Ingrid Beckles: Freddie Mac's Plan for the Housing Market

Ingrid Beckles, Senior Vice President of Default Asset Management at Freddie Mac, opened the SourceMedia’s 3^rd Annual Mortgage Servicing conference this week in Westlake, TX with perspectives and plans regarding the US housing market and foreclosures. Here’s a summary of the key points of her presentation [along with some personal commentary]. The statistics presented here are directly attributable to Beckles’ presentation slides.

Beckles opened her presentation by sharing that Freddie Mac has assisted over 120,000 families to avoid foreclosure, and excitedly announced that they have recently been awarded $10 million to improve their servicing IT system. (She quipped that this is funding they have been requesting for seven years but never received.)

[Given that there are supposedly 9 million homeowners in mortgage trouble, $10 million hardly seems an amount about which to get excited. If they have been supposedly requesting this funding for seven years, does that mean that a seven-year old proposal was approved and they’ll be purchasing and installing vintage 2002 systems?]

The “seriously delinquent” mortgage loans (defined at 90+ days delinquent, currently 3.46 million mortgages in aggregate) by mortgage holder:

Private Label	51%
Freddie Mac	7%
Fannie Mae	13%
Banks & Thrifts	11%
GMAC, FHA	11%
Other	8%

90+ Day Loan Disputes by category:

REO	19%
Vacant	32%
Short Sale	2%
Loan Modifications	19%
Repayment Plans	15%
Reinstatements	9%
Other	4%

Beckles stated, "People are leaving sooner than ever before. There is some fraud, but it’s not that big compared to overall delinquent mortgage market.” Then she asked – “How do we attack earlier in the process to decrease vacancies?”

Answer her own question, Beckles stated that intervening earlier is better because there are more options available, but it’s difficult to know what type of borrower sits in the early default population – there’s more noise in the 30-day delinquency pool than before. Historically, 75% of those late by 30 days did not move into a later state of foreclosure. Now, only 25-50% do not elevate to a worsened state.

Achieving Loan Modifications

Beckles raised the following questions pertaining to loan modifications:

• How do you target borrowers?
• How do you know who your borrowers are?
• How do you push loan modifications through the system faster?

She proposed the simple “dialing for dollars” method - setting up phone banks and simply contacting borrowers by brute force, as this would enable communication between borrowers and lenders and help to facilitate a resolution that otherwise may not have been reached.

[I have some serious reservations on this model. While marginally effective, there are private sector businesses across industries that have developed massive consumer behavior studies and scripts to gain even the slightest on sell-through rates. I later spoke with the CEO of one of these companies at lunch. His company is considered successful in showing their clients a 0.5-1.0% increase in pass-throughs. Why does Freddie Mac think they can set up a phone bank and resolve the problem with any effectiveness? Just instituting a program doesn’t equate to results… Oh wait, this is a government program.]

Freddie Mac is also utilizing a “Mortgage Risk Scoring Method” that works much like a FICO score. Borrowers are rated on a scale of 0-800, with the lower the value assigned, the higher the risk of default. At a score of < 300, borrowers have a 60% propensity to move into default. At a score of < 250, borrowers are 80% more likely to default.

[No comment.]

So why are so many borrowers defaulting? According to Beckles:

1. Borrowers get lost in the system – many of them in the eviction stage claim that they have tried to contact their mortgage servicer to no avail.
2. Education – Borrowers either don’t understand or don’t believe that the available options will help their individual situation. Freddie Mac organized 157 borrower outreach sessions last year nationwide.

[This is a conundrum for the industry. The worst cases are met first. It’s fairly commonplace for lenders to simply ignore borrowers unless they are 90+ days delinquent. Listen to Saturday morning personal finance shows and you’ll hear “loan modifiers” straightly telling listeners to stop making payments altogether if they want to seek a loan modification. On the other hand, borrowers need to take some responsibility for their financial well-being. What do borrowers consider “an effort” to contact their servicer – calling a 1-800 number and waiting on hold for 2 minutes? Writing a note on a partial payment check mailed to the servicer?]

