What I Learned From The Latest Federal Housing Finance Agency (FHFA) Foreclosure Prevention Report

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What I Learned From The Latest Federal Housing Finance Agency (FHFA) Foreclosure Prevention Report

Insights To Opportunities Ahead

What’s going on with the Federal Housing Finance Agency in what they’re doing for Foreclosure Prevention? As a result, what insights and opportunities do that give to us? I wanted to put together a blog for you about what I learned from the FHFA Foreclosure Prevention Report. These reports come out on a quarterly basis. This one came out in January 2019. What you’re going to get from this is an understanding of why I keep saying 2019 and 2020 are going to be the years of reperforming notes. I always caution people on that as to be very careful as to what that definition of reperforming is.

The way I look at those as an investor is they’re nonperforming until proven otherwise. You’ll see what I mean as we progress through this report. The other thing is you’ll learn some different techniques that you may not have heard before when it comes to loan modifications, what you can do and what these lenders through their servicing companies are doing. Let’s go ahead and go through this report in January. I’ve taken the best parts of this and made it easier for you to understand. For government reports, which I read a lot of, this was fairly easy. There were fourteen pages including the glossary, which is important.

Foreclosure Prevention Activities

The first thing here is the Foreclosure Prevention activities. When FHFA took overseeing Fannie Mae and Freddie Mac, they were on a mission to prevent foreclosures. Instead of foreclosing upon millions and millions of people in the crash of the marketplace, they shifted gears and said, “We can’t let that happen. We have to do some things that enable people to stay in their homes, keep the homes in good condition and pay property taxes. That’s the mission that they were on and that’s why you saw foreclosures are starting to go down and down to the point where they’re almost insignificant in terms of numbers nationwide because of all these prevention activities. The first one that they have up there is loan modifications. It includes the HAMP, Home Affordable Modification Program and the HAMP Permanent Modifications. This is the overall trend between December 2018 and January 2019. These are month-to-month reports, not annualized or anything like that.

They had 7,437 for loan modifications in the month of December 2018. In January 2019, it increased a little bit by 1,000 up to 8,446. The trajectory there is loan modifications are working out for most people. There are some footnotes to that. For example, sometimes loan modifications go bad and they do mods again. If you read my State of the Industry Address, I showed you that. The number of people going through three modifications has increased pretty drastically. There are some people gaming the system. Nonetheless, the overall trajectory is that loan modifications are working.

First of all, what do they mean by loan modification? I have the glossary that comes with this report. This is not my definition but the definition of FHFA. It says, “Loan modifications, the number of modified, renegotiated or restructured loans, regardless of performance to date under the plan during the month.” This is one of those indicators. When they say this loan has been modified, it doesn’t mean that it’s performing again. They may have just renegotiated and that’s all that they did. The first person hasn’t made the first payment. In some of these negotiations, people have to prove themselves before it becomes finalized. They have to make three months of payments.

You’ve got to be careful of what that definition of a reperforming or a new loan modification is. By their own definition, it doesn’t necessarily mean what their performance is to date. It’s that they did something during that month to modify that loan. It continues and says, “Terms of the contract between the borrower and the lender are altered with the aim of curing the delinquency (30 days or more past due).” By saying it’s been modified, it means there’s been a negotiation that has been concluded. All they did was alter something. It has nothing to do with what their performance is to date. It’s important that you understand what that means.

It also means that just because the loan has been modified, it doesn’t mean that loan is going to continue to perform. They get the loan. They might package that up and resell that under a reperforming note, but it may not be the same thing that you’re thinking. The point is clear there. Let’s talk about the HAMP permanent loan modifications. The terminology is so important. When people hear permanent modification, the direct logical inclination from the consumer is, “They’ve modified my loan. This is what my payment shall be.” Consumers are very focused on payment, not as much on the interest rate, term and everything else. When they see a permanent modification, they go, “This is my new monthly payment.” That is not the case at all. It comes down to the definition.

