Seattle Bubble

Now that the details are out, here's a new thread to discuss.

My understanding is these are the terms...

* Mortgage had to be issued between January 2005 and July 2007
* ARM must reset January 2008 to July 2010
* You must not have more than 3% equity in your home
* Home must be worth more than the mortgage
* You must have income
* You must prove that you can make the payments
* You must not be more than 60 days past due
* Program is voluntary with the lenders - government has no authority or legal status

I bolded the two terms that jumped out at me. In other words borrowers with 0-3% equity can qualify, no one else. (Mortgage<value of home<103% x value of home)

Now take a look at this chart from a recent goldman analysis


How does this work? Looks like across all mortgages, only about 4 % of borrowers have between 0-5% equity So to start, lets assume 4% could qualify based on equity range. Then you need to adjust for:

- less 1% because the eligible range is only 0-3% (not 0-5%)
- less 1/2% for borrowers who are >60 days delinquent (16% of subprime are delinquent)
- less 1/2% because because many subprime borrowers used no/low down-payment options, so are more likely to have no equity than average
- less 1/2% for borrowers who cannot document their income (assumes 10% use of NINJA loans)
- less 1% for 1/3 of lenders who are out of business, in bankruptcy, or will otherwise choose not to participate.

This is admittedly simplistic, but through some quick estimation I get down to an estimated 1.5% of borrowers who could qualify - and these are only post-2005 borrowers, so if you borrowed before that you are screwed. Unfortunately, if you bought in 2005 you also bought at the peak of the market so you are less likely to have any equity (so you are less likely to qualify)

I'm am saddened but not surprised by this. If indeed the list above is correct as to terms (caveat: I got it off of Housing Panic, which often lives up to it's name), then his whole thing feels like a mean, cynical ploy that is more intended to deceive than anything else.

t makes good front page news, and make the stock market happy.

But it does not surprise me, since I already had a pretty accurate estimate on Monday of who this bailout would actually help.

I haven't seen the bolded items listed in any of the articles I have seen. If true, it would make it worse than useless.

Tanta says they are trying to to violate contractual terms. That in itself makes it pretty much useless.

Fixed

FWIW, here is the source

http://housingpanic.blogspot.com/2007/1 ... heres.html

Here's the details from American Banker. Sorry for the length, but you have to register, so I figured I'd save you the hassle. Focus on Segment 2.



Framework for streamlined refinancing

* Applies to first lien owner occupied residential adjustable rate loans (ARMS) with initial fixed rate for 36 months or less
* Must be originated between 1/1/05 and 7/31/07 and included in securitized pools with reset date between 1/1/08 and 7/31/10
* Servicers should apply before reset and should begin contacting borrowers 120 days prior to reset
* Plan divides these loans into 3 "Segments"


o Segment 1 – loans where borrower appears to be likely to refinance to some available loan product, including but not limited to FHA, FHA Secure loans
+ Servicer is to make determination by things such as LTV, loan amount, FICO and payment history and generally won't have to determine current income or DTI to determine eligibility for refinancing
+ Program doesn't cover second liens other than noting second lienholders should agree to subordinate their interest to the refinanced first lien
+ Servicer may evaluate loans on case by case basis or apply any framework consistent with applicable servicing standard in PSA
+ Servicer is to take "all reasonable steps" allowed by PSA and governing documents to encourage/facilitate refinancing



o Segment 2 (the heart of the program---streamlined/fast track modification) – includes current loans where borrower is unlikely to be able to refinance into any available product
+ "Current" means not more than 30 days delinquent and not more than 1 X 60 days delinquent in last 12 months under OTS or not more than 1 x 90 days delinquent under the MBA calculation method
+ LTV > 97% - Current loans with LTV greater than 97% are deemed to be ineligible for refinance under other products so would be deemed to be within Segment 2 (LTV/CLTV determined on information at origination; also if LTV is below 97%, servicer "may" obtain updated home value by AVM, etc.
+ Not FHA Secure Qualified -Current loans that don't otherwise satisfy FHA Secure requirements are also deemed within Segment 2 unless servicer can determine they qualify for some other product without performing an underwriting analysis
+ Servicer is to determine for these borrowers: (1) owner occupancy based "solely" on borrower's representations at origin [note many of whom actually made gross misrepresentations] and on other information known by or readily available to servicer; (2) FICO score change since origination
# If FICO is <660 and is not 10% or more higher than FICO at origination, borrower is considered to meet the FICO test and servicer generally won't determine current income
# If FICO > 660 or current FICO is 10% or more higher than at origination, borrower considered to have FAILED the FICO test and then servicer uses a more detailed analysis to determine borrower's current income/debts
# Servicer must determine if payment after reset will go up by EITHER (1) more than 10% if meets FICO test; or (2) if failed FICO test, an amount that servicer determines borrower cannot afford
# Servicer has option to conduct more detailed DTI analysis instead of using the above tests.
# Borrowers falling within Segment 2 would be eligible for modification that freezes the interest rate at the pre-reset rate for 5 years
# This streamlined option is NOT exclusive and does NOT prevent servicer from conducting a more individual indept analysis consistent with applicable servicing standard in the transaction documents to determine if a LONGER TERM modification would be appropriate
# Servicer may make following presumptions if loan falls into Segment 2:
* Borrower is able to repay under the modification based on current payment history prior to reset date
* Borrower is willing to pay under the modification based on (a) an agreement to the modification after being contacted; or (b) if borrower's affirmative agreement isn't obtained [many don't respond to mailings of the modification docs] by the payment of 2 payments under the modified loan after being notified of the terms
* Borrower is unable to pay and default is reasonable foreseeable after the scheduled reset based on size of payment increase if meets FICO test or based on current income if fails FICO test
* The modification maximizes the net present value of the recoveries for the trust and is in investors' best interest IN THE AGGREGRATE as refinancing options not likely and borrower can/will pay under the modified loan


