I’ve given you every chance to move, Black

As revealed in a recent Guardian (UK) article, if the private participants don’t move, the government can find itself stalemated.

Why aren’t you moving?

It was a £1.5bn cash injection that was supposed to make a dent in England’s 5m-strong housing waiting list.

Five million waiting list?  In a country of 60 million total? 

The NHF, which represents housing associations, estimates that households on the waiting list in some areas would have to wait 280 years for a home.

I’ve got a good chance to be next up

Chief executive David Orr says: “What was already a significant problem [of demand for affordable housing] is getting worse on a day-by-day basis.”

Doesn’t that signal there is something powerfully wrong with the UK’s housing production system?

“In the short term, we have got to do as much as we can [to build], given the circumstances.”

So when housing minister John Healey announced the government’s new affordable housing drive this summer, first reactions were positive.

Want a billion pounds?

“The cash was a bit of a surprise and very welcome,” says Richard Capie, policy director at the Chartered Institute of Housing (CIH). “When was the last time you saw money coming from education, health and transport into housing?”

Capie can’t remember seeing money flowing from education into housing

But now the excitement has subsided, questions are being asked about the government’s new plans and its attempt to spend its way out of the house-building slump. Can the money really do anything to ease waiting lists?

Depends on how many homes the money builds, and at what affordability level.

And how can we provide enough affordable homes for the future once the funding runs out?  Such issues will be at the heart of the National Housing Federation (NHF) annual conference starting in Birmingham today [23 Sep 09 – Ed.].

Certainly, plenty of cash is going into addressing the development downturn: the new £1.5bn comes on top of £1bn in the Budget, including a special fund to restart stalled development projects. Housing associations are building, despite:

[1] Tougher access to finance

[2] Tightening land supply

[3] The collapse in demand for ownership that makes it impossible to cross-subsidise schemes with homes for sale.

You’re out of the building business

Tell again why they’re building?

Keith Exford, chief executive of one of the biggest developing housing associations, Affinity Sutton, says his association “is whole-heartedly open for business.”

Of course they are.  Sharks gotta swim, and bats gotta fly.  Developers gotta chase the next deal ’til they die.

But he warns that the recession is straining the system. “If you are going to do social housing without the benefit of cross-subsidy, then you need more grants and you build fewer houses out of available resources,” he says.

Cross-subsidy, which I liken to the unicorn – much pursued and seldom captured – is predicated on selling market-quality homes at market prices without having to spend  market costs (usually for land) to develop them.  Then the ‘excess’ profits resulting are plowed back in to greater affordability on the other apartments.

“We need to start thinking about the current development model as I can’t see how it can survive.”

That development model is precarious.  More than precarious.

Must answer me, these questions three

Ere the other side he see

In the US, we’ve seen that the LIHTC delivery system has been disrupted, and although it is slowly repairing, it has some ways to go.  The British system is under different but no less profound stress.

The NHF also argues the government is undermining social housing growth by insisting that housing association rents be cut by 2% because of falling inflation.

First case of mutual stalemate.  It’s tempting to scale back resident rent increases, but every dollar so saved is a dollar less of free cash flow to the Housing Associations – which, as non-profit MEEs, deploy their excess capital into building new homes.  By easing the stress on current residents, they prevent other people from becoming residents in the new homes Housing Associations would otherwise develop.

Orr estimates the cut would cost associations £260m a year, slashing development by up to 4,000 homes a year.

To save the many 2% a year, we leave 4,000 out in the cold.

If it were up to me, I’d charge them 2% more

And this is self-defeating; in the long run, lack of supply will push up rents.

“When we are expecting to see public capital investment reduce, reducing associations’ revenue capacity just makes development more and more difficult.”

What would make a real difference, associations say, is a readier supply of mortgages for those wanting shared ownership.

Certainly – but if the overall interest rates go lower, that will also push up prices.  Stalemate again?

They also urge more flexibility from councils on planning to make it easier for developers to build. Councils, associations believe, should not expect as much from planning gain – where developers incorporate affordable housing in return for planning permission – as they once did.

As I’ve previously posted, the UK’s form of inclusionary zoning, Section 106, is a zero-sum game.  Whatever the locality wins, the sponsor loses.  Every dollar of affordability grasped by the locality is a dollar less profit, land value, or risk cushion.

Councils themselves have now been put centre stage in developing new social housing. Earlier this month, the government confirmed 47 councils will share £127m to build more than 2,000 homes, with more money up for grabs in the autumn.

That’s £63,500 per home of permanent sunk (non-recoverable) cash equity out.

One per new affordable home?

