybacks May Trigger $164 Billion Loss
“Secret Seconds” On Top of “Piggyback” Mortgages May Trigger Homeowner Foreclosures of $164 Billion!
The Untold Truth:
Do Piggybacks without mortgage insurance create more risk, and higher borrower payment burdens?
Did Government Regulators Know About
Secret Second Mortgages?
Did the Lenders Know About The Secret Second Liens?
The Untold Truth:
Do Piggybacks without mortgage insurance create more risk, and higher borrower payment burdens?
Did Government Regulators Know About
Secret Second Mortgages?
Did the Lenders Know About The Secret Second Liens?
Creative, Exotic Loans!
So called “exotic” loans are not so exotic at all. They are purpose driven. They fulfill specific market needs. They are however the 2007 Congressional tell-tale of a pending unmet need of the borrower. Of course, in the wrong hands a misused loan product or a misinformed borrower can result in devastation. What I think is exotic is the possible infusion of unnecessary “RAhD” and “RAhC” into the mortgage banking market system. The sad truth is we may have naked lenders and naked government backed securities. Ginnie Maes are guaranteed against principal loss by the full faith and credit of the federal government, but Fannie Mae and Freddie Mac are not. Fannie Mae and Freddie Mac have to absorb the foreclosure fall out if borrower’s default. These mortgage pools are not rated. Are the triple-A corporate sponsor bonds able to support the risk? We have a large volume of high loan to value loans (with a high risk of default) that will reset to even higher rates compounded by a period of lowering property values, without mortgage insurance. This is critical because the lowering property values will create borrowers with no exit capabilities. These factors have the potential to feed upon itself and create broad economic trouble and loss of market liquidity. Lenders created and brokers sold non-insured loans (especially high ratio piggyback first liens with high variable rate revolving home equity line of credit (“HELOC”) second liens) to meet the market demand and rapid growth of homeownership. But did the government sponsored entities or GSEs (such as Fannie Mae and Freddie Mac) understand the risk of a first “conforming” (80%) lien without mortgage insurance; tied to the same borrower who had a piggyback overpriced 20% silent or secret second without mortgage insurance? Did the market properly price this risk? Did investors overcharge borrowers for this risk by overloading the borrower’s monthly cash burden? Worse yet, many of these secret seconds are not closed ended seconds, but revolving credit (card) type HELOCs. The GSE regulatory reporting guidelines were developed before the avalanche of piggybacks (The Hidden Risks of Piggyback Lending, C.A.Calhoun, PhD). Whether the market truly understands these risks or not, the risk therein must be truly mitigated by mortgage insurance type products that are shared in costs and benefits by all market participants, including the borrower.
Yes, The Default and Foreclosure Risk is Here and it is Real!
We now see over 100,000 home-foreclosures per month (for the last 5 months) (RealtyTrack 1/07). On January 24, 2007 the Central Valley Business Times (CVBT) reported on the latest PMI Group study entitled Economic & Real Estate Trends (Milner, Henry), saying: “There’s a greater risk of price declines in 34 of the nation’s 50 largest metro areas, PMI says. That translates into a 34.2 percent chance that home prices will decline in two years, according to PMI’s formulas. Nineteen MSAs face a greater than 50 percent chance that home prices will decline, up from 18 last quarter, it adds. While year-over-year appreciation remained in the double digits in 14 of the 50 largest MSAs, the rate of appreciation slowed in 43. The risk of price declines continues to be concentrated in California and along the eastern seaboard. Of the 19 MSAs facing a greater than 50 percent chance of a price decline, eight are located in California, eight are in the Northeast, and two are in Florida.” In high-price areas such as California, “foreclosures were up nearly seven-fold in the fourth quarter of 2006 and the number of notices of default, the first step in the foreclosure process, were up 145 percent compared to the figures from a year earlier, according to real estate information company DataQuick Information Systems of La Jolla.” Recent reports of increases in loan applications don’t necessarily show a healthy homeownership market, but reveal possible panic to replace adjusting Option A.R.M.S. as values and appraisals fall. Millions of homeowners are about to lose their homes from default or foreclosure over the next few years in waves, as adjustable loans and HELOCs reset. One of five subprime mortgages over the last two years will end in foreclosure, nearly double the projected rate from 2002. When distressed prepayments are added in, total “failure rate” approaches 25 percent. Of the subprime loans, over 50% went to African-Americans, and 40% to Hispanics. (Center Responsible Lending 12/2006) The foreclosure sub-culture is now gearing up (for the kill) and growing rapidly. Foreclosures are here and about to break the dam with dramatic numbers each and every year over the next few years corresponding to the reset dates of adjusting mortgages. Homeowners are already becoming locked-in with no way out. The negative consequences to the economy will be devastating when compounded by the strain of changing demographics.
Ultimate Public Policy Questions!
Ultimate Questions Not Yet Answered by Comprehensive Policy:
1. The question is simple. Do we want to expand the American Dream of Homeownership
and grow the Economy at the same time, or not?
2. Ultimately our children and grandchildren will sit back and ask, why did they punish the weak, and reward the strong – when they could have strengthened the weak and strengthened the strong at the same time?
1. The question is simple. Do we want to expand the American Dream of Homeownership
and grow the Economy at the same time, or not?
2. Ultimately our children and grandchildren will sit back and ask, why did they punish the weak, and reward the strong – when they could have strengthened the weak and strengthened the strong at the same time?
2007 Foreclosures-Defaults-Solutions
Professor Rydstrom, Esq. says: “Creative or exotic loans are not the problem per se, nor are they so “exotic”. What’s exotic is the possible infusion of what I call “RAhD” (randomly activated hidden debt) by the industry and government sponsored entities (GSEs) such as Fannie Mae and Freddie Mac. Reportedly, uninsured first liens with undisclosed second liens were sold to the GSEs. RAhD took down Enron and the dotcom boom. It can also ruin homeowners. If you’re as sick as your secrets, and unknown seconds are the secret, foreclosures will render the economy sick. We must expand the American Dream of homeownership, reduce RAhD with “permanent” tax deductible mortgage insurance, and use what I call: Truly Intelligent Disclosures™ (“TID”) and contractual Safe Harbor Intelligent Loan Options™ (“SHILO”).”
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