FDIC (and everyone else’s) Mortgage Mod Plans
Posted on November 15th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research
The FDIC plan is the lesser of all evils I suppose. Big wig guests on CNBC yesterday kept saying how these modification plans will help home prices. I don’t understand how any plan will fundamentally change the housing market and stop falling house prices. Especially a plan that makes people permanent renters. It may slow foreclosures but that just means house prices will take longer to reach affordability.
House prices are worth what people can afford to pay given current rates, loan programs, incomes, rents and overall economic conditions. It is very simple stuff. House prices were bubbled due to easy credit and excessive leverage which is gone indefinitely.
The problem is home prices are falling for truly fundamental reasons. Its not like the CEO got liquidated and drove a stock price down. Anything they try to do to avoid what is really suppose to be happening is a waste.
I guaranty you that sometime in the future, it will dawn on them that re-underwriting every borrower in American and dropping principal balances to what folks can really afford to pay is the only way to ‘fix’ this market. Then, home prices will fall but borrowers will not be stuck for the rest of their lives nor will they be renters.-Best Mr Mortgage
November 15th, 2008 1:55 pm
What do you think the chances are of that “principle dropping” method happening in the next 3-4 months? Would Fannie and Freddie be the first to offer it or would someone else lead the way? It seems like everything else has happened so fast since the whole economic crisis came to the forefront, with TARP and loan mod programs, that it would only make sense that the lenders accept the principle reduction inevitability sooner rather than later. Of course, them doing what makes sense isn’t usually what happens…
November 15th, 2008 3:29 pm
Lenders accepting new and lower principle would immediatley effect their books and asset levels. Something they cant reall afford to do right now as it would be an official statement of them being broke. So on we go with the avoidance tricks. But I think this will matter very little as the unemployment rate climbs in CA. 2009 will have all these Alt A and Prime/jumbo primes readusting and going off their teasers, etc….just when a lot of people will be losing their jobs. Talk about a perfect storm!! No loan modifications going to help that. Except perhaps a free house. Or at least a year or two of free rent while no one forecloses on you and you dont pay your mortgage.
November 15th, 2008 3:43 pm
If I were a trapped homeowner, the first thing I would do if I were offered a principal reduction would be to sell the house.
A spiked inventory probably won’t help stabilizing the housing market.
November 15th, 2008 4:58 pm
Well Mr. Mortgage, the people in Washington writing the mod plans must be the bankers and not the home holders. I keep saying “home holders” because you really do not own the home until the mortgage is paid off. As long as the bankers are writing what is acceptable to them only, you’re going to continue to sit here disgusted (as I can tell that you are) that nothing is really being done.
As long as we wait for Washington to do something, when in our hearts we know darn well that Washington is chock full of bankers, our expectations are simply out of line with reality. If we end up disappointed it is due to the false expectation we set in the first place.
Fact 1: The banker will never talk to you unless you miss payments. You’re struggling to make payments every month and doing without in many other areas to accommodate the monthly payment. Some have likely increased their use of credit card debt to compensate.
Fact 2: The banker will change the deal on you all day long. How many of you just got a notification of a change in terms on their credit cards? Remember how it started? The bank roped you in with a low introductory rate of zero point something %. You ran up your balances and you just got notice that your new rate is 24.99%. Just when you can afford it they least, they are sticking the knife in you and drawing blood.
Fact 3: It is the bankers that created this mess through loose credit. Not only did they do no money down, if you look at the Federal Reserve website, you will find that 83% of Alt-A loans are liar loans, the current segment of the foreclosure crisis hitting CA. Simply go to this link. http://www.newyorkfed.org/mortgagemaps/
1. On the upper menu bar click on the Alt-A button. The map will change from the default Sub-prime to Alt-A. You will note a severely darkened patch has formed on the map that appears to be in the shape of California!
2. On the side menu bar, now click “Share of low or no documentation” Once the map changes, mouse over on the state of California. Hark! 83%!!!
Fact 4: It was banker’s loose credit that caused you to overpay for a house in the first place. Because of high prices, you likely had less of a down payment, possibly forcing you into mortgage insurance. In addition, the ebullience of rising prices and the feeling of getting priced out forever was brought on by bankers loose credit. Buying decisions are emotional. Banks created the emotional atmosphere of the housing bubble causing people to buy that may otherwise never have jumped in. How many people jumped into the NASDAQ tech bubble that would not have bought those stocks had the bubble not been there in the first place??
Fact 5: Responsible use of credit.
Consumers are often taught to use credit responsibly and not to get in over their heads. Bank’s likewise should extend credit responsibly, it is their profession, their livelihood. Creating conditions of overpriced assets and issuing loans that cannot be paid is not responsible. Unfortunately so far, it seems to be a single edge sword. You screw up in responsible use of credit, you pay. The bank screws up in the responsible use of credit, you pay.
Fact 6: Pecking order. Shareholders elect the board of directors. The board of directors elects the CEO. Do the shareholders blame the CEO or the Bord of Directors that they voted in? If shareholders cannot control the destiny of the board room, they should find another place to park their money. Don’t feel sorry for the shareholders of the banks.
Fact 7: Fish, Bread and Seagulls. Get in your car and take a trip to the waterfront. Go to Pier 39 in San Fransisco, Santa Monica or Huntington Beach Pier. As you go out on the pier, carry a brown paper bag, in which is a loaf of bread. When you get out to the end of the pier, cast a slice of bread out onto the water. You will notice that the fish start eating the bread. You will also note that the seagulls are interested too! In less than a minute the sky will be filled with squaky sea birds. Some will even land on the rail and start being aggressive for a handout. In short order, the bread does not stand a chance of hitting the water as it is swooped out of the air in its flight path to the ocean below, the fish getting the inadvertent scraps. Before long you will have reached the end of your loaf. While you are standing there holding your last piece of bread in hand, take a deep breath and ask yourself this question; “Am I more like the fish, the gull, or am I the slice of bread?”
Fact 8: Slice of Bread. If you find that you are sitting there in a overpriced mortgage and do nothing at all but make the payment, you are being nothing but a slice of bread. You are the bankers slice. Remember the time that the banker roped you in with that low introductory offer and then changed the terms on you? If you modify the loan you are merely showing the banker that irresponsible use of credit can be a double edged sword, it is simply the bankers turn to be the slice.
November 15th, 2008 5:14 pm
re-underwriting every borrower in American and dropping principal balances to what folks can really afford to pay is the only way to ‘fix’ this market.
This is the ONLY answer ….It MUST happen and the sooner, the better THE COUNTRY will be….Cut EVERY mortgage balance 10, 20, 30 (pick a %) but it must be the same FOR ALL and the fix ALL rates at 3% for life on the loan….
November 15th, 2008 6:20 pm
Bert, this is exactly why people should, and will continue to simply just walk away…
1. Using a recourse CC to keep up on a depreciating asset that is non-recourse is just silly stupid (so is tapping your 401K).
2. The lenders will screw you in the blink of an eye, so why this silly notion that we must allow ourselves to get screwed by staying? The law allows for this decision and penalizes people accordingly. The fact of the matter is that the penalty is not nearly as bad as staying in your underwater home.
3. The lenders didn’t require any skin in the game so why should you place any into the game?
4. There is plenty of blame to throw around… on nearly everyone involved, but again there are legal ways to get out so why not use them.
5. See 2 & 4.
6. Your pecking order when discussing your own money should be me, myself and I!
7. Deep but a simple answer… The Gull is who you need to be if that was not your answer. Times like this very much favor joe public. When times are good politicians and business people do quite well. When times are tough that reverses course and the power goes to the public as a whole. NOW is the time to utilize this power to get things turned around. We screwed up right out of the gate by our miserable voting, but we will have another chance soon enough.
8. My advise is to WALK if any deal offered dos ANY of the following things to your loan.
A) Increase years to your mortgage.
B) Changes your interest rate to anything that is not fixed.
C) You have to come up with even a penny.
D) You have to sign any paperwork that changes the loan to a recourse loan.
E) You must give a % of future profits to the Government when you sell.
ALL of these things are not neccesary because FOR FREE you can simply walk away and leave them to work out these deals amongst themselves. You HOLD ALL OF THE CARDS in this game… ALL OF THEM!!! You want the following to be in the deal and ALL of the following or simply walk away.
A) A fixed interest rate period. No exceptions here.
B) A reduction in principle to a level of no more than the standard used to be (28/36). Anything more than that is unacceptable.
C) The loan remains non-recourse.
D) No money out of pocket for anything (just your signature).
