Subprime loans: a helping hand, Part 2
[Continued from yesterday’s Part 1.]
Sooner or later, these billions add up
Yesterday we heard about the $1 billion that NACA is taking credit for Citigroup and Bank of America’s willingness to provide to refinance subprime loans. It’s clearly capital that will be welcome, for the subprime sector is wobbly:
Mark Zandi, chief economist at Moody’s Economy.com, recently culled data collected by Equifax, one of the nation’s major credit bureaus. He found that 2.87 percent of residential mortgages were at least 30 days delinquent as of the last week of March.
So 1 in 35 is behind. Certainly that’s large, but far from the ‘disaster’ some are calling it.
Now that’s a disaster — the great Boston Molasses Explosion of 1919
That’s the highest rate since the two companies began collecting the data in 2000.
A period of unprecedented low delinquencies and high homeownership advances.
The Mortgage Bankers Association has found the rate is considerably higher for subprime loans, exceeding 13% in the most recent survey.
This adds to the mounting evidence that the risk is concentrated in the subprime slice — a localized sub-disaster.
In recent years, with the housing market booming, subprime loans grew rapidly as many people rushed to buy homes anyway they could. But many of them are now having trouble making the payments, and the softening market has meant they cannot easily sell their homes or refinance their loans.
Experts advise borrowers who have trouble meeting their payments to contact their lenders immediately to work out a plan.
As I posted on at length, a delinquent borrower doesn’t have to outrun the bear, just outrun other delinquent borrowers.
Lenders say they have a financial interest in cutting a deal because the alternative, foreclosing on homes, is costly to them and their investors.
A report released yesterday by Congress’s Joint Economic Committee said that each home foreclosure imposes an average $78,000 in costs on homeowners, lenders and local communities.
That’s an interesting figure. I’ll see if I can find the report and analyze it.
The effects are compounded as foreclosures multiply in some neighborhoods, dragging down property values and slashing local government revenues through unpaid property taxes, utility bills and other fees, the report said.
That’s what happens when problems cascade
Foreclosures also add to the inventory of homes, further softening real estate values in areas already suffering from an oversupply. As values drop, more borrowers get in trouble.
This last sentence conflates cause and effect. The borrowers are in trouble to begin with, they just have one less remedy.
Sen. Charles E. Schumer (D-N.Y.), the committee’s chairman, plans to propose legislation that would provide “hundreds of millions of dollars, maybe more,” in federal money to help borrowers avoid foreclosure by refinancing mortgages they cannot afford.
Here comes the vaporware.
Legislative proposals coming up!
That money should reach borrowers primarily through community nonprofit groups that are already helping homeowners refinance burdensome mortgages, Schumer said. But he has not worked out the details of whether banks and other groups would be conduits for the aid or where the money would come from.
Nice of the Senator to proffer other people’s money.
Schumer has said it might come from a federal appropriation or perhaps the Federal Housing Administration or mortgage financiers Fannie Mae and Freddie Mac.
Two of these three cost taxpayers money; the third is not (yet?) the Senator’s money to spend.
NACA requires that people who ask for its help attend intensive housing counseling workshops. It also assesses the person’s ability to own and maintain a home. It then helps the person obtain a mortgage with one of its partner lending institutions, the biggest ones being Citigroup and Bank of America.
All that is admirable and useful, making a service-oriented package — money plus counseling, neither severable from the other — that is a kind of credit enhancement because it lowers default risk.
Remember how Mr. Marks claimed that NACA was providing the money? Not only was that an exaggeration, so is the idea that the money is new, because it is not:
In 2003, Citigroup made available $3 billion in mortgage loans to NACA through 2013. Bank of America, which has worked with NACA since 1995, committed at least $6 billion through 2015.
The group traditionally found the money was best used to finance new home loans for low- and moderate-income buyers. But with the mortgage crisis unfolding, it decided that $1 billion should be used to refinance the loans of people preyed upon by abusive lenders.
Still, mustn’t grumble too much.
Stepping into the breach by offering to refinance from higher to lower cost capital is payment relief. It will be a big help.
The group expects to refinance about 7,000 mortgages —
Assuming $1 billion, they’ll average about $145,000 apiece.
— a small number, given estimates that more than 1 million homeowners nationwide could be at risk of foreclosure.
On these figures, to refinance all of the loans will take $145 billion in new capital. That’s staggering in the abstract but not when considered against the capital markets (it represents, for example, about 3% of Fannie Mae’s $5 trillion current loan portfolio).
Lenders and other companies that manage mortgages say they’re trying to do their part to remedy the foreclosure mess. They say their hands are sometimes tied because many mortgages have been packaged into huge bonds and sold to investors, so that the terms are not easily altered.
Here there’s a big difference between whole-loan packaging and securitization. In securitization, it would be the issuers deciding how to restructure the loans, because the issuers would have the first loss position.
But rules on that have been relaxed a bit, which has allowed EMC Mortgage, a
There’s delinquent loans to restructure!
Working out troubled properties is often wise, starting with the practical fact that, generally speaking, nobody will work as hard to make a home mortgage loan work as the current homeowner.
In all this, one might ask, where are the GSEs?
Can you spot the GSE activity in this picture?
