Mr Mortgage: My Case FOR Mortgage Principal Reductions
Posted on December 14th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research
This weekend a top reporter, Teri Buhl at the New York Post, wrote about one of my weekly research reports to clients that I put out a couple of weeks ago. In it, I talk about terrible bank- and regulator-led mortgage mods, Indymac and my solution. Most regular Mr. M readers already know my views, as I have been very vocal on this topic for months. Here is the Post story:
From the New York Post by Teri Buhl: Reworked Loans Aren’t Working Out at Indymac Bank
Below is the full write-up of my views on the mortgage market, mortgage modifications and where this has to go. Not included are the proprietary default and foreclosure data released in the original report.
Before I start, I believe that the housing market will ‘fix’ itself over time. But regulators, politicians and banks are hell-bent of ‘saving’ us all with programs that will just not work. In my opinion, the only way to ‘fix’ the housing and mortgage markets is to undo 2003-2007. To ‘undo’ means to:
- a) force de-levering the home owner/consumer through mortgage principal balance reductions based upon what the borrower really earns using market-rate financing
- b) make it so home owners can freely refinance and sell their homes
- c) make it so the vitally important move-up buyer comes back
- d) stop defaults and foreclosures without making home owners underwater, fully-leveraged, renters for the rest of their life as the present mortgage modification plans do
- e) allow home prices to fall to historic multiples of incomes and rents without exotic loan programs or artificial, temporarily, government induced low mortgage rates.
This can all be accomplished quickly if the right steps are taken. Below is how I believe we can get there.
HOME OWNERS AS A GROUP ARE NOT TO BLAME
The reality is that at the time most troubled loans were made, the borrowers really could afford their payments. This is because everyone made $150k per year for the purposes of qualifying for a loan due to the way the loans were structured.
This greater housing and mortgage crisis is not a result of millions of borrowers going wild, buying beyond their means blinded by greed or some massive consumer driven multi-year mortgage fraud era where everyone lied to buy a home. Nor was it caused by gangs of mortgage brokers who cruised the streets with 1003′s and pens in hand recruiting straw buyers to steal homes. This crisis was caused by fraud alright – but not by the consumer or loan officer to any great degree.
The greatest real estate bubble of all time was only able to occur because of the unregulated investment and commercial banks’ insatiable thirst for parts for their Frankenstein securities. As parts ran low when housing stretched or interest rates rose to levels that made the asset class unaffordable every few months, the constant re-engineering of loan programs focusing on low monthly payments and the elimination of income and assets as a variable brought affordability back in check. This continually repeated for years until virtually anyone with a heartbeat and a hand needed to sign the loan documents were active participants in the market. By turning a blind eye, regulators turning a blind eye endorsed their actions.
The problem going forward is that most don’t realize that during the bubble years, everything was exotic – even 30-year fixed rate fully documented loans.
PEOPLE VIEW THEIR HOME AS AN INVESTMENT – NOT A PLACE TO LIVE
What’s worse is that over the past five years there was a fundamental shift of how people viewed their home – from ‘a place to live’ to their single ‘largest investment.’ How could they not when all loan programs from Subprime to Prime allowed 50% of gross income (greater when considering limited income doc loans) to be used towards debt. In the good old days, when housing was viewed as a place to live, financing was sound; down payments were required and no more than 28% of gross income could go towards housing debt. When homes prices fell, it was alright because home owners could still save money and do the things they wanted to in life. 50% debt-to-income ratios changed the game.
Make no mistake about it – MOST ALT-A, JUMBO PRIME AND PRIME BORROWERS ARE NOT WALKING BECAUSE THE CAN’T TECHNICALLY AFFORD THE PAYMENTS. They are walking because all of their after-tax income each month is going out in bills and the largest portion is going to a home worth half of what they owe. When they are spending such a large portion of their income on such a massively depreciating asset, it makes good financial sense to dump that asset. When you can’t sell, you walk away.
That said, there are many who can’t afford their payments because of an ARM adjustment. But at one time they were qualified by the bank, and given the way the loan was structured, they could in fact afford the home. Banks and real estate professionals in every city in the nation used high-leverage, exotic loans in order get people to qualify for ever-increasing loan amounts. By 2005, interest-only was industry standard, as was stated income. You could not turn on the radio or television without being inundated with ads for $350k mortgage loans for 1% and $1000 monthly payments.
Lenders didn’t worry over what would happen to the loan after a few months because the loan was sold and they lose all liability after six months or so. The 2/28 Subprime ARM was a perfect example of a loan program not designed to hold over the initial teaser period. It was one that the lender didn’t care about because most were sold and securitized. Therefore, who cares about creating loans that will last? Just make loans that will last at least six months.
Even the securities investors never planned on holding these for very long. Exotic loans with teasers were sold as a ‘way to get into the home more cheaply’ or a ‘way to improve your credit before refinancing into something better a couple of years from now.’ The high churn rate of these loans was what kept MBS money flowing into this sector. They were short-term, high yield investments. This philosophy was not isolated to Subprime 2/28’s either – Prime 5/1 interest-only ARMs and Pay Option ARMs were also sold the same way. ARMs were the majority of mortgages in the bubble states through the bubble years.
EVERYONE EARNED $150K PER YEAR
Due to the way the loans were structured, from 2003 through 2007 everyone made $150k a year for the purposes of obtaining a mortgage loan. Teaser rates, interest only, negative amortization, high allowable debt-to-income ratios, zero down, stated income, and others made all homes affordable and all borrowers rich. Home prices responded by surging higher to meet the new-found national high affordability level. As home prices surged, new loan programs were rolled out 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 hourly day-laborer 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 income and credit, you qualify for this loan.’ Why should he argue with his bank? They know best; they are the experts.
REALITY
But now it is obvious that the past six years were 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 This has rendered the nation’s financial institutions and millions of home owners instantly insolvent. The same household that earns $85k per year could have bought a $650k home with no money down two years ago. Today they can buy a $275k – $300k 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 the smartest guys in the room never thought 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 and will never be ‘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 people 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 banks’ part was the real driver of home prices. Taking that away is ‘going straight’ and the leading driver for the destruction of the housing market and consumer. It’s simple; housing prices are just going to the levels determined by incomes, rents, interest rates and the macro-economy.
ARTIFICIALLY LOW RATES WILL NOT HELP EITHER
Who Can Really Benefit From a 5% CONFORMING (=<$417K) Mortgage?
With a 69% home ownership rate at the peak and values at least 50% across the bubble states, who is left to take advantage of these low rates? While low rates are a great thing for those who qualify, it is very possible that the excitement over low mortgage rates will end up exactly like the excitement surrounding the previous 20 bailouts, acts, proposals and ‘lights at the end of the tunnel’ that ended up being trains over the past two years.
The reality is that rates for most are not as low as people think. In addition, too many home owners in the bubble states are underwater and therefore unable to refi or sell. Remember, selling is needed in most cases to get the down payment needed to re-buy.
Exotic Loan Affordability Comparison
100k at 4.5% (5/1 interest only) = $375 per month or a 2.1% – 30-year fixed full doc
100k at 5% (7/1 interest only) = $417 per month or a 2.9% – 30-year fixed full doc
100k at 1.25% Pay Option ARM = $333 per month
For those who went “limited documentation” as with 83% of all Alt-A borrowers, affordability and interest rates and comparable affordability are moot points.
‘Back Then’
In the good old days, when rates dropped 50bps in a short period of time, the entire country would refinance for a lower rate, cash out or combine a first and second into a new first mortgage while adding a HELOC.
Back then, when values went up every month and there were hundreds of lenders with thousands of programs and interest rate structures, it was very easy to pump the mortgage money. Back then, the refi waves came every 6-8 months and within a few months after a wave began, it was noticeable how this injection rejuvenated the consumer. This can’t happen any longer.
Refinances Now
Negative Equity- Within the states that need the most help and are most beneficial to the macro-economy, the vast majority can’t refi due to negative equity. In CA for example, 60% of all mortgagees are either underwater or ‘near’ underwater and will not be able to take advantage of the rates. NV, FL and AZ are even worse. Most home owners in the top 10 trouble states are underwater in their homes, rendering them unable to move or refinance.
Rates are lower than last week for sure, but these ‘low rates’ are ONLY for the best AAA Prime gold borrowers with 80% LTV’s and 740 scores. This represents a small fraction of borrowers. THE REST STILL GET RATES WELL ABOVE the rates being recklessly thrown around by the media. As a matter of fact, most borrowers with the previous profile may have not participated in the past several years of serial refinancing. Many already have low 30-year fixed rates at 5% attained in 2003-2004. These rates are not for anyone less than perfect.
Folks don’t qualify - ‘Back then,’ nearly everyone could benefit from a drop in rates because values always went up and stated income and interest only loans made it so everyone could qualify. Until mid-2007, lenders actually funded 75-80% of all loan applications!
Now, lenders are funding 40-50% of applications. That is serious fall out. Now, you must have two years tax returns, a current pay stub, great credit and sizable equity to take advantage of the best rates. This profile represents a small minority of borrowers.