Historically, 78% of borrowers with loan modifications have re-performed over five years (a 22% re-default rate). And now? -

Months since Modification	Re-Default Rate
3 months	27%
6 months	42%
9 months	47%

To take faster actions for borrowers requiring loan modification, Freddie Mac phone servicers are now authorized to take actionable steps to avoid bureaucratic approvals, under the guidance that NPV > 0 for the modified loan:

• Extend loans to a 40-year tenor
• Introduce principal forbearance (not principal forgiveness)
• Reduce interest rates payments by up to 2%

[I question the ability of phone servicers to truly identify each unique case and move them to the right solution. A later panel discussant from Ocwen Financial described the massive effort they have taken to create a system that creates homogeneous mortgage modification outcomes through their servicing. Again, is this simply Freddie Mac creating a program without considering whether or not they have the ability to implement effectively?]

Freddie Mac has found that borrowers are generally not seeking principal forgiveness, but instead require affordable cash flows – that is, monthly payment amounts are more important than the total amount owed on loan.

Beckles noted that 93% of loans are still performing, but the number of seriously delinquent loans is on the rise from only 2% of loans in Q1, 2005 to 6.3% in Q4, 2008.

[Keep in mind that there is currently a foreclosure moratorium in place, so these numbers may be artificially skewed lower than the actual rate.]

She also proposed that the mortgage servicing process was almost identical to the mortgage origination process. It’s a matter of setting up a servicing shop at the back end as you would a front-end origination shop – “It’s a product flow through a process” – adding a positive “we can do this” as it’s a matter of delegation and standardizing the process that provides phone servicers the ability to make decisions and reach the “low-hanging fruit” on the phone.

[I heard this statement and immediately thought – “Sure – you did such a good job at the front-end and clearly demonstrated your expertise in mortgage origination….”]

Beckles took a moment to clearly stated her support for the Obama administration’s loan modification program. [No surprise here...]

REOs & REO Inventory Trends (for Freddie Mac Loans only)

Beckles introduces some frightful numbers in looking at the number of new REOs entering the market quarterly since 2005 (and keep in mind, these are REOs stemming only from Freddie Mac loans - 7% of the total mortgage market):

Q1, 2005	~10,000
Q1, 2006	~8,000
Q1, 2007	~10,000
Q1, 2008	~17,500
Q2, 2008	~22,000
Q3, 2008	~27,000
Q4, 2008	~30,000
Q4, 2009 (projected)	~136,000

Freddie Mac is projecting 136,000 new REOs will hit the market in Q4, 2009. Compare this number to Beckles’ opening statement that Freddie Mac has saved 120,000 homes from going in to foreclosure in aggregate. So now they will be facing 136,000 new REO entrants in a single quarter this year?

[Extrapolating these numbers based on Freddie Mac’s 7% market share, that 136,000 number turns into 1.9 million REOs on a national basis by year’s end at the current pace. It’s a good thing they received $10 million to upgrade their servicing systems…]

42% of these properties are owner-occupied, and 50% of these are former borrowers. Freddie Mac is offering a month-to-month rental program for former borrowers, are seeking the loan modification option and “will potentially reinstate the mortgage where possible.”

Prime & Alt-A Delinquencies are also on the rise in the “sand states”:

5.56% in California

7.55% in Nevada

5.04% in Nevada

8.90% in Florida

Freddie Mac’s 2009 Initiatives

• Implement “Making Home Affordable Plan” which includes relief refinancing.
• Bolster the workout toolkit
• Develop alternative REO strategies
• Expand the flexible business model
• Restructure operations to drive optimal outcomes
• [And introducing ambiguous bullet points in public PowerPoint presentations]

Feel free to shoot me an email to discuss this session, or others, at this week’s conference.

Disclosure: No positions

Comments

[Geoffrey Ching:]

At least they are modifying some mortgages. If they weren't, housing prices would be pushed down faster. It certainly won't solve the problem, but it will lessen the pain.

