Posted on November 4th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

Oh my.  Friends, get ready to default on your mortgage…on purpose. The first chatter about the government sponsored loan modification initiative has surfaced from Paul Jackson at Housing Wire and what a disaster it is.

I have been telling you guys for months that a homeowner bailout is coming. But this is unlike anything I expected – it actually encourages mortgage holders of all paper grades to default. This is better than a Pay Option ARM because the monthly payments are zero! Why not default when you get to skip three years of mortgage payments and pay the government back five years from now at FED FUNDS RATE!


The plan is to FULLY SUBSIDIZE millions of borrower’s mortgage payments for three years.  The program is predicated upon the housing market improving within the next 5-years.  This is a really bad assumption to make but also could shed some light on the Fed’s inflation expectations. This plan may help borrowers de-leverage temporarily but will not help the broader housing market.  It just kicks the default can down the road several years.

“In five years’ time, participants would, in all likelihood, be able to sell their homes or refinance their mortgages at amounts that would allow them to repay the loan.”

This program does nothing about the leading cause of loan default across higher paper grades, which is negative equity. Those severely underwater borrowers that would chose to participate in something like this are the very ones that you want to foreclosure upon in order to clear the market in the first place. The primary reason one would enter a program like this is if you planned on walking anyway. After three years when their mortgage payments kick in again or five when the big balloon is due, do you really think the these underwater home owners will feel better about their situation or more passionate about saving the home in which they have lived for free for years knowing they are another $100k in debt?  I think not.

The program will have the unintended consequences of encouraging Prime borrowers to default. What about the person with a lot of equity who can’t get a cash-out refinance due to lack of financing? Instead of selling at what he perceives to be a low, he can default and get a government loan. The plan will pay his mortgage payment, which he pockets at a rate of 1% or less for five years. This is the best cash-out refi plan I have ever seen. He can use the savings to buy a rental of second/vacation home.  Or what about that family barely making their payment every month but who would have never defaulted. This gives them an easy way to ease the pain quickly by putting all of their payments on the back end like a Pay Option ARM.

However, when you think about it more closely it is ingenious. This could turn out to be the most direct, long-lasting stimulus plan ever concocted. When you give all those who are over-leveraged and are defaulting on their mortgage no monthly payment for three-years, what will they do with the money?  Right – they will go spend every penny pumping the sectors of the economy that were so hot during the housing bubble years.  They may also use some to pay down other debt, which of course helps the banks. The government is the strongest creditor out there so the banks are sure to get their payment every month. Hey, maybe the government can pay all three years up front so the banks can book it all at once and spike their earnings report.

The solons are banking on homeowners not saving a penny, which also means they will not be able to pay off the five-year balloon when it comes due.  But that little issue is for a different group of regulators to figure out.  The Fed’s know that the foreclosure crisis is so large and complicated that this hail-Mary pass may be the only possible ways to ‘save’ consumers and revitalize the economy at the same time. Additionally, they are banking on massive inflation to carry home prices higher so in five years the borrowers can sell or refi making this all a gift. Now wouldn’t that be a perfect world!

One thing is for sure. This plan will not directly revitalize the housing market or ultimately save the home owner.  This just keeps people spending and in more debt. When it comes to mortgage modifications and setting borrowers straight, unless a pre-emptive mortgage modification initiative involves the re-underwriting of all borrowers with ‘at-risk’ loan types and borrowers using strict full-doc guidelines with 28/36% debt to income ratios and market-rate 30-year fixed mortgages, it does not solve the problem.  If you re-underwrite and reduce principal accordingly, the borrower is instantly de-leveraged. Please CLICK HERE for my recent mortgage modification post.

Housing-Boom was a Ponzi-Fraud

They won’t address the consumer de-leveraging the right way because it will be too costly. After being at IndyMac for months and seeing first hand that 90% of the loans are not as originally portrayed on the loan application, Sheila Bair understands that the only way out is a payment subsidization a plan.

They now realize that the entire housing ‘boom’ was artificial brought upon by exotic mortgage loan programs and leverage that were only available for a brief number of years and that will never exist again. Most of the loan programs contained fraud because the way that the programs were structured, they endorsed it. 

Ultimate affordability through creative financing made it so everyone in the nation earned a minimum of $150k a year and housing prices reacted accordingly.  Unsuspecting buyers who really earned $150k bought homes under fraudulent conditions and are now 50% underwater in their homes, paying the price. They will be asking for a bailout as well. However, they should get one.

Pre-emptive Mortgage Modifications & Wachovia

Many banks are all of a sudden coming out with pre-emptive loan modification plans.   Wachovia was one of the first.  But from early reports I am getting the program is failing miserably. Apparently Wachovia’s close ratio is less than 10%.  This is because they did not estimate how many ‘liar loans’ were really out there or how far housing values have fallen.