Purchases Now
Given that over half the market is distressed sales and foreclosure related properties, rates do not matter as much – home prices do. 6% or 5% will not change things – its about how cheaply they can buy. Everyone wants a ‘deal’ on a foreclosure. Many ‘investors’ pay cash and it is all about price, rents and cap rates.
Renters and first time home buyers are a different story and should see some benefit from lower rates if they hold. They will either save money or qualify for slightly more house. But remember, first time home buyers and renters are the weakest portion of the market and have always been.
What is missing is the all-important move-up buyer, which lower rates will not help to any great degree. This is because of the gross amount of negative equity already discussed. Without the exotic loan programs and easy qualifying, many can’t even afford to re-buy the home they live in now.
THE SOLUTION
The solution is not for regulators to force interest rates down to artificially low levels for a brief period of time to sucker people into buying homes. That’s what got us here in the first place. That said, sustainable low rates are good for the housing market.
But low rates mean very little when millions will default and lose their homes over the next few years because all of that added supply can’t be absorbed by the available buyers. The fact is that there are fewer buyers than ever before given that home ownership was at 69% a couple of years back and now the largest sector of the purchase market, move-up buyers, are all but non-existent. Please see the stories below regarding this. It is my opinion that low mortgage rates do not mean what they used to.
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- Bubble-States Awash in Negative-Equity (Revisited) (67)
Posted on December 5, 2008 12:35 PM - Who REALLY Can Benefit From Lower Mortgage Rates? (69)
Posted on December 4, 2008 1:41 PM - Mr Mortgage: In-Depth Look at Mortgage Rates…5.5% Does Not Exist For Most (45)
Posted on November 28, 2008 1:31 PM - Mortgage Rates Drop! It Does Not Mean What it Used to (67)
Posted on November 26, 2008 1:09 PM
- Bubble-States Awash in Negative-Equity (Revisited) (67)
If not for the unregulated institutions providing unlimited and irresponsible credit and leverage to every household in America, this never would have happened.
First off, I am a fan of letting the market work and the housing/foreclosure crisis clearing itself up on its own. We are already seeing positive signs that the Subprime crisis is on the other side of the hill mostly on its own. The problem is that the Alt-A, Jumbo Prime and Prime mountains lie ahead. However, if the government and banks are hell bent on modifications and saving people, they ought to do it the right way. Their present ‘solutions’ only kick the can down the road and ensure housing is a lost asset class for many years.
This blame does mostly lie with the banks, law makers, and regulators (including Greenspan) who branded and endorsed exotic loans as mainstream until 80% of all loans in the state of CA in 2006 were exotic by definition. This is very similar to the cigarette makers not telling the American consumer for decades that cigarettes were highly addictive and cause cancer. They were branded as the ‘cool thing to do’ in the media. Then they lied about the health effects and addictive qualities in nicotine for two decades until science caught up.
To fix the housing market and greatly aid the economy, you must focus on two important segments that made up 80% of all housing activity: the refinance borrower and move-up buyer. Now they are the minority. This is a major problem. We need to get these people back into the market. Investors, vacation home buyers, renters and first-time home buyers have always been the smallest segments of the market and now they are its primary participants. Low rates may be great for low priced homes in foreclosure epicenters, but as the default crisis jumps tracks into Alt-A, Jumbo Prime and Prime, higher end areas will follow down the same path. Without any reasonable financing available for loans over $417k, it is already a foregone conclusion.
Prices are coming down fast, and the market will clear at some point and at some level. But that level could be years away. The banks, regulators and lawmakers with all of their highly exotic loan modification plans will ensure it takes two decades for this to happen. See The Great Loan Modification Pump- God Save Us All! for the reason why. The re-default rate after loan mod is over 50% because most loan mods keep the borrowers leveraged up and underwater in their homes. The plans by Fannie, Freddie, FDIC, banks and lawmakers do exactly this. My plan will achieve the same within a couple of years. Yes, there will be pain but much less.
As with the financial institutions, the quicker the borrowers de-lever and raise cash, the better for the housing market and macro-economy. It is worth spending a few more trillion on quickly de-leveraging US households so they are free to save and spend money on other things besides an underwater house. The present mortgage modification structure takes care of the institutions at the expense of the very same tax payer that is bailing them out in the first place. I relate it to how the taxpayer has given AIG $150 billion, much of it to pay off losing bets to other financial institutions. The reason AIG has a blank taxpayer check is because it passes right through them to the financial favorite children like Goldman Sachs and Chase.
Undoing the Past 5-Years
It is time for the very same financial institutions that created all of this to do what’s right and re-underwrite every loan originated between 2003 – 2007 using prudent underwriting guidelines. Then, they must reduce the principal balance to what the borrower really earns using a 28% housing and 36% total debt-to-income ratio at a market rate 30-year fixed loan. When home owners are levered to 28/36 DTI they are able to save money and live a decent lifestyle. If they go upside down in their property who cares – they are still able to save money and live the lifestyle their income level allows. At 28/36, their home once again becomes a place to live.
If reducing the principal balance to 28/36 on a market rate 30-year fixed loan winds up being $100k lower than the present value of the home, the bank should receive the differential through an equity warrant to 90% of the value of the property. This way the home owner is not upside down in the home, they can freely sell or refi, they are not getting anything more than they deserve and the bank is still protected. But the home owner gets all of the upside. Anything less and the program will fail. If the borrowers can’t prove income through bank statements at the very least, then they need to leave the house and rent. They should have been renters all along.
For the small percentage of folks who can afford the payments with DTI’s under 28/36 but are underwater solely due to house price depreciation, principal balance reductions to 90% of the present value of the property is likely in order WITH a full-recourse provision to thwart fraud.
For the minority with equity who may owe $200k on a $400k home or have no mortgage at all, you get a multi-year tax break and a lollipop. By de-leveraging and stabilizing the consumer, you will stabilize house prices much faster, which will benefit you. Left unchecked and the consumer de-leveraging and housing price depreciation will continue for years, which brings you down too. You may end up underwater in your home unless the right solution is brought forth.
These things will not prevent housing prices from coming down over the next few years to reach a level of affordability consistent with present mortgage rates and lending guidelines. But at least it would be the best way to begin to undo the irresponsibility of the past five years and get back to basics where house prices and affordability are based primarily on traditional factors such as rents, incomes, interest rates, macroeconomic conditions and sentiment. - Best, Mr Mortgage
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December 14th, 2008 2:35 pm
Great idea, except it may lead to a very quick demise of many lending institutions. They wouldnt like that.No, we’re turning Japanese for the very same reason that the Japanese did….the alternative is just too painful..
December 14th, 2008 3:27 pm
I agree. Mortgages should be dropped 30-40%, across the board. The banks had their fill of the blood of the US economy, time to end the bloodshed. Banks can start over. And lend only five times what they have in reserves, instead of the excessive lending they got away with. We need to radically re-look at our investments, home and stock. Its very simple. Deduct. Then start over. Do we, as Americans, have the strength to look at smaller numbers, or do we go down in flames insisting on big numbers?
December 14th, 2008 4:18 pm
“Mortgages should be dropped 30-40%, across the board”
Never happen. Why on Earth would a lender drop the principal on a mortgage that isn’t underwater?
Principal reduction should only be considered by the lender when they conclude that it’s in the best interest of their investors. i.e., they should choose it if it recovers the greatest number of pennies on the dollar (factoring in the high probability of recidivism). Otherwise they should just foreclose.
December 14th, 2008 4:28 pm
It is not about value vs what is owed it is about bringing principal balances to a level that is affordable at market rates and allows home owners to save money.
Remember, whatever the value of the property today by the time it goes all the way through the foreclosure process, banks are losing on average 55% of the property value in foreclosure. So before you say they wont drop the balance consider the alternative.
Also when you consider in the bubble states where most of the problems are, between 60% and 90% are underwater and due to values being down so much so fast very few have much equity. I am only talking about modifying those done between 2003-2007, the very bad years. Of all those loans the percentage of equity is very small. Maybe a snall percentage get hosed but they win in the long run as the value of their house is saved over time.
December 14th, 2008 4:41 pm
By rights the loan should be brought down to reflect what the house would have been worth in 2003 including putting your down against that house value and crediting your payments against that loan balance.
The banks has basically created a ponzi scheme where new “investors” were what kept the game going generating fees for the banks and home prices flying.
The reality is that you are not likely to get this kind of settlement unless you sue and since nobody has the resources to take on all the banks (including the Federal Reserve Banks) that are overseers of this kind of situation.
The only way I see getting restitution is through a class action lawsuit that will bring in all relevant parties contributing to the mess on the table as defendants. This should include people who got drawn into the mess who walked and lost their down payments and otherwise suffered due to the ponzi scheme that the banks supported.
Heck, even I was damaged from flying debris from the banks scheme and I don’t even own a home. The United States Government has determined that it is in the best interest of the country to have the banks not fail so upon successful completion of the lawsuit, the government can pony up the funds. The government should not argue, after all aren’t they receiving money year after year to protect us?
