FED White Paper Identifies Negative Equity as Primary Economic Problem


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EDITORIAL NOTES: The principal problem I see is that while the Fed and other agencies are still getting their heads wrapped around what occurred in the mortgages mess, they still barely notice the elephant in the living room because if you remove the distraction it will reveal basic flaws and defects in the debts, the notes and security instruments (mortgages and deeds of trust) that are present in the system. It will also reveal the fact that the transfer documents, even if they were real, are in conflict with (a) the provisions of the enabling documents that were meant to create the blueprint of securitizing residential mortgage debt and specifically (b) the transfer of non-performing loans into the alleged pools — an event that no investor would approve.

The focus on all these proposals and white papers is to preserve the integrity of the mortgage lending process that was employed and to preserve the integrity of the foreclosures that followed. These premises are false and they cannot be made true by saying so, or by establishing a national registry for lien (in violation of states rights under the U.S. Constitution) or otherwise.

The reality is that nearly all the mortgages, whether declared delinquent or not, involve debts that have not been liquidated or determined by a full accounting. Further each debt is subject to third party payments that either cured any alleged default or reduced the principal due, or both. Thus the “credit bid” at the auction was defective unless the bid was reduced by payments received but unaccounted for previously by the creditor. The absence of the creditor from the courtroom or at any part of the process prevents the court, the trustee on the deed of trust, and the borrower to determine where the money went and why.

The second problem clearly evident in its absence, is that the debt arose between the borrower and the lender, which is to say the party who took the money (or the benefit) and the party who paid the money (the source of funding on the loan). Everyone else is a intermediary with no right to claim otherwise. This fact alone accounts for the corruption of the state and county title registries, which, contrary to the assertions in the white paper, have operated perfectly regardless of volume, thus negating the use of a national registry that is being attempted to paper over the property rights of individuals, and local taxing authorities.

The third problem is the assumption that it is difficult for the investors to fire the services and replace them with others who will perform in the interests of the real parties, thus reducing the huge unnecessary deflation in home values caused by forcing them into foreclosure. Investors can easily set up their own operations (announcement from livinglies coming shortly) wherein they can either purchase clear title from the homeowners effected or enter into meaningful modifications and settlements without the use of the existing servicers who are marching to the tune played by banks. It is well known and well established that most homeowners would give up many claims and defense if they settle the issue with their home. For those who have left they could be induced to either return or be paid a small fee for clearing title.

The solution is evading the regulatory authorities because they are presuming the mantra from Wall Street is true. There is nothing to support the mantra other than the persistent drumbeat of the same lies.

The central thesis of the white paper is true, however. Negative equity will destroy the housing market and the economy will be dragged down with it. Converting properties to rentals assumes the parties renting the properties own them. Not even Fannie Mae of Freddie have any clear right to claim title to these “REO” properties. But its equally true that a trusted portal could provide a method of settling, mediating and modifying the mortgages such that the recovery would be multiples of what are current being reserved for investors. And it is equally true and well-established that most homeowners will accept principal due and payments that exceed the current value of the collateral which is artificially deflated by the incessant pressure of ever-expanding supply inventory.

The ONLY obstacle to resolution is our commitment to using realism and practicality instead of ideology and an unswerving loyalty to those who trashed the system.


Federal Reserve Jan 4 2011 housing-white-paper-20120104

The ongoing problems in the U.S. housing market continue to impede the economic recovery. House prices have fallen an average of about 33 percent from their 2006 peak, resulting in about $7 trillion in household wealth losses and an associated ratcheting down of aggregate consumption. At the same time, an unprecedented number of households have lost, or are on the verge of losing, their homes. The extraordinary problems plaguing the housing market reflect in part the effect of weak demand due to high unemployment and heightened uncertainty. But the problems also reflect three key forces originating from within the housing market itself: a persistent excess supply of vacant homes on the market, many of which stem from foreclosures; a marked and potentially long-term downshift in the supply of mortgage credit; and the costs that an often unwieldy and inefficient foreclosure process imposes on homeowners, lenders, and communities.

Finally, foreclosures inflict economic damage beyond the personal suffering and dislocation that accompany them.1    In particular, foreclosures can be a costly and inefficient way to resolve the inability of households to meet their mortgage payment obligations because they can result in “deadweight losses,” or costs that do not benefit anyone, including the neglect and deterioration of properties that often sit vacant for months (or even years) and the associated negative effects on neighborhoods.2    These deadweight losses compound the losses that households and creditors already bear and can result in further downward pressure on house prices. Some of these foreclosures can be avoided if lenders pursue appropriate loan modifications aggressively and if servicers are provided greater incentives to pursue alternatives to foreclosure. And in cases where modifications cannot create a credible and sustainable resolution to a delinquent mortgage, more-expedient exits from homeownership, such as deeds-in-lieu of foreclosure or short sales, can help reduce transaction costs and minimize negative effects on communities.

