“It’s dumb for Fannie, Freddie, FHA, VA, the FDIC, or any regulated bank who is (or has access to) an experienced and scale mortgage lender and loan servicer to fire-sell nonperforming mortgages in bulk to speculative private investors…
…these institutions all have very low cost-of-funds and/or significant leverage; typically much better than most speculative buyers would have. As long as they mark these loans to market, they should hold them and decide what is the best course of action to maximize value for their institution and minimize pain to the struggling home borrower. Why give speculative investors very high returns? These investors’ return models assume “worst-case” recoveries, higher cost of funds, lower leverage, and a big profit margin!!! Government regulators and investors need to change their thinking. They should not pressure these institutions to artificially reduce high-non-performers (via bulk distressed sales) during a downturn, as long as they have been properly marked-to-market (and especially if asset prices are generally not falling, but stable or rising as they are now). They should want these institutions to maximize the value of these assets and fire-selling these nonperforming mortgages, in bulk, to speculative investors is absolutely the wrong way to accomplish that. These institutions can do a lot of creative things speculative investors can’t: Once marked-to-market, they could modify the mortgage terms to keep people in their homes, they could foreclose and keep the home as a rental property rather than dump it on the market and make the market worse (they could even do a rent-to-own program for the borrower who lost the home), they could provide 100% financing to new borrower, etc. And realistically, does anyone really think these private speculative investors care more about the struggling home borrower than Fannie, Freddie, FHA, VA, the FDIC or the bank that made them the loan? I don’t. It’s almost like a cult has developed where everyone believes that these institutions must get nonperformers off their books ASAP, without regard to the economics. The FDIC does the same with entire banks (like they did with IndyMac)!!! That’s dumb and to me just plays right into the hands of the private speculators who make lots of money (from these institutions), as a result.” (It reminds me of a time a few years ago when I was working in Las Vegas and decided one evening to learn to play poker. I got $100 of one dollar chips to bet at the small stakes table. An elderly lady sitting next to me offered some advice after I had lost about half of my chips! At one point she said, “see those two fellows, they are pros…” and I asked her why pros would be at the small stakes table and she said, “because people like you are here.”), Mike Perry, former Chairman and CEO, IndyMac Bank
Fannie, Freddie Regulator Puts New Rules on Delinquent Loan Sales
Buyers of loans must consider delinquent borrowers for loan modifications
New rules from the Federal Housing Finance Agency aim to make foreclosures an option of last resort. PHOTO: ASSOCIATED PRESS
By JOE LIGHT
Investors who take over delinquent mortgages backed by Fannie Mae and Freddie Mac must try harder to reach agreements that let borrowers keep their homes before kicking them out, according to a new set of rules released Monday. The rules could limit foreclosures but also could cost taxpayers money.
The rules from the Federal Housing Finance Agency require investors to consider extending loan terms, forbearing or forgiving mortgage principal, or pursuing a short sale before foreclosure. When an investor does foreclose, for the first 20 days after the property is marketed, the investor can consider selling the property only to nonprofit groups or to people who intend to live in the house, rather than to other investors.
Fannie and Freddie don’t make mortgages but buy them from lenders, wrap them into securities and guarantee to make investors whole if the mortgages default. When a default occurs, Fannie and Freddie try to mitigate their losses through getting a borrower to pay again or, eventually, through foreclosing upon the property.
Because such a process can take years and is expensive, both companies have lately considered selling the nonperforming loans to investors who would go through the process themselves. Loan buyers also have the flexibility to take drastic steps to keep homeowners in place, such as by cutting mortgage principal balances, which Fannie and Freddie are largely prohibited from doing. The companies are taking their cue in part from the U.S. Department of Housing and Urban Development, which has held auctions of nonperforming loans backed by the Federal Housing Administration for several years. Nonprofits have criticized some of those auctions.
The rules represent a nod to housing advocates who have long complained that some investors have treated homeowners roughly after buying loans formerly owned by the government. Some advocates had asked for the rules in response to what they said were anecdotal reports of ill treatment from some investors who bought the homes.
However, some investors say that they generally follow the practices outlined by the regulator already, and that to the extent the rules make them go through extra steps, it could result in lower prices for the loans, and steeper taxpayer losses.
The FHFA’s rules essentially seek to ensure that investors who buy the loans make several attempts to keep borrowers in their homes before foreclosing.
“These guidelines are a great step toward ensuring that the auctions are more responsible and have the potential to benefit homeowners and neighborhoods,” said Sarah Edelman, a senior policy analyst at the left-leaning Center for American Progress.
“FHFA expects that with these enhanced requirements, [nonperforming loan] sales by Freddie Mac and Fannie Mae will result in more favorable outcomes for borrowers and local communities, while also reducing losses to the Enterprises and, therefore, to taxpayers,” said FHFA Director Melvin Watt in a statement.
The rules come as Fannie’s and Freddie’s auctions get under way. Freddie has held auctions for loans with around $1 billion in unpaid principal. Fannie executives have said they’re considering auctions but haven’t yet had one.
“The problem is, what’s the purpose of changing the rules midstream? The goal of an investor when he buys a nonperforming loan is already to make it perform,” said Vincent Fiorillo, president of the board of the Association of Mortgage Investors and an executive at DoubleLine Capital.
Mr. Fiorillo said that investors would have to see the specifics of the next Fannie or Freddie loan auctions before knowing whether the rules would hurt prices.
New Jersey Community Capital, a nonprofit group that has purchased several hundred FHA-backed loans, said that it took a look at Freddie’s recent auction but ultimately couldn’t put together a bid.
Among the constraints, Freddie’s bidding window—at two weeks—wasn’t enough time for the nonprofit to inspect the properties or figure out where to get financing, said Peter Grof, deputy to the president at NJCC.
The size of the pools so far, at several hundred million dollars, have also been hard for nonprofits to swallow, he said.