How hard is it to find a lawyer to be on the team of the largest class action lawsuit in the world?
December 14th, 2008 5:04 pm
Theoretically, I agree, Mr. Mortgage. It would reduce the severity of the self-reinforcing downward spiral we’re entering.
Their ability to absorb those losses makes me curious. As borderline insolvent as many lending institutions are right now, would they seriously be able to absorb principal writedowns of that size and scope though? The lenders in question seem content to ‘kick the can down the road’ by offering ridiculous mods and rejecting short sale offers rather than take huge, immediate losses.
My question is, are they truly in a position to be able to do something like what you are suggesting and remain solvent doing so?
December 14th, 2008 5:23 pm
I do agree with mr.m. I will add this, human beings are not to be trusted where money is concerned. there are good kind honest people out thier,but there dont seam to be to meney these days. If it gets much worse can we survive?
December 14th, 2008 5:24 pm
I’m fine with mods – as long as every mod comes with a fraud investigation on the borrower! If you had a stated income, and you knowingly inflated that income, you now have a felony loan fraud charge to deal with.
But thats not a major problem, is it? oh yea.. 90% of stated income loans were padded by at least 5%. And CA has 80% low/no doc mortgages. Sweet. 72% of all homes were fraudulently obtained.
And we need to help these people why?
December 14th, 2008 5:24 pm
sorry.. 72% of CA homes were fraudulently obtained.
December 14th, 2008 6:00 pm
dafox, well if the loan was fraudulently obtained, then all losses should be borne by the fraudsters… So where are these droves of people that should be doing time?
December 14th, 2008 6:03 pm
passerby – you nailed it. On the other hand TAXPAYERS are spending TRILLIONS on insolvent banks, time to get some thrown our way. What the hell is an extra few trillion at this stage to make the consumer and housing market healthy in a shorter period of time.
December 14th, 2008 6:22 pm
dafox I agree. On the other hand the banks essentially endorsed it. I think a national forgiveness for income/asset inflation is also needed for those that bought who intended to live in the home.
December 14th, 2008 6:46 pm
“Remember, whatever the value of the property today by the time it goes all the way through the foreclosure process, banks are losing on average 55% of the property value in foreclosure. So before you say they wont drop the balance consider the alternative.”
If the bank figures it can recover more through a loan workout than through foreclosure (a big “if” when they factor in recidivism) then they should go with the loan mod.
The important thing is to maximize the return for the investors. All else is secondary.
Lowering principal balances for those borrowers that are in no danger of being underwater, and who are not in default, makes no sense whatsoever.
Remember, the original poster said mortgages should be lowered “across the board.” My point is that that’s utter nonsense. Someone who has 50% LTV and who current on their payments? You’re going to reduce their principal? You would have a revolution.
Remember the majority of the country either rents (31%) or owns their house outright (26%).
You are fighting against the tide.
Expect to see mods where interest rates are lowered to ridulous levels (~2%) to keep underwater borrowers paying on their overpriced houses. Expect to see people walking away from their underwater homes (the smart choice, IMO). Expect to see the Gov increasingly rely on tactics such as buying agency debt to drive mortgage rates down to ~4%.
I would expect all those things. I could even see mass formulaic principal reductions for underwater borrowers with modest loans (conforming). But the Government forcing banks to write down the principal of every mortgage holder in the country? No way. I’ll stick with my prediction that it will never happen. But we shall see.
December 14th, 2008 6:53 pm
I never said lower across the board – I said re-underwrite the mortgages at a 28/36 DTI on what the borrower really earns and lower mortgages accordingly. This has nothing to do with present value. Present value is secondary with everything that is happening. Value means nothing. In CA 3 identical homes can be $100k apart in listing price according what the seller (bank, MBS holder, home owner) is owed.
December 14th, 2008 7:34 pm
Mr Mortgage helped create the problem by selling tons of toxic option arms to investors and now we should listen to him…
December 14th, 2008 8:02 pm
Sorry, I was refering to the Mary W post:
“Mortgages should be dropped 30-40%, across the board”
As far as rewriting mortgages at a 28/36 DTI, I still don’t see banks doing that unless they think they can recover more through that process than through foreclosure.
December 14th, 2008 8:21 pm
Stop all mods!! Let the foreclosure process run its natural course. We have too many homes built , that means that they should all be cheap. Let every American citizen be able to opt in for a new credit profile after they change the bankruptcy law to allow for people to do a bankruptcy no questions asked.
Have all the bail out money plus all the money we spend on foreign wars go out to new loans on normal priced homes with zero interest. (They do it for cars all the time) get rid of the Federal Reserve and income tax. We will see America come out of this depression until then its more of the same.
December 14th, 2008 8:24 pm
Mr. M “This greater housing and mortgage crisis is not a result of millions of borrowers going wild, buying beyond their means blinded by greed or some massive consumer driven multi-year mortgage fraud era where everyone lied to buy a home. This crisis was caused by fraud alright – but not by the consumer.”
You are flat wrong that consumers are not 1/2 the problem here. Yes, investment banks, commercial banks, and all the warehouse lenders were part of the problem, but in the end the homeowner took out a mortgage that in many cases was 10X their income. If common sense does not tell them they can’t afford it, then they’re just plain stupid! As for the mortgage mods, I support your idea!
December 14th, 2008 9:32 pm
I never said lower across the board – I said re-underwrite the mortgages at a 28/36 DTI on what the borrower really earns and lower mortgages accordingly.
What about those loan officers and realtors who were making 100k/yr and are now making $30k/yr? Which do you write down to? Cause if its ‘whatever you’re making now’, I’ll quit my job IT and go work at a gas station – get a loan mod for near nothing – then go get another IT job with my salary somewhat near what it is now. That’d be worth cutting my mortgage in 1/3!
You have said that many people who bought shouldnt have, because their FICOs were essentially purchased with HELOCs. Those same people are who you’d be helping out with this.
December 14th, 2008 10:08 pm
Im amazed with the amount of intelligent people on this blog, that most here still blame the HOMEOWNERS !!!
Do you not understand that most people buy a house to LIVE IN and if the timing of buying a house in your life fell between 2003-2007, the price you paid was a ponzi scheme that thru no fault of your own, you had to over pay to buy and now you are most likely underwater because the ponzi scheme has ended…..
the fairest thing i have read so far, is the above post that says to move all prices back to 2003 levels , subtract the down payment and recalculate the mothly payments and balance….probably will NOT happen, but its the FAIR solution for all (except for the “genius” renters that seem to post on this blog just waiting to buy their dream house for 10 cents on the dollar)
December 14th, 2008 10:18 pm
exactly java – AAA Prime, 20% down, 30-year fixed buyers paid prices they thought were ‘the market’ when a $10/hr McDonalds clerk and her manager husband were bidding for the same $500k home because the loan program worked with their incomes – they really could afford the PAYMENTS on the loan and the zero down that got them in. Now the AAA Prime borrower is 50% upside down and is saving no money because it is all going into this crapbox house around which the neighborhood has turned into gangland because all the foreclosed homes have been turned into rentals.
December 14th, 2008 10:49 pm
Javagold:
In addition to the 31% of the households that are super-genius renters, there are also the 26% of the households that own, but have no mortgage (mostly elderly).
So the “FAIR solution for all” stiffs over half the nation. No amount of slicing, dicing, spinning, or suger coating is going to make that look any different to the 57% of households that have no mortgage. Add to that a substantial number of households with above-water mortgages that didn’t buy in the magic bailout lottery window of 2003-2007 and you’ve got a LOT of people who will fight these bailouts to the bitter end.
Just sayin’
December 14th, 2008 11:01 pm
They sure have not done too good fighting to the bitter end the $9 trillion in guarantees over the past 6 months. The re-underwrite plan will only cost a couple trillion and go directly back to the taxpayer. In addition, the forced de-leveraging of the consumer will benefit the macro economy more than anything they have done so far.
December 14th, 2008 11:37 pm
Mr. M;
It sounds all well & good IF mortgages were still held by the originating lender or held, IN WHOLE by mortgage buyers.
I am led to think that, perhaps, the majority of mortgages originated during the bubble years were sliced & diced into MBS. Therefore there is no one institution that can make a unilateral decision to modify a mortgage. A mod would require the permission of a whole class of investors.
If 99% of the holders of a given MBS issue agreed that it would be in their own best interest to take a moderate haircut rather than end up with next to nothing, the remaining 1% (& their lawyers) could delay/derail the process.
How is this situation to be dealt with?
December 15th, 2008 12:04 am
I have been auditing Subprime loans from all across the country that are up for bulk sale. Looking at loans originated in 2006, and with the wisdom of hindsight, it’s painful to see cash out 2/28′s given to so many maxed out borrowers.
Mr. Mortgage is exactly right. It’s DTI that is most important. If that means $100,000 is lopped off the balance, then so be it. A 58 year old husband and wife, with $0 retirement savings, cannot be paying 50% of gross income to debt service, especially on a home that’s now worth half what it was 18 months ago. Especially if they were to retire on $1600/mo max Social Security income.