Wachovia’s plan involves allotting a predetermined amount to each borrower they call a ‘spend’.  This is used to buy down the principal balance and/or interest rate to the level it takes for the borrower to qualify for another loan through FHA, Fannie or Freddie.  The borrower then must sign a zero-interest silent second for the amount of the ‘spend’ that has to be repaid in full in 30-years. However, only after one month into the program they are realizing that ‘nothing is at it seems’, which is what I have been telling you for a long time.

This is because so many loans were initially originated as limited doc (stated income/asset etc/liar loans) or using false paper work, borrowers just don’t qualify for new FHA, Fannie or Freddie loans with the amount of money allotted.  Borrowers need much more help than they have provisioned. In the few circumstances in which the amount is enough, values are down too much for it to work. These will be continual problems when they try to fit a square borrower into a round hole.  Click HERE for my Wachovia write-up.  This is another reason why the ‘free mortgage payment bailout’ may be the only option.

All of this being said, after seeing what the government has in mind, I am convinced that the housing market collapse, price depreciation and foreclosure disaster will be with us for much longer than most think…at least five years!– Best Mr Mortgage

Feds May Be Considering Subsidy on Troubled Mortgages

By: Paul Jackson November 4, 2008

When it comes to the idea that Treasury’s TARP funds may be used to manage a bailout of troubled mortgages, all options are still on the table, and the only thing that most of us really know is that the plans under consideration have been stuck in the negotiating room for some time.

The Wall Street Journal suggested in coverage Monday that “disagreements over how to structure a federal foreclosure-prevention program are complicating and potentially delaying what is likely to be the Bush administration’s last attempt to forestall sliding home prices.”

One plan that may be garnering some consideration is the idea of a federal subsidy for troubled borrowers, perhaps tied to an effort to modify loans. A source near Democratic senator Robert Casey’s office in Pennsylvania forwarded us a copy of a memo on Sunday evening, said to have sparked some of the ongoing negotiations now taking place, although HousingWire could not obtain further details. The memo outlines a proposed bailout that would use three-year subsidies for some troubled borrowers.

The subsidy plan represents the thoughts of Assured Guaranty Ltd (AGO: 11.03 +5.15%) CEO and president Dominic Frederico, who had been asked by legislators to provide his thoughts a few weeks earlier. A spokesperson at Assured confirmed the authenticity of the memo on Monday evening, but stressed that Frederico’s input wasn’t the only advice sought by legislators looking for a solution to the nation’s foreclosure mess.

“We assume others were being asked for their input related to this issue,” said Ashweeta Durani, vice president for global communications at the firm. Frederico “was asked for his personal opinion [on] how the government might improve its response to the problems caused by high mortgage delinquencies,” she said.

Sen. Casey’s office had not yet commented on the memo officially when this story was published. The Pennsylvania Democrat sits on the Senate Banking Committee chaired by Christopher Dodd (D-CT).

The proposal outlines the mechanics of a mortgage bailout that would cost as much as $441 billion, relying primarily on a three-year borrower subsidy that would be repaid in five years, with interest. “Upon receipt of a notice of default on an owner-occupied primary residence, a homeowner could apply to participate in a program under which the government would fully subsidize three years’ mortgage payments in exchange for a note, to be paid in a lump sum five years from receipt of the first payment subsidy, equal to the payment subsidies plus interest accrued at the federal funds rate,” reads the proposal, in part.

“In five years’ time, participants would, in all likelihood, be able to sell their homes or refinance their mortgages at amounts that would allow them to repay the loan.”

Only one of many options
A few of HW’s sources on Capitol Hill suggested the general idea of a borrower subsidy is only part of what is now being discussed among Administration officials and legislators; key Democrats are said by our sources to be pushing hard for such a measure as a way to push bailout dollars directly to borrowers, after what they see as a handout to Wall Street firms needing capital.

The plan is also just one of the options being tossed around by legislators, we were told by a lobbyist on Capitol Hill with knowledge of ongoing negotiations. The newest idea now being considered is one that would see the role of the U.S. Department of Housing and Urban Development further expanded by relaxing criteria for FHA’s newly-minted Hope for Homeowners refinance program.

A report at American Banker on Monday evening suggested that officials are considering a new proposal to reduce the haircut needed to participate in the Hope for Homeowners program; investors must currently take a minimum 13 percent loss relative to current LTV to put a loan into the H4H program (actual losses are likely to be much greater, given the current LTV requirement). The report suggested regulators may move that loss level down to as low as 3 percent in order to encourage greater participation.

As HW reported last week, investors are so far reluctant to participate in the program, and many mid-tier lenders are finding themselves locked out of H4H altogether based on requirements from warehouse funding sources.

