More Than Half of Current HELOCs Facing Payment Shocks Over the Next Two Years

delinquent-noticeHome equity lines of credit (HELOCs) originated during the housing bubble years of 2005 to 2007 have either reached or will soon reach their 10-year “end of draw” period, at which point borrowers will face a payment shock that may cause delinquency rates among HELOCs to rise substantially.

According to Black Knight Financial Services’ July 2015 Mortgage Monitor released Tuesday, HELOCs originated from 2005 to 2007 make up more than half (54 percent) of the current HELOC universe. These borrowers are facing full amortization of outstanding balances for the next two and half years, which means that approximately three million borrowers will see their monthly mortgage payment increase by an average of $250. About 550,000 to 600,000 borrowers will experience that increase within the next six months, according to Black Knight.

“This remains a situation that bears close watching.”

Furthermore, despite improving overall equity positions, about 29 percent of borrowers facing end-of-draw periods and subsequent payment shocks have less than 10 percent equity in their homes, which will make refinancing problematic, according to Black Knight.

“To give an idea of what this could mean, consider that new non-current rates—HELOCs that were current six months ago and are now at least 60 days delinquent—are up 44 percent year-over-year on HELOCs originated in 2005, and total delinquencies on that vintage’s HELOCs are up 19 percent year-to-date,” Black Knight Data & Analytics SVP Ben Graboske said. “This remains a situation that bears close watching.”

BK MM Graph 2

The credit quality of recently originated HELOCs has greatly improved.  HELOCs originated in Q1 2015 had the highest weighted average credit score on record—about 40 points higher than in 2005. The improvement of credit quality for HELOCS has resulted in overall delinquency rates for HELOCs falling to their lowest level since 2007, but the delinquency rate for HELOCs originated during the housing bubble years has been much higher. Year-to-date in 2015, HELOC delinquency rates were at 11 percent, but those with a 2005 vintage had a 19 percent delinquency rate. The number of seriously delinquent HELOCs year-to-date with a 2005 vintage is estimated at between 45,000 and 50,000, according to Black Knight.

Prepayment rates, which are historically a good indicator of refinance activity, for 2005 vintage HELOCs are outpacing the rates seen last year for 2004 vintage HELOCs—which suggests that borrowers who are able to refinance are taking advantage of low interest rates. Out of the number of HELOCs scheduled to reset during the first half of 2015, 23 percent have either been paid off or are no longer active, according to Black Knight. The number of outstanding 2005 vintage second-lien HELOCs has been reduced by 15 percent during the first half of 2015, Black Knight reported.

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In Search of the Next Generation

If the residential valuations industry was a football field, many appraisers would tell you they’re sitting on the 50-yard-line, with no book of plays, no running back, and a star quarterback who is on vacation.

Such is the nature of pessimism: It spreads quickly. But, perhaps, appraisers cannot help but feel ‘in the trenches’ when a pervasive belief exists, suggesting that the residential valuations industry is shifting dramatically, and doing so without a solid direction to head in.

You have American Banker magazine writing in a headline that the “Appraiser Shortage Could Gum Up the Works at Mortgage Lenders.”

Then there is the writer/appraiser who wrote on his own blog, an article called:  “Lone Wolves: Appraisers Fighting Everyone, Including Appraisers”—A Civil War-inspired theme apparently.

And my personal favorite—WorkingRE Magazine’s appraisal shortage headline, which seems a bit like the title of a Nancy Drew novel: “The Mystery of the Missing Appraiser.”

An Industry at a Crossroads

Despite the slew of negative headlines, signs of progress bubbled to the surface over the summer months, with more regulators and lawmakers actively paying attention to the issue of there being too few rookie appraisers. If the problem persists, consumers and lenders will eventually find themselves paying more for appraisals when demand for valuations professionals outstrips supply.

In August, U.S. Senators Mike Rounds (R-South Dakota) and John Thune (R-South Dakota) jumped into the fray, sending a letter to The Appraisal Foundation—the body that sets standards for the industry—requesting the foundation provide input on the appraiser shortage, given the many difficulties already spotted in South Dakota.

The Senators wrote: “According to the Appraisal Institute, the number of residential appraisers declined nearly 19% between 2007 and 2014.” “We are all concerned that this decrease in real estate appraisers will primarily impact homeowners and prospective homebuyers in rural and underserved areas, making it more difficult to buy or sell a home.”

