a synopsis of the hope program in the new bill

[hglenbetts]

Moh,

Thank you for all your input on this. It's great to have professionals like yourself to help us all try to understand these things a little better.

 

[OSU Beavers]

So what sort of fixed rates and loan points are people going to be looking at?

 

[Mike Seward]

Servicers are going to do them. The same servicers who are collecting the payments or sending default notices and doing foreclosures on those loan are going to do the write downs. I think they are going to evaluate the situation to find out which way to go if the homeowner is at the verge of foreclosure. Is it in their advantage to participate and take the loss and let the FHA to refinance or let the property to go to foreclosure. Some experts say, sometimes it is in the lenders advantage to write down the loss. If they don't do that, it takes them at least to foreclose the property and sell it in REO sale and may be with less value and more loss.
Those banks that made thos loans and sold them to investors are usually serving those loans now. Banks like B of A, wells, Wamu

Let's say B of A made a loan and sold it to Merril Lynch. Merrill Lynch packaged the loan into a CDO which was sold to a State pension fund.

B of A is servicing the mortgage, but the State pension fund is the one that will take the loss. Are we saying that Bof A will make the decision rather than the holder of the note?

 

[Mike Seward]

Here's a more realistic example: Mr Smith gets a $200K mortgage. That loan gets sold to Merrill who combines it with 250 other $200K loans to create a $50 million CDO (Collateralized Debt Obligation) having 8 tranches. Those 8 tranches are sold to 20 different investors.

Who holds Mr. Smith's note?

 

[ghrousseau]

Here's a more realistic example: Mr Smith gets a $200K mortgage. That loan gets sold to Merrill who combines it with 250 other $200K loans to create a $50 million CDO (Collateralized Debt Obligation) having 8 tranches. Those 8 tranches are sold to 20 different investors.

Who holds Mr. Smith's note?

The devil is in the details. I think it will take the market some time to digest and figure it out.

 

[moh malekpour]

Let's say B of A made a loan and sold it to Merril Lynch. Merrill Lynch packaged the loan into a CDO which was sold to a State pension fund.

B of A is servicing the mortgage, but the State pension fund is the one that will take the loss. Are we saying that Bof A will make the decision rather than the holder of the note?

The answer is yes. B of A in this case has a contract to be the trustee and/or the servicer of that loan for a fee and do the following work:
1-collect monthly paymensts and send them to the investor
2-If property was refianced or sold at anytime prior to termination of the loan, collect the remaing principle with a prepayment penalty if there is any and sed it to the investor which is going to be the end of its service as the loan was paid back.
3-If borrowers defaulted on the payments after 3 months, send them notice of defaulats and wait another 3 months and if nothing happened, send them a notice of trustees sale
4-If it was contacted by the borrower to negotiate the loan or to let the property sold in in shrt sale basis, cooperate with the borrower and save furteher loss for investor
5-If the borrower didn't cnotact or the property didn't sell in the short sale for the amount that could save money for investor, auction the property after the expritation of notice of defauts and notice of trustees sale/or transfer the property to its name, the trusee of the loan.
6-Sell that property as an REO in the market and after the sell and deduction of all expenses, send the remaing to the investor

If the property or the homeowner was on the phase 4 condition and the homeowner was qualified to refinace with FHA and asked the servicer's cooperation, the srevicer or trustee has an option to look at the condition of that loan and find out which way is better for the investor. If writing down the loss as of that date and get the remaining principle would be in advantage of inverstor, the servicers will cooperate but if it is better to let the property go into foreclosure, the servicer will not cooperate. In most cases, it is better for investor to cut the loss as soon as possible and get a way with that bad loan so the servicer may cooperate rather than let it get to foreclosure.

The state pension fund takes the loss because it is a bond holer of a bad investment.
When you buy a bond of an investment or a business or a corporation or a loan package, you buy it for the yield and return of principle of that investment. For example, a corporation or a loan package is graded by credit agencies as AAA and that corporation or loan package is selling bonds in public market with 10% yield. If you have $10,000 money in the bank which gives you 3% return but that loan package or a corporation gives you 10% on your $10,000; you will buy the loan package or the corporation bond instead of investing your money in the bank CD or stock market for a lower return. You do it because the bond is rated AAA which means that the principle and the 10% return of your $10,000 investment on that bond is going to be safe but after 2 years, you will find that the AAA rating on that bond was wrong and you had bought a bond of a risky investment and now you not only are not going to get 10% return on your $10,000 investment, you may not get your full $10,000 back. You may get $5,000 instead of $10,000 because the investor got half of its investment money. As a bond holder, you cannot tell the investor how to proceed on that loan. The investor loss is your loss. It is like those who bought more that $100,000 CD from IndyMac. They could get only $100,000 of their investment back with no interset because it is insured by FDIC but anything more than $100,000, they could get 50 cents for $1 and of course no interest at all.

Any bond is a security instrument meaning that there is a security behind it.
A treasury bond has US government behind it
A California bond has the State of CA behind it
A corporate bond has the corporation behind it
A mortgage bond or a mortgage backed security has the mortgage behind it
Ther are several mortgage backed securities. Gannie Mae bond has FHA loans behind it, Fannie or Feddie bonds have prime loans behind them and CDO bonds have sub prime loans behind them.
Why some pension funds bought CDOs? They bought them because they were offering higher returns than any other bonds and they were rated AAA. They should have known that it was too good to be true.

 

[moh malekpour]

There is a new development on the bill regarding the 3% upfront fee Which was asked by the HUD to be there. The House agreed with that fee, but the Senate clamped a one-year moratorium on FHA risk-based pricing in its version, which the House ultimately accepted.
In addition, the seller gift or downpayment financing is also eliminated.

 

[hglenbetts]

Who holds Mr. Smith's note?

The more important question in my mind, is who holds the RISK!!

 

[hglenbetts]

In addition, the seller gift or downpayment financing is also eliminated.[/quote]

 

[moh malekpour]

Here's a more realistic example: Mr Smith gets a $200K mortgage. That loan gets sold to Merrill who combines it with 250 other $200K loans to create a $50 million CDO (Collateralized Debt Obligation) having 8 tranches. Those 8 tranches are sold to 20 different investors.

Who holds Mr. Smith's note?

Lets say that Mr. Smith has a home to his name. He uses that home as a security to borrow money from a lender and in exchange he gives the lender a legal note that promises Mr. Smith to pay the payments according to the contract in which that legal note was made and if Mr. Smith didn't pay those payments, it gives the holder of that note to foreclose on the home that Mr Smith has used as the security for that note. The legal note is tradeable in the market and can be signed and transfer to somebody elese usually with a discount. Lets say that Merill bought that legal note and other 2000 similar notes and made tranchese and CDOs or a security instruments. What Merill is doing is using those legal notes which were backed by Mr Smith's and other 2000 homes new security devices wihich are going to backed not by a hard asset but by 2000 legal notes and sell them to anyone who buys them. Those who buy those new securties from Merill are not getting a mortgage note, they are getting a note which is backed by a mortge note. Mr. Smith note is still with Merill as those homes which were used as security for all those notes are still in the possession of their owners