Housing Market Conditions
House Prices and Implications for Household Wealth
House prices for the nation as a whole (figure 1) declined sharply from 2007 to 2009 and remain about 33 percent below their early 2006 peak, according to data from CoreLogic. For the United States as a whole, declines on this scale are unprecedented since the Great Depression. In the aggregate, more than $7 trillion in home equity (the difference between aggregate home values and mortgage debt owed by homeowners)–more than half of the aggregate home equity that existed in early 2006–has been lost. Further, the ratio of home equity to disposable personal income has declined to 55 percent (figure 2), far below levels seen since this data series began in 1950.4

This substantial blow to household wealth has significantly weakened household spending and consumer confidence. Middle-income households, as a group, have been particularly hard hit because home equity is a larger share of their wealth in the aggregate than it is for low-income households (who are less likely to be homeowners) or upper-income households (who own other forms of wealth such as financial assets and businesses). According to data from the Federal Reserve’s Survey of Consumer Finances, the decline in average home equity for middle-income homeowners from 2007 through 2009 was about 66 percent of the average income in 2007 for these homeowners. In contrast, the decline in average home equity for the highest-income homeowners was only about 36 percent of average income for these homeowners.5
For many homeowners, the steep drop in house prices was more than enough to push their mortgages underwater–that is, to reduce the values of their homes below their mortgage balances (a situation also referred to as negative equity). This situation is widespread among borrowers who purchased homes in the years leading up to the house price peak, as well as those who extracted equity through cash-out refinancing. Currently, about 12 million homeowners are underwater on their mortgages (figure 3)–more than one out of five homes with a mortgage.6    In states experiencing the largest overall house price declines–such as Nevada, Arizona, and Florida–roughly half of all mortgage borrowers are underwater on their loans.

Negative equity is a problem because it constrains a homeowner’s ability to remedy financial difficulties. When house prices were rising, borrowers facing payment difficulties could avoid default by selling their homes or refinancing into new mortgages. However, when house prices started falling and net equity started turning negative, many borrowers lost the ability to refinance their mortgages or sell their homes. Nonprime mortgages were most sensitive to house price declines, as many of these mortgages required little or no down payment and hence provided a limited buffer against falling house prices. But as house price declines deepened, even many prime borrowers who had made sizable down payments fell underwater, limiting their ability to absorb financial shocks such as job loss or reduced income.7

Loan Modifications and the HAMP Program
Loan modifications help homeowners stay in their homes, avoiding the personal and economic costs associated with foreclosures. Modifying an existing mortgage–by extending the term, reducing the interest rate, or reducing principal–can be a mechanism for distributing some of a homeowner’s loss (for example, from falling house prices or reduced income) to lenders, guarantors, investors, and, in some cases, taxpayers. Nonetheless, because foreclosures are so
costly, some loan modifications can benefit all parties concerned, even if the borrower is making reduced payments.

Negative equity is a problem, above and beyond affordability issues, because it constrains the ability of borrowers to refinance their mortgages or sell their homes if they do not have the means or willingness to bring potentially substantial personal funds to the transaction. An inability to refinance, as discussed previously, blocks underwater borrowers from being able to take advantage of the large decline in interest rates over the past years. An inability to sell could force underwater borrowers into default if their mortgage payments become unsustainable, and may hinder movement to pursue opportunities in other cities.

Mortgage Servicing: Improving Accountability and Aligning Incentives
Mortgage servicers interact directly with borrowers and play an important role in the resolution of delinquent loans. They are the gatekeepers to loan modifications and other foreclosure alternatives and thus play a central role in how transactions are resolved, how losses are ultimately allocated, and whether deadweight losses are incurred.
Thus far in the foreclosure crisis, the mortgage servicing industry has demonstrated that it had not prepared for large numbers of delinquent loans. They lacked the systems and staffing needed to modify loans, engaged in unsound practices, and significantly failed to comply with regulations. One reason is that servicers had developed systems designed to efficiently process large numbers of routine payments from performing loans. Servicers did not build systems, however, that would prove sufficient to handle large numbers of delinquent borrowers, work that requires servicers to conduct labor-intensive, non-routine activities. As these systems became more strained, servicers exhibited severe backlogs and internal control failures, and, in some cases, violated consumers’ rights. A 2010 interagency investigation of the foreclosure processes at servicers, collectively accounting for more than two-thirds of the nation’s servicing activity, uncovered critical weaknesses at all institutions examined, resulting in unsafe and unsound practices and violations of federal and state laws.40    Treasury has conducted compliance reviews since the inception of HAMP, and, beginning in June 2011, it released servicer compliance reports on major HAMP servicers. These reports have shown significant failures to comply with the requirements of the MHA program.41    In several cases, Treasury has withheld MHA incentive payments until better compliance is demonstrated.