The Senators are not the only voices on the front line. In August, National Appraisal Congress (NAC), an advocacy group for appraisers, launched by the Five Star Institute (the parent company of DS News Magazine) submitted feedback to The Appraisal Foundation’s Appraisal Qualifications Board, offering input on possible alternative tracks to training. The one issue that has turned appraisers into advocates is the cost of training the next generation—and the dwindling ranks of new appraisers because of it.

“Let’s pretend I’m a recent college graduate that’s looking for a career,” noted Jordan Petkovski, chief appraiser with Title Source and Chair of NAC.

“Someone mentions residential appraising and expounds on the benefits associated with working independently and setting your own schedule, all while having the potential to earn six figures a year.  At this point, I’m probably pretty excited about the opportunity…until you explain that I’ll be lucky to earn something slightly north of minimum wage—once time invested is quantified—for two years,” he explained.

“We are all concerned that this decrease in real estate appraisers will primarily impact homeowners and prospective homebuyers in rural and underserved areas, making it more difficult to buy or sell a home.” 

But Petkovski and NAC are now taking the process in a new direction—one where standardization is applied to the training model and cost-effectiveness is built into the system.  In other words,  they are not destroying the appraisal wheel—or buying into the belief that automation will takeover—they are fixing the existing wheel and their instincts haven proven correct, given some of the play the issue is enjoying in Washington, D.C.

“Surprisingly, there is no standard way to ensure a trainee appraiser has achieved competency on this aspect of the appraisal process, beyond relying on the passage of time as a qualifier for aptitude.  To this I say, we can do better,” Petkovski added. “The National Appraisal Congress is in the process of codifying these standards, inclusive of educational modules, practicum-based learning and competency-based examinations,” the chief appraiser said.

“This initiative will allow us to fully develop a trainee appraiser’s understanding of the most rudimentary component of the whole appraisal process (that of the physical inspection), all within a predefined period of time (90 days).  Once the trainee appraiser has demonstrated their understanding of the inspection, they could begin physically inspecting subject properties sans their supervisory appraiser’s attendance.”

Removing Roadblocks

Designing a faster competency program is only one hurdle. The first step is getting state regulators to focus on removing excessive barriers to entry for new appraisers and to influence changes at the state level, especially in states where a trainee cannot work alone on behalf of a mentor for most of the training period.

The NAC launched a regulatory advisory paper in August, advising all states with excessive oversight times to allow for the creation of solutions that will let qualified apprentices work alone without supervision after proving competency. Such a development would save mentors money and time.

To garner support and advocate for younger appraisers, the NAC also formed an advisory committee, known as the Society of Young Appraisal Professionals. Both NAC and the young appraiser subcommittee will be in Washington, D.C., in October to present their solutions for the appraisal shortage to the Association of Appraiser Regulatory Officials (AARO).

While advocates of change want to maintain a high level of professionalism in appraisals, the pushback inevitably comes when the push goes too far, creating standards perceived harmful to a healthy onboarding process for new appraisers. One such point was raised when Senators Rounds and Thune filed a request for information with The Appraisal Foundation.

At one point, the Senators noted that “The Appraisal Foundation recently promulgated standards requiring a bachelor’s degree for an individual to obtain State Certified Residential or State Certified General Credentials. This regulation completely discounts practical experience.”

The main concern of the Senators is the risk of going too far and eliminating this as a career path altogether. And it’s a growing concern in South Dakota among other states, given the fact that 65% of appraisers in South Dakota are 51 years old or older, the lawmakers pointed out.

“We agree that high quality standards in this industry must continue to be a priority, Sens. Thune and Rounds wrote. “At the same time, we believe it is important to assess appraiser education and training requirements, standards and qualifications to make certain we strike the appropriate balance to make certain rigorous standards exist while making, the profession attractive and accessible for individuals interested in the field.”

Federal Judge Dismisses Two Fraud Lawsuits Against Ocwen

gavel-threeA federal judge in Florida has dismissed two class action lawsuits against non-bank mortgage servicer Ocwen Financial, according to court filings.

U.S. District Judge William Dimitrouleas in the U.S. District Court, Southern District of Florida, dismissed lawsuits filed by Ocwen Financial shareholders and Altisource Portfolio Solutions shareholders accusing the Atlanta-based servicer of fraud.

“We are pleased that the Court has dismissed these two separate actions against the Company,” Ocwen spokesman Jon Lovallo said in an email to DS News. “We agree with the Court’s rulings, and will continue to vigorously defend ourselves as necessary.”

According to the court filings, Ocwen is the fourth largest mortgage servicer and the largest non-bank servicer in the United States.