There are also planned reforms to the way council housing is funded, allowing councils to keep money from rents. The Local Government Association (LGA) is urging the reforms to be pushed through quickly. LGA chair Margaret Eaton says: “Councils could build up to 300,000 new homes and improve conditions for millions of tenants if there is root-and-branch reform of the housing finance system and the government takes away the barriers to building.”

Like the love affair with greenfield preservation.

But some authorities are unhappy about the house-building drive, since it means the funding they need to improve their existing stock is on hold.

Another stalemate?  Spend more to build new and you have less to rehab existing? 

That’s the consequence of the public housing dependency trap.

The authorities affected – around a dozen that have set up arm’s-length management organisations (ALMOs) –

In addition to housing associations, UK public housing is operated by local authorities.  Under the Labour government, strong coercion was applied to compel those authorities to set up professional management operations (Arm’s Length Management Organizations, or ALMOs).

I’m tickled to be an ALMO

Having relied on the government for funding, the ALMOs find themselves in the position of Flounder in Animal House: “You effed up.  You trusted us.”

– now stand to lose hundreds of millions in decent homes programme funding. Gwyneth Taylor, policy director of the National Federation of ALMOs, says the government should not renege on its promises to existing tenants.

Taylor doesn’t believe in reneging

“They are throwing all their eggs into one basket, when there’s no guarantee all the £1.5bn will be spent,” she says.

Catch the subsidy!

Block that metaphor!

For the Conservatives the answer lies in scrapping current house-building targets, which, according to shadow housing minister Grant Shapps, are just imaginary numbers. “In many ways it’s not through lack of money that we are not building enough homes… [the government] has got the wrong approach, with: 

[1] Too much targeting

[2] Inefficient ways to spend money

[3] Lots of schemes that add little, and

[4] Cumbersome administration.”

(”Other than that,” he added, “they’re swell fellows.”)

For Exford, recently appointed to the Joseph Rowntree Foundation’s new housing taskforce, which aims to develop policy options, the solution could lie in more homes for intermediate and market rent.

Basic principle: if you add supply anywhere on the income/ cost continuum, you will ease stress throughout the system.  That would be a move to loosen the stalemate.

More flexible options could bridge the gap between those who can afford ownership and those who qualify for scarce social housing. “We need a more sustainable, mixed-income, mixed tenure product range,” he says.

The CIH’s Richard Capie argues that, in the wake of a government pledge to make the allocation of social homes fairer – councils are being urged to inform communities better about who gets housing, for example – there should be a range of “price points” for affordable housing.

“Someone in a social home on £65,000 and someone next door on housing benefit both pay exactly same rent. It’s not about them being in the properties – that’s a good thing – but should we be looking at rent geared to income? That would give you more rental income and that’s how you build more homes.”

Means-testing is another form of poverty trap.  Another possible mutual stalemate.

The time is ripe, many feel, for change, and this is acknowledged by Sir Bob Kerslake, chief executive of the Homes and Communities Agency: “It is critical that the sector actively joins the debate and is open to new models. Who knows what the process will bring, but we are more likely to succeed through collaborative thinking across the housing and regeneration world.”

To make a move, you’ve got to break the mutual stalemate.

At least it’s not stalemate

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By: David A. Smith

… is affordability?

Am I up when you’re down?

When the homeownership rate drops, what happens to apartment occupancy?  As illustrated by this Wall Street Journal article, the answer depends on two factors:

1. Why homeownership rates are dropping

2. How long it has been since the homeownership drop began

Start with a fact. 

Start with just the facts, ma’am

Apartment vacancies hit their highest point since 1986, surging in cities from Raleigh, NC, to Tacoma, WA –

While the Journal leaves its choice of cities unremarked, neither of these are primary cities, nor are they at the epicenter of foreclosures – Miami, Phoenix, Las Vegas, or California’s Inland Empire.

During the third quarter, vacancies increased in 42 markets, improved in 26 markets and remained unchanged in 11 markets. Omaha, Neb., saw the largest rise in vacancies, with the rate rising 1.1 percentage points to 7.4%. Other big rises were seen in Memphis, Tenn., Indianapolis, Raleigh and Tacoma.

Here’s a hint: dark red is bad

If apartment vacancies are high in such normal-America cities as Raleigh and Tacoma, the cause is not a glut of supply, but a withering of demand:

– as rising unemployment continued to chip away at demand during the traditionally strong summer rental months.

People tend to forget that housing demand is elastic.

The muscles in my mighty arms

Are as strong as rubber bands

When housing is cheap, people consume more – they move out of the house, lose the roommates, buy a larger home with a media room, a home office, or a game room.  Going the other way, when housing becomes expensive: the total number of households shrinks.

