The blog Calculated Risk posted that there is a new update to the Home Affordable Modification Program (HAMP), the government sponsored program for lenders to modify loan terms to make borrower's payments more affordable. Here are a couple quotes from the article.

There are two key components:
1) New Requirements that Documentation be Provided Before Trial Modification Begins.
2) and guidance on Converting Borrowers in the Temporary Review Period to Permanent Modifications

These new guidelines are to take effect on June 1, 2010. Here's a link to the press release.

Another aspect to be addressed is how to handle existing trial modifications:

2) The second key component of the directive is how to handle all the current trial modifications. For the borrowers who have not made all of their payments, the directive requires the HAMP trial program to be canceled. For borrowers who have made payments, but are missing documentation, Treasury provides some additional guidelines.

This suggests a surge of trial cancellations in February.

A Calculated Risk posting relates that DataQuick reports that California Notices of Default peaked in the first quarter of 2009 and have since been falling in numbers. The article contains a couple quotes that are relavent to our market.

First related to why the number of defaults is dropping:

The number of California homes entering the foreclosure process declined again during fourth quarter 2009 amid signs that the worst may be over in hard-hit entry-level markets, while slowly spreading to more expensive neighborhoods. There are mixed signals for 2010: It's unclear how much of the drop in mortgage defaults is due to shifting market conditions, and how much is the result of changing foreclosure policies among lenders and loan servicers, a real estate information service reported.

Second related to lenders starting to recognize the benefit of dealing with distressed properties through short sales:

"Clearly, many lenders and servicers have concluded that the traditional foreclosure process isn't necessarily the best way to process market distress, and that losses may be mitigated with so-called short sales or when loan terms are renegotiated with homeowners," said John Walsh, DataQuick president.

Third discussing the expected shift of defaults to higher priced properties:

In terms of units, the peak of the foreclosure crisis may be over, but the mid-to-high end foreclosures are increasing - and the values of these properties is much higher than the low end starter properties. This suggests that prices may have bottomed in some low end areas, but we will see further price declines in many mid-to-high end areas.

This post on Calculated Risk shows the situation in Sacramento, CA. Short sales are rising and REO's are falling as banks and homeowners realize that both parties benefit from avoiding foreclosure.

A recent Housing Wire Article by Linda Lowell describes changes underway in Treasury's support of the GSE's (Fannie Mae and Fredie Mac). Although other articles like the link from the Wall St Journal referenced the announcement changing the cap limit as a controversial effort to by the government to approve limitless funds for Fannie and Freddie , the Housing Wire article provides additional background and less hype about the changes made over the Christmas Holiday.

The Treasury announced (1) it was allowing two programs to terminate as scheduled (at inception in 2008) at the end of this year, the Treasury $200bn GSE MBS purchase program and the unused short term credit facility established for the enterprises and the Federal Home Loan Banks; (2) it was changing the calculation of the cap on its funding commitments to Fannie and Freddie, (3) it was giving the two housing finance enterprises greater flexibility in meeting their portfolio reduction requirements; (4) it was putting off for a year, to December 31, 2010, setting the periodic commitment fee the GSEs will owe on unused financing; and (5) it was making technical adjustments to definitions of assets and liabilities in the Preferred Stock Purchase Agreements (PSPAs), in light of accounting changes driven by Financial Accounting Standards (FAS) 166/167.

Under the new calculation the maximum amount either enterprise may draw is the greater of $200 billion, or $200 billion plus the cumulative amount of deficiency amounts covered by Treasury preferred purchases as of December 31, 2012, less any surplus at December 31, 2012.

Deficiencies are negative net worth measured in any quarter; these require the enterprise to sell preferred stock to the Treasury to maintain net worth at zero. Surpluses are positive net worth. Please notice that the new calculation provides for the possibility that the enterprises will not continuously run in the red.

MBS investors and the analysts who seek to advise them have been struggling with two concerns for months: the potential for a sharp widening in MBS spreads when the Fed reaches the expected end of its MBS purchase program around the end of Q1 2010 and the impact on prepayments as HAMP modifications and other credit events trigger an escalation in the pace at which the GSEs buy loans out of pass-through securities. Moreover, bringing guaranteed securities back on the GSEs balance sheets with adoption of FAS 167 on January 1 changes GSE incentives to buy loans out and has raised investor fears prepayments will accelerate sharply. (I ran through these concerns for HousingWire readers a revamping of HAMP to include principal reduction. Indeed, equity analysts at Keefe, Bruyette & Woods anticipated this could be an outcome of removing the funding cap. In their note, Bose George and Jade J. Rahmani note the GSEs are already at the “forefront” of HAMP efforts, but given the limited effectiveness of the program they believe “the government is likely to push for an enhanced version of HAMP which allows for some form of principal reduction.” That is, removing the cap makes room for principal reductions which necessarily result in immediate losses on modified loans.

These changes may be related to the criticism in recent weeks (such as this link to the testimony of Amerst Securities Laurie Goodman) that the Home Affordable Modification Program (HAMP), the government's loan modification program, is destined to fail because it does not address the most important criteria for current buyer default, namely negative equity. Homeowners with negative equity are much more likely to default than owners with a substantial amount of equity, even when both are unemployed. A couple other issues have reduced the effectiveness of HAMP, namely how best to address second liens in the process and the need to requalify the borrower as part of the process.

Speculation is that the recent changes to Treasuries support of the GSE's will be part of a larger effort to allow principal reductions in HAMP and also to support more short sales in the manner that the new Home Affordable Foreclosure Alternatives (HAFA) program promises for borrowers with non GSE loans.