These must be included because it is you doing them a favor and not the other way around. You can always walk so don’t get bullied into agreeing for any deal unles at minimum these simple rules are followed. Simple really when you get right down to it. The lenders may try to make it much more complicated than it is, but just stand your ground and you will be fine!!!
November 15th, 2008 7:19 pm
Stu,
I agree with your post, however as someone who has never missed a payment in 18 months, got a fixed rate (thus a higher rate than i could have ARM) and put 20% down yet has seen my value of my horse decrase from $550,000 to below $500,000 thru no fault of my own and most likely from the fraud commited by the others, how is your advice helping the people who are in good standing….i dont see why i should have to stop paying to get the upper hand….just give EVERYONE across the board the same fixed rate and decrease in mortgage balance, as i believe Mr. Mortgage is stating will happen….The “good guys” are getting the short end of the stick, to say the least, and this cannot happen or the whole thing will collapse (if it hasnt already)
November 15th, 2008 8:55 pm
Stu, I think your on to something here.
I’ve been holding on by the skin of my fingertips
but quite frankly, not for long. My greatest issue
would be ruining my good credit rating, but like you say,
we got to stand our ground and things are bound to get better.
November 15th, 2008 9:55 pm
Principal writedowns are political poison.
Approximately 31% of the country doesn’t own a home and ~26% own their home, but have no mortgage. By my reckoning, that’s a majority of the country that has ZERO interest in principal writedowns. Add to that the percentage of folks who have LTVs of 50% or lower and, as such, are in little danger of ever being underwater, and you’re talking about a LOT of pissed off people.
An attempt will be made to convince those with paid off mortgages and low LTVs that the bailouts will ultimately benefit them by propping up house prices. But of course this is bull. When a bank reduces the principal on an underwater borrower’s loan, it’s essentially the same as foreclosing on the borrower but allowing them to repurchase the home at a much reduced price. For some significant percentage, the first chance the borrower gets, they’re going to sell the house (for a profit, no less!). Any program (like Hope for Homeowners) that requires the debtor to repay some of the forgiven amount out of future appreciation is essentially doomed. Why? Because people think, even after all this, that it’s their God given right to realize capital appreciation from their home. When faced with the prospect of ZERO profit over the next 10 years (essentially an eternity for many Americans) most will simply make the rational choice and WALK. If the banks choose to make principal reductions — especially if done en masse, without discrimination between the deserving and not-so-deserving — there will be some SERIOUSLY angry citizens. This will be doubly true if the banks are only capable of providing this “relief” given the backstop of TARP and God knows what other liquidity injections Uncle Sam comes up with.
Loan workouts done on a massive scale are profoundly inequitable to the vast majority of the country that are not even close to being underwater on their homes (or who don’t own homes). There is no way the banks could do this without the backing of Uncle Sam. They would be bankrupt in short order (as they probably should be). The government, by telling us that these banks are considered so systemically important to the economy that they will never be allowed to fail, has, in essence, made it a public policy to reward a small minority of imprudent people at the expense of a large majority of prudent people.
I would strongly encourage anyone who is NOT a targeted recipient of the government’s largesse to contact their representatives and voice opposition to these bailouts.
November 15th, 2008 10:55 pm
I wonder if this might be a solution that the gov’t might impleement. What about if they kept everything the same but just let those who are in trouble switch into a crazy long term mortgae like lets say 60 – 75 years?
I know this is crazy and I think only the max is a 40 year mortgage exisits. But, this would help lower payments to people in trouble and it would stablize the housing market. There would be no reduction in principal. I do wonder what an i rate would be on a 75 year mortgae. But the long tennor would definitely lower the mo. payment.
This program would have to be avaiable to the folks who are current on their mortgage, new buyers as well so to make it fair to everyone.
Once the entire system stabilizes, the 75 year product would not be offered anymore.
November 15th, 2008 11:52 pm
Wow – you guys have been busy tonight. Hey, dumb it up a bit or you will make me look bad. Great stuff guys. Sorry I don’t have time to reply more, but I do read all. Thanks for all the great stuff. I get comments via email from readers all of the time telling me how great the responses are to my posts. That’s find of fuc**ed up they don’t tell me how great my posts are but hey, whatever I can do to help. Again, thanks.
November 16th, 2008 12:38 am
All you homeowners that paid too much and now want a bailout make me sick! You all deserve to die. Nobody put a gun to your head and made you overbid for something you couldn’t afford. Not the realtors, the government, nor the pimps offering the loans. Stop crying and take the beating you deserve. If you want to walk away like a puss, then so be it. At least you’ll be out of the house, prices will return to value and the thousands of people like me that are waiting on the sidelines with cash and excellent credit will step in and buy.
November 16th, 2008 1:04 am
admin – we only hang out because you are so awesome! Do you need that in an e mail too? (hint everybody send Mr. M an awesome e mail!)
As California fires raged today and ashes filtered from the darkened skies, the thought was “I hope this is not someones idea of getting out of an underwater mortgage!” That would suck.
November 16th, 2008 1:08 am
Hey Dick,
One problem is that the difference between a 30 amortization and a 75 year amortization really isn’t that great. For example, 100K @ 6% amortized over 30 yrs is approximately $600/mo. Change that to 75 yrs and the payment drops to $505/mo. A 16% reduction in the monthly nut is nothing to sneeze at, but isn’t anywhere near enough to rescue a lot of these people (which should give you an idea of how awful a lot of these loans were).
Now I’m having a math geek moment:
Compounding is strange. Suppose a bank offered you 100% interest on a $1 deposit, compounded monthly, for one year. At the end of the year, you’d have $2.61. Pretty good deal! Now, say the bank says “we a GREAT deal this month… we’ll pay you 100% interest on your $1 compounded every nanosecond!” You might think “wow, that’s gotta be some serious coin!” But, in fact, you’d end the year with $2.71 for a whopping gain of a dime. In fact, if the compounding rate was infinite (i.e., an infinitely small time between compoundings) the rate of return would be “e” (the base of natural logarithms) dollars. Cool!
November 16th, 2008 1:10 am
I suppose lopping off the interest payment as in an interest free loans and leaving the principle and fees intact is out of the question…. *what was I thinking?*…
Fairness across the broad range of debtors and non-debtors is desirable. If the bankers would agree, I would agree.
November 16th, 2008 1:26 am
Great posts, but the only real answer is to do nothing and let each borrower, do what they can with their bank. Anything else ends badly. Personally, a 28/36 would not keep me in my home, not when the value is down by 200k. Payments are triple of rent. No win here for anyone, and all the bank wants is more info from you, not to work with you but only to work against you. Don’t believe the hype, remember, “I’m from the government, and I’m here to help you” Has never worked. Like you all have said, they are out for themselves and now so are we.
November 16th, 2008 1:31 am
In reality justice demands massive loan defaults to punish bankers et al for trying to enslave debtors to creditors. Only this will clear the way for social and economic rebound if the context is freedom.
November 16th, 2008 1:38 am
SO, so true.
Every plan to “fix” the crisis simply involves keeping these PONZI scheme, arficially bloated prices PROPPED UP a little longer….
Prices have to crash back to their historical relationship to rents and wages, period, end of story.
November 16th, 2008 2:08 am
Save the Flippers,
In actuality there is a difference. Nobody knows what the i rate is on a 75 year mortgage because no products exist. The standard yield curve only goes up to 40 years.
Theoretically, the FED can create a synthetic 75 year i rate product at perhaps ANY rate they would like. Let’s say 4%. Or, perhaps they can issue 75 year gov’t bonds in the market in order to have the market determine the i rate. I just hope it is LESS than the current 30 and 40 yr rates or it will not work.
The low i rate combined with a longer amortization timetable will enable the scenario to work.
Think about it.
Thoughts? Comments?
November 16th, 2008 2:59 am
All you say is true were it not for one fact.
The uS weirdly permits non-recourse loans.
that means that there is a foreclosure avalanche as most are voluntary.
The negative dynamic from this is worth tackling as it will send house price below where they would be and below the level justified by fundementals.
in addition the foreclosure process involves MUCH higher costs for banks, making the final crisis worse than it needs to be.
November 16th, 2008 3:02 am
Well, I just assumed when you said “What about if they kept everything the same but just let those who are in trouble switch into a crazy long term mortgae like lets say 60 – 75 years?” you meant keeping the interest the same and just extending the length of the loan. My point is just that dramatically extending the length of loan 30 to 75 years, in and of itself, doesn’t dramatically improve the monthly payment (assuming it fully amortizes over the 75 yrs).
Also, I would imagine 75 year bonds would have a higher yield than 40 year bonds (assuming a normal yield curve), not a lower yield.