Driving the change is the troubled employment market, which is closely tied to rentals. With unemployment at 9.8% –  a 26-year high – 

“Hey, aren’t you as big as you think?”

Young singles double and triple up in larger roommate combinations.

And with the money we save not washing, we can be solvent!

– more would-be renters are doubling up or moving in with family and friends during periods of job loss.

Young adults move back home (’boomerang kids”).

Even if you charge him rent, household consumption has shrunk

Landlords have been particularly battered because unemployment has been higher among workers under 35 years old, who are more likely to rent.

Families put young children two to a bedroom.

Most of us grew up with bunk beds at one time or another

The result is fewer households, and higher structural vacancy:

The U.S. vacancy rate reached 7.8%, a 23-year high, according to Reis Inc., a New York real-estate research firm that tracks vacancies and rents in the top 79 U.S. markets.

When that happens, some landlords, usually of weaker properties, cut their rents as they seek to prop up occupancy, at least in the short term:

Meanwhile, the air leaving the market is driving rents down, most sharply in markets that had been chugging along until a year ago, when unemployment accelerated, including Tacoma; San Jose, Calif.; and Orange County, Calif.

From the WSJ: higher vacancy squeeze rents down

Nationally, effective rents have fallen by 2.7% over the past year, to around $972.

Only 2.7%.  Could be a lot worse.  Still, with structural weakness embedded in the rental sector, as long as the economy continues to shed jobs, we can expect to see apartment occupancies wobbling, even though new construction has largely dwindled to a stop.

Not so flashy any more

For the next six months, occupancy will also drop cyclically, because housing demand expands in the late spring, when people tend to move house and when we graduate a new crop of collegians.

The [vacancy] rate is expected to climb further in the fall and winter, when rental demand is weaker, pushing vacancies to the highest levels since Reis began its count in 1980.

The weakness has even hit that least-American of marketplaces: Manhattan.

Manhattan has all the drivers of structural rental tightness: pernicious and stubborn rent control, severe land restrictions and barriers to development, and a strong employment base.  Even so, New York City landlords are confronting market forces, some for the first time.

In New York, Jennifer Hyman rented a one-bedroom apartment in July at a monthly rate of $1,950 — down from $2,450 for the previous tenant — when she returned to the city after graduating from Harvard Business School. Her first month’s rent was free — and her landlord painted the apartment, scrubbed the floors and added window coverings.

Painting the apartment?  Scrubbing the floors?  Sprucing the window coverings? 

Half of America of ROTFLMAO right now, since in America (the land of the Kleen Rest Room and the free ice tea refill), all those things are de rigueur for landlords upon new rentals.  It’s called “prepping a turnover vacancy.”

“The experience was night-and-day different from before,” said Ms. Hyman, who had rented other Manhattan apartments between 2002 and 2007, each time paying a brokers’ fee –

Another sign of a formerly hyper-inflated apartment; the commodity was so scarce people paid finders’ fees to secure one:

– and feeling pressured to sign a lease the minute she found an apartment.

Third sign: haste in closing, because if you don’t take it, there is someone right behind you.

Now, she says, “Renters are the ones with the power.”

Not all the power, but certainly more than the zero they had before.

“When job losses stop, rents will firm and occupancies will firm,” said Richard Campo, chief executive of Camden Property Trust, a Houston-based real-estate company.

“Living inexpensive?”

Well, yes.

The deteriorating rental market comes amid some signs of stabilization in the housing sales market.

Normally, home ownership and rental are countercyclical, so as the demand gradually rises, we can expect apartment occupancy to tick up before home prices do. 

But then there’s our Federal government putting its thumb on the rent-buy scales:

Need rebalancing?

An $8,000 tax credit for first-time home buyers and investor demand helped to boost sales of low- and moderately priced homes this summer.

But some analysts warn demand could fall with the expiration of the tax credit and supply could increase with more foreclosed homes hitting the market.

Both are true: housing will fall again, and supply will probably rise, particularly when one looks at the interest rate resets still before us:

We’re not through the rate resets by any means

While a housing recovery could lead the best quality renters to move out and purchase homes, the move-out rate [into homes – Ed.] isn’t expected to surpass levels seen during the housing boom earlier this decade.

In other words, we have a very long hill to climb.

Mortgage credit standards have tightened considerably since then, which should keep more renters in place.

Can’t support that much, can I?

In the intermediate term, that should be good for rental.

Apartment owners ultimately could gain from the housing bust because the U.S. home-ownership rate has fallen as foreclosures rise. But the housing bust has also flooded some of the most overbuilt housing markets with new apartment inventory as developers have converted unsold condominium developments into rentals.

Reis projects that the vacancy rate will peak at well above 8% in mid-2010.

Folks, this recession is a long way from over.

