A couple of interesting developments in the mortgage world that are worth pointing out:
Bernanke: Lenders Should Be Writing Down Principal on Troubled Loans
Speaking at the Independent Community Bankers Conference [full text of remarks]:
- "In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure. "
- …a reduction in principal may increase the expected payoff by reducing the risk of default and foreclosure. "
- A writedown that is sufficient to make borrowers eligible for a new loan would remove the downside risk to investors of additional writedowns or a re-default.
This idea has always made a great deal of sense, in our view, and is nothing more than a simple math problem – if the costs of a principal writedown are less than the projected loss in a foreclosure, write the thing down already. The trick is here is separating the truly troubled borrower from the opportunist.
Another thorny issue: The idea that a loan reduction large enough to make the borrower eligible for a new loan (so they can refinance elsewhere, limiting the risk of additional writedowns or delinquency) might be easier said than done. These will be ‘troubled’ borrowers (we presume – these writedowns should not come free of a credit score penalty) with few refinancing options even after principal reduction. If the decision is made to write down principal, best write it down to the point where default risk is limited, and assume there won’t be a lender willing to step in.
Fannie Mae/Freddie Mac Agree to Tighter Appraisal Controls.
A "code-of conduct" greement with NY AG Cuomo attempts to rein-in inflated appraisals by banks and brokers, some highlights from the WSJ:
- The code bars lenders and their representatives from pressuring appraisers to supply inflated estimates of property values.
- Bank employees who are involved in making loans won’t be allowed to choose appraisers.
- Lenders won’t be able to make loans on the basis of appraisals from their own employees or from other companies they control.
- The code also bars lenders from using appraisals ordered by mortgage brokers.
- The new code does not take effect until next Jan 1st (2008)
This will blow up the business models of more than a few brokers, lenders, and appraisers who’ve been reliant on juiced values (providing, or receiving) to do business. This will also end the tidy little revenue stream provided by bank/lender owned appraisal affiliates. About time appraiser independence got some support.