His argument will always be met with the “Why should we bail out these stupid homeowners?” Just like Javagold said above, it’s not the homeowners but it was a ponzi scheme that’s over. The ponzi scheme and fraud were the norm, not the exception.
Going through all these non-performing loans, it’s crystal clear that the REAL MORONS were the securitizers who used homeowners as pawns of easy money that created 1 new mortgage and attached 100 new Credit Default Swaps/Derivatives that could be traded over and over (commissions paid on each future trade) to unsuspecting Pension and Hedge Fund Managers. (See Michael Lewis’s excellent article in Portfolio Magazine, “The End” to fully comprehend what happened and how it worked – http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom.)
Keep up the excellent analysis. Maybe we readers can all pool our money to get Mr. M appointed as Obama’s appointee to HUD. What does that cost? $1,000,000 to start?
December 15th, 2008 12:04 am
>> They sure have not done too good fighting to the bitter end the $9 trillion in guarantees over the past 6 months.
Not for lack of trying. Opposition to the original 700B bailout was quite high. Quoting from one of my Senators (Feinstein):
“My office has received over 91,000 calls and emails with over 86,000 opposed.”
Of course she still voted for it! Cowed into believing the world would end if Uncle Sam didn’t throw open the doors to the Treasury. But she will pay for it, come election day.
In any case, our voices are being heard. I see a growing backlash to the bailouts. Just because the pols caved once doesn’t necessarily mean they’ll cave again. I will keep up my opposition to the bailouts as a matter of principle.
>> The re-underwrite plan will only cost a couple trillion and go directly back to the taxpayer
A trillion here, a trillion there, and pretty soon you’re talking about real money!
>> In addition, the forced de-leveraging of the consumer will benefit the macro economy more than anything they have done so far.
De-leveraging will also happen just fine it they do nothing. I prefer that they do nothing, and will continue to argue for that path (even if futile).
All that said, I remain optimistic that ANY bailout efforts will be continue to be targeted at modest mortgages (conforming). I can live with that (grudgingly). So long as they stay away from rescuing jumbos. I think political opposition would be enormous to any bailout of borrowers with jumbo mortgages.
December 15th, 2008 12:08 am
Javagold
Dropping the price back down to 2003 and applying the down and payments to what the price should have been would seem right to remove the effect of the ponzi prices created by the banks.
Beyond that we get into these hotly contested issues.
1. People lied to get in on the game.
2. Some pulled money out. (maybe a lot)
3. Many entered into contracts they could never pay anyway. Except if the scheme were to continue.
The buying emotions that caused people to enter into these contracts were created with the price pump. Buying emotion fear “If we don’t buy a house now we are going to be priced out forever”. This is a very powerful motivator for a young couple just starting out and intending to raise a family. Normally these young couples get sucked in at the top of the market buying a well over priced condo. This time around however they could “afford” to buy a house!
Then there is the buying emotion called greed. You drive home and look across the street and your neighbor has two brand new vets in the driveway! How do you get in on that action? They have an ATM machine called a house and by golly you need to get one of those ATM’s too…
So we have this situation that the banks are not just running a ponzi scheme, but they are triggering the buying emotions that are inherent in all of us as human beings. Then of course there is the “other half” factor.
All these issues presented, we are still not going to have anyone banging on the front door, modifying your loan to what should have been. The truth is that banks are not going to talk until you miss payments. Short of a class action, I see no other way to get restitution on you loan balance simply because the average homeowner does not have the resources to hold the banks to the fire.
However the housing issue is now second to the economy which is called “California Burning”. As I stated before the number one employer was trade. Dock activity has slowed significantly, ask any longshoreman. The “A book” is getting work but not so lucky for the thousands of ID and casuals. The docks are stacked with cars that the dealers cannot take and their facilities are full, requiring the renting of new land to place all these unsold vehicles. Ships around the world are looking for permanent moorings.
Then we have the budgetary problems in Sacramento. The current number they are talking about is 41 billion, or about $3,100 per household. Even if they pull off half cuts, we are looking at $1,550 per, we are dealing with a significant number of layoffs. Since all households are not created equal, a good portion of new taxes will fall on the homeowner variety. For many CA households, this is more than the entire Christmas budget.
Even if you were lucky enough to get pushed back to 2003, the economic tightness coupled with bank REO hitting the market could push prices well below that era of home pricing.
December 15th, 2008 1:02 am
Did anyone watch 60 Minutes tonight? They had 2 stories on the housing issue. It was no a repeat. They went to a Miami condo which sold for something like $2.1M in 2006. Today, they are trying to sell it for like $900k and no offers.
One analyst said “We are only 50% of the way through this. Still another 50% to go before it is over.”
Could a soutltion be for the banks to used the most recent town/city/county property tax assessment as “real current maket value” and write the excess principal off on the orginal purchase price? At least for the buble states?
December 15th, 2008 1:15 am
Mr. M, Given your in-depth knowledge of the mortgage and Real Estate industry, to what extent did the Community Reinvestment Act (CRA) influence the events which you describe in this post? Please — this is not a trick question; I’m asking because you appear to have first-hand knowledge about the background of various decisions in the mortgage industry.
December 15th, 2008 2:16 am
MM,
It is about time you got you start getting some ink in the MSM this was a great write up. But reading the comments most do not get it. I know being an avid reader. Being a socal guy and 20 year mortgage vet. this is going to get much more ugly (based on data not doom and gloom) keep up the great work and god help us you will get the masses to understand. Thanks again
December 15th, 2008 2:17 am
Admin, Information presented on this blog said that option arms or Alt A’s were 65% by dollar volume in CA. How do you politically get the rest of the nation to go along with a CA bailout? If the problem was more equally dispersed across the nation it might have a chance. Truth is, the rest of the nation will pay for what is primarily CA and FL through bailing out the banks anyway. Getting politicians to pony up for for what amounts to the primarily beneficiaries of two states would seem to be a tough one to pass.
December 15th, 2008 2:21 am
The housing market is correcting and the Government, try as they might, can’t do a thing about it except maybe delay or slow it.
There are many over-the-counter derivatives attached to the original mortgages, derivatives with obscene leverages, sold and re-sold to many players worldwide. This is why banks are being propped up and loans reworked to include the original loan value if at all possible even if it takes 40 years to payback (you know that is impractical).
Forget about the housing values and think derivatives values. This will end not with deflation or inflation or stagflation or hyper-inflation or liquidation but end in currency destruction (total lack of trust).
December 15th, 2008 3:52 am
“I never said lower across the board – I said re-underwrite the mortgages at a 28/36 DTI on what the borrower really earns and lower mortgages accordingly.”
Now why does that sound vaguely familiar? Oh yea, “From each according to his ability, to each according to his need” – Karl Marx
Geez, whatever happened to supporting the principles this country was founded on? Why does every proposed solution to our countries financial problems always suggest moving us in a socialist or communist direction?
December 15th, 2008 4:05 am
Admin;
I asked you before for your opinion in my responses to your two articles: Bubble states revisited and Indepth look at mortgage rates.
My proposal takes less than 12 months to stablize the market and your proposal doesn’t even attempt to stablize the market, if fact it refers to years.
My proposal helps the 31% of renters(lower home prices) and the 26% of homeowners(stopping their losses) who own their home free and clear, while your plan doesn’t. Your plan and the government intentions allows prices to remain elevated, while mine reduces them.
My proposal eliminates the borrowers who never really qualified, yours gives them a home at a great price, actually in might be under a rental payment and still be able to recieve a tax benefit.
My proposal aids all underwater homeowners who are paying on time with a lower payment, yours benefits the homeowner who is deliquent or earns less money the most. The more money you earn the more money you pay for the house, regardless of being next door or on the same block, according to your proposal of 28% of your income goes to housing. Almost the same of the governments, moral hazard situation.
As I stated before, LOCATION, is the key in real estate.
Since the total outstanding mortgages are 12.1 TRILLION DOLLARS, my proposal will cost 2.1 TRILLION DOLLARS to correct all negative equity and the remaining homeowners are qualified borrowers in a STABLIZED MARKET.
You, yourself state that homeowners should walk away if they are in negative equity, regardless of whether they can afford it or not. That is regardless of any ratio’s. DO NOT REMAIN UNDERWATER, YOU ARE BASICALLY RENTERS, IS WHAT YOU PREACH.
***Now if your proposal only refers to the BUBBLE states, the cost to cure at your 28% ratio per the US Census bureau would cost 1.46 or 1.5 TRILLION DOLLARS VS my proposal of correcting the entire USA of negative equity at 2.1 Trillion dollars.
If the government only corrected half the problem (bubble states) , the other half would continue to decline, affecting the initial half that was correctes as well. Similar to what is happening today, the bubble states (10) are affecting the rest.
In view of the above, which do you think you should be pushing for ? What do you think the general public would want?
Investors, who the government is looking to protect the most, I believe would rather take a 40 % loss on principal for all underwater homeoweners with a 5% interest rate return on the 60% of the remaining balance vs a 45% loss on principal with no return – foreclosure.