SIGNS advertise apartments for rent in San Francisco in July. Rents declined during the third quarter, usually a strong period for rentals

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Yesterday we saw that even with strong Administration and Congressional pressure for lenders to modify loans, and modest financial incentives to loan servicers achieving successful workouts (we’ll return to those below), as chronicled in this Wall Street Journal, many people – at least, the Journal had no trouble finding plenty – are waiting as impatiently as those who expected to get free Kentucky Fried Chicken some months back.

That’s a big oupsie, isn’t it?

Actually, despite the Journal’s chastisement of Saxon for ‘falling behind,’ an extraordinary number of loans have been dealt with:

This always presumes that you’re supposed to modify all these loans, doesn’t it?

Saxon so far has completed nearly 17,000 loan modifications where borrowers have submitted income verification and other documentation and made their first payment.

All of you have already been accommodated

In fact, Saxon’s been accelerating its procedures in a manner that, were it applied to new loans, would be accused of recklessness:

In total, it has given initial approval of 28,000 modifications where the borrower has provided spoken information about income, a process that underscores the government’s desire to move things along quickly.

Once upon a time, that approach was called a no-doc loan or a liar’s loan.

Trust me, the sign is lying, not me!

I presume Saxon’s smart enough not to convert an initial approval into a final without the borrower’s documentation.  Certainly Mr. Meola’s loaded with experience:

Charged with beefing up Saxon’s operations is Mr. Meola, an accountant who held senior mortgage positions at Citigroup Inc., PNC Bank, Washington Mutual Inc. and New Century Financial Corp.

Having been the EVP of home lending at a subprime lender that went massively bankrupt in April, 2007 is certainly experience, but is that of the comforting kind?

We’re experts, we have experience

Mr. Meola, 52, is the author of a how-to management guide, which offers tips on communications and staying positive.

I shouldn’t mock that, but how can a blogger resist?

“Always look on the bright side of life”

He joined Morgan Stanley in the spring of 2007 [After New Century's bankruptcy – Ed.] as chief operating officer of its residential mortgage business as the firm was in the midst of a massive spurt of loan originations and securitizations.

Despite the Journal’s understandable sympathy toward Mr. Meola, leaping from a bankrupt lender to another lender rapidly buying the same product, and in vintages that we now know were among the worst – well, that’s not what would lead my resume.

‘Massive spurt’?  Really?

That growth had enabled Morgan Stanley to climb up the rankings of subprime-mortgage sales. Within a few months, Mr. Meola and Morgan Stanley effectively stopped making subprime loans as the industry collapsed.

Perhaps Mr. Meola was the voice of caution.  That he is still at Morgan Stanley suggests so.

At the time it was purchased in 2006, Saxon’s portfolio totaled 165,000 loans for an unpaid balance of $26 billion. As of June 30, 2008, the portfolio had grown to 342,404 loans, the bulk of which were subprime, with a balance of $56.9 billion.

Even if Mr. Meola turned off the tap in September 2007, outstanding commitments would have taken some months to close, and the portfolio would swell. 

That swelling’s still hurting

The 2006 vintage averaged $157,500 apiece; the 2008 vintage $166,000, or 2.5% annual increase in loan size – basically keeping up with inflation. 

Another inference in Mr. Meola’s favor is this:

Part of the problem at Saxon is that it didn’t ramp up its ability to modify loans as early as other servicing companies. A spokeswoman for Saxon says that when Morgan Stanley purchased the company in 2006, it lacked enough employees and systems to undertake massive numbers of modifications. It wasn’t until the spring of 2007 – after its portfolio of subprime loans had already started to sour [And after New Century had gone bankrupt, and Mr. Meola had joined Morgan – Ed.] – that Saxon began to focus on modifying loans.  Not until the fourth quarter of 2008 did Saxon boost its capacity to handle a large flood of requests.

We’re under water

Nor would there have been a huge reason to do so, as until that time there was no Federal relief to change the workout equation.  The offers are generous:

Some Saxon borrowers have gotten swift modification approvals. Lorraine Rodriguez, a hospital worker in Anaheim, Calif., called Saxon in mid-May. Following an hour-long call, she says, Saxon told her she had been approved for a three-month trial modification starting June 1, cutting her mortgage rate to about 5% from 9.5%. Her monthly payment was cut 42%, to just below $1,900.

Monthly payment cut from $3,275 to $1,900, saving you $1,375 a month.  Who can argue with that? 

The new rate “is still a high amount and is tough for us,” says Ms. Rodriguez, 57.

If a 42% debt service cut is still ‘tough,’ how ever did you buy the property in the first place?