Beginning in 2010, Ocwen’s portfolio of mortgage servicing rights grew rapidly, which resulted in heightened regulatory scrutiny. In 2011, Ocwen was required by the New York Department of Financial Services to enter into an Agreement on Mortgage Servicing Practices in which Ocwen promised to comply with national mortgage standards.

Shareholders of Altisource, which spun off from Ocwen in 2009, sued Ocwen over alleged losses of $1 billion incurred when the price of Altisource stock plummeted (by 76 percent, from $170 per share to $31 per share) in response to a lengthy investigation of Ocwen’s mortgage servicing practices by the New York DFS. The regulator suspended Ocwen’s mortgage servicing rights from Wells Fargo in February 2014 due to “concerns about Ocwen’s servicing portfolio growth” and subsequently issued a series of letters regarding Ocwen’s regulatory compliance. Ocwen eventually settled with the New York DFS for $150 million in December 2014 with an agreement that Ocwen founder and chairman Bill Erbey would resign.

“We agree with the Court’s rulings, and will continue to vigorously defend ourselves as necessary.”

Ocwen countered in that case that “Plaintiffs cannot assert a federal securities fraud claim against Ocwen when their alleged losses stem solely from their purchases of stock in Altisource,” according to the Court filing. The Court ruled that the Plaintiffs lacked standing to sue Ocwen in this case.

The lead plaintiffs in the Altisource case were the Pension Fund for the International Union of Painters and Allied Trades District Council 35 and the Annuity Fund for the International Union of Painters and Allied Trades District Council 35, acting on behalf of themselves and all persons and entities who purchased stock in Altisource between April 2013 and December 2014.

In the case of the Ocwen shareholders, Plaintiffs sued alleging that Ocwen made fast statements and omissions regarding Ocwen’s business practices, compliance with the New York DFS, the efficacy and cost-effectiveness of Ocwen’s servicing platforms with compliance, the nature of Ocwen’s compliance controls regarding related party transactions, and Ocwen’s ability to compete for mortgage servicing rights acquisitions, according to the Court filing. Plaintiffs sought to recover losses they incurred when Ocwen’s common share price declined by 63 percent between February 2014 and December 2014 during the New York DFS’s investigation, which culminated with the $150 settlement.

Ocwen responded in this case that the Plaintiffs “failed to plead a single actionable false statement of material fact.” The Plantiffs’ claims were all dismissed because “Regardless of the falsity of the alleged statements, the Complaint is deficient because Plaintiff has failed to adequately allege scienter (intent to deceive or defraud, or knowledge that the statements were false) as to any of the Defendants,” according to the Court filing.

The lead plaintiff in the Ocwen shareholders case is Sjunde AP-Fonden, acting on behalf of itself and all persons and entities who purchased  Ocwen common stock from May 2013 until December 2014.

Mortgage Bankers Believe Real Estate Market Will Favor Sellers in 2016

HandGrabbingHouseAlthough the rate hike is expected to occur at some point before the end of 2015, mortgage bankers indicate that the real estate market in 2016 will favor sellers.

Lenders One, a subsidiary of Altisource Portfolio Solutions S.A., reported Tuesday, 60 percent of the bank’s members noted that 2016 is expected to be a sellers’ market. In addition, 89 percent of member are confident that the market could survive a possible interest rate increase this fall.

Mortgage bankers are also watchful of other factors that could affect the industry’s growth such as: innovation in banks’ menu of mortgage products (26 percent), continued increases in home values (22 percent), and lowering acceptable down payment amounts (10 percent).

“Mortgage bankers are generally optimistic about 2016 and believe that a possible interest rate hike is not going to create a major hurdle for continued industry growth next year,” said Daniel Goldman, interim CEO of Lenders One. “Respondents also expressed positive views about TILA-RESPA preparedness, another big mortgage industry concern, in part because the extension of the implementation deadline has afforded mortgage bankers more time to get technology and processes ready to be compliant.”

Lenders One also found that mortgage bankers’ sentiment showed that they are prepared for TILA-RESPA Integrated Disclosure (TRID) rule, which will go into effect on October 3, 2015. However, the bankers are mixed on impact of the rule’s delays.

“Mortgage bankers are generally optimistic about 2016 and believe that a possible interest rate hike is not going to create a major hurdle for continued industry growth next year.”