Your proposal basically calls for a 70% reduction of the bubble states with no stablizition of the housing market or regard for any other state. Except if your state got a 70% reduction, why wouldn’t NY,CT, Penn, VA or NC be entitled to it as well?
If it took a general LAW accepting that an appraisal stating the market peak value minus the “current deflation” equals the new refinanced mortgaged amount acceptable which would pay off the existing mortgage in full, similiar to a bankruptcy for investor or second homes, how many investors would opt for the continued return at the reduced principal balance versus the end of their cash flow with the principal balance of 40-50-60% paid to them?
I believe in principal reductions, just not modifications for all. I believe I have shown how the housing industry/market could be stablized for the benefit of the majority.
December 15th, 2008 4:29 am
[...] borrowers were really no less greedy- like I said, I did my best to explain, even tried to talk some borrowers out of using a POA to buy [...]
December 15th, 2008 4:52 am
Mr. Mortgage, wow about a tweak to your plan to make it more palatable to the bubble-sitters?
How about forcing all modifications to be publicly registered, and allow outside bids on the resulting property and mortgage?
So, if a distressed homeowner is offered a mortgage mod, the bank must list it, and allow any party to buy out the homeowner’s deal by paying a premium for it set by auction, somewhere between 1% and 20%. If there are no bidders, the modification goes forward as you describe.
Here are the advantages:
1) it’s fair. If you think a distressed homeowner is getting a sweetheart mortgage mod from the bank, you can steal it away by putting up some cash of your own.
2) it solves the re-default situation. The weakened homeowner, who may at this point have many other debts to settle, is out, and a financially stronger party takes ownership. The new owner then also has “skin in the game” according to the amount of premium paid.
3) the premiums paid by outside parties add immediate capital to banks, as opposed to a promise to repay over time.
4) this would be a great signal to the sideline capital that the bargain hunting phase can begin, since the market would be setting prices, not fantasyland valuations
5) it is far less risky to banks than to take the property through foreclosure.
December 15th, 2008 9:20 am
My house payment is 22% of my gross. I am now underwater by about 40,000. I wanted to buy a bigger house but I can’t sell mine.
Your proposal would not help me at all. I bought a house I could afford (with a fixed 30 year mortgage and 20% down).
Why should I have to subsidize those who spent beyond their means?
Why should my white-trash neighbor who bought more house than he could afford get a “Special Deal?” We both bought $250,000 houses. He was dumb, I was smart. Let’s lower his principal (and the values in the entire neighborhood) and not lower mine. That makes sense…to a socialist.
December 15th, 2008 10:16 am
Meh, I was yelling about this same thing over 2 years ago. Back then, everyone thought I was insane. Now it’s way too late. Doing this now will only be putting a bandade on a broken arm. The window of opportunity as long since passed. What we need now is to save the jobs. Bailout out GM with very strong regs. Then institute new oversight and resurrect the old regs on the mortgage industry.
can’t pay off a house or even pay a mortgage payment unless you have a job. This time next year, jobs will be at a premium.
this is no longer closing the door after the horse is gone, this is trying to find the door after the barn has been destroyed by a tornado.
December 15th, 2008 10:24 am
why is everyone compared to “white trash” !!!….its getting to be a bit comical that every underwater house was bought by “white trash”….plus ALL THE news shows i have seen with buyers needing help were “black trash”, but i guess that isnt PC ….so lets just understand ALL people need help with their homes whether its, principal, interest rate or equity and they are not all “trash”
December 15th, 2008 10:29 am
MrM-
The re-underwrite plan will only cost a couple trillion and go directly back to
the taxpayerthose who gambled.I fixed that for you.
December 15th, 2008 10:42 am
dafox – they are going to spend $3 trillion anyway. This way is better and will only cost $2 trillion. http://www.bloomberg.com/apps/news?pid=20601039&sid=a.YJmSfnHD9o&refer=columnist_hassett
Java – exactly. With values down 50% in CA in the past 18-months everyone is screwed. The only reason is because they took an exotic loan that allowed them to buy more than they should have with respect to TODAYS financing. If all of those programs were still in effect, we would not be talking about this now.
Susan – I have your posts in my inbox but it will take an hour or two to read thoroughly makes notes and reply. I am sorry but I have not had the time. Would you do me a favor and condense and cut and past them together, condense and email to me. Thanks.
December 15th, 2008 11:44 am
Javagold – “Im amazed with the amount of intelligent people on this blog, that most here still blame the HOMEOWNERS !!!
Do you not understand that most people buy a house to LIVE IN and if the timing of buying a house in your life fell between 2003-2007, the price you paid was a ponzi scheme that thru no fault of your own, you had to over pay to buy and now you are most likely underwater because the ponzi scheme has ended…..
the fairest thing i have read so far, is the above post that says to move all prices back to 2003 levels , subtract the down payment and recalculate the mothly payments and balance….probably will NOT happen, but its the FAIR solution for all (except for the “genius” renters that seem to post on this blog just waiting to buy their dream house for 10 cents on the dollar)”
This is amazing to me. I didn’t realize renting because houses were too expensive was not an option. Thats what I did. Since when do life circumstances FORCE you to buy a home. Many single family homes are rentals. Yes banks are 1/2 at fault, but an ignorant society is at fault for the other 1/2. If we do not hold ourselves resonsible for the biggest purchase most people ever make, what the hell are we responsible for?
December 15th, 2008 11:48 am
JAVAGOLD – “so lets just understand ALL people need help with their homes whether its, principal, interest rate or equity and they are not all “trash”
Not all people!! Is this your way of convincing yourself you could not have made a smarter decision, and that you had no choice but to overpay for a home. For those of us who said “the emperor has no clothes” do not need any help!
December 15th, 2008 12:17 pm
Finally some common sense! I am from California, where a three bedroom two bath track home was selling for $600,000. That is insane! Property values must and will come down to the point that the average person with 20% down can actually afford the payments and have enough money left over to save. What a concept!
December 15th, 2008 12:22 pm
If this had taken place, say 20 years ago when there was no internet and it was difficult to access information, I might give you an edge in your argument but the reality is….
“IGNORANCE IS NO EXCUSE”
What your saying is that the bank’s are to blame and people we’re to stupid to figure this out.
The reality is that people we’re greedy, don’t f’n tell me you we’re not one of them. I was getting ready to purchase my first home after returning from my honeymoon when this whole market went to hell and this stupid ARM loans we’re a joke and the surge of home price’s going up was even a bigger joke…. There was so many people I talked to that got in with an ARM loan, not as a place to live but as an investment. They figured that once their ARM loan finished, they could sell their home for double 2-3 years later. This was the reality of what was happening. Home flippers we’re destroying the traditional buyer with a level head from wanting to purchase.
It’s because of the greed that was generated by the buyer’s, bank’s and realtor’s. But it’s who ever is caught holding the bag that will take the brunt and that is the home buyer.
Should we be creative in helping them out, NO…. most of these home buyer’s that we’re subprime to begin with, cannot afford their home even with help, the majority have no ability to control their spending habit and view their credit cards as a source of income.
Should the bank’s allow them take down their principal, sure as long as they agree that any future equity in the property goes back to the bank.
December 15th, 2008 12:38 pm
Jonathon,
I like your twist on the modification process. I agree that it seems to be the most fair outcome to everyone, renters and owners alike, as well as being the best way for banks to minimize their losses. Interesting ideas in my opinion.
December 15th, 2008 1:12 pm
It’s getting hot in here…
Take a step back for a second. Those screaming for a re-write are going to get it. It may not come just the way you’d like, but you will get relief. The new administration-elect has promised that ‘Deficits will have to wait’. And that means the spigots are open to cover losses – wherever they may exist.
Real value on the other hand, will find it’s way back, via market forces.
Sadly, no finagling of numbers nor re-write programs are going to re-inflate deflating house values. But that’s not the issue here, right? The issue is keeping people in their homes.
The 7th largest economy in the world (Ca) will receive Federal $$aid and that will include relief in some form, for a large section of house-owners in bubble-states, Ca likely being 1st on the list. So whether it’s your program and you make it on CNN/CNBC or be called to present it before a senate sub-committee, or a $$patchwork quilt designed by the Treasury, relief in some form is coming.
And when all of the ‘Helping’, ‘Re-writing’ and ‘Forcing’ is done, and they still can’t Pay/Save/Eat/Survive, we’ll simply Help, Re-write and Force some more. Since there seems to be plenty of money to go around, why not?
What, you thought this would only have to be done once and everything is Ok?
Peace -
C.C.
December 15th, 2008 1:42 pm
Two BIG problems with this solution, you need to know what you’re talking about before you give a solution.
1) Who do you think ownes these loans? The banks sold them all, and do you know who they sold them to? US, the mortgage balance you want reduced is owned by you and I in our retirement accounts. So I as a partial owners don’t want to give up some of my retirement funds.
2) so if I understand you correctly the guy that bought a million dollar home with a 1% interest only POA could now have his mortgage reduced to 200-300,000 so his payment with a standard loan is only 28% of his income???