November 16th, 2008 3:42 am
MM,I forgot to say “Thanks”. Your posts and the others on here that chime in, help me stay focused on what’s really going on out there and whats coming down the line.
November 16th, 2008 5:02 am
Graham Cox
You can buy stocks on 50% margin. More for day trading. The idea behind the margin is cushion so that the broker does not get left holding the bag. The idea behind a down payment is so that the bank is protected. Non recourse should insure that the banker is responsible in its lending practice. If the banker is in a heated market, the bank should either stop making loans or increase the margin requirement to protect itself. As we have found, no money down was stupid. As we also found, mortgage insurance adds additional risk if the insurer goes belly up. All this did was to put the 20%ers at risk which would have otherwise not been the case.
All markets when they correct go below fair value, it is the nature of the beast. I fully expect housing prices to just do that. I see no reason why housing should be unique.
I also expect stocks to take on a new risk assessment in the price, placing yields once again over bonds. In the past bear markets, S&P yields have bottomed at yields in the 6-8% range or even higher. If stocks do indeed correct to this level, it will place Calpers in a well underfunded position. Calpers just reported that thier realestate position is down 35%.
We have serious problems that go well beyond housing here, that will further compound the housing situation. The are increased unemployment and higher taxes on both a state and national level.
If we use the Japanese Asset bubble as a model, we could have prices correcting downward for 10 years. I view this as a central bank failure. The central bank may point to Bush saying they were following the President’s instruction. Bush pointed the finger at Wall Street saying they got drunk. Regardless of what Wall Street did, the banks ended up with slew of bad loans on their books. Therefore the banks must have got drunk too. The Federal Reserve is in charge of the banks so we have it right back on the laps of Greenspan and Helicopter Bearnie.
All that is nothing but side issues at this point. What we have to do is get California back on its feet. We have a long hard and tough road ahead that is going to be punctuated with pain. The sooner we get people out of the bad loans the sooner we are going to get back on our feet as a state.
So do we walk or do we mod? If we follow the Japanese model of 10 years of declining prices, walk and rent would appear to be the far superior option. This is also the quickest way to place housing back in line with available financing.
November 16th, 2008 5:30 am
A deflationary cycle is classified as ” a loss of a “any subject noun” (ex. air,value,money etc..) in a recurrent round of events, such as what the housing industry is in. Defaults increased due to payment changes or negative equity,more foreclosures occur, Reo’s are sold at 30-50% discounts under the market, lowering the real estate values of the given area, more negative equity occurs, more adjustables are re-setting , more defaults occur, more foreclosures and the cycle continues with no end in sight. This is why housing values are falling, the deflationary cycle, not a correcting of values to an “affordablity” level, that is a benefit.
How happy are the 26% of homeowners with no mortgage when they continue to lose their anticipated profits from their equity with housing values PROJECTED to over correct by the government( look up Sheila Bair, chairman of the FDIC statement to the lenders requesting massive modification to try to stem the problem)? The latest quote as of 9/1/08, per NAR is a national decrease in housing values of 23% already, that includes approximately 20% of homeowners with over 70% of them paying on time.
Housing values will not return to market peaks because the supply and demand has been removed with the termination of the “subprime”, “no doc”, “no money down” etcerera mortgage programs fueling the price increases.
Modifications are not the answer it does not correct the number one problem of foreclosures which is negative equity.
Issuing a new mortgage is the only solution. The mortgage would have a principal reduction equal to a standard pre-determined value (60% of the market value at its peak) for qualified homeowners( debt to income ratio’s involved) that are already affected by negative equity ACROSS THE BOARD given a fixed rate, not a reduced interest rate or extended terms. This would reduce the number of foreclosures, especially if the lenders were forced not to discount their REO’s under the market with their participation with the plan, stablization of the market would occur at an affordable price for the 31 % of “renters”. There would be no profit sharing ever with lenders, but neither would the homeowner be eligible for a profit for a period of five years,( there is sharing with the government from year 5 to 10). This would create a stablization of the market, by reducing the over supply of homes being listed for sale.
The cost of the reduction credit would be shared by the government and the lenders/investors.
The plan I created is individualized for areas, not borrowers to say that the dollar amount of principal reductions would be given at 28/36% ratios based on what the borrower could afford is just as discriminatory as allowing modifications to only those that are deliquent( affecting the income of Wall Street). The plan corrects Main Street while repairing Wall Street, the liquidity and credit crunch would be eliminated, ensuring that viable small businesses would be able to obtain loans enabling them to retain employees.
The proposal I created uses less money than was already allotted for the financial sector, and was sent to every Senator already. The only problem of my plan, is it expects Wall Street to participate in the loss.
November 16th, 2008 10:18 am
Robert McHugh a wave analyst I read daily has an interesting plan.
The solution is simple: Rebate the past 5 to 10 years of income taxes, up to $10 trillion worth, requiring half the rebate to payoff debt. If households don’t have debt, they get to keep all the rebate. This will metamorphose current and future bad assets (loans and loan securities) into good assets. This gets the household back on their feet, heals both household and corporate balance sheets, and choke starts this economy with a boom that could last decades. Sure, the Dollar would take a hit, maybe a 50 percent hit, but debts will be eliminated, a depression will be averted, and everyone gets a fresh start. This stimulus would be alarmingly successful. Then the income tax should be replaced by a national sales and excise tax. Hey, the U.S. survived very nicely for 150 years without an income tax through 1912. Then, the real estate tax should be repealed, an unconstitutional confiscation of wealth, and replaced again by a sales or consumption tax. And finally, to support the Dollar, the Fed should be eliminated, currency should be issued by the Treasury Department, and should be backed by Gold, even if Gold is valued at $3,000 an ounce.
To effectuate the 10 year income tax rebate, the Treasury Department should issue $10 trillion of fresh U.S. government Treasury securities. Those securities should then be sold to the Federal reserve for cash, and the cash would be distributed to every household in America. The tax rebate would not include corporations, just households. Corporations and Wall Street would benefit through trickle up, not the trickle down policies that have failed. Demand for goods and services would skyrocket as households, which account for 70 percent of Gross Domestic Product, buy, buy, buy with the strength of their newfound solid balance sheets. This spending will create jobs all over the place, reinforcing free market capitalism, in opposition to socialist policies that just benefit specific industries or projects that present Congressional thinking suggests a government stimulus plan would adopt, a narrow target policy that will fail.
Everyone needs help now, not just the few high profile, lobbying-spending industries that have the publicity machines to convince government a bailout should be for themselves. The massive income tax rebate plan would benefit the broadest range of targets possible. People paying their debts on time now, but making painful sacrifices to do so, need help now, not just those who have stopped making payments. Having a job today is no guarantee that job will exist tomorrow. The present focus of the Master Planners – to address only those who already hit the fan – is too narrow and will fail to stop the spread of this systemic economic plague. Can you imagine the boost to Detroit’s big three auto makers if every household in America got a check equal to what they paid in taxes over the past ten years? GM’s stock would not sit at $3 a share for very long. The Governor of Pennsylvania came out today suggesting he may raise PA income taxes next year. Are you kidding Ed? You’ve been watching the Eagles’ Andy Reid’s coaching too long. That is the precise worst thing you can do in a developing depression. He wouldn’t have to do that, or even think about doing that, if this federal income tax rebate plan was effectuated.
This plan could be implemented quickly. Very fast. Checks could be in the hands of every household by early 2009. Further, this plan should include a floor tax rebate of $50,000, assuring the poor, who are victims of job losses and a higher cost of living, receive help to get back on their feet. It is the right thing to do, in the spirit of inclusion.
November 16th, 2008 10:23 am
Sanity – you are wrong. People really didn’t overpay for housing in many cases. With interest only loans, Pay Option ARMs, 100% CLTV 2nds and stated income etc there was a great level of affordability at those levels. As those programs disappeared and lending went back to circa 1990 affordability was gone overnight and values are dropping to meet what people can really afford. Couple that with millions in default and foreclosure and you have a housing crash.
With respect to taking out those loan programs, the were mainstream. The investment banks, traditional banks, realtors and regulators branded and sold these loans program as mainstream so why wouldn’t 95% of Americans think they were ok.
Mainstreet did not cause this problem.
November 16th, 2008 10:44 am
Susan – I strongly disagree.
The negative equity feedback loop to which you speak is a result of housing going back to historic levels of affordibality present when financing is what it is today.
In 2001 to 2007 due to exotic loan programs from Subprime to Ultra-Prime, affordability was only predicated by the monthly payment, credit history of the borrower and the creativity of the loan officer, underwriter and borrower.
