Another housing scorecard… another month of “market fragility”:

September Scorecard


The result are in for August and (surprise), while the scorecard sites modest program successes, the housing market is still “fragile”:

• The Administration’s efforts have helped millions of families deal with the worst economic crisis since the Great Depression. More than 5 million mortgage aid arrangements were started between April 2009 and the end of July 2011. While some homeowners may have received help from more than one program, the total number of aid offers is more than double the number of foreclosure completions for the same period (2.2 million). In July, more than 28,000 additional homeowners received a permanent modification through the Administration’s Home Affordable Modification Program (HAMP); more than 790,000 homeowners across the country have now received a HAMP permanent modification with a median payment reduction of 37 percent. To date, homeowners in permanent modifications have realized aggregate savings in monthly mortgage payments of nearly $7.8 billion. The July monthly report can be found at: http://www.treasury.gov/initiatives/financial-stability/results/ MHA-Reports/Pages/default.aspx

• Housing market remains fragile as data through July paint a mixed picture of recovery. Home prices as reported by S&P/ Case-Shiller and FHFA were up for the third consecutive month in July after several previous months of decline. Foreclosure starts and completions continued a downward trend, as mortgage aid programs are helping homeowners, although some of the decline remains due to lender processing issues delaying some foreclosure actions. The fragility of the market is underscored by the fact mortgage delinquencies rose slightly in July.


Roughly a week after the Washington Post revealed the Obama administration is maneuvering for a continued government role in mortgage market, the New York times is reporting the administration is considering more action to strengthen the housing market. According to the times, the administration wants to ensure that any housing relief plan would, “help a broad swath of homeowners, stimulate the economy and cost next to nothing.” One such proposal that would potentially satisfy those three requirements is a broad refinancing program that would allow homeowners with government-backed mortgages to refinance them at today’s lower interest rates:

A wave of refinancing could be a strong stimulus to the economy, because it would lower consumers’ mortgage bills right away and allow them to spend elsewhere. But such a sweeping change could face opposition from the regulator who oversees Fannie Mae and Freddie Mac, and from investors in government-backed mortgage bonds.

Read the full article here: U.S. May Back Refinance Plan for Mortgages


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According to a story in today’s Washington Post, the Obama administration is quietly assembling a team of advisors to craft a proposal that would keep the government involved in the mortgage market:

The decision follows the advice of his senior economic and housing advisers, who favor maintaining the government’s role as an insurer of mortgages for most borrowers. The approach could even preserve Fannie Mae and Freddie Mac, the mortgage finance giants owned by the government, although under different names and with significant new constraints, said people knowledgeable about the discussions.

The proposal would be the next major step in the administration’s policy on mortgage finance since a february white-paper on the matter. The paper outlined three options, two of which called for greatly reducing the government’s role in the mortgage market, and a third that called for maintaining the government’s involvement but in a way that would mitigate tax-payer risk.

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The Obama administration has announced that it will seek proposals on how to turn thousands of foreclosed properties into rental units. The novel approach would prove a boon to affordable housing stock as the large number of rental units would ease pressure on the rental market. The proposals will be jointly solicited by the Federal Housing Finance Agency, the Treasury Department and the Department of Housing and Urban Development

According to an administration statement, the goal is to, “explore alternatives for maximizing value to taxpayers and increasing private investment in the housing market, including approaches that support rental and affordable housing needs.”

Read more on the story here: Obama team seeks ideas on foreclosed properties

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The Obama administration released it’s July Housing Scorecard, revealing another month of “mixed signals” in the housing market. Here are the key figures from this month’s report:

  • Fewer homeowners fell behind on their mortgages during the month of June. In June, 4.4 percent of prime mortgages were at least 30 days late – a significant decline from the peak of 5.9 percent seen in 2010. Moreover, seriously delinquent prime mortgages – those at least 90 days late or in foreclosure – remained approximately 22 percent below a high of 1.9 million recorded last year. As new delinquencies decrease across the nation, the number of new homeowners seeking assistance through the Administration’s programs may also decrease.
  • The Administration’s recovery efforts have helped millions of families deal with the worst economic crisis since the Great Depression. Nearly 5 million modification arrangements were started between April 2009 and the end of May 2011.This includes more than 1.6 million HAMP trial modification starts, more than 938,000 FHA loss mitigation and early delinquency interventions, and nearly 2.4 million HOPE Now proprietary modifications, reflecting the reach of standards developed in the Administration’s programs. While some homeowners may have received help from more than one program, the total number of agreements offered continues to more than double the number of foreclosure completions for the same period (2.1 million). In June, nearly 32,000 additional homeowners received a permanent modification through the Administration’s Home Affordable Modification Program (HAMP); more than 760,000 homeowners across the country have received a HAMP permanent modification to date with a median payment reduction of 37 percent.
  • Even as new delinquencies continue to fall, eligible homeowners entering HAMP have a high likelihood of earning a permanent modification and realizing long-term success. The rate of modifications moving from trial to permanent is up to 74 percent, and the average time to convert from a trial to permanent modification is down to 3.5 months. Homeowners in HAMP modifications continue to perform well over time, with re-default rates lower than those on industry modifications. At one year, more than 84 percent of homeowners remain in their HAMP permanent modification.View the June HAMP Servicer Performance Report.


Yesterday, the Obama administration announced adjustments to Federal Housing Administration (FHA) requirements that would require FHA-approved lenders to extend special forbearance to 12 months (from 4 months) for un- or underemployed borrowers who are at least three months behind in their mortgage. Here is the press release announcing the policy:

HUD No. 11-139
HUD Public Affairs
(202) 708-0980
Treasury Public Affairs
(202) 622- 2960
July 07, 2011

Adjustments to FHA and MHA requirements to allow 12-month Forbearances

(Washington, DC)-Today, the Obama Administration announced adjustments to Federal Housing Administration (FHA) requirements that will require servicers to extend the forbearance period for unemployed homeowners to 12 months. The Administration also intends to require servicers participating in the Making Home Affordable Program (MHA) to extend the minimum forbearance period to 12 months wherever possible under regulator and investor guidelines. These adjustments will provide much needed assistance for unemployed homeowners trying to stay in their homes while seeking re-employment. These changes are intended to set a standard for the mortgage industry to provide more robust assistance to unemployed homeowners in the economic downturn.

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HUD Public Affairs
(202) 708-0980
Treasury Public Affairs
(202) 622-2960
May 9, 2011


Administration finds Bank of America, J.P. Morgan Chase, Ocwen Loan Servicing, Wells Fargo in Need of Substantial Improvement under Making Home Affordable Program; Begins Withholding Financial Incentives for Three Servicers

WASHINGTON- The U.S. Department of Housing and Urban Development (HUD) and the U.S. Department of the Treasury today released the May edition of the Obama Administration’s Housing Scorecard. New to this month’s report are detailed assessments for the 10 largest mortgage servicers participating in the Administration’s Making Home Affordable Program, setting a new industry benchmark for disclosure on servicer assistance to struggling homeowners. In addition to providing greater transparency about servicer performance in the program, the new assessments are intended to prompt mortgage servicers to correct identified deficiencies to improve program implementation and more effectively reach eligible homeowners.

“While we continue to get tens of thousands of new homeowners into mortgage modifications each month, we need servicers to step up their performance to meet the needs of those still struggling,” said acting Treasury Assistant Secretary for Financial Stability Tim Massad. “These assessments set a new benchmark by providing an unprecedented level of disclosure around servicer performance and will serve to keep the pressure on servicers to more effectively assist struggling families.”

Since the inception of the Making Home Affordable Program, Treasury has required participating servicers to take specific actions to improve their servicing processes.  The new Servicer Assessments summarize performance for the 10 largest Making Home Affordable participating servicers from reviews largely conducted throughout the first quarter of 2011 on three categories of program implementation: identifying and contacting homeowners; homeowner evaluation and assistance; and program reporting, management and governance.  Based on the reviews for this quarter, four servicers have been identified as needing substantial improvement and six servicers have been identified as needing moderate improvement.  The servicers identified as in need of substantial improvement are:

  • Bank of America, NA;
  • J.P. Morgan Chase Bank, N.A.;
  • Ocwen Loan Servicing, LLC; and
  • Wells Fargo Bank, N.A.