Ambition, that’s how

If anything, Saxon’s been too generous:

Saxon’s borrowers’ rate of so-called re-defaulting — or defaulting on a loan after it’s been modified — has also been higher than most.

Translation: We promised you’d reform, we gave you a break, now you’re in the soup again.

Higher is not better

Of the loan modifications made by Saxon in the first quarter of 2008 where monthly payments were decreased by more than 20%, 34% of the amount owed was delinquent by 60 days or more 10 months after the modification, according to Credit Suisse Group.

The ‘20% drop’ is a shorthand for ‘modifications big enough to be meaningful.’  For every three borrowers to whom Saxon offered a concession – again, a free, no-cost concession – one out of those three went back in default.

One of those three balloons pops

That compares with an average of 27% delinquent for the 18 servicers Credit Suisse analyzed.

If Saxon’s having 1 in 3 redefault, while the average is 1 in 4, Saxon’s being too nice.

[Treasury Secretary Geithner] said the agency would begin publicly reporting each firms’ results starting in August –

Perfectly appropriate, but what statistics will be reported and what inferences will be drawn from them?

– and that Freddie Mac, the government-controlled mortgage buyer, would be auditing a sample of declined requests to make sure no borrowers were denied incorrectly.

An ex post facto audit with a standard of zero defects?  Why not just jail me now?

Do not collect $1,000 reunderwriting fee

Saxon is certainly trying:

Mr. Meola says in the fourth quarter of 2008 he had ordered Saxon to upgrade its call-center systems, improve training and make sure callers were routed to the right employees.

The company has retrained 659 employees on how to implement the government program. It has invested in a new, high-speed scanning software system, which can scan up to 125 documents a minute. Before the change, it took 20 minutes to upload the same amount of documents.

Mr. Meola reviews a sample of calls into the Saxon call center, including analyzing wait times. His checklist, which monitors customer dealings in 30-minute intervals, includes counting the number of denials and available agents.

Scoring based on how many agreements are reached is self-adjusting; you can always hit whatever ratio you want just by telling your people to be easier or tougher.

Just modify it, okay?

He’s been deflecting criticism from some watchdogs. In April, for example, Saxon executives convened at the Fort Worth unit of the Better Business Bureau. The agency, after receiving a spike in complaints from Saxon customers, had given the company an “F” based on the complaints.

Sitting in a small conference room, members of the bureau told Saxon executives of complaints about service, billing and miscommunications during refinancing, according to an agenda for the meeting. More than 300 people had lodged complaints in the year ending early 2009.

Sorry to be repetitive, but these people are asking for unilateral relief.  Patience is a virtue.

Won’t, can’t … or shouldn’t?

Mr. Meola says complaints spiked after Saxon took over a portfolio of 80,000 loans from a troubled rival in 2007.

No good deed goes unpunished. 

We’ll make your loan conform

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When you’re denied something, a chasm separates being told I won’t help you from I can’t help you.

It ought to be easy, oughtn’t it?  Hard-working people who suffer temporary setbacks deserve mercy from their lender.  For the lender, mercy will be good business, as those hard-working folks will gratefully repay their new obligations, saving the lender foreclosure expense, uncertainty, and loss on resale.  All will be well.

If only it were so …

We love fables and epics because they form neat narratives with right and wrong, triumph and tragedy, winners and losers, and those narratives reinforce our world views. 

Reality is more complex, especially when it comes not in spies but in battalions and, as revealed in this Wall Street Journal, it’s by no means clear who should be relieved, and what form that relief should take.  The Journal set it up in time-honored link-high-and-low fashion. 

Can they possibly be linked?

Start with the high:

Morgan Stanley chief John Mack recently made a new friend, he told shareholders in April — a Southern woman who had benefited from the big bank’s stepped-up efforts to modify loans under a new federal program aimed at keeping borrowers in their homes.

“I’m now invited – if I ever visit Memphis, Tennessee – to drive two hours south to have dinner with her and her family,” Mr. Mack said.

How far south of Memphis?

Meet the low:

Steve Applegate of Lake Mary, Fla., has tried without success to modify his $750,000 home loan through Saxon Mortgage Services Inc.

Before you get out your handkerchiefs for Mr. Applegate, let’s see his home:

Mr. Applegate in front of his house

Saxon is Morgan’s single-family loan servicer.

An April Credit Suisse Group analysis of how quickly companies have renegotiated loans ranked Saxon last among 18 mortgage-servicing firms. Saxon has modified just 6% of the loans it oversees that originated between 2005 and 2007.  

Isn’t there a middle group here, Saxons?

By contrast, Litton Loan Servicing, a Goldman Sachs Group Inc. unit, modified 28% of its loans.