These practices have persisted for many reasons, but we focus here on four factors that, if addressed, might contribute to a more functional servicing system in the future. First, data are not readily available for investors, regulators, homeowners, or others to assess a servicer’s performance. Second, even despite this limitation, if investors or regulators were able to determine that a servicer is performing poorly, transferring loans to another servicer is difficult. Third, the traditional servicing compensation structure can result in servicers having an incentive to prioritize foreclosures over loan modifications.42    Fourth, the existing systems for registering liens are not as centralized or as efficient as they could be.

A third potential area for improvement in mortgage servicing is in the structure of compensation. Servicers usually earn income through three sources: “float” income earned on cash held temporarily before being remitted to others, such as borrowers’ payments toward taxes and hazard insurance; ancillary fees such as late charges; and an annual servicing fee that is built into homeowners’ monthly payments. For prime fixed-rate mortgages, the servicing fee is usually 25 basis points a year; for subprime or adjustable-rate mortgages, the fee is somewhat higher. From an accounting and risk-management perspective, the expected present value of this future income stream is treated as an asset by the servicer and accounted for accordingly.
The value of the servicing fee is important because it is expected to cover a variety of costs that are irregular and widely varying. On a performing loan, costs to servicers are small–especially for large servicers with highly automated systems. For these loans, 25 basis points and other revenue exceed the cost incurred. But for nonperforming loans, the costs associated with collections, advancing principal and interest to investors, loss mitigation, foreclosure, and the maintenance and disposition of REO properties might be substantial and unpredictable and might easily exceed the servicing fee.

A final potential area for improvement in mortgage servicing would involve creating an online registry of liens. Among other problems, the current system for lien registration in many jurisdictions is antiquated, largely manual, and not reliably available in cross-jurisdictional form. Jurisdictions do not record liens in a consistent manner, and moreover, not all lien holders are required to register their liens. This lack of organization has made it difficult for regulators and policymakers to assess and address the issues raised by junior lien holders when a senior mortgage is being considered for modification. Requiring all holders of loans backed by residential real estate to register with a national lien registry would mitigate this information gap and would allow regulators, policymakers, and market participants to construct a more comprehensive picture of housing debt.


9 Responses

  1. This isn’t something to ignore. It’s justification for a national computerized system for real property records, and in a few words, it’s full of red herrings and baloney. Real property records need to stay in the counties where they have always been and where they belong. If some systems are in fact antiquated, here’s my 20 bucks if my county is one of them. Why and who wants a new national registry ? Spend the money on the present recorders. Leaky faucet? Build a new house! That’s what’s being promoted here.
    Someones want a private endeavor they can control and just because I or you don’t know why they want to control it this second doesn’t mean that wont’ happen and then we can learn the ‘why they wanted to’ the hard if not brutal way – again. It’s also another layer to the legitimacy of the millions of dot’s showing MERS as the beneficiary, because of course, that will be what is transferred to the new in no time private system. As evidence that this paper is bull and has the motive I give it, servicers earn 3/8th’s on servicing, not 25% on “conforming” loans or I’ll eat my words and who knows what on those sub-prime stinkers. This is not a secret, so the fact that the income is understated, to me discloses a bias and ulterior motive. I also note the word “subprime” was changed to “nonprime”. Doesn’t that describe some beef? County recorder’s offices by and large are not the pandemonium being foisted here. And if they are, pay your
    *&*!#@* fees, you bastards, and we’ll fix them. That’s almost funny. This one is really making me see red. I see why Mr G has that part in red. Oh yes I do. Anyone else?

    “An online registry” – that is sonofabitch-speak for doing away with all original instruments. Oh, let me guess. They’ll be warehoused somewhere with um, let’s see….could it be a document custodian?
    They want to scan these collateral instruments and that is the end of the blue ink original signature. And it spells the end for the recorder’s office all over this country. Right now, you can go to a county recorder’s website and see a list of the docs recorded. If you go down to the office, you can pull up the actual docs. You can’t get the docs themselves online unless you subscribe to a paid service. It’s a recorder’s office service, I believe), which is exactly what the banksters do.
    If someone wants to support a new business in the guise or form of a national registry, than damnit, do so.
    But I am personally insulted at being treated, hustled, and talked to like some barefoot, uneducated hick from the sticks (and I mean no general dispersion to those hicks) by this bull.
    And btw, why must a party with no skin in the game like a servicer be compensated for modificatton? Does this author or his gang purport to believe there’s some communication required between the servicer and another party? Who would that be? FNMA – why? FHLMC- why? If so, they already got that – isn’t that what all those FNMA formulas are? If they have to hire more people to work on modificatons, some renumeration would be reasonable, but it’s still kinda weird.
    The servicers don’t want to do modifications. I’ve heard the speculation, thrown in my own, and from this I get it that a) they have no right and they know it and 2) they don’t know whom IF anyone would have that right. And I still stand on ‘don’t get the old note back when sign new agreement, no modification’. That old sucker is probably destroyed, but if not, it’s still subject to the claims of a hidc.
    The solution in this white paper is to throw more money at it. Yep, that’ll solve the inherent problems. The whole thing is a hustle of somesort, not just the disguised but still obvious plug for a national registry. That’ll fix it. As if.
    We can’t let this go. Not if we oppose it.