Write to Paul Jackson at

65 Responses to “NO MORE MORTGAGE PAYMENTS SOON – Get Ready to Default!”

  1. This proposal is just one more example among an almost infinite number of them that all prove the same thing:

    Government is a disease masquerading as its own cure.

  2. Stu,
    Thank you for your response and insight. I’ll admit that patience is not one of my strong suits, but in this environment I agree that a hefty cushion of liquid cash will help me sleep better no matter the location.

  3. Ha. this is beyond farcical. Big government is attempting to wipe out any semblance of financial intelligence and personal responsibility. Doesn’t this make anyone consider the real plan? Why would a plan so encompassing and inclusive encourage economic irresponsibility amongst this large a group of people? There is only one answer; to weaken our collective discipline and thus force us to depend on the government more and more. This is socialfeudilism. The more we need to be baby fed our health, wealth and security, the more we are disempowered. stop focusing on the shell on the left, and look at what the right hand is doing. You are about to be thrown into the depths of serfdom. Keep your eyes on the bank of International settlement and the fed

  4. “Three measures of wheat for a penny, and 1 measure of barley for a penny, and spare ye not the oil and the wine”…Rev 6:6

    This speaks of a time, when there is no ‘middle class’, only the very poor and very rich…IOW hyper-inflation.

    The Piper will be paid.

  5. I bet a few years back that the housing market was overpriced and I decided to rent until the housing prices came back to historical averages. I guess an educated bet is a losing bet.

  6. I think that haveing a home is a right to every family and something your born with not something you have to work your life away to get”’I like the ides in the bible that every 50 years the property goes back to the original owners.. no matter how bad your parents messed up… 30 years ago my Gramdna ask me why I didn’t build a house like she did..every week buying some roofing some lumber and building one room first then adding on as I could afford to.. as a contractor I told her the sad truth too many rules too many laws.. Everyone needs their own home so they can have a life instead of this backwards way of doing thing where you work all your life do have a place to die

  7. How bout some food stamps with it?
    Sign me up.
    Wow… I am having flashbacks from the good old days…. just me and my HELOC VISA.
    Now… all I got to do is find that shady shell corp guy, a bank to cash out at… and of course the local coin mart.
    Oh shazzam… I heard they are short on gold coins too!
    Stimulus plan?
    I am stimulated!
    INGENUITY got us into this mess… and INGENUITY has got to get us out… right Secretary Paulson?
    Change has come to America!

  8. OHHHH MYYYY GODDD– They cannot be serious. There will be riots in every city across America if this happens.

    PRICES MUST BE ALLOWED TO FALL BACK TO THEIR PRE-PONZI SCHEME LEVELS—This is the only way the problem will be solved.


  9. I see the idiots on the hill are once again trying to throw good money at bad by asking for yet another “Bail Out” Will they ever learn that you don’t solve a problem of insolvency by tossing money at it. That is how we got into the mess we are in today. You can keep kicking this can down the road for only so long. The cost is to our future generations however and people should be outraged (nice job by the way voters for re-electing these same idiots back into office yet again).

    Auto manufacturers next, and then airlines perhaps, and then bond insurers off course, and then… WHEN will this all end? PLEASE somebody… anybody in Washington GET A CLUE!!! Their has got to be somebody in Washington smart enough to stand up and speak out on this. Shame on YOU Ron Paul for not taking your message to the street!!! You collected the money and didn’t spend it to deliver the message this country needed to hear!!!

    I am cynical perhaps, but for damn good reason. We cannot continue down this “Bail Out” for everyone path or we will cripple our country and our future. WHY don’t they see this? I just don’t understand how so many supposed great minds can continue to get it so wrong time after time. Is it somthing in the water in Washington? I mean seriously… how do you explain such incompetence? How can one explain such miserable handeling of the situation at hand? It just makes no sense to me!!!

  10. FED-UP: I’m sorry for you and your three kids. Sister, your first and foremost responsibility is to your three kids . . . not the bragging rights to tell your friends that you are a home owner or a business owner. It made absolutely no financial sense to buy that house at the peak of the market with zero-down unless your plan is to walk away from the house all along. 12%? Why? You can rent a comparable house for far less than that. The typical rental return on capital across the country is running below 5%! Realtor is not a viable profession any more than saddle-making is in this economy . . . when people are not speculating on houses any more than riding horses for daily commute. For the sake of your three kids, you need to find a different line of work that the society actually needs right now. That’s just reality, nothing fair or unfair. It may take me 1000hrs to raise a single pet chicken in my backyard, but nobody would be willing to pay me even $15,000 for the chicken; how much cost and effort I have sunk into caring for that chicken is irrelevent when there are other people able to sell a chicken for $10 or less. What’s fair is what the sell and the buyer can agree to at any moment; I’m sure you probably felt unfair when the house price went from $100k to $199k in a few years before you became the owner. With three kids to care for, speculating is risky unless you fully intend to exercise the lender’s put option giving you the right to give the house back to the lender.

