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

65 Responses to “FDIC (and everyone else’s) Mortgage Mod Plans”

  1. 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.

  2. 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?

  3. 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

  4. 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.

  5. […] 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, […]

  6. 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%.

  7. 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.

  8. 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.”

  9. 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.

  10. 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.

  11. 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.

  12. 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!

  13. 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

  14. 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!

  15. I must appreciate your work. from last couple of days i was searching for something interesting and this post is really nice. Thanks for this nice post. Tomas

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