Is this a race?  Shouldn’t the number of loans needing modification vary based on how good one’s portfolio is?  Wouldn’t a better measure be “percentage of non-performing loans”?  Or “percentage of non-performing loans that are salvageable”?

Actually, that question invites another, deeper one.  A loan is a contract entered into by willing parties.  (We’re omitting from this discussion those who were defrauded or duped into loans, as there’s no suggestion that such happened to Mr. Applegate or anyone else referenced in the Journal article.)  If a loan is to be modified, what’s the justification for modifying the loan, and whose perspective(s) should decide? 

We all have standing!

The borrower.  We know why the borrower wants it – the borrower gains an unalloyed benefit, one to which he or she is not contractually entitled.

The lender.  Lenders should modify loans only if they think it is in their interest to do so, compared with their alternative of enforcing and foreclosing.

The government.  This is the wild card, because the government’s objectives are larger:

Such firms are at the center of a grand government experiment aimed at halting foreclosures and the collateral damage they cause neighboring homes.

New foreclosure notices will total 2.4 million this year, which could trigger price drops in 69.5 million nearby homes, estimates the Center for Responsible Lending, a financial-services research and policy firm.

Not all markets are equally at risk of collateral damage; they are highly concentrated in a few places, such as Mr. Applegate’s Florida, or marginal neighborhoods whose homeownership rates (and prices) were inflated.

Don’t be in the orange states

At an average decline of $7,200 a house, that translates to a potential drop of $502 billion in total U.S. property values.

As the old math joke goes, I’ve got one foot in boiling water, the other in ice, on average I’m comfortable.

The government plan, rolled out in February and called the Home Affordable Modification Program, or HAMP, will pay mortgage-servicing firms to modify mortgages and find other ways to keep people in their homes.

Another four-letter acronymic program, to follow TARP, TALF, HERA, ARRA, and PPIP.  Now with 33% more letters than previous TLAs!

But the program’s sheer scale and the speed with which it was rolled out has created a new set of problems for some of the 27 firms charged with carrying it out.

Hampered by scale?

I look great but I pose new problems, don’t I?

Are we surprised that the lenders are swamped?  There are two reasons.

“Now listen closely – you need a bailout”

1. Workouts are much more difficult, and slower, than underwriting new loans. 

Unless, that is, you simply want to give the money away without regard to whom is deserving and whether the restructuring will work.

Staff lacked the training and experience to modify so many sour loans.

During the housing boom, Saxon’s mortgage-servicing employees did little more than send monthly statements in the mail and track down delinquent borrowers.

Servicing means coupon-clipping and matching payments to loans.  It’s highly routine, algorithmic, scalable, and electronic.  Servicing platforms (the term of art these days for companies or business units) handle enormous volumes of transactions, all on an entirely automated and standardized basis.

Loan servicing, 1996-style: we use the same architecture, just faster hardware

Workouts are the antithesis of loan servicing – customized rather than standard, small-scale rather than aggregatable. 

Under HAMP, reworking a single loan can be a time-consuming process with many steps, from:

·         Calculating a borrower’s debt-to-income ratio

·         Figuring out which type of modification works best for each borrower

·         [Choosing the appropriate form of restructuring – lower interest, lower principal, or a combination]

·         [Sizing the new loan or loan payments]

·         Negotiating with investors who own different slices of the loan pool

[Rearranged from the Journal's jumbled list.]

That means many employees need to be trained in an entirely new set of skills.

Loan specialists need to study multiple guidelines, online tutorials and a HAMP data dictionary with terms such as “underlying trust identifier.”

This is more than simply training, it’s a whole new type of activity, one that usually requires more brain power, and therefore a higher-grade executive. 

Yes, you’ll be able to write on a whiteboard

Now, firms like Saxon are under pressure to stem foreclosures at all costs.

Saxon also has a financial incentive: The government is paying servicers:

$1,000 for each loan they modify

Another $1,000 annually for up to three years if borrowers stay current.

At $4,000 per modified loan, only about 2.5% of the unpaid principal balance (based on Saxon’s a$166,000 average loan) – not enough to encourage profligacy, particularly as three-quarters of it is paid only if the borrower stays current.  Rather, it’s a token of recompense to Saxon for upgrading their infrastructure and bringing in modification specialists to replace mindless servicing.

In all, the U.S. could provide as much as $18.6 billion to the mortgage industry, investors and borrowers.

Add to that the conflicting objectives – help the borrower, get a good loan, avoid being ambush-profiled in the Wall Street Journal or New York Times – and you have a high-stress job.

In May, shortly after the government program kicked off, Anthony Meola, Saxon’s chief executive, gave his employees a call to arms.