Mortgage loans today are not ‘tight’. They are like they were prior to 2001. All price movement between 2001 and 2007 has to be discounted. When you do this and adjust for a terrible economy, massive inventory, surging foreclosures housing still has a long way to go on the downside.
November 16th, 2008 11:30 am
>> Reo’s are sold at 30-50% discounts under the market
Reo’s ARE the market. Housing price are declining to affordability levels. 30-50% is not overcorrecting, it’s just a return to what can be afforded without the ridiculous “affordability products” of the lending industry.
>> How happy are the 26% of homeowners with no mortgage when they continue to lose their anticipated profits from their equity with housing values PROJECTED to over correct by the government.
Since this is the category I fall into, I feel I can comment on this. Housing prices returning to reasonable levels MAKES US HAPPY. That’s why we paid off our mortgages in the first place. We want to be in a position where a decline in house prices WON’T cause us undo stress. What really makes us angry (and I’m sure renters fall in this category as well) is when the Government steps in and basically makes lottery winners out of a small minority of the population at our expense.
>> Housing values will not return to market peaks because the supply and demand has been removed with the termination of the “subprime”, “no doc”, “no money down” etcerera mortgage programs fueling the price increases.
I agree.
>> Modifications are not the answer it does not correct the number one problem of foreclosures which is negative equity.
Underwater homeowners have a generous option already available to them: the can walk away. No 1099 for the forgiven debt. A few years of bad credit, and that’s it (oh the horror, they’ll have rent!)
>> Issuing a new mortgage is the only solution.
Of course it’s not the only solution. It’s certainly a popular solution with the small percentage of the population that would benefit from the Government’s largesse. No surprise there.
November 16th, 2008 11:33 am
Sanity, I think that you have things backwards. Homeowners don’t want or need anything here. It is the banks that want to keep people in their homes. Most people in bad shape can walk and instantly better there financial situation by having roughly half of their living expenses removed from their monthly budget and in most cases can rent roughly the same size house in a very similar neighborhood if they so prefer.
These people paid what the market value was at the time, but things have changed in many of these markets now. I think what you meant to say is that nobody is putting a gun to peoples heads to stay put. The banks need to stop crying and either make a deal with these homeowners or take back the property. If the deal to take back the property is better than the deal to write down some principe and get them into a fixed rate mortage then take the house back or vise versa.
This isn’t rocket science here but rather very basic and simple math. It may not be the greatest for homeowners (such as myself) that were prudent and / or who are current and not over their heads. This is more about what is good for our country and economy and sometimes things don’t appear to be fair. The issue is that our lenders and the economy is getting crushed with all of the foreclosures hitting the market or sitting on lenders books. So either do something about it or let it play out. I am not opposed to either choice as it is a deal struck between a lender and their client. No different than me getting a deal on a car that is $2,000.00 better than the next guy that walks on the lot. You cannot paint a picture with a broad brush and you can’t have the same situation apply to everyone. This is a unique problem facing our country and so it needs a unique approach.
As I said in my prior post, for homeowners certain things must happen or just walk. For banks you either rework these loans or you take the home back. If I was in the shape that I read some of these people are in, I would be as bold as to walk into my lenders office and tell it just like it is and what you expect from them or let them know full well what they can expect from you based on their response. This approach is fully legal and within the constraints of your mortgage paperwork. You are not doing anything wrong and you are not guilty of anything. Don’t let them tell you differently and again… stand your ground on this. You hold all of the cards so remember that when you walk in. Also realize that by doing this you may in fact lose your home so the stakes can be high.
Now tossing tax payer money at the problem is a different story because now it involves me and I don’t agree with that. I don’t deserve to have to pay one penny to solve this issue and would vote against any tax payer bail out for anyone or anything for that matter. One… they don’t work as we can plainly see from all the attempts to date and two… you would in essence be creating a welfare program for people behind on their mortgages. You are then getting back to the moral hazard situation again, and that would not end pretty for this country in my opinion.
November 16th, 2008 11:38 am
The Robert McHugh plan sounds a heck of a lot more equitable than paying down the mortgages of underwater “homeowners”. Free candy for everyone! (Except tax scofflaws — not a significant % of the population).
November 16th, 2008 11:47 am
Save the flippers, your first sentence sums it all up pretty good. REO’s are currently selling for 30% – 50% less value today in many markets. That means anyone that is 20%-30% behind in equity and struggling with a newly adjusted loan that just reached 12% is easily reworked to the benifit of all. The homeowner would now be current in home value and able to pay their motgage moving forward and that is what I am talking about. I bet lots of people would fall ino this catagory and could be saved with no more than a quick meeting between the lender and homeowner on any afternoon they wish to sit down. It really is that simple.
So the bank takes a $500,000.00 adjustable 2/28 that just reset to 12% and rewrites it down to a $375,000.00 30 year fixed at 7%. The bank didn’t lose anymore than they would have on the loan and in fact will have lost less than if they were to foreclose on the property. The homeowner is now in an affordable fixed rate loan and on a home value that is current in todays market.
What is so wrong with that? It didn’t harm me in anyway and probably helped me if I live anywhere near the home that was saved.
November 16th, 2008 12:16 pm
One problem with the income tax refund is so many households don’t pay any anyway. So they won’t get any refund. Another is Congress will so modify the scheme as to make it worthless. Another is you’re fighting the buisness cycle, which is the fundamental mistake going back to Greenspan. Another is you’re destroying the savings of unsophisticated retirees through inflation. One can go on and on with this sort of thing.
November 16th, 2008 3:49 pm
Stu – I agree with most all of what you said except “Homeowners don’t want or need anything here.”
That’s not whatI’m hearing, reading or seeing. If the homeowners don’t want anything, there is no discussion. If they want to renegotiate in any way, they want something. They want a better interest rate, they want pricipal to be forgiven…..The want something. I’m not saying you (one) shouldn’t be able to renegotiate your terms. I do not support an automatic repricing of the asset and allowing the person to stay in the home. Out you go, and as I said, let me or somebody like me have a shot.
Admin – you said “Sanity – you are wrong. People really didn’t overpay for housing in many cases. ”
I’m wrong? Are you insane?? People on my block paying $800k-$1M for a 1500 sq. ft fixer didn’t pay too much?
If you buy an apple for $3 and I buy one pound of apples of the same quality for $3, did you overpay? I’d say yes, case closed.
Look, the truth is the majority of people in trouble thought the value would keep going up, they could refi,push it off until later, the whole works. They took on more risk and debt than they could support. They were greedy, stupid or both. If you really believe people didn’t overpay, you should not be an “admin” of this board.
November 16th, 2008 4:37 pm
“What is so wrong with that? It didn’t harm me in anyway and probably helped me if I live anywhere near the home that was saved.”
I don’t have a problem with a PRIVATE bank deciding it is in their best interest to do a loan workout with an underwater borrower. But when banks effectively become taxpayer backed, then it it’s a whole different matter. Banks are being pressured to perform workouts en masse, with little differentiation between those who are gaming the system and those who might truly be deserving of some help.
And if you think that principal writedowns are better than foreclosures vis-a-vis neighborhood property values then I think you are going to be disappointed. Principal reductions without a provision for repayment of all or part of the forgiven debt at some future date are basically equivalent to the bank foreclosing on the house but then selling it back to the owner at the current market price. i.e., it’s fundamentally deflationary for the neighborhood. The “homeowner” now has a much lower cost basis and can afford to dump the the place at foreclosure pricing, thereby setting the new comps for the neighborhood. In fact, it’s even WORSE than a foreclosure. With a foreclosure, there is the possibility (even likelyhood) that the purchaser is someone who who is a good credit risk. In the case of a principal writedown, the bank is effectively selling the foreclosed house to the same deadbeat who defaulted in the first place!
November 16th, 2008 5:18 pm
Susan Day Minerly
Here is my proposal and it does not require the action of anyone else but the individual. The great part about that is you get immediate benefits now, no applications to fill out, no notary, no nuthin.
When your next payment is due, write a check for $1, slap a yellow sticky on the check with a note “times are difficult right now.”
Use the money you did not send to pay off you credit cards (if you have them with balances) or any other loan you have. Any financial advisor will tell you to pay off your high interest debt first anyway.
When your next payment is due, be generous, write them another check for 95 cents. Get out your sticky pad and slap another note. “It is really tough out there”. Continue to pay down your high interest debt if you have any. Next month another check, another sticky, “I never dreamed it was going to be like this.”