o Segment 3 – loans where borrower is not current showing could not even meet the introductory rate (i.e., refinance would not help them)
+ Servicer is to determine appropriate loss mitigation approach consistent with applicable servicing standard but without using the streamline/fast track procedures used in Segment 3 and should maximize the net present value of recovery; approach can include, e.g., forebearance, short sale, rate/principal reduction, foreclosure)
+ Servicer will need to do more intensive analysis of current debt/income to determine best mitigation approach.

OK, that makes a huge difference. It's everything to the right of 3% on the chart above, not the space between zero and 3%! while I am sure that the distribution of equity is different for subprime borrowers than shown above (skewed left) that's still a much bigger base to work with!

Listen to Mark, preach on..

http://blogs.marketwatch.com/greenberg/ ... n-insider/

http://wallstreetexaminer.com/blogs/duc ... 9#more-129

"How do you 'know' the NPV will be higher for the loan modification option when you can’t calculate the NPVs to begin with? How does that stand up in court exactly?"

Just how many struggling home-owners actually have equity? I can't see how this plan is really going to help anyone. If you actually have equity (i.e. the real market rate is worth more than the mortgage) you can always just sell to get out from under your liabilities.

So long as the bail-out excludes anyone with negative equity, this program isn't going to mean a thing.

http://www.haloscan.com/comments/calcul ... 987720303/

A former FDIC employee sent these comments out today. I try to place value in comments from people like this who actually worked to clean up the S&L Bank crisis we felt in 1980s Texas.

One of the things they are leaving out of this story about the sub-prime rate freeze is that the owners of the debt (sub-prime mortgages or anything tainted by sub-prime such as mortgage backed securities) are NO LONGER required to re-price these assets on a monthly or quarterly basis as has been the case. The balance sheets in question will no longer reflect market value. This will allow institutions to hold securities of unknown value on their books without any valuation reserve or write-down (Regulations on the freeze action have not been released). This is exactly what the Japanese banks did in the 90’s when they did not quickly clean up their balance sheets and deal with the problem, and many of them still have bad debt from the late 80’s on their books. SO, the result of this is that there will be a ticking time bomb in the banking / financial system AGAIN...

Oh wait, it turns out the first interpretation looks to be correct, or close to at least- you must have LTV >97% but <100% - so only borrowers with 0-3% equity can qualify.

This is according to both Mish and Calculated Risk as of today.

In this case, EVERYONE should expect the Spanish Inquistion of Investors to control things....

Sorry, could not resist bringing lame levity to shameful subterfuge.

Another interesting take from Paul Krugman, who summarizes the situation well:

http://www.nytimes.com/2007/12/03/opini ... ref=slogin

I've seen a number of opinions regarding the bailout, and I think it is functioning exactly as planned. I.e. nobody seems to really have a clue what it means.

Let's summarize how things went bad in the first place.

First, things went out of control, but nobody knew to what degree (2002-2005). Ergo, things were 'good'. Then people and institutions began examining what was really happening (2006-December 2nd 2007). That's when things 'got bad'.

From this chain of events, we can arrive at the understanding that in our financial system confusion is good, and knowledge/comprehension is bad.

Paulson saw this and did the only rational thing. He made the situation confusing again. Since it became confusing, the markets have rallied and drunken investors are singing in the streets. We can deduce that this plan is working exactly as they had hoped.

My only question is how long will it continue to confuse?