    Having the government to pay your mortgage is even worse than having the government to pay your rent on welfare (12% of the house’ value each year vs. 5% or less). The scoundrel lenders who should never have deluded themselves and deluded you into bidding the house prices sky high would just get paid by the government at the expense of your future gainful employment and the productive work of your three children! Why would you want that?! I say, punish the irresponsible lender now by putting the house back to them! Renting would cost much much less.

  11. If the chips fell where they land, I would have been able to clean up. I was planning this and already had most of my money in bond,cash and gold when the market hit 14,000.

    Now they devalued my cash with the bailouts and to ensure I cannot open a business to compete.


  12. And how is this different from AIG?

  13. Stop your wining! We have the finest government that K Street Money can buy.

  14. Ok. well, as the story is told, there is a hole in the wall, several in fact, with a few more breaking thru at the seams, and the water is gushing out everywhere, and the rooms that you are standing in seems to be getting smaller by the day.

    So many people whine, complain, and agonize over what may or may not be done by the Feds. I wil tell you this, I have 3 business running at this time: RE business, Restaurant and a Retail Clothing Store. The restaurant is off by about 30% in sales, the retail store is off by 50% in sales ( and we expect hard competition from vendors who are discounting up to 75% on clothing items, since several stores in our area have announced their closings – Meryns, Circuit City, Linen N Thins, Weatherbeys Furntiture, and many more who are on the verge of closing) The RE finance business is off by about 60-70% in the commercial finance market. For our retail store, we have seen 2 tenants vacate the location. In our Restaurant location, we have seen 3 tenants vacant the location. In the office complex for my RE business, I have seen 5 RE office shut down and close over the last 12 months. I can state, first hand, that I have clients ( owners of commercal buildings, most especially, retail and office buidings) who have lost larger tenants ( retail stores, furinutre, home interior spaces or any home product releated business tenanat) in the last 24 months and expect several more to close their operations and leaving the commercial owners with an estimate 20-40% vacancy in their commercial building. In some cases, we have new commercial development that is sitting empty, with no signs of courageus tenants lookig to open up in a 10 unit commercial center when there is no anchor tenant, or 2nd tier 10 tenant looking to sign a 10 yr lease agreement.
    Today, to stay in business, for a small business in these markets, is tough.

    My argument is this: if there is no effective plan to stop to slide of housing prices, and no plan to stop the tsumani of foreclosures, then I can see hundreds, if not thousands, of SMALL BUSINESS shut downs in the next 12 months –and thousands of layoffs of employees across various sectors of the economy.

    As a business owner in California, my retail store cannot continue with another 10% drop in sales. This is now the final cut off line for the business unless I get a reduction in my commercial by about 20% – 30% — and, that, in turn, sounds like a mortagage reduction plan.

    My RE Business will be shut down until and the restaurant business may continue, with a very slim staff ( we have dropped several position and would need to drop 2 more as we replace family members into these positions. so, there you go, we have added to this growing problem and we will be forced to push to the edge of insolvency as we cut costs, cut people, serve smaller portions, etc)

    So, the point in this description. I am not alone. I would argue there are thousands of other small business, family focused business, who are facing the same issues and will be forcd to cut into their oprations and push as far as they can until they close. And when they do, if they do, you — the public who whines, complains, makes those knee jerk reactions comments about “moral hazard” issues, etc regarding homeowners, “liar” loans etc — will see another rise in foreclosures from hard working family businesses. What then? Just let it all fall down — and just marvel at the chaos that will unfold, point the finger, call out names at hard working american family business who is affected by the the guy who pays his bills, and the guy who lost his home?? The color of money is still green in the cash register — but, this time, there is less green in the drawer.

    At this point, A PLAN, any effectve plan that STOPS the foreclosure is the only viable solution to avert a financial disaster in this country. If not, then I know I it will be a matter of time before GM, AIG, FORD, Chysler, your local new and used car dealership, and the thousands of small business owners will close up their business and default on credit lines, auto loans, equipment loans, commercial and home loans. You name it, its comming soon. And people are concerned about NOT helping the homeowner in distress. I think Mr. Mortgage’s focus is correct. A pragmatic plan to stop the bleeding in the mortgage industry is the solution, anything else is, well, an exercise of time.

  15. Thank you very much for your post. Absolutely excellent information and very useful for me. Great done and keep posted. Looking forward to reading more from you.

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