Just a couple of months before the TRID rule goes into effect, 64 percent of mortgage bankers said they feel knowledgeable of the rule and have the right tools to adjust to the changes. Only 27 percent indicated that they were somewhat ready, while only 9 percent stated that they do not have the tools or knowledge to adapt to the new rules.

Nearly half of the survey respondents said that adjusting to the new TRID rules would be difficult when questioned if the implementation delay will make adjusting to the new TILA-RESPA rules more or less difficult for lenders. However, 47 percent felt adjusting to the new rules will be the same, with or without the delay.

“Preparation for the TILA-RESPA integrated disclosure rule requirements has dominated industry conversations for several months, and we’ve been working closely with our members to provide services and offerings that can help them address these changes,” Goldman said. “Fortunately, the survey results show that at this point the industry feels relatively well-prepared for the implementation of these new regulations.”

The Impact of HAMP on Loss Mitigation Norms

The Home Affordable Modification Program (HAMP), as established by the Department of the Treasury, which was previously scheduled to expire on December 31, 2015, has been extended through the end of 2016. This continuation will allow homeowners who may be struggling with their mortgage payments on loans owned by Fannie Mae orFreddie Mac, or serviced by a participating mortgage company, to seek relief through a HAMP loan modification.

While this extension is good news for families that are in a difficult financial situation between now and the end of next year, HAMP is unlikely to be extended beyond 2016, according to FHFA Director Mel Watt. HAMP loan modification options were never intended to be permanent, and will eventually be phased out. However, this doesn’t mean that homeowners who find that they can’t make their mortgage loan payments will have no other options but to default on their loan.

The Evolution of Loss Mitigation Norms

Prior to 2009, when HAMP was first introduced, mortgage companies had no standardized framework for offering struggling homeowners a loan modification to help reduce their monthly payment. There was no mechanism by which servicers and investors could agree to modify the terms of a mortgage loan; there was no precedent for reducing the principal or interest rate, or for extending the term of the loan; and there was no process for tracking and accounting for changes like these over time.

HAMP has laid the foundation for loss mitigation in the mortgage industry that will far outlast its extension to December 2016.

As a result, with occasional exceptions, the mortgage industry typically followed the well-worn path of sending repeated late payment notices, adding on late fees, and eventually foreclosing on properties when homeowners couldn’t make their payments. However, with the introduction of HAMP, the industry was given other options to work with, and shifted its focus from foreclosure to keeping homeowners in their homes if at all possible.

HAMP has laid the foundation for loss mitigation in the mortgage industry that will far outlast its extension to December 2016. It has enabled the industry to evolve its loss mitigation norms by helping to define a process that uses income to drive to a specific debt-to-income level, and it is likely that modifications beyond HAMP will continue to occur on this basis.

Foreclosure Avoidance Now the Standard

Today, foreclosure volumes continue to recede, but it is unlikely that the nation will ever see zero delinquencies. However, the concept of the HAMP modification has laid the foundation for the development of future modification programs, whether developed by financial institutions themselves or by the government. Either way, the industry will continue to be dedicated to exhausting all loss mitigation options in an effort to avoid foreclosure. It is not just a worthy goal, but it has become a standard, permanent part of the servicing process across the nation

The Impact of HAMP on Loss Mitigation Norms

loss-mitigation

The Home Affordable Modification Program (HAMP), as established by the Department of the Treasury, which was previously scheduled to expire on December 31, 2015, has been extended through the end of 2016. This continuation will allow homeowners who may be struggling with their mortgage payments on loans owned by Fannie Mae orFreddie Mac, or serviced by a participating mortgage company, to seek relief through a HAMP loan modification.

While this extension is good news for families that are in a difficult financial situation between now and the end of next year, HAMP is unlikely to be extended beyond 2016, according to FHFA Director Mel Watt. HAMP loan modification options were never intended to be permanent, and will eventually be phased out. However, this doesn’t mean that homeowners who find that they can’t make their mortgage loan payments will have no other options but to default on their loan.

The Evolution of Loss Mitigation Norms

Prior to 2009, when HAMP was first introduced, mortgage companies had no standardized framework for offering struggling homeowners a loan modification to help reduce their monthly payment. There was no mechanism by which servicers and investors could agree to modify the terms of a mortgage loan; there was no precedent for reducing the principal or interest rate, or for extending the term of the loan; and there was no process for tracking and accounting for changes like these over time.

HAMP has laid the foundation for loss mitigation in the mortgage industry that will far outlast its extension to December 2016.