By month four you should be building a mound of cash. If you find you are still paying credit cards, you were likely headed to disaster anyway. Break the monotony, have a garage sale. Sticky ideas for month four “Amazing times!” “Wow, non stop layoffs out there, when will it end?” “What do you think of Obama so far?”, “Maybe we should talk”, “I really hope 2010 is better than this”.
With mandated extensions forcing mod talk with the home holder, you should be able to get 8-12 months near free rent out of the deal ($10 or so plus postage). If you have a 4k mortgage payment, this gives you a minimum 32k to 48k bailout benefit (that is what the government will likely pay the banks) if you don’t like the mod deal they offer.
Now Susan, I know you worked really hard on your plan to help try and save the day, but let’s look at my plan and see if it is not far superior.
1. Funding already in place (may have to be increased down the road)
2. No forms to fill out with the government.
3. No approval necessary, acceptance guaranteed.
4. Addresses high interest consumer debt.
5. Homeholder could loan money to employer bypassing tight credit markets.
6. Gives homeholder discretionary powers to modify or crap can the whole home owner idea altogether while receiving credit card debt relief.
7. Non discriminatory. Not geographically bound. You do not have to be distressed to qualify.
8. Minimum tools required: Pen, checkbook, sticky pad, stamps.
The truth is that housing prices are likely to go down at a minimum for the next three years. Could be five years, could be ten. In the end game, the underwater home holder would be best off taking the “free rent” portion and walking, saving up for a new down payment down the road where he will likely be able to get in with a 20% starting equity position verses the now reunderwatered modification with no equity.
This bailout is already in place, you are merely using the bank who is tapping the Federal Government. Arnold is asking for a federal bailout of California. What Arnold needs to do is address Californians and show them how to transfer this federal money into the state via existing channeled funding Bertdilbert California bailout plan.
We have to save California, this is an emergency, we need to act now.
November 16th, 2008 6:00 pm
Bert,
Why would you tell anyone to pay a credit card , that is backed by no collateral, at this point my guess is credit score is not an important factor, so i would say not pay your CC, as nothing much can happen to you and if a lowlife collector comes a calling, doubt very much they would waste their time attaching any judgements..however, by not paying your mortgage, you are going to lose an asset, plus something most people are attached to and you r still need a place to live….if you have any equity this is even more important that you protect your home
November 16th, 2008 6:49 pm
Javagold, well naturally I am assuming that you are presently underwater on your home which means that you are holding a liability and not an asset and rent is considerably cheaper than what you are doing now. As for credit cards, do what is right for you. I never thought about not paying a credit card because there is no collateral behind it, interesting thought…
November 16th, 2008 8:31 pm
All of the “programs” are going to end up to be so insufficient that the crash will happen anyway that it really doesn’t matter to me other than that the people who pay their mortgage and were prudent in not buying more than they could afford do not subsidize or fund the deadbeats who need the bailout.
You would ask “don’t you benefit from a stable market?”. Yes, to a point, but we are beyond the point of repair. At this point I will be harmed by reduced values anyways so either I need a handout or no one else should get one. This attitude will become more prevalent as we go into 2009 and it becomes apparent that none of these programs are solving anything.
Rewriting mortgages or reducing loans to 38% or 31% or whatever does nothing other than reward those who overbought at the height of the crisis and now has, in essence, a rental payment at below market rates.
November 16th, 2008 9:00 pm
well said JJ….thats how i feel, i am tired of being the sucker all my life, playing by the rules , when others do not, which in the past has NEVER bothered me, as i USED TO believe what you do is up to you and if you dont mess with me, i dont mess with you
but now that the rules of the games seem to change whenever the powers that be feel like it, i am going to play 3 card monty with them and i am going to sleep well at night as well…..i will do everything i can to stay 2 steps ahead from now on , and i plan as taking as much down as i can thru any and all handouts or loopholes, without breaking any laws
this may sound like a jokester post but i am serious and i doubt very much if i am the only one who feels this way, i have yet to have the courage to talk to others face to face, so for now i stay behind my screen name and try and get as much info as possible
November 16th, 2008 10:07 pm
I live in the Houston area and when Ike hit, this attitude of entitlement from the government pretty well filtered down to everyone, since we have spent the last 3 years watching Katrina “victims” (you know, since George Bush blew up the levees) get handout after handout with no accountability.
Thus, when Ike hit, everyone and their uncle asked for aid to see if they could get something while they were giving it out.
Wait ’til Obama raises taxes; you will see a level of tax planning, avoidance, and absurd positions because when you do pretty well (and I do pretty well by most standards) you only get frustrated when cutting large checks to the government as you realize you get next to nothing back from it and will probably not get anything in the future, just the knowledge that your wealth is redistributed to those who won’t work for a living.
November 17th, 2008 11:10 am
Sanity, I am referring to people willing and ready to walk. For the most part they really do not want to be saved. They don’t want to be bailed out and they don’t want to have their mortgage reworked. They want to move on with their lives and get stability back. Stop the stress and the mountain of debt which is piled so high they can’t see past it any longer. They just don’t want or need anything. The banks however want for them to desperately stay in their homes and keep paying their mortgage. The banks need them to stay in their homes and they need them to continue paying their mortgage. See the difference…
November 17th, 2008 11:22 am
Save the flippers, the banks are not tax payer backed, but rather we tax payers own shares of stock in some of these banks. That makes me as a shareholder want to see these banks succeed or we tax payers lose money. If this success is achieved by rewriting loans via principle reductions and interest rate changes then so be it. It is not as if we have many options here is all I am saying. I would rather have the banks rework these loans than to see federal assistance directly to the homeowner take place. At least the banks will only rewrite loans that they deem are worth saving, while the Government cannot be trusted to figure out anything. I think if we are going to do something this is the best solution. On the other hand doing nothing may have been the best ultimate solution, but we already gave that option away. Now we need to not only still fix the problem, but also clean up the mess that the Government interference created. By the way a lot of these people are not dead beats, but rather simple homeowners that may have got into shaky loans, lost their jobs, have medical issues, etc. The majority of these people are good, hard working Americans in my opinion.
November 17th, 2008 3:29 pm
>> the banks are not tax payer backed, but rather we tax payers own shares of stock in some of these banks
Banks are taxpayer backed. When the US Government becomes an investor in a private enterprise, they are backing it. We will never see a real return on our “investment”. Possibly we will see a nominal return in 20-30 years, but in real, inflation adjusted terms, no way in hell. That money’s gone.
“If this success is achieved by rewriting loans via principle reductions and interest rate changes then so be it.”
How would you define “success”? Arresting the fall in overpriced assets? Just curious.
“I would rather have the banks rework these loans than to see federal assistance directly to the homeowner take place.”
I would rather have neither.
“At least the banks will only rewrite loans that they deem are worth saving, while the Government cannot be trusted to figure out anything”
They would if they didn’t have the backstopping of Uncle Sam. But that’s not the case, so they will be just as injudicious as the Government.
“On the other hand doing nothing may have been the best ultimate solution”
I agree.
“…but we already gave that option away”
No sense throwing good money after bad, write your representative and strongly oppose releasing next $350B.
“Now we need to not only still fix the problem…”
We don’t need to fix anything, it will fix itself.
“By the way a lot of these people are not dead beats, but rather simple homeowners that may have got into shaky loans, lost their jobs, have medical issues, etc”
Everyone falls on hard times at times in their lives. Everyone gets terrifying medical conditions, and everyone dies. What’s your point? Some people plan carefully, knowing these things are coming, others do not. All that said, I’m actually sympathetic to people who have truly been dealt a bad hand. But the banks and the Government are NOT going to discriminate between the deserving and not-deserving when doling out the candy. And that pisses me off. But I will refrain from using the term “deadbeat” in the future. I’m not totally insensitive…
November 17th, 2008 5:28 pm
You hear all the talk about mortgage modifications, I heard Clark Howard today and he talked about Mo Mod, that is alot easier to say than the other long wording. Someone needs to implement the Mo Mod and quit talking and start performing action
November 17th, 2008 7:07 pm
Save the Flippers, I am going to answer your questions, but I think you will need to either be more open minded or grasp a better understanding of this issue and it’s severity before we can get into too much dialog.
>> Banks are taxpayer backed. When the US Government becomes an investor in a private enterprise, they are backing it.
My Comment: This is simply untrue. This is not the same as with the GSE’s or AIG where the Tax Payers are the majority stake holder. We simply own a small percentage of preferred stock. They are not even voting stocks. We have zero say and these shares are truly just investor shares. No different than if you went on ETrade tonight and bought some shares for yourself (except they are preferred shares).
>> We will never see a real return on our “investment”. Possibly we will see a nominal return in 20-30 years, but in real, inflation adjusted terms, no way in hell. That money’s gone.