Before they start I know a nice ocean front house I’d love to have with that deal.
December 15th, 2008 1:50 pm
Admin
You said…
“Java – exactly. With values down 50% in CA in the past 18-months everyone is screwed. The only reason is because they took an exotic loan that allowed them to buy more than they should have with respect to TODAYS financing. If all of those programs were still in effect, we would not be talking about this now.”
Not exactly. It was a confirmed bubble with unsustainable finance. Keeping the bad products out there and further saturating the market with crap loans would only make for some larger future problem when it finally unwound. After the last hamburger flipper was in, we would be looking at 60-70% losses at this time from peak instead of 50%. Even you say that Indymac went under because they were booking full payment but only getting the minimum which left them under capitalized. At that point, the market is no longer sustainable.
Granted that the tightening of standards and products have lowered affordability but the loan terms of affordability are basically a return closer to historical norm.
Yes the banks pulled the financing but they really did not have a choice, it would have just been a larger firecracker when they blew up later and increased taxpayer cost.
One disagreement with your post proposing a bailout is people viewing a home as an investment and not a place to live. Well yeah, that is what happens in bubbles, it becomes a speculation. Should we be bailing out speculators? Should we be bailing out people who were unable to recognize a speculation in progress?
I wholly agree with you that it was a failure in regulation and Greenspan endorsed it and threw fuel on the fire. I would really like to see the Federal Reserve bank of SF Chairman’s reports to the Board of Governors over the bubble years.
December 15th, 2008 1:57 pm
JOhn BoB said: I bought a house I could afford (with a fixed 30 year mortgage and 20% down).
Why should I have to subsidize those who spent beyond their means?
JAllen says: Oh, it sounds like you expect “the system” to be fair. I suggest we all forget that silly expectation.
December 15th, 2008 2:05 pm
What is disturbing is how the housing mess is being painted as a tragedy–as if people losing homes are being made homeless, when in fact they get: 1. up to a year free rent, and 2. when they do actually move out and rent, the rent is lower than their previous house payment.
Nobody is being made homeless here, greedy people made an investment that stopped appreciating at 14% p.a.
JOhn BoB was responsible, and I respect that. What is sad is that he’s not looking very smart right about now.
December 15th, 2008 2:32 pm
Borrower A put 20% down, his house dropped 30% in value, but he’s toughing it out because he’s a man and has to look at himself in the mirror every morning.
Borrower B bought the same house, put 0% and now he’s to get a mortgage write-down of 30%? Screw that. Let Mr. B get bounced out on his ass, and Borr A can buy B’s house for 80% of the already-reduced value and rent it out to Mr. C. (Don’t rent to B because he’s a proven deadbeat.)
Mr. B can move his family in with his mom or buy a tent.
Here’s something to smile about: Wyoming has as many senators as California.
December 15th, 2008 2:34 pm
PS. The real problem is people trying to “fix” this. There’s nothing to fix. Let the chips fall where they may.
December 15th, 2008 2:44 pm
The following comment in the article explains one reason for continued pressure on home values:
“The same household that earns $85k per year that two years ago could buy a $650k home with no money down can now buy a $275k – $300k home with 10% down. It now takes at least $150k a year and a large down payment to buy a $650k home.”
In our free market economy, banks with too much bad debt should go out of business, and be replaced by new ones, which can help create a more stable real estate market.
December 15th, 2008 2:55 pm
JAllen
Interesting thought. Your right, nobody is being made homeless and they aer not homeowners to begin with, they only entered a highly levered contract to purchase a home. When is the right obtained to call yourself a homeowner? When you have 50% or more equity? I can go to a department store and put something on layaway but I don’t own it until it is paid for. Even if you put 20% down, you cannot claim a majority ownership. The biggest lie perpetrated is the RE agent handing the keys to a home buyer and congratulating them as a homeowner. This is laughable, they have only entered into a very large debt agreement in which it will be years down the road to where they cross the 50% ownership line.
On another blog someone said they refied and saved $300 per month. This of course is economically positive since the homeowner has an additional $300 per month to spend being a consumer (even though in this instance he claimed the money would be going to paying off the home faster with extra payments)
Someone walking and saving $1,000 to $1,500 per month renting would be the equivalent of 3-5 homeowners refiing and saving $300 per month. Thus it would seem that the economy would achieve a greater benefit from a walk away than from a mod. If a mod only took an exotic payment and turned it into a 30 year fixed payment that left the homeowner with a high DTI, I would rather see the economic benefit to the whole, of that person renting and having more disposable income per month to spend in the local community.
Which brings more economic activity? A modification or a foreclosure? It would seem that overall more economic activity would be created in a foreclosure (more jobs overall) than if the homeowner just modified the existing loan. The overall fix is that prices must return to income vs home prices at 30 yr fixed. Stuck holders are going to have to figure out what math works best for them.
December 15th, 2008 3:27 pm
JAllen,
I agree with your assessment that living rent free and then renting for less than the mortgage is not a tragedy. In many cases, it is likely a much needed financial break and a lesson in sound financial judgement. But to say that nobody is being made homeless is not true. One major problem which I see is that a family of 4 (or larger) really can’t rent an apartment because apartments just are not big enough to accomodate families of 4 or more. They have to rent a SFR (which is fine) but being able to trust that the landlord is actually paying the mortgage is a risky business. I don’t have any personal experience with this but I have seen several stories about people paying rent and then receiving a NOD on the door because their landlord walked away. I wouldn’t be surprised at all to see this happen more and more as the economy continues to struggle. And this scenario really only applies to people who didn’t lose their homes to legitimate financial problems (ie. job loss, medical tragedy, divorce, etc.). For those people, even renting may not be an option.
December 15th, 2008 3:29 pm
There is a possible solution coming. Many will not like it, but unfortunately it is becoming more and more likely. By this time next year I fear things will be much worse.
History: Between 1930 and 1936 18 Country’s devalued their currency. Yes 18! Including the US UK France Sweden Canada Australia Japan…to name a few. The US gave in in 1933 with a 40% devaluation. Want your mortgage cut in half? DONE! Just don’t be holding cash. Just remember this COULD very likely happen.
Just didn’t want anyone here to be caught napping.
December 15th, 2008 3:32 pm
The sad part of the situation to me is not the losses being realized by investors, but the families who got caught up in the “if I don’t buy now, I will be priced out forever” mentality. I think most of these people bought to establish roots for their families. I look around my neighborhood (which is being decimated by foreclosures) and I don’t see investors and renters, but hard-working people who make good money and can’t, or won’t, continue to bear the burden of sending 40-50% of their monthly income to the mortgage companies.
Even responsible people in our neighborhood (20% down, 30-year fixed) would be $2000 a month better off to walkway and rent the house down the street. I am pretty sure that a savings of $24k a year is enough to make people at least entertain the idea of walking. Not only will they save $24k a year, but living rent free for a year would save quite a bit more. Even with $125k down, that loss can be made up in five years by walking as opposed to 15-20 years by staying. To me, the real tragedy is the fact that walking away from a home in our neighborhood, even if 20% was put down, is a sound financial decision. Even people who bought a home to live in, and not as an investment, have to face the facts when it comes to financial decision making.
All of that being said, I agree that the chips need to fall where they may. Someone who walks away now, learns their lesson, and socks away the money they will save by renting will be able to get back in the game in a few years and prices will still be close to what they are today. A tough lesson to learn, but a better lesson than what would be taught by drastic modifications and bailouts.
December 15th, 2008 3:43 pm
Dan Correspondent Said:
“Here’s something to smile about: Wyoming has as many senators as California.”
Exactly a point I have been driving home for some time. How do you get the other senators and house members to go along with a bailout of homeowners of a minority of bubble states?
Let’s review.
1. Bubble states had the greatest benefit of home and condo building through jobs created.
2. The RE and finance industry had the greatest benefit in the bubble states.
3. I have no data, but it is very safe to assume that the majority of mortgage equity withdrawals happened in the bubble states that had the highest price gains.
Now the states which are in majority that did not fully benefit are going to be asked to bail out the citizens of the states that enjoyed the bubble economy and received out-sized benefits throuh the bubble years? Once again the subject of principle reductions come up and a volcano of opinions erupts on the subject showing that this is indeed a political hot potato. That is why I say that a political solution to the problem is very unlikely to make it right.
My view is that if there is any form of recourse it is going to be legal resolution to the matter taken up on a class action basis and a Washington handout unlikely.
One thing Dan, I think it is California that is going to be living in a tent for a while, not just “borrower B”.
December 15th, 2008 4:22 pm
“Here’s something to smile about: Wyoming has as many senators as California.”
Exactly.
December 15th, 2008 4:27 pm
Bert,
That is why i have been posting that modifications need to be done for EVERYONE, not just CA,NV AND FL….i doubt anyone in WY,OK or VA (or any other states) will be complaining if they are also made whole on their “lost equity”
December 15th, 2008 4:29 pm
I would say the COASTS are toast, since Florida is in big trouble too. I did many refis in Florida and it was incredible how fast some of those condos appreciated. They have a glut of over 40,000 units sitting empty right now.