As a result, with occasional exceptions, the mortgage industry typically followed the well-worn path of sending repeated late payment notices, adding on late fees, and eventually foreclosing on properties when homeowners couldn’t make their payments. However, with the introduction of HAMP, the industry was given other options to work with, and shifted its focus from foreclosure to keeping homeowners in their homes if at all possible.

HAMP has laid the foundation for loss mitigation in the mortgage industry that will far outlast its extension to December 2016. It has enabled the industry to evolve its loss mitigation norms by helping to define a process that uses income to drive to a specific debt-to-income level, and it is likely that modifications beyond HAMP will continue to occur on this basis.

Foreclosure Avoidance Now the Standard

Today, foreclosure volumes continue to recede, but it is unlikely that the nation will ever see zero delinquencies. However, the concept of the HAMP modification has laid the foundation for the development of future modification programs, whether developed by financial institutions themselves or by the government. Either way, the industry will continue to be dedicated to exhausting all loss mitigation options in an effort to avoid foreclosure. It is not just a worthy goal, but it has become a standard, permanent part of the servicing process across the nation

Congress Urged to Pass Bill to Protect Taxpayers from Another Fannie Mae and Freddie Mac Bailout

Fannie Mae and Freddie Mac Bailout

GSE, Fannie Mae, Freddie Mac News, Mortgage FinanceThe Competitive Enterprise Institute (CEI) and 14 other organizations have written an open letter to the U.S. House of Representatives and the U.S. Senate urging them to pass legislation that would provide a cushion to prevent another taxpayer bailout of Fannie Mae and Freddie Mac.

The organizations, representing “hundreds of hardworking Americans fed up with government spending and overreach,” encouraged members of Congress to quickly pass H.R. 1673, known as the Enterprise Secondary Reserve Taxpayer Protection and Government Accountability Act of 2015 was introduced by Rep. Marsha Blackburn (R-Tennessee) in March. This bill would create a reserve fund from the GSE profits from which Fannie Mae and Freddie Mac could draw if necessary rather than depend on the Department of Treasury (taxpayers) for another bailout similar to the $187.5 billion resuscitation they received in 2008.

Since September 2008, Fannie Mae and Freddie Mac have been in conservatorship of the Federal Housing Finance Agency (FHFA). Four years after the bailout in 2012, the GSEs became profitable again, but Treasury amended the bailout agreement (known as the “Third Amendment”) and since then, virtually all GSE profits have been swept into Treasury. The sweeping of GSE profits into Treasury has prompted several lawsuits from the GSEs’ largest investors, notably Fairholme Funds and Pershing Square Capital, who claim the profit sweep is in violation of the Fifth Amendment to the U.S. Constitution that prevents the taking of private property for public use without just compensation.

In the letter, the organizations referred to the profit sweep as a “scheme” that has left Fannie Mae and Freddie Mac with “almost no capital reserves to offset potential losses in the event of another downturn in the mortgage and housing markets.” They also said the profit sweep “masks higher spending and creates phony short-term deficit reductions that the Obama Administration can claim credit for.”

“While H.R. 1673 is a wise proposal, it highlights the need for Congress to reduce dramatically the role of government in the housing finance system.”

Analyst Dick Bove from Rafferty Capital Markets said on Friday that a recent request by White House lawyers to gain access to certain documents in the Fairholme suit is an indication that the White House was unaware of what FHFA and Treasury were doing with regards to the Third Amendment. Bove said he believes the White House’s actions indicate that a settlement in the Fairholme suit may be forthcoming.

While the GSEs remain in the FHFA’s conservatorship seven years later, the taxpayers remain on the hook should Fannie Mae and Freddie Mac completely lose their capital. In the letter, the organizations were critical of the Dodd-Frank Act’s financial reform that imposed higher capital levels for insurance companies and community banks that had nothing to do with the mortgage crisis but allows Fannie Mae and Freddie Mac to operate with almost no capital reserves.

The letter stated that H.R. 1673 creates an “insurance policy” for taxpayers, since they are a “threat” to taxpayers as long as they are under conservatorship of the FHFA.

“While H.R. 1673 is a wise proposal, it highlights the need for Congress to reduce dramatically the role of government in the housing finance system,” the letter stated. “In particular, Fannie and Freddie’s government support–implicit and explicit–should be phased out. Until lawmakers embrace comprehensive reform, however, they should pass the Enterprise Secondary Reserve Taxpayer Protection and Government Accountability Act. And this measure must, as a first step, be part of any large appropriations or financial services bill that attempts to deal with Fannie and Freddie.”