My Comment: We won’t know that until it is time to collect. I do however agree with you that this money is probably not invested wisely and will not return any profits. We wiill get our money back unless some of them default in which case the FDIC or Tax Payer will be paying the bill. We in essence will pay ourselves back and that would suck!
>> How would you define “success”? Arresting the fall in overpriced assets? Just curious.
My Comment: Success will be if we can hold together this economy from utter collapse. That is how dire it is right now. We are borderline in default as a nation and because of all of the interference that has already occured we now must fix the damage caused by those poor decisions while also trying to allow things to unwind without total chaos. No big picture thought was done before the money started flying.
>> I would rather have neither.
My Comment: I agree but it is much too late for that now.
>> They would if they didn’t have the backstopping of Uncle Sam. But that’s not the case, so they will be just as injudicious as the Government.
My Comment: This is also simply untrue. These banks want to survive and be around decades from now. I am cynical as well, but let’s not take it to ubsurd levels. Their is no conspiracy theory going on here. They are not backed and just ask Lehman how much you can count on Uncle Sam. Nothing is a sure thing except your own survival. You take care of yourself first and if you need something after that then you can ask for it, but not the other way around.
>> No sense throwing good money after bad, write your representative and strongly oppose releasing next $350B.
My Comment: I strongly opposed the Bail Out from the start and was very out spoken about it. I knew it was not going to work and I also knew it would potentially make things worse for the economy. We needed to just allow things to be unwound and the assistance should have been nothing more than to allow it to at a slow pace so as not to cause mass carnage. They failed in both cases.
>> We don’t need to fix anything, it will fix itself.
My Comment: No it won’t fix itself now. It could have, but the rules have all changed now. You cannot change all of the rules and expect the same old approach to have the same result. That is not going to work. They screwed things up pretty good and caused a lot of damage with some of the rule changes made (stop shorting killed a lot of hedge funds for example). We need to start over with an approach to take into account the changes in the rules and the changes in the Government involvement (i.e. Fannie, Freddie and AIG for starters). There is a lot of work that needs to be done here and we need to start doing it. Enough with just throwing money at the problem. That is what got us here to begin with. We need a well planned stratagy that combines money, changes, team work, etc.
>> Everyone falls on hard times at times in their lives. Everyone gets terrifying medical conditions, and everyone dies. What’s your point? Some people plan carefully, knowing these things are coming, others do not. All that said, I’m actually sympathetic to people who have truly been dealt a bad hand. But the banks and the Government are NOT going to discriminate between the deserving and not-deserving when doling out the candy. And that pisses me off. But I will refrain from using the term “deadbeat” in the future. I’m not totally insensitive…
My Comment: Thank you and I am sure many other readers feel the same way. One thing that I will say about this point however is that this isn’t a normal everyone falls on hard times thing. This is millions upon milions of people losing their homes to foreclosure. An event like none other in our countries history. Unprecedented happenings in our economy and specifically in the world of finance which is also the back bone to the entire system overall. This is not your fathers recession. This is a borderline depression and may end up being one before all is said and done…
November 17th, 2008 8:04 pm
No Stu, ’tis you who needs to either be more open minded or grasp a better understanding of this issues.
I couldn’t disagree more with most of your positions here. And rest assured, I am not the only one.
I’ll stick with my original assertion that principal writedowns are political poison and the backlash is going to be substantial. The vast majority of the people in this country either do not have a mortgage or are in no danger of being underwater, even with the 20-30% drop in housing prices still to come (insert the usual caveat: real dollars, not nominal).
Banks ARE backstopped by the Government. Ownership stakes, TARP purchasing toxic paper (at least prior to the direction change), EXTREME loosening of the requirements for collateral quality, ever increasing time periods for rollovers of short term debt. You would have to be blind not to see that the Goverment has made the decision that these banks are critical to the systemic health of the economy. They are *not* being allowed to fail. Lehman was the experiment to see what would happen if an I-bank was allowed to fail and it scared the sh!t of Paulson and crew and pretty more cemented the moral hazard that followed. These banks will simply not be allowed to fail. And that is a backstop if there ever was one. And trust me, I would LOVE to be proven wrong and watch these guys go down the toilet. That would almost be as much fun as watching house prices decline.
In the end, all our bloviating aside, this is nothing more than a transfer of wealth from the prudent to the imprudent. But as you suggested, I think we’ll have to agree to disagree.
November 17th, 2008 9:32 pm
You are really just missing the entire point… that is ok however, because in due time you will get it. It will be right in front of you and you won’t be able to miss it…
November 17th, 2008 10:02 pm
Hi,
Sorry for the delay in responding. Just a few questions though:
1- What is the percentage acceptable in property value decreases?
2-Affordability for what group or income bracket?
3-The NATIONAL average is a 23 % decrease already. Let’s do some math, according to NAR the median price of a home sold was $219,400. and the average was $263,600 x the current 23% decrease equals a new reduced sales price of $168,938.(median) and $202,972. (average)
The same $219,400 and $263,600. x the 40% I suggested equals $131,640. (median) and $158,160.(average). The national average to purchase a home in 2000 was $150,000. ( I did discount the years 2001-2007)
Note the high cost area’s are also discounted by the same 40%, if an area is considered high cost it is because the income levels are also higher, same affordability factor is involved, it was always the monthly payment in financing. (only the ratio’s were increased from 28% to 50% or the programs were changed to lower the monthly payment, adjustables, teaser rates).
Over-correcting referred to if the deflationary cycle is not halted by CONTROLLED OUTSIDE MEASURES , the housing industry will surely lose another 30-40% as suggested, using the same fiqures of $219,400 and $263,600. times 23+35% equals $92,148( median) price and $110,712 (average) price. Is that affordable enough?
Or are we getting toward depression prices?
2- How will the market stop decreasing at the RIGHT percentage without CONTROLLED OUTSIDE MEASURES? What happens to the additional homeowners that end up in negative equity?
3- Can everyone agree that fair market value of the home equals what similiar homes in the immediate vicinity are sold for, also known as comparables?
4- If the answer is yes, then you must also agree what is happening to housing values is not a correcting to historic pricing, that might be a benefit, but a deflationary cycle has taken effect due to the REO’s which are the majority of the houses being sold today being discounted. The longer, we let it go on, more foreclosures will occur due to negative equity ,the loss of jobs/income, and the over supply of housing also decreases prices, all this will affect homeowners who did not purchase at the “wrong time” or height of the market. The REO’s are being discounted at 30-50% off the CURRENT market value, translation that means they are losing more money this year than last year, the government and the banks are aware of the deflationary cycle and do not want to address the issue. It would cost money to correct Main Street, but isn’t that where your money should go?
November 17th, 2008 10:06 pm
I saw the FDIC MO MOD plan on Clark Howard Show. I researched the Mo Mod plan and saw alot of merit of the program. First, It appears with an appraisal it will determine NPV (Net Present Value)then the lender can modify with rate reduction along with extension of terms (years). It appears the principal stays in tact. I found the website Smithfield & Wainwright and viewed all componets of Mo Mod. Now the bank really knows what that asset is worth, and can set the value for the books, the difference is termed out over the course of the loan, with a balloon payment out there. This Mo Mod it appears is the way to get out and do the massive mortgage modifications needed to stabilize the real estate values that take a constant beating during this meltdown.
November 17th, 2008 10:50 pm
Sorry to wade into a topic that you guys are clearly very knowlegable about, but I’m wondering:
what about the large amounts of new housing built in the past 8 years? Doesn’t the potential to over correct significantly increase because there is much more supply out there than at the start of the bubble? I don’t hear that mentioned when people talk about a return to “2001 pricing” or “2000 pricing”. Maybe the net increase in homes over that period isn’t significant, but I’d be surprised if that were true.
I’m thinking in particular about SoCal where builders seem to have gone crazy over the past 8 or 9 years.
November 17th, 2008 10:57 pm
Hi Susan,
“1- What is the percentage acceptable in property value decreases?”
I would expect complete reversion of price/rent ratios to historical averages. So for my ‘hood that would be around 15x annual rents.
“2-Affordability for what group or income bracket?”
Affordability as defined by rational price/rent ratios (see #1). Price/rent has a high correlation to price/income, so choose whichever metric you like.
“3-The NATIONAL average is a 23 % decrease already. Let’s do some math, according to NAR the median price of a home sold…”
At the risk of being overly pedantic, I would avoid stats based on median home prices as median prices are almost entirely a function of income levels and credit availability and cost. I would suggest switching to the Case-Shiller index for your calculations.
