ABA Banking Journal - October 2008 - (Page 8)

briefing Who can participate? Borrowers who owe more on their houses than the house is worth and whose current mortgage payments are unaffordable. The refinance program is only for owneroccupied properties and only for mortgages made on or before Jan. 1, 2008. FHA has established a mortgage debt-toincome ratio (including insurance and taxes) of 31% as a proxy for being unable to afford payments. The Oversight Board may move the ratio higher. In contrast to many of the no-doc and stated-income loans that are being refinanced, the new FHA program requires documentation, with some exceptions. Initially two years of tax returns were to be required, as well as bank account information, job histories, and credit scores. But because many borrowers who got in trouble with adjustable loans probably wouldn’t have gone that route if they could have provided income documentation, as one of the bankers explained, FHA became concerned that program participation could be curtailed. So in mid September the agency acknowledged it was moving to adopt a trial qualification plan as an alternative to tax returns. The general idea is if a borrower could make payments for, say, three months under the program, they could then qualify for FHA insurance. if they do, they are agreeing to a principal write-down to 87% of the current appraised value of the property (90% minus a 3% origination fee), and to acceptance of that amount as payment in full for the old loan, waiving any penalties or fees on the existing mortgage. The dollar size of the “haircut” could vary considerably depending on where the property is located. One of the bankers provided this sample analysis: A house was purchased for $150,000 with a loan for $135,000. Now, however, the house is worth just $100,000. Under the program, the new FHA loan can only be for $90,000. The bank would accept that amount as payment in full, minus a $3,000 origination fee for a total of $87,000. The bank, in other words, would forgive $48,000. On the other hand, the risk of default is now borne by FHA. The decision to participate or not, the banker continued, depends on whether you think that going through the long process of foreclosure will net you less What will they get? A new FHA insured, fixed-rate loan for a term of no less than 30 years with a principal amount of no more than 90% of the current appraised value of the property. In other words, the borrower instantly has equity in the home, and, in most cases, substantially lower payments. Plus they have a fixed rate. In return for this they pay an annual fee to FHA of 1.5% of the principal, and agree to share any future appreciation of the home with FHA on a sliding scale (100% if sold within a year). Why would a lender/servicer participate? It’s voluntary so they don’t have to. But Snapshot Branch sales sag to ten-year low T he annualized number of branches sold by banks and thrifts in 2008 has fallen to the lowest level in at least ten years, according to SNL Financial data. Premiums paid for deposits, though, have held relatively steady, indicating that there is still an appetite for brick-andmortar among depository institutions. The banks that have divested the most branches this year are companies that have been stung by the economic downturn. Royal Bank of Scotland sold 18 branches in upstate New York to Community Bank System Inc. at a 12% premium to deposits. RBS recorded almost $6 billion in writedowns during the first half of 2008. Another bank bitten by writedowns, Citigroup sold off eight branches in Amarillo, Texas, to Happy State Bank. The premium in this deal was not disclosed. Overall, though, the number of branches sold in 2008 totaled just 74 as of Aug. 27. compared to 184 sold in 2007 and 240 sold in 2006. If the pace of branch deals remains the same throughout 2008, it will be the lowest number of branches sold per year in SNL’s database, which goes back to 1997. The median premium paid for deposits has dipped to 5.70% in 2008, compared to 8.00% in 2007 and 6.30% in 2006, but the rate is still higher than rates seen in 2002. StoneCastle Partners Managing Principal Joshua Siegel told SNL Financial in June that community banks are eager to take over branches from larger, out-of-state institutions as the big banks retreat from downward turning markets. “This is an interesting time for well-run community banks,” Siegel said. Industry observers await the release of the June 30, 2008, deposit data to see if the overall growth in new bank branches slowed significantly over the last year, and how much of an increase occurred in online banking. Could the mortgage bust have put another nail in the coffin of brick-and-mortar branching? — Maria Tor, senior analyst, SNL Financial, mtor@snl.com 1200 1000 800 Branches 600 400 200 0 Branch sales on the decline Number of branches sold Median tangible book premium/deposits (%) 20% 18 16 14 12 10 8 6 4 2 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: SNL Financial 2008 annualized 0 8 OCTOBER 2008/ABA BANKING JOURNAL Subscribe at www.ababj.com http://www.snl.com http://www.ababj.com

Table of Contents for the Digital Edition of ABA Banking Journal - October 2008

ABA Banking Journal - October 2008
Contents
Editor’s Column
A Banker's View of FHA's "Hope for Homeowners" Program
Snapshot: Branch Sales Sag to Ten-Year Low
Covered Bonds Gain Interest after GSE Takeover
ABA Chairman’s Position
ABA Resources
Hot, Web, and Green
Rethinking Segmentation
Still Pushing the Envelope
Keep Regulation Functional
Capital Windfall?
Mortgage IT: Not This Year's Hot Property
Case in Point: Looking for Sales in All the Right Places
Put Your BSA/AML Program into Shape
Mailbox
Banker’s Mart
To Advertise/Index of Advertisers
Remembering Joe Kizzia, Veteren Editor of ABA Banking Journal
100th Anniversary: Then & Now
The Economy

ABA Banking Journal - October 2008

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