Mr Mortgage: Actual IndyMac (Exotic) Loan Modification

Posted on December 3rd, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

Sheila Bair’s underwriting makes Angelo Mozillo’s look tight. The IndyMac loan modification shown here has redefined ‘exotic’ and ‘leverage’ with respect to mortgages.  I am going to name it the 5-year hybrid, 30-year term, 8-year graduated payment, 176% combined loan-to-value, mega-balloon, super bendover ARM (document below).  And you thought Pay Option ARMs were exotic!

Even IndyMac has a extraordinarily long acronym for this modification.  The image below is cut straight from the document. Breaking out the acronym using mortgage lingo you get: Bulk Modification Principal & Interest and Interest Only Fixed and Adjustable Rate Mortgage with Step-Term Balloon. It is this very ‘innovation’ that got us here in the first place.

If they would have had these loans out during the bubble years the housing bubble could have grown twice as large.

This borrower is not as bad off as many in the bubble states – they are only 44% or $370k underwater in their home. Their present first mortgage is only slightly higher than the value of $475k. But when you add in the $345k second mortgage that the IndyMac modification lets stay in place, they are $370k upside down.

This modification makes the borrower a renter and debt-prisoner for life. This is not a financial solution for the borrower, rather a structure that lures the borrower into a terrible financial decision because it is cheaper to stay than walk away and rent. All of these new proactive loan modification plans by the law makers, regulators and bank are designed to do just this.  A ‘solution’ where the borrower still owes $840k on a $475k home and will never be able to refi or sell, should send them running.

While some will take this offer, I am hopeful that the typical home owner is not this ignorant. That is a lot of debt to carry around for life. On the other hand when you have nothing to lose and your only alternative will be foreclosure 6 months down the road, you may just accept the offer not considering the legal ramifications. I am sure this is also what the banks hope.

One thing is for sure – having millions of zombie homeowners unable to refi or sell their property awaiting the day a life circumstance forces their default and foreclosure is not the clearing process needed for an ultimate bottom in housing. Modifications such as this stretch the problem out several years.

I do believe that Sheila Bair is doing all that she can with the tools provided to her and banks that refuse to modify loans using principal balance reductions.

Let’s be clear – I am all about letting the housing markets clear naturally. That is the only way we can be sure when we hit a real bottom. But the solons are hell bent on modifying there may out of this and they are on the wrong track.

I am in firm belief that the only successful mortgage modification is one where the loan is re-underwritten / restructured using a market-rate 30-year fixed mortgage at 28/36% debt-to-income ratios.  To get there, a principal balance reduction will likely be necessary in most cases.  But the process will allow home-owners to operate at leverage ratios that greatly reduce the chances of walking away due to negative-equity permanently solving the problem.

A year from now when the after-modification 50% mortgage default recidivism rate keeps growing they will do mods the right way. But between now and then hundreds of thousands of home owners could sign their lives away. It is a shame.

Please see my most recent report on mortgage modifications and the right solution:

New IndyMac Loan Mod Structure & Term

New first mortgage: $494k
Second mortgage in place: $345k
Total liens:  $840k
Combined Loan-to-Value: 176%
Negative Equity: 44% ($370k)
Interest rate: First 5-years at 3%
Graduated rate/payments: Years 6-8
Max rate: 6.25%
Balloon (deferred principal): $245,581 (even at 3% this borrower could only legitimately qualify for roughly a $250k loan.)

The actual numbers have been changed slightly to protect the borrower.  They are in exact proportions to the original loan modification.

63 Responses to “Mr Mortgage: Actual IndyMac (Exotic) Loan Modification”

  1. WOW anyone who signs that Really Proves that buyers have NO IDEA what they are signing !!
    The homeowner in 2008-09 are in the driver seat but YOU NEVER hear that on any 24 hour news station….
    why are people so AFRAID of “losing” their house they would be LOSING A MAJOR LIABILITY …..if you have not learned any thing, learn this, DO NOT TRUST THE BANKS

  2. Wow. All people want to do is push out the problem still. We already pushed it as far as I thought it could go in 2005-2006.
    No way will this borrower make it to 2035 on this loan and if they do, they are still trapped. With 44% negative equity, why would one want to even try?

    BTW: I heard a radio ad this morning for people who want to rent a house but are scared of eviction due to foreclosure. I might use this site in about 7 months when I move. They advertised it as a free service. If it is not, I’ll just go to the county records myself. (I know my current landlord is up to date.)

  3. Indy has been soliciting a friend, who is a current Indy customer. They have a 10 yr adj loan (no lates, not underwater or even close it “currently” – key word – who knows next year). It appears that Indy is trying to refi everyone in this portfolio that they can. This is actual text from the email that was sent to my friend.

    “The only reason why Indymac is offering such a great product is because of the current loan you have, and the fact that it’s a bad loan. Indymac needs to get this loan off there portfolio, and what that means is they need an investor to back it up”

    Needless to say, my friend had no clue what she was talking about “bad loan.” I can’t believe that the lo would actually send that out in an email. The product offered is a 30 yr fixed loan at 5% with no prepay. The “only” fee to the borrower is $290 rate lock fee. Anyone have any input on the validity of this offer???? Funny – can’t get a solid GFE from them and the offer seems to be only good this week??? HMMMMM

  4. As unemployment rises, modifications will have less and less appeal, if they had much to begin with. When you’re afraid of losing your job or having to relocate…the idea of staying in a house you’re upside down in is not very attractive.

  5. the loan mod terms above from indymac sound like a great loan for that person though compared to what they probably had on their current loan. Yeah their upside down but they got themselves into that mess and bought way over their head in the first place. Now they have a great first mortgage that is better than anyone in the real world can get. I am not a fan of big prinicpal reductions – once that starts happening a LOT – we will see a lot of good payiing people who happen to be upside down going into default in hopes of a big reduction and then it all continues for a long time to come.

  6. Anyone know if the modification changes the loan from non-recourse purchase money loan to a recourse refinance loan?

  7. Partyboy – Modification typically changes non-recourse to a recourse. However, everything is negotiable.

  8. banks that refuse to modify loans using principal balance reductions.

    Even if banks did offer the principal reduction, wouldn’t this count as income to the IRS?

    If so, the tax hit would be unaffordable for those borrowers. And that makes a classic catch-22 – can’t reduce the principal because the borrower can’t afford the tax hit, can’t refi into a same-principal-but-very- low-interest loan because no investor would take it.

  9. If this was in their letter: “Indymac needs to get this loan off there portfolio”

    Then this was phishing. No one spells “there” like that who uses english as a first language when they mean “their”. Especially not a bank letter to attract new customers.

    It is uneducated and a dead giveaway that it is not from anyone serious about their offer.

  10. Chap 13 , scratch off the 2nd , then wait for market to return or 3 % fixed mod?

    What’s better for the bank ? Borrower ?

  11. Make them produce the note. A lot of them can’t!

  12. Bob, have you talked to a typical bank worker these days? They are shockingly illiterate. Nice catch though and you are probably correct.

  13. Carrie,

    I would assume that you are correct but I have heard in the past that a modification does not change the fact that the loan is a purchase money loan. However a refinance is a new loan altogether and not technially a modification of the current loan.

    I was talking to an aquaintance of mine who works in loss mitigation (I don’t know this guy very well at all so I cannot guarentee his credibility) and he said that this is a sticking point in modificaions. Banks are looking to make the “modification” a refinance to change the loan to recourse, but in order to refinance the owner has to qualify for a new loan. Since many people who are trying to be modified are underwater and/or have bad credit, they cannot qualify for a new loan and therefore would have to modified. But if the modification does not change the loan to a recourse loan, the owner maintains the option of walking away in the future with no financial liability in regards to the mortgage.

    I was hoping someone could confirm or contradict this.

  14. Mr. Mortgage, I love your informative website, I find myself visiting this website frequently for the invaluable information. HOWEVER, I find it so frustrating when you follow up great information with a plea to reduce principal on bad loans. As a renter who has been biding my time to hop into the market I resent such notions of unfairness. Those who bought at the top of the market or who cannot (or could never) afford their payments need to step out of the way and let responsible families buy their house at the historical market value. Modifying loans is a proverbial can of worms. Where do you draw the line? what do you do with the homeowner that struggles every month but is always on time? He will never appear to be “distressed” and therefore will not got any help, when he in fact is more worthy of help. I know of too many losers that are living in houses well above their level – RENT FREE because they have not made a payment in over a year and countrywide, Indymac or FM/FM may very well never get around to booting them. That is very unfair to the rest of society. And this is not to mention that we live in a nation of Laws and contracts. that is really the only thing separating us from the rest of the world these days. If the notion that a large loan is a now a “flexible” and malleable concept sticks, then lenders will forever need to keep interest rates high, to cover the enhanced risk of making a loan that the government can mess with if it becomes convenient to do so. The higher interest rate will perpetually harms future generations, just to save the skins of one batch of losers in 2008. You are correct, that the principal modification is the only solution to the crisis, but please reconsider the morality of pleading for something so unfair and Un-American. It’s an over-used expression, but the free market “is what it is”, and we should let it do it’s harm the way we let it do it’s favors to so many.

  15. I agree Jorge…I rather just let everyone be foreclosed upon and clear the market that way. Fact is the solons are hell bent on modifications. So if they are going to do it anyway, I may as well use whatever piddly influence I have to get them to do it the right way.

  16. Oh, and one more thing: Every dollar that gets shaved off the principal of a loan will almost surely be financed by the taxpayer, directly or indirectly. That just adds insult to injury. Why should responsible society pay for the foolishness of these people?

  17. I checked the telephone number she has on her email.. It’s an INDY #. And her email address is an INDY address. By all means, it appears to be a legit offer just a very poorly spoken individual delivering the message on behalf of the bank. Partyboy – you appear to be correct!

  18. I like it! 28/36% ratios. Wow, that will give the weak sucks the way to get that new Escalade next year when auto financing comes back around. And, don’t forget about those custom nails for the wife, now that they don’t have to pay that monthly payment that they contracted for. What a crock!

  19. Please do not publish:

    Admin / Mr. mortgage thanks for the quick response and for allowing me to vent this one time, I promise not to become a flamer on your fantastic website. But perhaps over the course of 2009 I would enjoy the opportunity to periodically recant these same sentiments, if I see too little outrage being displayed over the loan mods.

    thanks again!

  20. Jorge,

    I am 100% with you. It really makes me sick! I am a homeowner that purchased and am a bit upside down (about 15%). The reality is that I CAN afford my payment. I have friends that purchased multiple home and foreclosed on all of them. Mainly because they went from a 300K home, to a 600K home using the equity from the 1st sale, long story short, last home being a $2.2M home 5K sq/ft 2 boats, and 2 mercedes in the drive way. This guy made 1/2 of my annual and I warned him of the collapse. When it came he paniced. Now he calls and brags how he is moving into the 2nd home and living collecting 8K/mo rent while ‘waiting to modify’ into loans where he will break even with rental income. These people are not paying any price for the mistakes. What kind of message are we sending. From wall street to main st. America forgot to take responsibility. At the end of the day, we all are bailing out these guys. Mr. Mortgage, I think that this person in your article is getting one HECK of a deal. She has that 2nd because she used it. She should pay it. Not reduce it. She should be kissing the feet of Indymacs CEO for offering this. NO reduction, payback your debt on lower interst. And the differece should be a personal lien. If they mod or foreclose, we should stick a judgement on them that bars them from purchasing again until its the loss is paid. This will prevent the next bubble.

  21. Jorge,

    I am 100% with you. It really makes me sick! I am a homeowner that purchased and am a bit upside down (about 15%). The reality is that I CAN afford my payment. I have friends that purchased multiple home and foreclosed on all of them. Mainly because they went from a 300K home, to a 600K home using the equity from the 1st sale, long story short, last home being a $2.2M home 5K sq/ft 2 boats, and 2 mercedes in the drive way. This guy made 1/2 of my annual and I warned him of the collapse. When it came he paniced. Now he calls and brags how he is moving into the 2nd home and living collecting 8K/mo rent while ‘waiting to modify’ into loans where he will break even with rental income. These people are not paying any price for the mistakes. What kind of message are we sending. From wall street to main st. America forgot to take responsibility. At the end of the day, we all are bailing out these guys. Mr. Mortgage, I think that this person in your article is getting one HECK of a deal. She has that 2nd because she used it. She should pay it. Not reduce it. She should be kissing the feet of Indymacs CEO for offering this. NO reduction, payback your debt on lower interst. And the differece should be a personal lien. If they mod or foreclose, we should stick a judgement on them that bars them from purchasing again until its the loss is paid. This will prevent the next bubble.

  22. Sorry Carrie but I find your story of IndyMac chasing someone to do a refi a little unbelieveable.

    My husband and I have a loan with IndyMac. I contacted them regarding a loan modification just to see what they would say(Hey if you can’t beat them join them. We are not behind, we do have a ARM(not by choice we were in between closing on both houses. One selling, one buying and this was they only way we would have gotten the loan. We do plan to refi before it adjusts. We still have equity.)

    Before we even filled out any paperwork we were told we must be AT LEAST 90 DAYS BEHIND!!!..So I commented to the Loan Mod Rep.hey I live in Georgia which is one of the fastest foreclosure states in the country. Here foreclosures can be done in as little as 60 days. If I went 90 days behind could you GUARANTEE me a loan mod? The rep said no.

    Indymac is not chasing anyone. But instead have NO CLUE of the fact that loan mods are not a standard package deal and require understanding of not only the finance side of it but also the LAWS that govern foreclosures. The foreclosures will continue.

    Sadly, I agree with Mr. Mortgage. They will not understand the depth of the problem until it reaches high double digits!!!

  23. MM: thanks again your shits the best.

    i don’t see a fix to this UNLESS the free cheese is passed out to everyone…

    like the other poster says prudent behavior is being punished and bad behavior rewarded….

    this is how civil wars start

  24. Jorge:

    I’m a renter too but frankly I think modifications done correctly would minimize losses and force more of them closer to where they are deserved.

    Otherwise, the government will be do more ill-thought-out scattershot “rescues” and “bailouts” which may actually make the problems worse.

    Mr. M:

    You know, reading this it really sinks in just how steeped in fraudulent, usurious behavior this whole mortgage complex really has become. In what universe is it legitimate to “help” someone by getting them to sign on a 175% LTV loan, of over $800,000, that there is an overwhelming probability will just go delinquent again? At this late date, there is just no excuse for it. It is fraud perpetrated on the borrower, and perpetrated on the investors of the loan pool, and on the shareholders and other funders of the bank. There is no one it is good for except the culprits.

    The only excuse I can think of for why this is still going on is that the “rescues” have actually been mainly geared towards funding a continuation of this behavior. It is tacit consent, also known as robbery at the highest levels.

    But then again, maybe the strategy really is consciously to keep the debt burden always higher than what can be managed, so (even if modified) you can keep the borrowers enslaved.

    Ok, end of rant.

  25. I’m with Jorge and Mark F. The bank isn’t the one who got them in over their head. Mr Mtg didn’t mention the borrower’s income except to say that he’d be lucky to qualify for a $250K loan. Hmm, how did he then qualify for the original loans in the first place? He didn’t LIE, did he?! If he was so hot to own this house that he was willing to break the law and put himself into hock for life, who are we to stop him?

    Jorge, as a renter, how long would you be able to stay in your home if you got in over your head and couldn’t pay? Maybe 60 days if you’re lucky. You probably put more down in a security deposit than this guy did to buy his McMansion, yet I don’t see any politicians falling over themselves to keep you in your home, urging your LL to work it out and forgive your debt!! Is that fair? NO.

  26. Linda

    Before you start judging people, maybe they are self employed people that DID

  27. whoops…….that DID have the money, but due to the economy NOW,there business has gone in the toilet, and are stressed out that they CAN’T afford the loan now.
    No one asked for this terrible economy in addition to being upside down on their mortgage.

  28. I actually don’t believe it’s a sinister attempt to screw borrowers into awful slave-like terms. I think this is just the only “tool” available to politicians to look like they’re doing something while really just kicking the can down the road. I am sure if the pols COULD easily mandate across the board principal reductions the would have by now. What holds them back is 1) the complexity of carrying that out and making those fine distinctions. 2)fear of people like Linda and myself calling foul, and 3)perhaps more importantly to the pols, the outrage and lawsuits of the holders of mortgage-backed securities. They can and will justifiably claim breach-of-contract and derail everything in the courts.

  29. Jorge
    You are correct. What the lenders/banks are offering on the loan mods now, didn’t happen 6 months ago, and what they will offer 6 months down the road, will be better what they are offering today. Just like MM says……the only way to fix this mess, is to do principle reductions. Sorry for all of you out there that are enraged by this concept, but we HAVE to stop the bleeding somehow, someway.

  30. “but we HAVE to stop the bleeding somehow, someway”

    No we don’t.

    It will stop on its own. Prices will fall. A few million people will become renters again (the horror!). Prices will continue to drop until price/rent ratios are attractive again AND THEN… the bleeding will stop.

    Principal reduction is simply free candy for a select (and small) subset of the population at the expense of the majority. As such, it will never have the political support needed for it to be applied on a scale that will make any real difference.

    31% of country rents. 26% own their houses outright. And some significant percentage of those *with* mortgages will never be underwater. There are going to be a *lot* of enraged people (and their representatives in Congress who hold the purse strings). I think that’s why strategies like quantitative easing are being employed instead. They are much more popular since they benefit a significantly larger chunk of the electorate. Free candy for everyone!

    Of course, in the end, artificially low interest rates are a bad idea too. It’s like “helping” an alchoholic by giving him a fifth of gin. But it’s going to be *way* more popular.

  31. Loan Mod Chick: the recividism rate on modifications are very high (go read the WSJ editorial page today) and thus any of these mods to 28 or 31 or 36 are mostly crap because the folks who took at a loan at 52 percent of monthly gross are either morons or greedy and deserve to go down just like anyone else.

    Principal reductions only benefit those who cheated or stretched and penalizes anyone else and I believe it will have LITTLE TO NO EFFECT on stabilizing the market – it basically allows someone to stay as an owner at a subsidized rent (fixed at a percentage of income) and immediately lowers the value of everyone else’s house.

    The only solution is to let the market take care of itself and we can go to 12% unemployment and house prices down 40-50% – it’s going to go there anyways eventually and all modifications do is stretch out the problem – IT IS NOT A SOLUTION, BUT A TREATMENT

  32. Combined loan to value= 176%
    Negative Equity= 44%

    When can I sign up?

  33. Jorge,

    First of all I’m in exactly the same boat as you. Rented, saved and waiting. However, your cry for ‘fairness’ is naive. Don’t expect fairness. Expect them to change the rules. Try to anticipate where this is going, or hope Mr. Mortgage will shine a light on the truth.

    @Mr. M, thanks for your comment (…I rather just let everyone be foreclosed upon and clear the market that way.) And as far as I’m concerned, feel free to plug any personal interest you like. You’ve saved a lot of people a lot of headache – and money.


  34. Carol,
    It’s not a loan modification. They are solid borrowers & solid credit – full doc and approx 30% equity in the home today. They are trying to refi the people that can qualify out of their 10 yr adj portfolio. Not unbelievable – very true. I have the emails. It is INDY, not a phishing scam. They are “DESPERATE” to get people out of this portfolio because they can’t unload it off on investors – simple as that.

  35. I will join 5755hsa, Mr. M, please sign me up too. I’d love to get 176% loan to value deal.

  36. Two comments
    First, all the griping about people deserving this because they bought over their heads is crap. There are numerous reasons these mortgages failed, not all due to a buyer’s greed. My own involves a disability that cut my income in half. Others I know bought the least expensive home they could find, but the banks hand picked appraisers and realtors had driven prices through the sky. That’s not the fault of the buyer but the greed/fraud created price fixed market.

    Second, the loan mods are a true joke, another fraud being perpetrated on the purchaser. I just got mine in the mail yesterday. It’s another arm, no reduction on principle even though the property appraises for 50% less than the banks appraisal when I bought it. Payments go from 2495 up to 2895 within 3 years.
    The amusing, amazing thing is I got the standard form reset letter in the mail just a week earlier. Due to “limits on the loan” the maximum interest was 3+ percent and the payment for the full balance of the 30 year loan is 2345. Goes to prove their right hand doesn’t know what the left is doing. This one is WAMU.

  37. Carrie:

    Then lets see if they actually QUALIFY for the refi. I get mailers all the time to do refi’s. Is this refi automatic or do they HAVE TO QUALIFY for it?

    Which means going through the whole loan process as a “new loan.”

  38. Isn’t it amazing that a bank taken over by the FED has the nerve to offer this as a Mod?..

    Can we go back to the banks that “stole” the bailout money and demand from them a balloon payment back to the taxpayers? I would like to add that to my retirement fund.

  39. The problem with that JJ is that the homeowners that you talk about are not “contained” in the problem. This has now gotten to affect a much broader range of people who HAD NOTHING TO DO WITH THE HOUSING BUBBLE! My parents who live in their home for the last 15 years, have it paid OFF, now have to put off retirement due to the stock market and their retirement funds. Should they be penalized? They are worried about their jobs which the need to keep for another 5 years.

    I have friends of our that are good people and parents. They both got laid off from their jobs. They have been search for 6 months(jobs not related to housing). They have 3 good kids. We just sent them gift cards, Anonymous, from us group of us, so they could get Christmas gifts for the kids. Should they lose their home? They bought a house they could afford pre-boom.

    Seems, like the comments from “renters” is very bitter. Listen you choose not to own a home fine, but you shouldn’t down those that want one and have one.

    It is easy to say hey, let everyone go into foreclosure, let the chips fall where they may, but I am seeing too many GOOD people affected by the craze of the housing years and free and easy lending.

    Whatever it takes to stop it, it need to be stopped. Our goverment and our banks got us into this mess, they need to get us out of it. It is no longer a problem of just the McMansion, Flippers and Donald Trump Wannabees. It is much larger and worse than that.

  40. Had an argument with a friend, who is a lawyer no less, about the “new” way the government is trying to solve the mortgage mess by extending the life of a mortgage from 30 to 40 years. She thought it meant a person would have a smaller monthly nut to pay and so they could stay in their home. I think it’s ridiculous. By the time you are done, you’ve probably paid three times the original buying price and are gambling that the real estate market has recovered enough to make your house worth that amount. And who knows what the dollar will be worth during those 40 years? Would you take that gamble and indebt yourself for 40 years? I wouldn’t.

    Our cowardly politicians never want to tackle problems head on or come up with workable solutions that might offend their corporate masters. But I also blame the average American who gets their news from television and who is ignorant of the facts. This is not the fault of the home buyers. This is the fault of banks colluding with appraisers and real estate and mortgage companies to first lie about the creditworthiness of the home buyer and then about the value of the sliced and diced mortgages they bundled and sold. Instead of the wall street bailout we should be sending these guys to jail for fraud.

  41. “Whatever it takes to stop it, it need to be stopped”

    No it doesn’t.

    You WANT it to stop, obviously.

    “…but I am seeing too many GOOD people affected …”

    So the GOOD people who rent (many of them young people) and the GOOD people who have paid off their mortgages (many of them elderly) should be forced to subsidize the GOOD people who made the error of buying near the top of biggest housing bubble in history? Do you think they’ll do so quietly when they’re a majority of the country?

    I don’t think so. But time will tell.

  42. I have said this before, you cannot go to your lender for HELP. They are not going to help you, they are only going to help themselves and this example by Mr. Mortgage highlights this. Some of the comments on here and somewhat hurtful to some folks. We have never been a country that has debtors prison. Bankruptcy was created to legitimately address money problems. Suggestions that punish people for life by forcing them to pay back deficiencies is exactly what led to the great depression. Lenders lent money to anyone and when they foreclosed they went after the consumer with judgments. Antideficiency and one form of action laws were created to protect against such ABUSIVE behavior. Yes, society decided lenders engaging in such activity was abusive. Lenders today who are trying to circumvent those laws are abusing the consumers.

    Consumers are all being sent to the wrong place for help. In theory loan modifications sound like the direction, but as this example points out, it just does not work. So, dont send consumers to the lenders for loan modifications. I would file a bankruptcy any day then put an anchor on my neck for life on over 300k in unsecured debt. I would take the hit on my credit for the 5 years. Look at it as how much would I pay to have credit available for the next 5 years. Its an individual decision. Is it $10,000, $25,000, $50,000 or more? I would argue that a 5 year credit hit is better than having to pay back $50,000.00.

    Folks there is not a debtor prison, we do not punish people that fail and lenders will not come to the table until the losses get so big that dont have any choice. Just look at the news with Countrywide/BofA being sued by the mortgage pool investors for loan modifications… loan mods will get tougher, not better.

  43. What do the mortgage experts here see in their crystal balls when it comes to jumbo loans (nonconforming) over the next year?

    I’m hoping that coastal real estate prices will finally crack in earnest — so I’m sure that tints my personal take on all this — but nonetheless I’m going to offer my opinion.

    I think the coast is toast.

    1. I think the spreads between conforming loans and jumbos will widen. I’m guessing quantitative easing will only target agency debt.

    2. I think underwater homeowners with jumbos will, by and large, get little or no candy from Uncle Sam. The political fallout from flyover states over bailing out overpriced coastal McMansions would be enormous. I think they will concentrate their efforts on helping the greatest *quantity* of people (voters). This says to me that they will bail out ten $150K home owners over one $1.5M underwater homeowner.

    3. Many coastal markets have MSA medians that are now substantially off peak. My understanding is that next year government loans will revert from their temporary limits to 115% of the MSA median. This will drop the limit in places like SD County to around 550K. Ouch!

    4. Coastal properties are still WELL above their historic price/rent ratios. Common sense suggests they will ultimately return to something closer to the historic average.

    5. Lots of affluent boomers who own these homes are probably feeling some additional pressure to downsize after watching their nest eggs cut in half by stock market.

    PS, I’m talking about homes in the $1-2M range. Truly rich people with prized coastal properties will probably hang on, come hell or high water.

  44. Carol – I’ve been looking blindly at my computer screen for at least several minutes considering that your view of the situation is very likely the view of a large majority of Americans.

    A University Business professor I had sucked all the oxygen out of a large auditorium when he said, “I want you all to consider living your lives as if the entitlement programs Social Security & Medicare when you reach retirement age will not be there. Not because they might not be there, but because they won’t be there.

  45. Save the Flippers –

    You are correct, Sir.

  46. JAllen: “A University Business professor I had sucked all the oxygen out of a large auditorium when he said, “I want you all to consider living your lives as if the entitlement programs Social Security & Medicare when you reach retirement age will not be there. Not because they might not be there, but because they won’t be there.”

    A great statement to get ones attention and for the moment, lets assume it is true. Should consumers assume a liability for the rest of their life that will impact their ability to support themselves in their elderly years ulimately (with no entitlement programs)? Shouldn’t they just look at this wisely and realize that they are whipped, take their loss, take the credit hit for the next 5-7 years and try to preserve their future?

    Ultimately, if banks provide loan modifications via principal reductions, it should be because THEY made the business decision that it was better to do that then to have more folks walk from their homes.

    Martin Luther King once said, “That old law about ‘an eye for an eye’ leaves everybody blind. The time is always right to do the right thing.” Right now society is too focused on blame and trying make people blind as punishment. People need to look what is right for them and just do it. Sometimes doing the right thing has some pain to it. Filing bankruptcy, going into foreclosure and letting people support their families and provide for their future is the right thing for many people. Shaming people for doing something that is lawful is counter to the very law they get assistance from.

  47. Save the Flippers:

    Thank you for your crystal clear repudiations of those people whose truly seem to think that the free market only has one side, the “happy” side, and that government exists to squash the “mean” side when it rears its ugly head. I.e. people who say things like:

    “but we HAVE to stop the bleeding somehow, someway”

    As a Cuban I suggest they go reside in Cuba, there’s no bleeding going on there right now. Oh yeah, there’s no private ownership either.

  48. Did anyone by chance catch the Glen Beck show yesterday? This post was from the boards at MarketWatch, and it has me in a tizzy……

    Glenn Beck has said it well on his radio show yesterday…
    “You cannot inflate the world’s money supply to the point that we have. They are lying to you. They are trying to take this down let’s look at them in the best possible light. They are trying to take this system down as slowly as they can so you can prepare, but I’m telling you you are running out of time to prepare. You must prepare your household, you must prepare your children, you must do logical, well thought out things to be able to prepare your family and please do not do them in a panic fashion. I don’t tell you these things to panic you. I tell you this with a sense of urgency so you may move with a sense of urgency and it is the same reason why CitiBank is telling you this today. They say it’s either going to be inflation or a downward spiral into Depression, civil disorder and possible wars. They are talking about this on a global scale. They don’t say that this is the United States but, gang, there’s trouble coming. They are throwing the kitchen sink at this. This is what I told you a year ago.”

  49. economists need to eat SH*T, since they said they were shocked by the jobless number. Are they blind or deaf, just live in a confined coffin?


    Independent investment strategist Edward Yardeni said Friday’s employment snapshot confirms the nation is mired in a difficult recession but that the extent of the weakness likely will galvanize government officials.

    “The number was a shocker to such an extent that it’s clearly going to require an enormous stimulus response from Washington,” he said. “Cleary the Fed and the Treasury are going to move even faster.”

  50. First of all I thought the authors spin was funny but very distorted. I am knee deep in the Mod business with attorneys. I do not understand why people feel they are entitled to a principle reduction just because their property value went down. let’s look at it from the other point of view. When the properties were appreciating and going nuts the lenders were not calling up and saying “hey, we noticed you value in the past few years has doubled so we feel as though it was our loan to you that made that happen so we need to adjust your loan balance upwards to meet the LTV guidelines of the loan we sold you and seeing how we financed 90% of the properties value aren’t we entitled to that appreciation?”

    I know my poin of view is extreme but it has got to work both ways or not at all. Yesterday Bernanke announced a plan to have the Gov’t pay the investor on the loan each month for a portion of the loss in the reduction of that rate. ARE FREAKING KIDDING ME? That means my taxes are paying for my neighbors mortgage. The hell with that, pay your own way.

    Here is the ONLY way they will be able to fix this freaking mess and it will get one hell of a lot worse before it gets better if they do not get it in gear. Instead of having an ignorant consumer that does not know the difference between a Tier 1 to a Tier 5 loan Mod and creating an enviorment of negotiation, what needs to happen is SOMEONE, the Gov’t (what a joke) needs to require all loan modifications to be handled by third party mediators with no vested interest in the outcome, kind of like collabrative divorce. One nuetral party, fair and reasonable out come to re-underwrite the terms of the mortgage so the payment is aligned with the household income. SIMPLE.

    BTW there are PLENTY of qualified and trained, ready to go mediators. In their past life they were called processors and underwriters, you know all the people the mortgage companies have been firing or laying off. A great, trained and ready to harness workforce that would love to be put back to work. Hell, give them half or $500 of the $1,000 adminastrative insentive they are offering banks (they already created the budget for this) and trust me, they would be popping out files like no ones business.

    Instead, the employees at CWC or B of A are dragging their asses because they know when this is done, so are they. Back to work, if I pissed anyone off with my rant, I apologize, I do not blog very often.

    Ronnie Q.

  51. I know who you are Ron. You know me too. That being said I have always respected your place in the industry. That being said, this time I think you are wrong.

    I don’t have time to comment in full right now but I am against all modifications. But since the solons are hell-bent on doing, I want to make sure they don’t destroy the housing market and borrowers for 30-years. There is a right and wrong way to do it.

    With respect to borrowers being bailed out – due to fraud by the investment banks and banks they overpaid for their homes. Below is frm a recent post…


    Due to the way the loans were structured, from 2003 through 2007 everyone made $150k a year for the purposes of buying a home. Teaser rates, interest only, high allowable debt-to-income ratios, zero down, stated income etc made all homes affordable and borrowers rich. Home prices responded by surging higher to meet the new found nationally high affordability level. As home prices surged, new loan programs were rolled out what seemed like daily to keep affordability in check.

    Everyone was suckered, as these loan programs became the norm. Folks who really earned $150k a year went out and bought over priced homes based upon flawed and temporary fundamentals not knowing they were being suckered. Now they too are upside down in their home by 50% and have seen their life savings go up in smoke. They overpaid because the janitor was bidding against them using a stated income 100% interest only combo. Hey, the loan officer at the bank and the Realtor told the janitor that ‘based upon his income and credit you qualify for this loan’. Why should he argue with his bank? They know best. They are the experts.


    But now it is obvious that the past six years was an illusion and none of those easy credit, high-leverage programs exist any longer. Prices are coming down to the real affordability levels using 15 and 30-year fixed rate loans and a down payment, which has rendered the nations financial institutions and millions of home owners instantly insolvent. The same household that earns $75k per year that two years ago could buy a $650k home with no money down can now buy a $275k home with 10% down. It now takes at least $150k a year and a large down payment to buy a $650k home.

    100% stated interest only and Pay option ARMs will not return. Nor will 100% HELOCs. They were doomed to fail from their creation. The banks had modeling systems that they never stress tested. You mean to tell me that it never occurred to the smartest guys in the room to plug into the model that home prices could actually fall? That was a fatal error that the world is paying for.

    This is why this crisis was never ‘contained’ to Subprime. This is why those who put down 20% are walking away from their homes – it makes for a sound financial decision. Negative equity is now the leading cause of loan default among higher paper grades. As house prices fall further, more will walk.

    Yes, there were people who took advantage of the system. But, that was a small percentage of everyone who bought a home on flawed and temporary market fundamentals induced by easy credit and exotic loan programs that never should have existed in the first place. This five year period of absolute recklessness and blind greed on the bank’s part was the real driver of home prices. Taking that away is ‘going straight’ is the leading driver for the destruction of the housing market and consumer.

  52. Admin… you pretty much have it right at a high level. However, I would not blame the banks, they were merely the conduit for the product that was actually peddled on wall street. It is a wall street product of which they were making an insane amount of money and needed more and more product. The banks dumped them off.

    Losses today for the banks seem to be coming from buy-back agreements with those products and the instant inability to generate any revenue due to no products. If bank portfolio’s are declining at such a rapid rate, can you imagine the MBS’s?

    There is no real fix for all of this… it just has to run its course.

  53. There is a fix look under Bubble States Revisited.

    Save the Flippers stated:

    31% of the population were renters
    26% own their homes outright
    43% have a mortgage

    the government records agree that 69% of homeowners, so I agree with him so far.

    The 43 % that have mortgages decide the market value, since LENDERS are the judges issuing the mortgages, not many people have all cash to purchase.

    Here’s where it gets confusing:

    6.99% of homeowners are deliquent
    1 of out of every 10 homeowners are underwater
    20% of all homeowners are underwater or deliquent

    These fiqures were out taken out of the NY TIMES. In reality it doesn’t matter what percentage you want to believe, the reality is that home values have declined from the market peak over 24% Nationally. Some area’s have only decreased by 5 or 10% but some have by 35 or 40% and all areas will continue until something is done.

    When and How does the market correct or bottom out, if nothing is being done to correct the deflationary cycle from fueling itself to “zero”?

    The market is not a reasonable or logical instrument that states okay now we stop deflating because we are at affordability for the majority or the correct rents vs mortgagehas been reached REGARDLESS of having the same fuel of discounted reo’s being applied and affecting lower values.

    I believe that the “course” is to long and definately has the ability to over-correct to the extreme.

  54. As much as the terms of the modification are not all that great… one very glaring and important element of the Indymac modification agreement is it does not contain a release of liability of clause. I have to admit it is an honest approach geared merely at the modification. Most of the other modifications I have reviewed contain full releases of all liability and I would never recommend a consumer ever sign one with such provisions unless they were settling some very specific issues that they area aware of. So while there are criticisms, I think their approach is more genuine. Would I accept it? No way, I would give them the keys and go rent for half the price.

  55. So it’s a problem that people aren’t turning around massive profits on their bubbled properties? They’d actually PAY their loans back if they wanted to keep their houses? Oh those poor souls, for a second I thought we were going to be a society of nothing buy gimmes and quick profits from flipping. I hope that this option to keep their houses and lesson of person responsibility doesn’t bite too hard. I mean, we wouldn’t want people to stop buying what they couldn’t afford.

  56. I’ll certainly agree with something that Mr. Mortgage has figured out before probably anybody else out there (and still most people don’t get it). Subprime, Option-ARMs, etc are not the problem any longer. Nothing in that regard will surprise us at least. It is the incentive to walk away from your house because it makes you house poor and is worth a fraction of what you owe. That’s why the reset schedules don’t really matter any more unlike a year ago. And the problem can compound on itself.

    But with an angry fire in my soul I am absolutely appalled that anybody with a good understanding of these greedy homeowners thinks they should have a principal reduction. Go read the forums on They will make you lose your minds. “Why does the bank not want to let me keep the money I borrowed? Should I tell them about my RV or three vacation properties when begging for a principal reduction?”

    The greed is sickening. All the Scorcese mobsters combined lack the level of wretched scum, selfishness, and narcissism that each of these people have.

  57. I am for letting the market clear but here is my case for principal bal reductions – it was not all greedy consumer by any means. Those were the exceptions.

  58. Mark, I read it and it repulsed me. They were greedy consumers. They wanted in on the big game, but now cry that they aren’t reaping profits exceeding their annual income. We cannot construct a society that artificially dictates who owes how much and try to engineer people’s lives. That is what they do in countries like North Korea.

    Now while people today are saying “this sucks, I never thought I’d owe more than my house is worth,” it’s really an follow-up from what they said three years ago: “My house is awesome. I’m going to make a killing off of it. My neighbor just bought his for 10% more than I paid, so I’ve made $50k. Time to refi and buy that Jaguar.” These people shouldn’t be bailed out, they deserve to be cock-punched.

  59. What is INDYMAC offering for land loans with balloons payments? I recently spoke with a law firm who claims they can negotiate mortgage reductions from INDYMAC arguing that the reduction in principle still provides the bank a performing asset. Sounds too good to be true.

  60. Brian – please email me privately with their contact information.

  61. I heard a rumor that these loans are going to be both:

    (a) full recourse loans (meaning that if you default the creditor can sue and obtain a judgement against you), and

    (b) exempt from discharge under both Chapter 7 and Chapter 13. (meaning that Bankruptcy won’t wipe them out — simmilar to student loans).

  62. Kevin, that is awesome. Perhaps if the current concerns are that the incentive to walk away is too great, permanently attaching them to their debt will force them to stay and we won’t have to worry about it getting out of control.

  63. Latest plan to save housing values, immigrants over bulldozers….,%5Egspc,XHB,TLT,TOL,DHI,PHM

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