“Over-correcting…”
There is bound to be some over-correcting. I could see some areas falling to 10x rents. However, I would think equalibrium would be restored in fairly short order as 10x rents with the cost of money @ 6.5% is a pretty good deal, assuming rents aren’t in freefall…
“2- How will the market stop decreasing at the RIGHT percentage without CONTROLLED OUTSIDE MEASURES?”
Again, prices will fall until price/rent ratios are normalized and then they will stop falling (assuming rents are stable). Nothing else needs to be done.
“What happens to the additional homeowners that end up in negative equity?”
They can walk away. Many will be better served by purchasing later at much lower prices. Their credit will be trashed for a few years but they can use that time to put their financial house in order.
“3- Can everyone agree that fair market value of the home equals what similiar homes in the immediate vicinity are sold for, also known as comparables?”
Yes, assuming the comps are fresh and the isn’t a lot of fraud occuring in the neighborhood (straw buyers, etc.). Incidently, the latter is not an assumption one should readily make in my neck of the woods (So Cal).
“4- If the answer is yes, then you must also agree… …The REO’s are being discounted at 30-50% off the CURRENT market value…”
No I don’t think it’s anything more than a return to rational price/rent ratios. In areas where sales volume is rising, it’s almost entirely due to foreclosures and short sales. There are are lots of houses on the market at bubble prices, but they don’t sell. Of course, a few outliers sell at bubble prices but that’s because people aren’t entirely rational when purchasing homes and/or they’re not sufficiently savvy about the market. I’m sure you’re familiar with the greater fool theory… Well, these are the last of the greater fools.
“It would cost money to correct Main Street, but isn’t that where your money should go?”
My money? No thanks. I worked very hard to get it. I’d much rather keep it, thank you very much. I donate significant amounts of time and money to charities; I really don’t want Uncle Sam deciding where my charity should be directed.
November 18th, 2008 1:16 am
Susan, the last thing we need is the government to be involved in anything here. The mechanism already exists for people to just stop paying and walk away. Under your conditions where prices could fall another 30-40%, might be just enough to stop politicians from saying “We need more affordable housing.”
The market is going to set its own clearing prices which might mean that purchasing and renting out the property produces a positive cash flow. Currently the government has stepped in funding the banks and preventing wholesale forced foreclosures from being dumped on the market. As we saw in October’s foreclosure report, cancellations of foreclosure sales were up nearly 100%. This clearly shows that your “controlling outside forces” are already at play.
At this point however, we are still left with all these overpriced mortgages that the owners cannot sell and the only realistic way to “sell” them is to stop paying. Even if they want to consider a modification, they still have to stop paying before the bank will talk.
It would be interesting to see how a bank loan modification officer would react in a modification negotiation if you said something like the following.
“Here is the deal I am offering you. The markdown is fair and the interest rate is fair. I also want you to know that in the event you do not accept my offer, I will be following this property through the foreclosure process. In the event the foreclosure price ONE PENNY below my good offer, I will be sending a copy of my offer along with the foreclosure price to Senator’s X X and X, the X committee, as well as the Governor and X, X and X of the press/newspapers.” BTW, I need you to sign here that you rejected my offer. You then produce to him sample letters already written out to the persons that you just named off with the only thing missing being the foreclosure sale price.
What is going to happen next? He is going to turn white as he imagines himself in front of a congressional committee being grilled as to why he did not accept the offer. As he is sitting there staring at the array of letters made out to the various public officials and news organizations, be kind and offer him your phone so he can call his supervisor.
What is the modification officer to do? He knows that he is in a market that is falling like a rock, he knows that economic conditions are deteriorating and he probably does not have a chance in hell of getting even close to your offer if it goes to foreclosure which at the earliest will be four months from now.
After he signs the mortgage modification made out to your terms, offer him comfort with a glass of warm milk and a plate of cookies.
So Susan, what do you think of the merits of my mortgage modification plan?
November 18th, 2008 5:55 am
Bert and Save the Flippers,
If FDIC or Treasury does not implement a Mo Mod plan to stabilize the current market condition the following will occur.
1) Like you said price’s will continue to drop, you said that bank’s are accepting offers 30-50% below market. What is market (in this case, market will be defined as cost approach to rebuild structure) therefore an appraisal will be needed to set NPV for bank.
2) If it stands currently, how can market value be determined for your home if similar properties (like kind) in your area, are sold and you later refinance your property, what comparable sales are going to be used, because all sales like you said are being sold 30-50% below market. How is a appraiser going to justify in adjustments to a bank if this is the case. It can’t, this would cause a greater negative situation to builders because the educated consumer would purchase the lower price at the huge discount and not even look at the builder’s model.
3) In that scenario, it would take 10-15 years to set values back, taking 3-4% increase of value (normal rates) for a piece of property to reclaim lost equity. In a Mo Mod scenario the housing market could stabilize very quickly and property would see a upturn within 3-4 years.
4) This is a VERY HOT ISSUE, one that people really need to understand, I would rather bite the bullet now, protect the equity I have in my property, live with the R/E market to be down for 3-4 years instead of 10 years. It will restore confidence in the lending markets and consumer markets. This Mo Mod plan needs to get started NOW
Susan
November 18th, 2008 9:41 am
Bert,
I love the following statement you made:
“Here is the deal I am offering you. The markdown is fair and the interest rate is fair. I also want you to know that in the event you do not accept my offer, I will be following this property through the foreclosure process. In the event the foreclosure price ONE PENNY below my good offer, I will be sending a copy of my offer along with the foreclosure price to Senator’s X X and X, the X committee, as well as the Governor and X, X and X of the press/newspapers.” BTW, I need you to sign here that you rejected my offer. You then produce to him sample letters already written out to the persons that you just named off with the only thing missing being the foreclosure sale price.
I sent a similar letter to the lender and they responded with a token form letter which in essence was a polite decline. I will definately write them again with some of your ideas. Until they make a decision as to whether they will modify or foreclose, I will just continue to stockpile cash as it is king now and will be for the next several years. Either way, I will be in a better situation than I am now and that is really all that matters to me.
November 18th, 2008 12:10 pm
[...] Rally, Is GM too Big to Let Fail? ———— FDIC (and everyone else’s) Mortgage Mod Plans – MR Mortgage – … House prices are worth what people can afford to pay given current rates, loan programs, [...]
November 18th, 2008 12:47 pm
Partyboy
Well I am glad you liked that, it seemed like a good negotiation move that would increase the chances of considering your offer and place you outside the general form letter category.
I forgot to add Meridith Whitney as a recipient of one of your letters. Meridith can then get on CNBC and explain how not only are they missing two quarters of payments, but they are having to take a larger write down than they otherwise would have. While the banks may save posting a write down one or two quarters, the cost of hiding reality is long term detrimental to the balance sheet. Meridith will then have to factor dumb management into the future share price target.
So at this point, you have made the bank a fair market offer. You have already lost your skin in the game, your right arm and your left nut. They created this situation and now you are offering them their best deal.
The fact remains though, that today’s price will very likely be there in 2015-19. If we follow the Japanese model we are looking at a lower price. Now here is something to take into consideration. The Japanese model did not take place through a severe worldwide recession/depression. Why then, would we kindle a better outcome?
Now here is the most recent spin being placed in front of the masses. Paulson will save 350 billion for Obama and unemployment will top out at 7.5%.
November 18th, 2008 2:28 pm
Bert,
My loan is an 80/20 with 0% down. The 80 is a fixed rate at 5.5% for 5 years (then variable) and the 20 has a balloon payment (100k) due at the 5 year point (Jan 2012). The home was bought for $512k and is now worth ~ 275k. I offered to take a fixed rate at 6% for 300k. I told them that they can work out the distribution of the 300k with the 2nd lien holder as they see fit. This should not be too difficult as the 2nd stands to get absolutely nothing if they foreclose. I also provided them with a list of all homes in my subdivision which have closed in 2008 to prove my value assessment. I further indicated that I will not pay my property taxes (which will not be attached to me, but to the house in the event of foreclosure) until I hear back from them and we have a written agreement. All told, they stand to clear ~ 220k (optimistically) if they foreclose. That would a loss of ~ 189k for the 1st and ~ 103k for the 2nd. The thing that I wanted to stress to them is that I will not continue to rent my home for 3 more years at 150% of what I could rent it for simply to lose it to foreclosure at that time. It just makes too much sense to pocket cash now, let the credit damage happen, and start the recovery process now instead of 3-4 years from now. The total lack of communication from the bank indicates that they will not take any action and I am fine with that. They just seem to be a few months behind in their offers when they really need to be a few months ahead to make a difference. The offers they are putting forth now may have seemed reasonable to someone a few months ago and the offers they will make in a few months would probably be acceptable now. But until they catch up with the times and use a lot more forward-thinking and cost-benefit analysis, they are going to continue to get slammed.