Mr. Meola was previously EVP of Home Lending at New Century, whose April, 2007 bankruptcy [featured at the time on the blog – Ed.] was an enormous early-warning indicator of trouble ahead. 

Sir, we’re picking up a subprime lender’s bankruptcy

He then spent a few years as a motivational speaker (he was certainly motivated J ) before landing this post.

Standing atop a makeshift stage in the middle of Saxon’s call center in Fort Worth, Texas, Mr. Meola barked into a microphone: “You are getting a chance to help preserve the American dream. Think about what you could do — you can save someone’s home!”

A man with a mission:

Mr. Meola, outside the firm’s New York headquarters

2.  Relief is free, so everybody wants some.

As so often happens, the vaporware outruns the fulfillment.  As we saw with the Free Kentucky Fried Chicken fiasco, offer something at no cost and everybody wants one – and many become irate and litigious if they are not satisfied.  All that uprush of demand sweeps the undeserving and the hangers-on along with the desperately worthy.

By the time the Obama administration and Treasury Department launched HAMP, Saxon was having trouble keeping up with requests for modifications, even as it attempted to get up to speed.

The company, based in Irving, Texas, has hired or expanded contracts with four outside companies to help handle the influx, and it recently added a late shift from 4 pm to 11 pm to manage the extra work.  

Systems designed for one load level cannot handle a peak load a full order of magnitude larger:

Even the volume of paperwork at one point grew unwieldy — an internal audit in mid-May found that Saxon’s scanning equipment was overloaded with materials sent in by borrowers, leading to delays and lost documents.

Any time load increases torrentially, the system can temporarily crash.

Here come the applications

Yet there is growing concern among some lawmakers that loan modifications aren’t moving fast enough.

I doubt that lawmakers have ever tried modifying a loan. 

[I have, and it's serious negotiating, made harder when the counterparty – the borrower – is unsophisticated, because you spend what seems eternities explaining the basics, the simplest principles, even the lexicon. – Ed.]

In late June, 20 Democratic senators wrote to Treasury Secretary Timothy Geithner, whose agency is the architect of the housing program, to ask him to put more pressure on mortgage-servicing firms.

“Close your hands around the sensitive parts, and squeeze”

The group cited a recent report from a foreclosure program administered by NeighborWorks America, a Washington network of affordable-housing organizations, that found homeowners still were being forced to wait, on average, 45 to 60 days for help.

NeighborWorks is a great group, so I trust their data, which nevertheless invites the question, what’s a reasonable interval?

On July 9, Mr. Geithner sent a message to the mortgage-servicing firms that have signed up for the modification program and told them to ramp up their efforts. “We believe there is a general need for servicers to devote substantially more resources to this program,” Mr. Geithner wrote, including adding staff and call centers.

Tell me something I don’t already know.

“Today’s lesson is mighty important, remember?”

[Continued tomorrow in Part 2.]

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“A car that ordinary Americans can afford.”

Henry Ford with his Model T

For nearly a century, that thesis has appealed to automotive titans, of whom the latest is from India, as reported in the Financial Times:

Indian companies want to repeat the success of the low-cost Tata Nano, the world’s cheapest car, by designing homes affordable to the nation’s hundreds of millions of slum dwellers.

Henry’s heir? The Tata Nano

Ever since Henry Ford harnessed mass production to the horseless carriage, architects and builders from Frank Lloyd Wright’s Usonian house through George Romney’s Operation Breakthrough, whose history is so important it deserves its own future post, but for now, consider this:

“By relying on mass construction, assembly line techniques, and factory-produced materials, Romney’s projections indicated that Breakthrough could build between 250,000 and 350,000 units of low income housing annually.”

Breakthrough was the brainchild of George Romney, who came out of the auto business as CEO of American Motors:

Henry’s spiritual heir, seeping America with affordable cars

A man whose current reputation falls short of his many contributions, Romney as HUD secretary (in many ways the political predecessor to Jack Kemp) led the charge of rebuilding America’s cities after the 1967 and 1968 riots.

Taking back the cities, with technology and mass production

Breakthrough failed miserably, but that has not stopped visionaries from seeking the replicable, affordable house. We’ve seen, at great length, that mobile homes (another progeny of the automobile adapted to housing) deliver an affordable box but have an enormous vulnerability to loss of land tenure rights and, being immobile in fact if not in law, they are no guarantee of long-term affordability.

Tata’s plan is different: a mass-produced house, with secure tenure and land ownership, on a greenfield site:

Tata Housing Development, a unit of the Tata Group – maker of the Nano – has begun its first ultra low-cost development selling homes ranging from 283 sq ft to 465 sq ft [Roughly 26 to 43 m² -- Ed.] priced at between Rs 390,000 ($8,200) and Rs 670,000 ($14,000).