December 15th, 2008 5:03 pm
Javagold
No, the senator from Wyoming will say that CA is getting X percapita in benefit and when added to the bank bailout cost from the fiasco will insist on an additional 100 billion in no strings economic benefit for his state…. Remember the one page bank bailout turned into 400 pages with the whole world watching. So after all the senators from the non bubble states are satisfied we end up with a 30,000 page document and 5 trillion in package.
I can see them lining up at the trough now….. Nobody in Washington is going to give CA, FL etc a free ride. What would the “equality costs” be in arranging this magnificent piece of legislation?
December 15th, 2008 5:24 pm
Just a question and a concern…I purchased my home and put 25% down (cash from savings),gave full documentation on my income and assets, and had a mid 700 credit score at the end of 2005. My home is maybe worth the same now as then….many people seem to think we should do loan mods on people who are distressed and underwater but should do NOTHING for those like me…. so my neighbor buys exactly the same house as I did… he does a 100% POA and I pay 25% cash… he lies about his income and I don’t… he has crappy credit and mine is fine…. and we should help him because he is distressed and I am not…. so lets mark down his mortgage to what he could really afford at the time he purchased and let him keep his home and I get nothing from this new scam perpetrated on the decent people of the country…boys and girls this whole thought process is preposterous at the best and country killing at the worst… surely we have better minds in here then this proposal… and Mr Mortgage is doing a great job hollering out his proposals now with 20/20 hindsight…
December 15th, 2008 5:36 pm
Pardon me epfanman but I have a couple years of written material very accurately predicting exactly how this will unfold many months and years ahead of time.
The fact is the government is going to throw $3 trillion at this problem. They will screw it up I can promise you.
The fact is that you were screwed just as badly as everyone else. You paid way too much for your home based upon exotic loans that allowed everyone to earn $150k per year for qualification purposes. Everyone thinks their home is special and worth the same as then but in 99% of cases, they are way far off the mark. Even if you do have the one house in the nation that is worth what it was in 2005, the coming Alt-A, Jumbo Prime and Prime implosions will destroy your value as well. Subprime has only taken the overall mortgage and housing implosion to the 3rd inning if we are lucky.
In your case, which is not the typical case, I would be for a principal balance reduction to 90% of the value of your property or some sort of income tax relief.
but even without that the value you get out of this is that the mortgage and housing implosion does not carry on for the next five years taking your house value down 65%. Because if left unchecked or left to the regulators that is exactly what will happen. Now go back to the MLI board.
December 15th, 2008 5:41 pm
If this is your expertise then you must also know that to allow the “distressed” and “underwater” homeowners relief is in fact no different then offering a tax break if you have more kids then you can afford or setting up a nice food stamp program because you have chosen to not work for years… or perhaps a car gets dropped in your driveway because the rest of the taxpayers thought we should all have a car no matter what our income or worth caluclates to…perhaps a nationally centrallized bank, with no tax system where are are all hired by the government and live a minimal existence is what you ask for… or would that be communism…
December 15th, 2008 5:52 pm
I dont think you fully read the report. I said very clearly that ‘I am for letting the free market work this out but since the regulators are hell bent on spending tax payer money, try this’.
There is not doubt to fix the housing market we must undo 2003-2007. To ‘undo’ means to:
* a) force de-levering the home owner/consumer through mortgage principal balance reductions based upon what the borrower really earns using market-rate financing
* b) make it so home owners can freely refinance and sell their homes
* c) make it so the vitally important move-up buyer comes back
* d) stop defaults and foreclosures without making home owners underwater, fully-leveraged, renters for the rest of their life as the present mortgage modification plans do
* e) allow home prices to fall to historic multiples of incomes and rents without exotic loan programs or artificial, temporarily, government induced low mortgage rates.
What I outlined is my best shot. Sure there can be tweaks but it is far better than anything I have seen regulators, economists, politicians or banks come up with.
December 15th, 2008 6:04 pm
Let me restate my plan a little more clearly…
1) go forward with the modifications that Mr.Mortgage talks about, reduce principal so that payments meet 28/36 ratios, etc.
2) BUT allow any other party to buy the house for the modified price (or modified interest rate, etc.), also putting down a premium in cash. If there were multiple interested parties, the premium is set by auction.
This puts to rest a lot of the fairness issues. For example….
- exactly. You would be able to offer cash to the bank to take over the distressed homeowner’s loan. The bank gets immediate capital, a less risky borrower, and the market is involved in setting valuations again.
December 15th, 2008 6:09 pm
Two more concepts…. lets reduce inventory by dismantling the excess new homes that are sitting vacant in developments and neighborhoods. Any new homes not sold we hire currently unemployed construction workers to dismantle the homes. The banks take the full shot in the shorts on this as home owners were not involved. We decrease our carbon footprint as we can recycle most of the materail for other purposes. Lower inventory pushes down supply and “assists” with pricing stability down the road. Number two is seeing as many consumers did not deserve the homes they bought why don’t we start a national swap meet…. take the guy from the 400k home thats going down and stick him in one at the 280k range that he really could afford that is also going down…. that borrower gets shoved in to the 210k home they should have been in and so forth….we used to worry about the security investors not agreeing to it but seeing as most mods and principal reductions are done without their consent anyways I say the h*ll with them and start the swap meet….
December 15th, 2008 6:23 pm
I agree with Dan, to let the chips fail where they fail..
I’ve learned my lesson, everybody needs to.. or do we want to repeat the problem few years from now? Do we want to prolong it?
PP.. you’ve got to end of 09 to walk away! (no tax implication) For those of you that took cash out.. well at least you will NOT have to pay for all of it back! just a percentage!
Nothing will help now, but time! MM you keep concentrating on pp that bought between 03-07 that are still owning the house.. you left everyone else out.. don’t piss off the rest of the country! or this will get very ugly!
pp that lost homes yesterday, last week, last year.. you get the point!
pp that bought cash
pp that bought homes long time ago, and were responsible
pp that bought within their means
pp that never bought a home.. you want an artificial bottom for them?
pp that bought multiple homes
there is no help for all.. so let the chips fail where they fail, pp need to learn a lesson..the quicker the drop, the faster the recovery!!!
December 15th, 2008 6:57 pm
In my opinion, if you enforced the 28/36 ratio methodoligy in CA and reset prices accordingly, you you have an immediate decline in values of 50% here. The truth is, about 5-10% of homeowners in CA could reasonably conform to those ratios given their true current incomes.
I am adamantly opposed to any principal reductions, let the properties be foreclosed, put them back on the market, and let prices adjust via the market.
The only way I would EVER support principal mods would be if, following the implementation, there would be a federal law passed that any home loan made in the United States would have to be:
- no more than 80% of the market value, no 2nds, HELOCS, etc.
- must have a 20% downpayment that was actually saved by the borrower
- the borrower must conform to the 28/36 ratios based on real, documented income earned for the prior 3 years
- the borrower must have at least 6 months PITI in savings after the transaction
We had a stable financial system for 60 years based on these principles and unless they are followed this is all going to happen again.
Is this unfair to young people, the self employed low wage earners, people with high debt? Yes it is. Life is about trade-offs – if you want a stable financial system, then some people, maybe a lot of people, will never be able to own a home.
December 15th, 2008 7:03 pm
Ex_Owner,
You mentioned that you can only walk until the end of ’09 without tax implications. Can you expand on that? Does this mean that you would have to have been foreclosed on by the end of ’09, or just stopped paying? I heard that a few weeks ago but it was brief and I couldn’t find anything about that online. Thanks.
December 15th, 2008 7:23 pm
JohnF, ex_owner_now_renter, I highly agree with you both, but with the gov’t so willing to intervene I’m worried that the market won’t be allowed to correct naturally.
I’m concerned that instead of taking the losses on bad loans, banks and servicers will hold out as long as possible, create as large of a problem as possible, so as to force the gov’t to step in. The banks do not want price discovery to take place.
The gov’t forcing principle writedowns is probably the only solution that would prevent them from getting away with this.
At least if when these writedowns took place, banks were required to allow anyone to bid cash to assume the mortgage and take ownership of the house, then this could be done in a fair way.
For example, if you’ve saved up some cash during the bubble, you could find a property where a homedebtor borrowed $2mm with a 1% teaser. Instead of the banks unfairly just locking in that homedebtor at what he could really afford, you could step in, offer the bank 5% of the principal in cash, and take over the homedebtor’s home and modified mortgage.
Since these modified mortgages would compete with all other listings on the market, market prices would correct very quickly.
December 15th, 2008 8:29 pm
Partyboy Said:
December 15th, 2008 7:03 pm
Ex_Owner,
You mentioned that you can only walk until the end of ‘09 without tax implications. Can you expand on that? Does this mean that you would have to have been foreclosed on by the end of ‘09, or just stopped paying? I heard that a few weeks ago but it was brief and I couldn’t find anything about that online. Thanks.