Apr 09 02:43 PM

[Socialism c...:]

Refinancing or modification is fine under these conditions:
a) Re-fi or mod costs are borne by the lender & borrower, not subsidized by the taxpayer at large.
b) The borrower can realistically afford the new terms.

I do not, nor does anyone I know, object to the above for those who have dealt responsibly and are in need of new terms, which will render them a mortgage they are able to pay. But...I DO object to doing so at ANY taxpayer expense, no matter how small...because it's rare that the cost ends up as small as initially advertised -- that's just how government intervention is. And I also would object when the borrowers either lied on any of their original documentation, or deliberately have missed payments in order to qualify for help. So these must be private initiatives by lenders, not government programs. And they must be for honest borrowers who are not gaming the system, and can actually afford the resultant mortgage.

In short, the taxpayer must NOT be expected to pick up a single DIME of these re-fis and mods; in order for the market to stabilize and resume growth, it must not be manipulated!! Government subsidies will result in the effects of price manipulation, thereby preventing NEEDED DEFLATION in pricing!!

Apr 09 04:46 PM

[houstonian22:]

Dude - Are you Ingrid's publicist..?

Let's see how much of a difference a $10MM funding makes on Fraudy's antiquated systems and processes. Frigging redundant expense that is hitting us taxpayers..does'nt Fanny have the same system to do the same friggin things..sounds like people at this organization continue to be stupidly happy about suboptimal investments...us taxpayers are so screwed by these dopes!

Apr 09 11:21 PM

[jaxon:]

I think Obama has oversimplified the question of re-financing. You see, for many individual situation it is not wise. For example, if your credit situation has decreased, then modifying your terms may be worse for you. So think carefully before you jump on the bandwagon. Make sure you review this checklist:

tinyurl.com/refinanceo...

Apr 09 11:58 PM

[Scott Sambucci:]

houstonian22 - I think you missed my commentary in brackets throughout the article...

On Apr 09 11:21 PM houstonian22 wrote:

> Dude - Are you Ingrid's publicist..?

Apr 10 12:13 AM

[rm:]

[Why does Freddie Mac think they can set up a phone bank and resolve the problem with any effectiveness?]

Because their head is in the sand. They've been living in their own little bubble for so long, and so little good research has been done over the years, that they're still referencing studies conducted in the 90's to dictate loss mit policy.

Only now are thinking "out of the box." And for them, "out of the box" means trying to beat homeowners into submission with human calls, robo-calls, and more calls.

[Freddie Mac has found that borrowers are generally not seeking principal forgiveness, but instead require affordable cash flows ]

What is this, last year's data? Right now, EVERYONE is seeking principal forgiveness. It's a question of whether or not they'll settle for a plan that doesn't include it.

[Compare this number to Beckles’ opening statement that Freddie Mac has saved 120,000 homes from going in to foreclosure in aggregate. ]

Over what period? Based on your chart, it looks like they had 96000 REO's last year. When you consider that in past years, most defaults resolved themselves prior to FC, then for all of their "efforts," it doesn't look like their "prevention" efforts are terribly effective.

Why?

I've blogged about the double standard applied to homeowners who previously had good credit. If FNMA and FHLMC think that they can continue to be as stingy on their mod options as they've been, they're going to find themselves with a whole lot more inventory.

Case in point- the Obama plan. While it's a Christmas miracle that they let go of the mystical, magical Bair-endorsed front-end ratio of 38% and now, in some cases, they'll consider going to 31%, why couldn't they just go to the tried-and-true 28%?

I'm guessing because some dork came up with a model that said it's a good gamble.

Believe it or not, that 3% makes a difference in the daily (monthly) lives of a family.

Like the other "models" that got us into this mess, I'm expecting this one to blow up, as well.

Apr 10 08:53 AM

[Thomas Smic...:]

Excellent post.

I do believe that a majority of home occupiers (I set them apart from homeowners - who can afford to live in a home they finanvced) will crap out of almost any re-fi scheme because they are lacking income, budgeting habits, intelligence or all three. Just like the government.

Apr 10 10:25 AM