If you go to making the home affordable, which is what this HAMP program is underneath, the government website says, and you can go check it out on MakingHomeAffordable.gov, “You should understand what the new interest rate on the modified loan is, whether your interest rate will increase at some point and what the new term of the loan is (30 years, 40 years).” You will see HAMP permanent loan modifications that were stretched all the way out to 40 years. Somebody might have been in a house for five years. They started with a 30-year loan. Now they’ve got 25 years left. They ran into some problems. The loan has been modified under HAMP. Now they have a 40-year loan by stretching that loan out.

Typically, what they do with that is lower the interest rate that lowers the person’s payment. I’m purely speculating, but let’s think of the logic. Most consumers who are signing this paperwork have no idea. They’re thinking, “What is my payment?” Because it says permanent modifications, it’s what they understood. The reality is most of the loans that they did under HAMP start to go up after the fifth year. For five years, their monthly payment was very low. Sometimes the interest rates were moved all the way down to 2%. Five years down the road, that goes to 3%, then 4% and then 5%. Some of these loans were written where it goes back to the original interest rate or taps out at some government maximum.

There have been loan modifications on a lot of these HAMPs because people simply didn’t understand that. That became a big problem. The number will come up a little bit later on, but I’m thinking it was somewhere around 63% that had to be modified again. That’s a big number. How does that affect us as real estate investors and real estate note investors? They’re going to modify these loans, package them up and sell them on the big auctions. This is already happening. Go look at Fannie Mae on their website. You’ll see they’ve already had two sales. Freddie Mac had a sale of nonperforming. Mostly, when you look at the numbers, it’s reperforming. What does that exactly mean? That’s what we have with the HAMP programs. The next one up is repayment plans. You can see the repayment plans going from thirteen months spread. In December 2018, it was 2,400. In January 2019, it’s 2,400. It’s off by about three loans, which is pretty crazy when you think of it.

FHFA Foreclosure Prevention Report: Consumers are very focused on payment, but not as much on the interest rate, term, and everything else.

Repayment Plans

What is a repayment plan? If we go back to their glossary, it says, “Repayment Plan is an agreement between the servicer and a borrower that gives the borrower a defined period of time to reinstate the mortgage by paying normal regular payments plus an additional agreed upon amount in repayment of the delinquency.” You’ll notice it says, first of all, “An agreement between the servicer and a borrower.” Fannie Mae does not serve as their own loans. That’s what the banks do. Most of what’s going on, what the consumer sees is the bank is working with them. They think the bank owns the note. The bank doesn’t own the note. Fannie Mae or Freddie Mac do. The bank is simply acting as the servicer of that note. They’re collecting principal interest, taxes and insurance, handling the escrow, making sure the payments are made, following up on foreclosures and everything else, just like a regular servicing company. That’s what banks do for Fannie and Freddie. It’s between them, which means Fannie Mae and Freddie Mac have given the servicers guidelines to say, “Go work this out. Let’s see what we can do.”

Sometimes it happens where somebody lost their job. Look at the employment numbers. There are a lot more people working. We’re hitting record numbers of people working. It’s a very likely scenario. People lost their job and now they’re working again. They can afford to make the payment, but they have such delinquency. They don’t know if they should pay or not. They know that just making a payment doesn’t prevent foreclosure when you have two years of delinquencies. They’re a little bit stuck. This repayment plan simply comes into the server, looks at their information and says, “We’ll give this borrower a period of time to reinstate the loan. Make some regular payments. Prove to us that you can do that.

Normally, that’s around three months. You make three monthly payments. Show us that you can handle that. After the three months, we’re going to have you agree upon some additional amount that’s going to start repaying that delinquency.” That’s not going to work for every borrower. That’s why they break that out on that category there. More and more people are doing loan modifications but you had about 2,400 people per month that are doing these repayment plans. That’s what that is all about. The next one is forbearance plans. It’s pretty consistent. When you look at December 2018, it’s 2,298. In January 2019, it’s 2,009. There are a couple of hundred difference between that year on a month-to-month basis.

Forbearance Plans

What does the forbearance plan mean? Their definition is, “Forbearance Plan is an agreement between the servicer and the borrower to reduce or suspend monthly payments for a defined period of time.” They come in and say, “We’re going to try to help you out here. You have an arrearage account.” What they left off in their definition is normally this forbearance also means that you’re not going to enforce the acceleration clause in the mortgage to foreclose upon them. You’re saying, “We’re going to pull it off in the foreclosure. Even though we have the right as the lender to foreclose upon you, we’re going to forbear that. We’re going to delay that. This is going to be a short-term delay for you to prove to us that we can do some other loan modifications.” These are temporary plans. Going back to their definition, it’s like, “To stop foreclosures, show us that 80% of what your payments normally are. Make those payments to us to show us that you have the ability to do that while we’re working out some other agreement with you.” They might do that or say, “We’re going to stop the foreclosure and stop the payments. Let’s figure out what is going to work for both parties.” There’s flexibility within this.

It’s, “An agreement between the servicer and the borrower to reduce or suspend monthly payments for a defined period of time after which borrower resumes regular monthly payments and pays additional money toward the delinquency to bring the account current or works with the servicer to identify a permanent solution, such as loan modification or short sale, to address the delinquency.” Forbearance plans are short-term. “We’ve identified a problem. We have a cooperative borrower. Let’s see what we can work out.” It might include them saying, “Don’t make payments for us while we’re working this out or make some payments. We’ll reduce the payments. Prove to us that you have the ability to pay and let’s work to some permanent solution.”

If they’re looking at somebody who doesn’t have an income or does not have enough income, they might suspend payments and say, “It’s looking like we have to go to a short sale. Let’s try to have you sell this property. We would be willing to settle for less than what we are owed on loan through the short sale.” If somebody has a house that’s worth $100,000 and they owe $110,000, Fannie Mae through their servicer agrees and says, “Sell the house for $80,000 and we’ll forgive all the rest of the debt.” That’s the forbearance plans. There’s a lot of flexibility in those plans. You could see it’s pretty popular. The most popular is some kind of a loan modification program but repayment plans, for a certain number and also for forbearance plans work very well.

You as a note investor can do the same thing. Forbearance can be a pretty good option. For example, if you’re buying a note on a property, a nonperforming loan and winter is almost here, it might make sense to try to do a workout with that delinquent borrower to do some form of forbearance plan where they stay in the house. If you’re in the Midwest and you bought a note backed by a $70,000 property, do you want that to be vacant during the winter or would you rather have somebody living in there during the winter even though they’re not paying? If you think about that, you’ll agree that in almost all cases, I’d rather have somebody living in there even if they’re not making payments. Let’s put something in action. Let’s get them under a forbearance agreement where, during those winter months, to play along with my example, we’re at least working out some permanent modification. We’ve opened that door of communication where we can do that.

Repayment plans work very well. As an individual note buyer, when you buy that note and there’s a delinquency on there, you don’t have to forgive all of that if they can show the ability to make the payments. You do a repayment plan and now they’re making two payments. It could be paying the first mortgage moving forward. Now there’s been an agreement on what additional payment they need to pay to you to make up all of those delinquent payments in the past or maybe a part of that. Maybe you combine some of that and say, “You guys are behind $30,000 on this loan. We need to do a plan. Start making the payment again. I won’t foreclose on you, but you’re going to have to pay me back $20,000, $35,000 on a separate plan.” There are a lot of different ways that we can do these loan modifications. It’s more common as you can see on these numbers. It’s stretching out loans, lowering interest rates, lowering payments and anything like that. There are a lot of other creative ways that we can work with people to give them a good deal. They save their house after all. You’re saving their house when you do these prevention activities but you also make sure that you maintain your risk levels and your profit margins.

Charge-Offs In Lieu Of Foreclosure

The other one is charge-offs in lieu, which is a new one. We’ve all heard of deeds in lieu. This is not the same thing. This is used infrequently. In January 2019, there were only 107 of these done nationwide on Fannie and Freddie loans prevention activities. That’s not a lot at all because it’s rare circumstances. If you look at their definition, it’s, “Charge-offs in lieu of Foreclosure is a delinquent loan for which collection efforts or legal actions against the borrower are agreed to be not in the Enterprises’,” that’s Fannie and Freddie, “best interests (because of reduced property value, a low outstanding mortgage balance, or presence of certain environmental hazards).” It’s a very rare situation where they would do something like this. You can imagine if somebody has got a $70,000 home and they only owe $10,000 on this. Fannie and Freddie, through their servicers, are starting to look at that and go, “How much money are we going to spend to try to get either monthly payment on these $10,000 loans, a lump sum or a back?” We can’t do it short because then the people are having to leave their house and giving up a lot of equity. It doesn’t make sense. What are we to do? It used to be, “We’re going to foreclose and move forward.” Instead, what they’ve done is the servicer charges off the mortgage debt. In other words, they write it off.

“We’re not going to collect on this. We’re not going to demand payments or anything like that. We’re just going to let the person stay in the property but we will maintain this as a lien on that borrower’s property. That way, when they go to sell the property, we’ll get paid back because they can’t sell the property when it has a clouded title.” They’re giving up on collections. They’re saying, “Let the person stay in the house. Forget about even trying to collect this but we’re going to maintain or create our lien status on this property because someday when they go to sell this property, we’re going to get a phone call that says, ‘They need to pay off this out of the proceeds of the sale.’” They’ll get their money back that way. It’s very infrequently that they would use that.

FHFA Foreclosure Prevention Report: There’s a lot of different ways to do loan modifications like stretching out loans, lowering interest rates, lowering payments, and anything like that.

Total Foreclosure Prevention Actions

Here’s some more interesting information that was in this report. There’s a chart about the percentage of total Foreclosure Prevention actions. These are the percentage of what all those actions that we talked about did with their portfolios. This chart shows both the enterprises, Fannie and Freddie. Back in January 2018, forbearance plans were much stronger versus in January 2019. They went from 36% forbearance plans all the way down to 5% in August, September. It started increasing again and went down a little bit to 15% in January 2019. It makes sense. In 2018, there are still a lot of properties are still going through recovery early in that year. We’re looking at the end of 2017 starting in 2018. It made sense that there were still a lot more people facing the reality of foreclosures, “Let’s do a forbearance. Let’s do something to work out.”

Charge-offs in lieu is 1%, 0% and 1%. That’s a very small amount. The HomeSaver Advance Program of Fannie Mae was a short-term loan. They stopped that program in 2010. That’s why you’re going to see all zeroes on that one. For repayment plans, 10% of the loans in January 2018 went on a little rise, started coming down and landed at 18%. Even though it’s a little smaller, it’s still grown in popularity. It makes sense because we have more people working and more people able to afford their monthly payments. It’s a better alternative for them. Do a repayment plan and start paying back that other debt. It helps their credit and everything else. Loan mods were at 49% back in January 2018. That grew very quickly up to August 2018 where 80% are all loan modifications. Forbearance in August 2018 went down to 5% forbearance plans. Loan mods were much more popular at that. They’ve decreased to about 62% of that. In January 2019, 62% overwhelming majority were loan modifications, then repayment plans and then forbearance plans. That should all make sense. That was 96% in total for all Foreclosure Prevention actions. They have what they call home forfeiture actions. That is your short sales and deed in lieu.

Deed In Lieu And Short Sales

Deed in lieu stands for deed in lieu of foreclosure where the person signs the property over to the lender. We do this all the time in the note business. If we buy nonperforming notes and the person simply cannot afford to make those payments, we don’t have to foreclose upon them, put that on their credit and everything else. The alternative is they sign the deed over. That’s deed in lieu of foreclosure. That is best in almost all cases for both parties, being the borrower and the lender. Say, “You don’t need to foreclosure on your record. It’s going to be there for seven years. You don’t need all that. You don’t have to go through that. Sign the deed over to us and we will forgive all of the debt.” They walk away. That’s a good thing for that.

Short sales, to contrast, mean that the lenders are willing to accept less than the total amount that they are owed. That can make a lot of sense in some cases, where people owe more than their house is worth. They’re not able to sell it because of that. We still have 2.3 million of loans are underwater, meaning that the borrower owes more money than the house is worth. Using simple numbers, they owe $110,000. The house is worth $100,000. In their market, they can sell it quickly for $80,000. If the lender is willing to accept $80,000 as payment in full and forgive the difference between the $80,000 and the $110,000 that’s owed there, so $30,000, it’s great. That’s a short payoff or a short sale.

Those can be very good, especially for note buyers. You might buy a nonperforming note. Let’s say they owe $110,000. The house is worth $100,000. You might have purchased that note for $40,000. Somebody came along and said, “I’ll buy that house but I’m only going to pay $80,000 in cash.” You’re entitled because you’re owed $110,000. You’re entitled to that full $80,000. All you have to do is forgive the other $30,000 to the delinquent borrower. Would you take it? You paid $40,000 and you’re getting $80,000 back. You would do that. It can work out in many cases too. Short sales and deeds in lieu are going to be a smaller percentage of the time. They make up 4%, which is 100% of activities.

There are a couple of other interesting things to note here. There are the top five reasons for delinquencies. What is happening? Why did people fall behind on their mortgage payments? Back in January 2018, the highest response was the curtailment of income. They were making less money. Maybe their hours got cut or their wages went down. Whatever it is, they lost some of their income. That also probably includes divorce or something like that, where the breadwinners are out of the picture or one of the spouses has left and that cut the income in half. That curtailment of income includes that as well.

Top Five Reasons For Delinquencies

In January 2018, it was the number one reason for delinquency. That reason has been steady all the way through January 2019. It’s up a little bit. It’s 24% now versus 22%. Throughout that timeframe, it remained pretty steady. That’s the number one causation of delinquencies. What has crept up behind that is excessive obligations. That went from 19% and has grown up to 23%. People let their debt get up too high. It’s the credit card bills. The biggest part of this is also student debt. You might be thinking, “Student debt is on the student. They don’t even own a home yet. How could that be?” A lot of times, parents sign the promissory notes for the student debt and that’s been ignored. When we say student debt, you’re always thinking that some college kid is out there struggling. They got their first job. They’re struggling to pay rent and everything else because they have this student loan debt. This same thing has happened to the parents of many of these students because they’re on the hook as well. They cosigned for that loan. Now, their obligations have gone up as well.

A lot of banks got out of the lending business when it comes to mortgages. Nonbanks do more loans than banks do now. Banks are looking for alternatives. That became business loans and credit cards. People got access to easy credit. Their debt obligations have gone up. There are more people working, but more access to credit sometimes leads to more obligations. That can get out of hand. That has grown. It’s almost equal to the curtailment of income. It makes sense. It’s either lack of income or excess of debt are the two biggest reasons. When you combine those two, it’s 47%, half of the reason for delinquency. It’s not enough income, cutting back on income, cutting hours for a job, divorces and simply having excess debt obligations. Student debt is a part of that. Unemployment is 6% and that’s been pretty steady throughout.

There’s the illness of principal mortgagor or family member. That probably ties into the same thing of, “We’ve lost an income because of an illness,” or of a family member and they’re helping the family member out. They’re paying the debt of that family member. By family, it could be a son or daughter. There’s an illness, which is taking money away from their regular income. Also, sometimes if they can’t pay the bill, a debt obligation pops up for that. They go a little hand-in-hand. The illness was the triggering effect of that curtailment of income. There are also marital difficulties. They put 2% and 3% there. They don’t define what they mean by marital difficulties. I would have to think that divorce has more impact on that difficulty. I don’t know if divorce falls under that or not. Difficulty doesn’t sound final to me. When people are separated or having challenges like that, it affects overall income.

Unemployment, illness and marital difficulties are maybe the causation that leads to the curtailment of income and the excessive obligation. It all should make sense. As note investors, when we’re looking at probing and trying to figure out how we can work with somebody to keep them in their home and do a loan modification, a forbearance program, deed in lieu or short sale, part of the note business says, “Business is about the numbers and the story.” Finding out what their situation is might lead you to a better cure. That sometimes takes a little bit of probing. You find out, “My hours got cut back or we had family problems. We had an illness. Now, we’re able to pay this down. We’re able to pay that down.” You can start to work and put together a much more structured loan mod or forbearance or repayment plan based upon what their story is and working with within that. Keep that in mind as you’re working out these loans.

FHFA Foreclosure Prevention Report: Unemployment, illness, and marital difficulties are some causation that leads to the curtailment of income and excessive obligation.

Summary

In total, they have a nice little summary page. It says since the first full quarter of conservatorship. That was in the fourth quarter of 2008 and what that means is that’s when Fannie and Freddie went bankrupt. They simply didn’t have enough money and were taking back all these loans. Their income stopped on all these loans. We had the crash in 2008. By the fourth quarter, they were done. It was very quick. Conservatorship is a term used in bankruptcy. Fannie and Freddie did not declare bankruptcy but they were put under conservatorship, which is what you do when you’re in bankruptcy. There’s a pretty thin line that they had there. For all intents and purposes, they were bankrupt. Under conservatorship, it’s where the FHFA came in to oversee what they were doing to recorrect the bad lending practices, bad purchases and all those other things they oversee. Since the first full quarter of conservatorship, which was the fourth quarter of 2008, combined and complete Foreclosure Prevention actions total 4.3 million. More than half of these actions are permanent loan modifications. A lot of those were HAMP that have already redefaulted. They’re some pretty good numbers.

Repayment plans are 3.6 million when you add in the short sales and deeds in lieu that they have done. Short sales back in 2016 are 17.7 million. It made sense. Property values are still lower. There wasn’t a whole lot of equity in those deals. A lot more people were underwater with their loans. Short sales went way down from 17,760 in 2016 down to January 2019 where it was only 374 loans. It’s the same thing with deeds in lieu, but not as drastic. It’s 8,000 down to 200. The loan mods were 123,000 in 2016. In January, it’s 8,446. We see fluctuations through there. To date, there are two million on the loan mods, the biggest category by far, then repayment structures and then forbearances. The home seller program is out. We’ve got our charge-offs.

Those are all the numbers for you. We’re not out of inventory yet, or not out of the market. It’s still recovering. In the same report, there’s a brief mention of mortgage performance. The number of loans in December 2018 that were less than 60 days delinquent is 364,000. In January 2019, it’s 337,000. There’s an improvement. Do not think that we are out of the overall situation. The numbers of the 60 days delinquents are pretty close. Foreclosure starts are pretty close. Third-party and foreclosure sales are pretty steady. We are not out of this yet.

You can see the percentages. They’re down from what they were, especially on the delinquent loans, but that makes sense. The new loans they started putting out, past all the bad lending days, have less of a delinquency problem, as it should be. There are loans now that people can have 520 credit scores and put nothing down. They even have no-doc loans. Be careful out there. That’s what they’re doing. It’s not going to be good for the overall economy because those loans will go bad if we have a trip up in the economy. All of a sudden, people aren’t making money again.

We could go back to those five top reasons. If they lose a little bit of income or their debt gets too high, delinquencies are going to go up. Student debt is advancing crazy. Credit card debt is going up very steady. We are not out of this yet. Property values are peaking out. We just have to be aware of the marketplace. We have to have the ability to buy right. The note is still the best space to do that. I’m a big believer in combining notes with real estate, as far as entry strategies and exit strategies. That’s where everybody needs to be. I hope you enjoyed this episode. Subscribe to my YouTube Channel. I think you’re going to enjoy it. I do some great interviews with people in the industry. I do some solocast talking about the industry and what’s happening within that. It’s called The Kevin Shortle Show. You can find it on iTunes or wherever you get your podcast. Thanks for reading. I look forward to putting another episode for you soon.

 Important Links: 

• Federal Housing Finance Agency
• FHFA Foreclosure Prevention Report
• Home Affordable Modification Program
• MakingHomeAffordable.gov
• State of the Industry Address – Previous episode
• YouTube – Kevin Shortle
• iTunes – The Kevin Shortle Show

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