November 18th, 2008 4:36 pm
Susan, my plan is the equivalent of a federal grant or a merger equity withdrawal free of charge from the bank take your pick. My plan is an immediate capital injection into the California economy. Paulson offers you auto loans, student loans and credit cards. All of Paulson’s plans include more debt. My plan calls for the extinguishment of debt and paying off of debt from the banks gift of free rent.
While the oxygen is going out of the room in Sacramento, Californians can act on an individual basis and take the bull by the horns here.
The problem is simply this, the banks have taken more than their fair share of disposable income, which now has the economy of California in an anaconda strangulation choke hold. The only way to remove the strangulation of other businesses in the CA economy is for Californians to dump their underwater property and rent for less, bringing the disposable income levels back up.
This Susan is the fix. You say you are concerned about your property value. What you should be concerned about is whether or not your neighbor is going to have a job. Let’s examine what is likely to happen in the current situation.
Sales tax likely to go to 9.5%
Unemployment insurance tax for employers to get jacked up.
Personal income tax hike likely.
Government employees laid off, cut back, wage freezes etc.
Tax anything else that moves including a French fry tax.
What are all these taxes and assessments going to do for the business environment? These higher costs of doing business are going to cause businesses to close, move or not to consider California.
During the boom, California had the highest dollar benefit of Mortgage Equity Withdrawals (MEW’s). This means that the economy had a high level of artificial support which works out into a temporary increase of disposable income. Once the MEW’s were obliterated from the landscape however, we are left with the opposite effect of a disproportionate levels of households with low disposable incomes. The drop in disposable incomes was not visible while MEW’s were in play but they certainly are now and Sacramento is freaking out.
The other problem with your plan is that it is more traceable and will show a disproportionate amount of aid going to California verses other states. Now what do you think our people in Congress are going to have to do to have this giant California aid package passed? We did not think about that one now did we? You can present it as a national plan, but we all know where the bulk of the money is going.
My plan is like the silent majority plan. Quiet, independent and California ends up capturing all the Federal money without a shot being fired and without our congressional representatives having to give up anything on capital hill.
So maybe it is like flipping the bird at the rest of the nation but hey, they already hate Californians anyway. First thing you do when you leave CA is dump your licence plate and get a new drivers licence and tell them your Canadian or something.
What is going to happen on the Federal end? They are going to issue more treasuries to cover the bank losses. So we own more stock in the banks
and perhaps place some downward pressure on the dollar. Is downward pressure on the dollar a good thing? Let me leave you with a best of my recollection quotation.
“The ONLY bright spot in the US economy was increasing exports due to the lower dollar but this was wiped out with the recent rise in the demand for dollars.”
November 18th, 2008 6:00 pm
I have a question – where are all these people going to go and rent, after they’ve walked away from their homes? I keep hearing this over again, like a mantra on this site, and don’t disagree with the notion of walking to save your hide. But – where are all of these people going to rent? Is there a glut of apartment or home rentals available in CA? I live in New England and can tell you that there’s not a lot of excess here these days.
November 18th, 2008 6:29 pm
Mel
I don’t have an exact answer for you but in my area there are several large projects nearing completion that are going to be in serious trouble when they come on the market. I have also heard that the number of unoccupied homes in the US is 18 million. Cramer recommended bulldozing them. Homes I have seen on the market have started as for sale, turned into for sale or lease, then to sale lease rent…
But we still have all that property coming on line that was started in the boom.
November 18th, 2008 6:31 pm
Mel, the number of rental units available far exceeds the people looking to rent them. This is true especially in the areas that exploded in growth. Due to massive condo projects and speculation these homes are everywhere. The problem has become that the homeowner can’t get a rent high enough to cover the mortgage and many are adding to this bloated foreclosure number we keep seeing.
We are now seeing a trend however where prices on distressed sales have come down enough that people are starting to buy again. The problem is that it doesn’t alleviate inventory. The homeowners that need to sell to get out from under can’t sell for the prices the distressed properties are selling for. Hence they get foreclosed on as a result. The foreclosure or shadow inventory is not what people who own need to sell as it is REO.
This trend will continue, but keep in mind the northeast has yet to feel the full affects of this downturn. Our time has not yet come as of yet in full. Sure we saw the subprime and lower income areas get hit, but without the new build like other areas of the country it was minimal at best.
We are now at the beggining of the ALT-A and Prime defaults increasing ever so quickly. The older 2/28 subprimes have mostly reset, but the 5/25 are now coming due. These loans were much more typical in major but older cities like NY and Boston for example. They are bigger in value and will have a bigger impact as a result. I suspect we will see the Northeast and Northwest take it on the chin here soon enough.
Back to your question (sorry) it would seem that supply has far out paced demand. With 17 + Million empty homes I think we have rentals available. More and more people are rooming up as well leaving even more supply and new build is still relatively high for drastically slowing sales so inventory is being added while used inventory is increasing. Supply my friend… lot’s of supply. Go visit the website Craig’s List and look at rentals. They are everywhere…
I don’t know where you are from, but you can get an apartment in downtown Boston now for just slighly over $1,000.00 per month. That has not happened since the 80’s at the sheer numbers available.
November 20th, 2008 12:39 pm
This is absolutely the worst post I have seen from MM.
What an idiotic idea to think it would be a good idea to give people principal write-offs. Every single person in America with a mortgage will start defaulting on their loans so they can get a piece of the pie. It would cause complete chaos and havoc in the housing industry and economy.
Then on top of it, the idea of giving homes away for free because of possible loan fraud? Shit, people have to take some responsibility when it comes to signing loan docs! Many knew exactly what they were getting into, they wanted to be part of the housing bubble gravy train. They are gamblers and must now pay for their risk!
Come on folks, it’s absolutely ridiculous to propagate this type of plan, especially when it’s all of us (the taxpayers) that would have to foot the bill for this type of bailout…
Bullshit MM!
November 20th, 2008 2:41 pm
SOCIAL DEBTORS PRISON is about to break out…
People have had it with corporate scams and slams. They preyed on consumers with the right to jack credit then informed the rest of the financial district who knocked you down again when you stood up, 1st your mtg. then credit card, then car insurance and now seems no end to the ways they can prey on people. They have taken the “debtors prison” of yester-year and generated a 21 century version.
This whole decade has me furious, sure enough blame to go around! Sales people doubling your income after you sign without your knowledge right down to banks that approved your amount only to sell up and free themselves of liability (or did they hmm I’m not a lawyer, mother load of class action?). I looked into home ownership in the 90s, in my N.Y. minute as I listened to the Real Estate Agent tell me I could afford a Mtg. 3 times my rent I almost fell off my chair! I told her I’d like to eat too and left her and homeownership behind. When I went to classes the next day my Business law and Accounting classes took a 180 degree turn, I was now looking to protect myself and not become a Corporate Accountant (Thank God I never minded being poor) and soon left the glorified degree behind as well. We as a people need to keep on this! I truly believe in the letter I sent to obama.com that every owner occupied home should (R.T.O.P. )return to orginal position, if an applicate understood that ARMs and the like could have doubled their original mortgage in as little as 3 months I’m sure they would not have signed up nor needed a Real Estate Agent or Attorney….BOTH should be sued for Mal Practice and Gross Negligence!!!! Heck I’d throw in endagering a child if mine had one hair harmed while being tossed into the street because of a Foreclosure. Think about how fast our economy would pick up if 2 million homeowners had $200. to $500. extra EVERY month with that APR drop. I think any high ranking official or employee that was in the midst of dissapearing regulations should be fired and deported. People flipping or bubble jumping as well as those riding the greed train should now loose their future profit…hell they sucked American blood on the way up! If they loose their job they can beg for food in my neighborhood… I have a big bag of Cat Chow.
Now it’s GM hahhh! they need to suck it up too! I wouldn’t buy a car from any company in that much trouble that DIDN’T file bankrupcty…if I have no trust they have rules in place or modifications in writing they don’t even deserve my time. Bankrupctcy isn’t evil (ask Donald) besides if they hit bottom like 30 % of Americans they have nowhere to go but up.
Gen
Cc: anyone and everyone
November 25th, 2008 8:43 pm
Mr Mortgage you are Genius!!!!
This is mny first day reafing on your site and it is as if you are writing my very thoughts out of my brain.
Your ideas and writing are fantabulous. Keep us informed!
January 30th, 2009 3:34 pm
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