As we will see, part of Tata’s approach is an integrated financial value chain that incorporates land purchase on the front end and consumer/ home asset finance on the back end.

One-stop shopping: land, house, financing

The great advantage Tata brings is the ability to deliver massive scale and to pick up the economies of standardized along the way.

“We hope to show the world that a private-sector initiative aimed at the bottom of the pyramid can make money,” said Brotin Banerjee, managing director of Tata Housing.

Actually. Mr. Banerjee and Tata are not at the pyramid’s bottom, but at its lower trapezoid, a classic emerging-market population sector.

That middle trapezoid is still very large

Except he’s aiming at the lower trapezoid, not the bottom.

India’s housing shortage is fuelled by the immigration of millions of villagers to the cities.

The income band is commonly called ‘aspirers’

As India rises, aspirers and seekers become a huge market

In this century of cities, aspirers and seekers will migrate to cities, there find work, and there generate wealth. With that wealth will come an explosion in housing demand, because as people become less poor, they want to consume more space per person.

Tata Housing calculates India needs at least 24m homes if it is to house all its people living in slums.

That number has to be a huge under -stimation of the demand; I assume the FT lost relevant data along the way.

However, many slum-dwellers are not destitute by local measures. Tata estimates 180m Indian households live on between Rs 90,000 and Rs 200,000 a year ['Aspirers' in the lexicon – Ed.].

At Rs 40 this is $2,250 to $5,000 annually.

Housing at Tata’s new low-cost development – Shubh Griha, or “Auspicious Homes” – in Boisar, about 60km from Mumbai, comes with electrical, toilet and plumbing fittings built in.

Sixty kilometers is a long way from Mumbai, so the housing won’t be occupied by people who work in town; rather, they’ll be part of the ever-expanding greater Mumbai.

Here’s what Tata is advertising:

Salient Features

* 1 Room Kitchen and 1 Bedroom-Hall-Kitchen flats available

* Integrated township with school, playground and hospital facilities

* Easily accessible from Boisar railway station and NH8

* Ground +2 buildings with beautifully landscaped courtyards

* Eco-friendly green development with water harvesting facility

* Large community centre, convenient shopping and hawking zones

* Sufficient storage space inside the apartments

* Good quality interior fittings

* Landscaped gardens

Gleaming high-rises in a verdant landscape – it has to be CAD/CAM

As against that shining vision, here’s a sample Mumbai low-income co-operative, in the Mankhurd part of town:

The Mankhurd property is much closer to town than is Shubh Griha

The 3,000-unit development, which targets households earning Rs 9,000 to Rs 10,000 a month, will also have schools, a hospital, shops and a recreation centre.

It’s encouraging that Tata is incorporating diversified uses into their newly-built communities. The greatest mass-produced housing subdivision catastrophes have been failures not because of the physical construction or even the initial sale/ occupancy, but out of monomaniacal use concentration that made them into dormitories of the poor rather than working communities. By contrast, successful mega-development properties from Starrett City on down have integrated active communities uses – retail, social, religious – right into the community itself.

Make the street into a shopping arcade, and then women, children, and the elderly follow

Result: community! Mankhurd, Mumbai

There’s no doubt of the demand:

Tata said it had received 5,500 applications with deposits for the first phase of the development, which will be completed by 2011.

Tata is able to get people to put down hard equity up front, long before there is anything but a vision, because the company has a well-deserved and hard-earned reputation for delivering on its promises. That reputation brings it cost savings throughout the whole value chain:

To reduce its capital requirements, it has developed a business model in which it forms partnerships with landowners and only pays them once the house buyers begin to pay.

Very cool. Land value is a residual – meaning it’s what is left over after you subtract the cost of building housing from the value of the housing when built.

By forming an equity-sharing partnership with the landowners, Tata reduces its carrying cost for the land (resulting in a lower net price to the home buyers) and offers the landholders a share in the effective profits resulting from the massive increase in density by going up and up.

Go up twenty stories, result increased land value!

That’s why the value of urban land is so much higher than rural. Tata is sharing that value bang with the land sellers and with the home buyers. Clever.

Henry Ford’s assembly line was a physical value chain.

Tata’s approach is a financial value chain.

1. Recruit landowners up front, attracting them with your credibility and promise of profits, and securing their urbanizable land.

2. Recruit buyers up front, attracting them with your credibility, and securing their hard equity.

3. Build standardized unit using economies of scale.

4. [Probably] finance the buyers’ purchase, using your large corporate lines and ability to securitize to deliver low-cost loans.

I hope it works. India needs lower-cost mass-produced housing around its mega-cities.

Where will he live? Mankhurd boy

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