Partyboy – I’m not tax expert but do have a home purchased in 2006 that I will probably walk from and have been looking at the tax implications with great interest. The fed bailout inclued lengthening the ‘Mortgage Forgiveness Debt Relief Act of 2007′ to 2012. Also, CA may conform (currently the deadline for eligibility is 12/31/08) and you can find info about that here http://www.ftb.ca.gov/forms/mortgage.shtml
This is one area I don’t see many people talking about. For me and my wife, first time homebuyers in 2006 with 90K income at the time, purchased our home in East Bay with 100% 35 yr fixed, first 5 yrs IO loan thru CALHFA (we were both teachers and made aware of the loan program through our school district). For those reading I fully admit we made a HUGE mistake and should be considered idiots. However, at the time NO ONE ever said “Hey, maybe wait for home prices to come back down”. It was a buy now or be left behind mentality and we got ourselves caught up in it. In fact after we purchased I left teaching fior an IT job b/c we relaized we took on too much debt to be bale to enjoy our lives. We now earn over $150k/yr and can coomfortably afford our house pymnt, have no other debt, high savings rate, no credit problems ever, but our $520K house now sells for $260K. Since we didn;t put anything down and are paying 2X compared to rent, not to mention not paying towards any pricipal, we plan to walk in 2009. Making my Jan ’09 pyymnt in Dec ’08 to maximize our deductions, then stopping in Feb. I don’t feel good about it, but it’s in our best interest. We’ll save 6 mos of payments and rent for 3-5 years. This is our bailout.
December 15th, 2008 8:35 pm
epfanman
You touched on a brilliant concept. Instead of modifying the mortgage to the homeowner, modify the house to the borrower! Let the homeowner pick from a list of REO that they can indeed afford the payments on with 28% DTI 30 yr fixed…. They may have to move to a not so nice neighborhood but if that was all they could afford then that is it. Borrower will have to pick up cost of house transfer tacked on to the loan…. No more people deserving to be in the house that they are in because they have squatting rights of a claim via crappy loans they signed off on…
That would put an end to the bailout squabble (maybe not)
December 15th, 2008 8:39 pm
ncb,
dont know why you should feel bad about it
December 15th, 2008 8:58 pm
Javagold – never been one to shirk my responsibilities and even though the game was rigged there’s a bit of remorse for not following through with a commitment – even though we are just technically exercising the walk option in our contract. Still, we like our house and feel bad about leaving the neighborhood. The thing is we would consider a fair market deal that would save our mortgage holder plenty but they won’t talk to us unless we are delinquent. I think it’s somewhat ironic, but at this point I wouldn’t want to sign my life away for a crappy mod anyway, so f&*k ‘em.
December 15th, 2008 8:59 pm
ncb,
I don’t understand this…
“Making my Jan ‘09 pyymnt in Dec ‘08 to maximize our deductions,”
unless your marginal tax rate is 100%.
You’d be better keeping 100% of the money you would have paid in interest instead of deducting and keeping 45% of it (depending on your combined state+fed tax brackets)
December 15th, 2008 9:01 pm
ncb,
by the way I have to give you a lot of respect for making a very gutsy decision…
December 15th, 2008 9:41 pm
The HR3648 was intended to help people stay in their home by refinancing to a lower balance, or with forclosure (on your primary residence) if you’re insolvent.
Personally I didn’t decide to walk, the circumstances got me in that position. I’ve also try to refi twice, and also tried many times to participate in H4H program. None of these things worked for me. I’m ashamed, and I’m at fault too, and will not repeat it.
If you have an option to refi, get a loan mod, if you like the neighboorhood, and you can afford it.. then go for it!
If not.. you know the other option. Good luck everyone!
December 15th, 2008 10:36 pm
One solution proposed is to “let the Banks take the hit,” but in reality, its their stock holders who take the hit, which includes lots of working folks who’ll be watching their savings in mutual funds go in smoke.
December 15th, 2008 11:24 pm
I understand we need mortgage mods, but don’t give me this bullsh$t that homeowners are naive lemmings who had no other choice but to buy,buy,buy! If thats the case, Rome is burning! I do feel sick, when I read JAVAGOLD saying everyone gets a mod. Who the hell is paying for all this. Cash out refi people should be SOL. They spent their Fing house, and I’m not paying for it.
December 16th, 2008 10:10 am
The BANKS broke the law
1- if the BANKS lent money to people that could not afford the loan
2- if the BANKS mickey-moused income
3- if the BANKS mickey-moused appraisals
4- if the BANKS misrepresented or did not do proper disclosure as to the nature of 100′s of loan “products” the consumers could not understand
5- if the BANKS cannot produce all the pertinent records
Blame the farmer if the cows ran outside of the open gate! Responsibility of licensed and chartered businesses (BANKS) should be the main focus of what went wrong if you intend to fix what went wrong. QUIT BLAMING THE CONSUMERS UNLESS THEY WERE COMMITTING FRAUD THEMSELVES! ALL FRAUDSTERS SHOULD GO TO PRISON – PERIOD – END OF STORY!
December 16th, 2008 10:13 am
PS – where is the outrage that our beloved Federal Government allowed this to happen? WHY did they allow this to happen? Some government types should also be investigated and if found guilty – they should go to jail too, as co-conspirators! (RICO ACT?)
December 16th, 2008 10:15 am
Naked mod will not work and would be unfair.
I agree that bringing principle back to 28% DTI has to happen. But what should happen to the “forgiven” principle?
Mortgagees should sit down with modifiers. If the mortgage is $300K and the mortgage needs to be $200K to meet 28% then the feds (Fannie, Freddie, etc.) should buy the mortgage (that should get rid of the MBS attached to that mortgage and eliminate the issue of who owns the paper). The loan should then be re-written at $200K. This paper should be good and maybe the banks may want to do this. The $100K should not be forgiven. The $100K should be attached to the property as a lien. Taxpayers would own equity in the property. The lien could work as a loan at a fixed rate. The homeowner would not have to pay the loan for a number of years.
People get to stay in their homes. Taxpayers loan money (from TARP) to homeowners for a profit. MBS dwindle. Foreclosure inventory would decrease.
Housing inventory drops every year because of fire, storm, etc. Building as slowed to slower than inventory is lost. If foreclosure inventory can be slowed, it won’t be long before supply is less than demand.
December 16th, 2008 11:59 am
JavaGold: When someone moves into a house, lets the weeds overgrown the yard, park an old junker in the front yard, let their kids spraypaint the walls all over the neighborhood and have the cops visit every Friday night…They ARE white trash.
JAllen: It is scary when being responsible isn’t smart! I don’t expect the system to be fair, however I do expect the GOVERNMENT to be fair.
December 16th, 2008 1:57 pm
rocketrob Said:
“PS – where is the outrage that our beloved Federal Government allowed this to happen? WHY did they allow this to happen?”
Excellent question. I have started reading the FOMC transcripts for clues. Unfortunately they are withheld for five years and only December 2002 is currently available. Apparently the finance activity showed up as huge productivity gains showing the rest of the world how great we are. Looking at the effects of Mortgage Equity Withdrawal (MEW), consumers drew down on their home values significantly to affect GDP to the positive. Enough so, so that we would have shown negative to near flat GDP numbers. If you were to subtract finance gains and the gains of home building in addition to MEW, we would have shown negative growth through the entire period. As we see now, it was a false or “manufactured” economy. Removing the paint from the canvas, we have been in a state of decline since the beginning of the decade.
Perhaps nobody wanted to prick the bubble and be the party pooper. Perhaps it was known in high circles that stopping the party would reveal underlying problems that would need to be addressed, like our nation is in a state of decline and consumerism could no longer be relied upon to be the champion of economic growth.
Maybe it is just me, but it seems there has also been a significant drop in moral standards and an unwillingness to prosecute the wrongdoers. Sadly, there also seems to be a total lack of anyone willing to accept personal responsibility. The economy is not the only thing breaking down, it is our society in general.
December 16th, 2008 2:01 pm
Isn’t the ability to modify loans en masse hugely contingent upon the resolution of the Greenwich Financial v. Countrywide class-action lawsuit filed a couple of weeks ago? If Countrywide can’t cram down on their investors any losses due to modifications, then they (and any other servicer) are better off having losses from foreclosures than losses from modifications – in which case, there will be no more modifications and the chips will fall where they will fall. Congress would have to pass special legislation invalidating prior mortgage pool contracts in order for large-scale modifications to be even possible. It could get interestinger.
December 16th, 2008 2:12 pm
Just rec’d a mod for a client today from countrywide…neg am adjustable, three months in arrears….cw just adds the unpaid and fees to the principal balance…makes the payment interest only 4.5% at the same pmt as before for five years….then it reverts to the same loan terms as before…yikes…cw’s mod letter even states that the borrower will have “payment shock” at the end of the period..talk about kickin’ the can down the road…is anyone at home at cw? No wonder 50% of the mods fail…giving the troubled homeowner the exact same loan terms in five years that got them into trouble in the first place…the foreclosure problem will continue for years with this type of “shell game”….
December 16th, 2008 2:24 pm
This is exactly why I dropped my Mr. