Mortgage Market Troubles Grew in the Third Quarter

The troubles in the US housing market are far from over. Data released by the Office of Thrift Supervision and the Office of the Comptroller of the Currency found that the percentage of current and performing mortgages dropped in the 3rd quarter. It was the sixth consecutive quarter during which a drop was seen.

According to the report, over one million homeowners have a foreclosure in progress. And the problems in the mortgage market continue to be varied. 27.9% of Adjustable Rate Mortgages (ARMs) are either seriously delinquent or in foreclosure. "Prime borrowers," those with good credit scores considered the most desirable borrowers for mortgages, have seen the percentage of their ranks at risk of losing their homes double over the past year. 3.6% of prime borrowers are more than 60 days late on their mortgages--more than double that of last year.

Even with a growing number of borrowers choosing to walk away from their mortgages on underwater properties, these numbers are still troubling for both the industry and the government. While many argue that the economy is improving, an increase in the number of borrowers who cannot afford to make payments on their homes is not a good sign. It means that many remain out of work, property values are still low, and the market is depressed.

HUD Proposes New Rule to Change Broker Approval Process

In a new HUD rule proposed today, HUD seeks to change the process to become an FHA approved lender, among other things. Whereas currently the FHA approves both mortgagees and correspondent lenders, the new rule would streamline the approval process so that the FHA will only approve mortgagees. Correspondent lenders will then need to be “sponsored” by an FHA-approved mortgagee, with the sponsoring lender assuming responsibility for the loan correspondent. This means that the sponsoring lender would be responsible for insuring that the FHA loans from the loan correspondent meet FHA standards, correspond with the HFSH Act’s requirements and meet the requirements for integrity and financial soundness. If the loan correspondent is found to be out of compliance, the FHA-approved mortgagee would be liable for sanctions.

The new HUD rule also increases the net worth requirements for FHA-approved mortgagees from $250,000 to $2.5 million over three years. The changes will also apply to those applying for FHA mortgagee approval.

The FHA is soliciting public comments on the proposed rules via mail and email through December 30, 2009, a period of 30 days as opposed to the usual 60 days. The proposed changes are unsurprising, as the FHA has seen an unprecedented number of lenders applying for approval in the last two years, and there is already a huge backlog of lenders waiting to be approved. The proposed changes will hopefully help reduce FHA’s workload while allowing more lenders to originate FHA loans (though likely as correspondent lenders instead of full-fledged mortgagees).

The proposed rule can be found in its entirety here.

Treasury Announces Plan to Increase Pressure on Banks to Modify Mortgages

The U.S. Treasury Department announced Monday that it would increase the pressure on mortgage servicers and banks to modify delinquent mortgages. Mortgage servicers will now be required to submit plans to the Treasury department indicating how they intend to determine which loans will be permanently modified. Banks that fall short of the guidelines they submit could face fines or sanctions. The changes are intended to help the troubled Making Home Affordable Program. While promising to help keep three to four million homeowners in their homes, the program has so far only submitted test modifications to 650,000 borrowers, of which about 375,000 were scheduled to convert to permanently reduced payments by the end of the year. These numbers are seen as a colossal disappointment.

In addition, the Treasury Department will begin releasing data showing the permanent number of modifications issued by bank. This move is meant to shame banks into modifying more loans. The current report only shows temporary modifications.

The Making Home Affordable program has been plagued by reports of a “phone tree hell” and bureaucratic disorganization. However, the program has also suffered, as unemployment numbers remain high, causing many borrowers with good credit scores to have difficulty making their mortgage payments. While the program was initially designed to help combat option ARMs and sub-prime mortgages, the foreclosure epidemic has extended beyond these types of borrowers and mortgages.