While servicers are required to address all instances of non-compliance, beginning this month, the Treasury Department is withholding financial incentives for three servicers:  Bank of America, NA; J.P Morgan Chase Bank, NA; and Wells Fargo Bank, N.A.  Treasury will not withhold financial incentives owed to Ocwen Loan Servicing, LLC for this quarter as their compliance results were substantially and negatively affected by a large servicing portfolio acquired during the compliance testing period.

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Questions arise surrounding the default rate as the affordable housing industry fights to keep the program alive

On February 14th we posted a story on the Obama administration’s proposed elimination of the USDA Rural Development’s 538 multifamily guaranteed loan program.  In the Terminations, Reductions and Savings report that accompanied the proposed budget the administration cited the rising cost of the program caused by a dramatic increase in the program’s default rate:

…the defaults in these programs have been much higher than initially projected, and the increase has happened quickly, making them more expensive than their direct loan counterparts. In addition, the direct loan programs have very low defaults, even though they tend to serve the much lower income residents/communities

We also noted that the program’s default troubles were not news to the affordable housing industry. A CARH email newsletter had noted the troubling rise in default rate several months earlier:

In the USDA’s budget submission, the score for FY2011 appropriations increased nearly ten-fold from FY2010… It appears that certain defaults in the Section 538 program, together with changes resulting from the lack of interest credit subsidy, have been cited as reasons for this scoring increase.

Looking at the 2011 budget assumptions, we found that the subsidy rate increased from 1.15 in 2010 to 9.69 in 2011, driven by an increase in the default rate from 1.49 to 11.73.

Affordable housing advocates have since rallied around the program in an effort not only to save the program for FY2012, but also to maintain it’s funding levels in FY2011. These efforts culminated in a recent joint letter to both the house and senate:

We would urge you as you complete consideration of the Fiscal Year 2011 budget to provide the necessary appropriations to allow for a program level of $129 million and then in Fiscal Year 2012, consider allowing fees to be charged, thus making the program revenue neutral.

While the efforts to maintain a funding level of $129 million in 2011 have proven unsuccessful (the recently released FY2011 CR, H.R. 1473 only provides $30 million), the fight to keep the program alive in FY2012 goes on. The letter, signed by numerous advocacy groups, strongly contests the default rate at the center of the program’s proposed elimination:

We refute both statements, particularly the default rate… The default rate and therefore the subsidy rate for the program are incorrect as relayed by the Administration in its FY 2011 and FY 2012 budgets. The Council for Affordable and Rural Housing (CARH) has numbers that can demonstrate the default rates to be less than the agency transmitted in their budget.

The Numbers

Further investigation revealed that the increase in default resulted from just five properties going into foreclosure. The table below shows the series of loans that went into default, grouped by repurchase date to indicate which loans belonged to each of the five properties:

Also included in the table is a calculation of the default rate. This calculation, taken by summing the default amounts, and dividing the sum by the total outstanding principle in the program, results in a default rate of 8% not 11.73%. “Somewhere there is a disconnect, said Rob Hall of Bonneville Multifamily Capital.  While concerned with this disconnect, he was more troubled by the way in which the numbers do not paint an accurate picture of the program’s cost, “Historically [this default rate] is not indicative of the deals getting done in the past 7 years.”

A different program

Underlying this belief is the fact that four of the five loans were originated in the early years of the program, before updated underwriting practices went into effect: “Four of the five deals were not tax credit properties. All the deals closed in the last 5,6,7 years have been LIHTC properties. They are completely different than deals from the early days of the program, which had virtually no equity.”

The changes Mr. Hall is referring to stem from a 2004 Notice of Funding Availability that awarded points to 538 loan applicants based on Loan to Value ratios and a 2005 NOFA that awarded points for Loan to Cost ratios.  Additionally, since 2005, Rural Development has pushed to have every 538 loan securitized by the Government National Mortgage Association (GNMA). Because GNMA requires a Loan to Cost Ratio of 50% or less, this move has been accompanied by subsequently tighter NOFA requirements. The combined effect of these policies is that the agency has been funding loans that have more equity, generally in the form of tax credits. Pictured left is a clip from the 2005 Notice of Funding Availability that details the debt to cost preference scheme.

Given the historically low rate of defaults in the LIHTC program, the correlation between 538 and tax credit deals has significant implications for the 538 program’s projected cost. A recent Ernst and Young report showed the default rate for the 23-year history of the program at .83%, and an annual rate of about .03%.

“Recent 538 deals should be nearly identical to that TC rate because they are all the same deals. The default rate is well below 1% for 538 loans originated in the last 5-7 years.”  Said Mr. Hall. He also noted while the loans that went into default should never have been underwritten, “the lenders behind these loans are no longer involved with the program and the officers who originated the loans are no longer with the program.” He continued, “Members of the industry just want the default rate to reflect this, something reasonable like 2-3%. The higher default rate is leading the budget people and congress to believe the program is very expensive when it is not. “

Symptom of broader ills

A recently released GAO audit on the USDA’s 514/515 Farm Labor housing program suggests that the questions surrounding the 538 program could be indicative of broader problems for the agency. In particular, the GAO found that, “Rural Development (RD) overestimated its credit subsidy costs for the fiscal year 2010 FLH loan cohort”, attributing this overestimate to errors in calculating the default rate, “we found that the primary driver of the change from the fiscal year 2010 credit subsidy estimate to the re-estimate was the default cost component and, more specifically, how this cost component was calculated.”

The report also provides insight into the mysterious credit subsidy rate formula: “Four cost components comprise the credit subsidy estimate for the FLH program: defaults, net of recoveries; interest; fees; and a component labeled “all other,” which includes prepayments.” Going on to explain exactly how the agency erred in their default rate calculation:

Specifically, when the fiscal year 2010 budget formulation credit subsidy estimate was calculated, the estimated default cost component was inflated by a prepayment estimate. That is, RD overstated the estimated default cost component to reflect the effect of prepayment. RD, includes the impact of prepayment estimates in the all other cost component

It remains unclear whether RD uses the same credit subsidy formula for the 538 program and whether mistakes in the same prepayment calculations could have contributed to an inflated 538 default rate.  However, some industry experts find it hard not to see similarities between the two issues, “My take is that if there is a problem with determining the subsidy rate for one program, there may be issues in determining rates for other programs.” , said Colleen Fisher, Executive Director of the Council for Affordable and Rural Housing (CARH),   “I think that it shows that there are some issues that need to be worked out between OMB people and the budget people and the program people that actually know what the story is.”

She went on to reiterate that the program today is a vastly different one than produced four of the five problem-properties, “The program is too important now and we have really seen it improve since its early days. From an infancy period where it had some issues, we can now use this program to do some good”,  she continued,   “I think if we can get through FY2011, I think we might be seeing the agency reviewing the subsidy rate, that’s all premised on the crazy FY2011.”


Yesterday, an article in the Washington Post shed light on the renewed scrutiny of the mortgage-interest deduction:

there’s also a growing push to sacrifice this sacred cow, and the reasons are disparate. Some people say the policy should be changed because it doesn’t really encourage homeownership as it’s supposed to. Others say the government shouldn’t be encouraging homeownership anyway. Some people say the government can’t keep giving out such a big tax break when it faces huge deficits. Others say the policy isn’t giving enough of a tax break to lower-income families.

The article points to the President’s housing finance reform plan released in February, noting that the report said, “the deduction had encouraged investment in housing ‘over other sectors in the economy.’” Additionally, the administration’s proposed budget places a cap on mortgage-interest deductions claimed by families making more than 250,000/year.

So, what would replace the mortgage deduction, if it is eliminated?

Consumer groups say the government should replace the deduction with a tax credit of up to $5,000 a year to moderate- and low-income families buying mid- or low-priced homes. (A $5,000 credit, unlike a deduction, would wipe out the first $5,000 of tax owed to the IRS.)…

The president’s deficit commission advocates changing the tax deduction to a tax credit, similar to what the Greenlining Institute proposes. It would also cap eligible mortgages at $500,000, instead of $1 million, and eliminate any tax benefits for second homes and home-equity loans.


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