Whether it is due to a backlog, or the improving stability of the remaining borrowers, foreclosure numbers are improving. But it is still an issue to be reckoned with in our industry. In a Deed of Trust state (like California) as opposed to a Mortgage state (like Michigan), foreclosure is accomplished through a “trustee’s sale” rather than a judicial proceeding. Trustee sales (and now short sales) don’t allow for subsequent suits for deficiencies, i.e., the amount by which sale proceeds fall short of unpaid balances.
A new California law makes it clear that mortgagors can “negatively impact” junior lienholders (second mortgages) with impunity. Senate Bill 458 expanded anti-deficiency protection to all 1-4 residential mortgages or deeds of trust where the beneficiary consents to a short sale, whether a first deed of trust or a junior deed of trust. The headline for the linked story reads: “Short Sale Law Effective Immediately in California – No Fee to Approve Short Sales and Short Sale Law Now Applies to Junior Loans.”
Speaking of which, Sterne Agee released a study showing a comparison of the credit performance of RMBS collateral located in judicial and non-judicial foreclosure states. “We find that judicial states generally have longer liquidation lags, slower annualized liquidation rates (i.e. CDR) and higher loss severities relative to non-judicial states. The difference in delinquency rates indicates that non-judicial states will experience credit burnout faster than judicial states.” But this is, in part, why the value of servicing varies in different states.
MBS Hedging When Rates Fall
Understandably, investors are concerned about loans refinancing that they just purchased at premium prices and expected to have on their books for a while. But while mortgage rates may see a new record low, the conditions that are preventing many homeowners from refinancing remain unchanged: tight credit conditions, poor home values, higher loan costs, and a weak economy and jobs market. Barclays Capital points out that the population of good-credit borrowers, defined as FICOs above 740 and LTV’s below 80%, has declined by more than 20% in the past year due primarily to declining home prices.
“As a result, the balance of good credit-borrowers more than 50 basis points in the money at a 4.5% mortgage rate is roughly half the level of August 2010.”
J.P. Morgan analysts point out that in conventionals, 40% of the universe is credit-impaired, 40% were originated within the past two years and so can’t streamline refi under HARP, which leaves only 20% of borrowers that can clear the refi hurdles at current rates.
But Wall Street traders and analysts are quick to point out that the 4.5% coupon contains plenty of borrowers (who have loans at 4.75-5.125%) that will be able to refi at a 4.00-4.25% mortgage rate. If this is true, few investors will want to pay hefty premiums, which is why this MBS coupon, and that of higher coupons, exhibit more symptoms of “negative convexity.” And “current coupons” are usually near par, but the production has not crept down into the 3% range for 30-yr. mortgages, as Dean Brown from MCM points out. So anyone hedging a pipeline is selling 4% securities for the most part, and hoping that this coupon is not subject to short squeezes a few months down the road if there are no loans to fill commitments.