One of the problem issues for housing sectors, banks and homebuilders I wrote about regularly during the first several years after the Lehman-crisis era was the accumulation of nonperforming first trust residential mortgages being carried by the money centers, Bank of America (BAC), Wells Fargo (WFC), JPMorgan Chase (JPM) and Citigroup (C). (Bank of America and Wells Fargo are part of TheStreet's Action Alerts PLUS portfolio.)
I last addressed the issue at the beginning of this year in the column, "Lehman Era's Legacy Issues Leave Hangover for Banks and Builders."
The point of that column was that the government loan modification programs are being terminated at the end of this year, along with the excuses the banks have had for not sending nonperforming mortgages through the resolution and recovery process by way of foreclosure, short sales or by accepting the deed-in-lieu of foreclosure.
In all three events, the result would be an increase in the number of properties for sale to buyers.
One of the reasons the banks have been reluctant to pursue such action, beyond allowing the loan modification process to run its course, is that there has been a fear that doing so would result in causing a supply glut that would result in home price decreases again.
Keeping these properties off the market has been considered a viable way of supporting home prices while the banks wait for homebuyers, especially first-timers, to return to the market.
As I discussed earlier this month in three sequential columns, the last of which was, "Supporting Housing Is Not Supporting the Economy," the first-time buyers are not materializing.
The lack of buyer interest and the necessity to finally resolve the massive legacy nonperforming mortgage issue at the money centers is setting the stage for problems for the housing market, homebuilders and banks.
With that as the backdrop, a few weeks after I discussed this problem in January, Fannie Mae implemented a change in underwriting guidelines that could have a major impact on the resolution process.
On Feb. 23, Fannie Mae terminated a first trust mortgage underwriting requirement for the refinancing of existing mortgages called "Continuity of Obligation."
In simple terms, the "continuity of obligation" requirement meant that existing mortgages could only be refinanced or modified by mortgagors (borrowers) on the existing note.
If the existing mortgagors could not qualify for a refinance or modification, the loan could not be changed.
In that case, either the mortgagor had to continue making payments under the existing mortgage, sell the property, deed it back to the mortgagee (lender) or default and force the mortgagee to determine whether to pursue resolution, or simply let the loan stay in nonperforming status.
Throughout the last several years, since the Lehman-crisis era, it's been discovered that many mortgagors have not been able to refinance or modify their loans and have defaulted, with the mortgagees simply letting the loans sit on their books as nonperforming.
The termination of the "continuity of obligation" requirement now affords for these loans to be refinanced into the names of new mortgagors.
What that means is a new mortgagor (borrower) can now take possession of a property and facilitate the ownership transfer by way of a refinance transaction, rather than a purchase transaction.
The importance of this can't be overstated.
During the refinance, the old mortgagor's names and obligation are replaced by the names of the new mortgagors and the obligation to pay the mortgage becomes the new mortgagors.
The new mortgagors still must meet all the loan underwriting requirements.
There are multiple implications of this new rule, but it in essence allows real estate buyers and sellers to coordinate with existing mortgagees, to coordinate the "sale" of a property without having to incur real estate brokerage commissions.
That reduces transfer costs by as much as 10% of the "purchase price," which otherwise the seller, buyer or existing note holder would have had to pay.
It's unclear at this stage whether this was an intended consequence of this rule change.
As the real estate industry and municipal real estate taxing authorities become aware of this change, there will likely be some fighting over it, and it's possible Fannie Mae will have to revise or rescind the rule change.
As of now, though, this represents a huge opportunity for the banks to be able to facilitate the resolution of their nonperforming mortgages.