  2. anon – can’t you point me to anything where the fed talks about the creditor? thanks

  3. “What a crock” is right. Obama must think we’re all a bunch of idiots…

  4. Yes. MERS — not reality.

    Investor?? They type in the trustee to a trust. We all now know that REMICs, and their trustees, are not the creditor. No one cares about how MERS defines an “investor”, the Fed Reserve has said that security investors and REMICs are not the creditor. So, MERS definition of ‘investor” is irrelevant and contrary to the law.

    But, again, none of this will matter — by the AG settlement. Obama, what a strategy you pulled as to introduce a mortgage fraud unit — at the same time you promoted compliance with the AG settlement. What a crock.

    Hmm. Did you really think the American people bought this???

    No settlement, without investigation first, makes any legal sense.

    Come on attorneys — violation of constitutional rights?

  5. Enraged- investor/holder/ never identified. I know that also. But if you go on the MERS website, type in your loan number, or ss#, your ‘investor’ pops up. So there you go. I know the trusts don’t even know that they are in a courtroom, I really don’t think MERS is involved. The servicer just types in MERS. A forged signature, a smeared seal. Who’s to know? This is why alot of the info in MERS system doesn’t correspond to reality.

  6. Amazing that the feds still don’t get it: once again, although they put some of the blame on the servicers, they fail to identify the number one cause for the defaults: we no longer want to pay a servicer as long as we don’t know for a fact that it is the entity that will be able to file a satisfaction of mortgage when we have paid off. I have a non-satisfied, pending loan on my house, dating from long before I ever set eyes on my house, for Pete’s sake! Were I able to modify (which I would no longer, thanks to Chase having forced me to default on order to qualify… and having then turned me down), I wouldn’t do it unless Chase signed a indemnification agreement and hold harmless against any and all potential lawsuits from past servicers. Are they going to do it? You bet your boots they won’t!!!

    We already know that the servicers act on behalf of “unknown” that. most of the time, they can’t even identify. All the titles are clouded because so many servicers screwed up and failed to do the minimum of recordation provided for by state laws. And our economy is in disarray because servicers collected billions they were not entitled to, including money owed to investors. So much hanky panky will not be resolved overnight. We allowed servicers to change the rules as they went along, unbeknownst to everyone.

    What is so difficult to understand about that?

    What Obama must insist on is force ALL servicers to retrace ALL investors for every single house. Once it becomes obvious that the same mortgage loan was sold over and over, then servicers will have to pay back the investors, move aside and allow investors and borrowers to work out settlements among themselves.

    Can it be done? No. Hence the need to dismantle them, fine the living hell out of them, prosecute and jail. Or… we keep looking at riots until it becomes a full blown civil war. I’m ready for that. I’m really ready for a big blow out. I would rather have some republican clown elected so that we can speed up the process, instead of countless reports which fail to address the real issues and try to find reasons other then the real ones.

    Greed, fraud, grand theft, what other reasons do they want?

  7. Obama could order the FHFA to do principal reductions at Fannie and Freddie tommorrow. Some of the private banks have started to do a few.

    Fannie Mae in my case stands behind their “investor” status and won’t reveal the trust and/or true investors. I won’t pay them until they do so.

  8. Neil, how would you suggest bypassing the Trustee, who in every case is a N.A. or GSE. Do you think they are going to just hand out the certificate holders names. The folks at PIMCO and other holders of GSE – MBS don’t care if the taxpayer makes the quarterly payment, or if the SWAPS are paying, they know Uncle Sam will make good or they will hold us hostage to the Chinese dumping treasuries again, just like AIG did.

    The Trust are also set up that even the investor can’t find out the name of other investors to avoid class filings. Anyway, the government is giving out 175 LTV loans with no appraisal and limited income docs (no recourse) to clean up the mess. What Fannie and Freddie don’t own, they will now, and they ain’t selling it back to no one.

  9. […] Taken from: FED White Paper Identifies Negative Equity as Primary Economic Problem […]

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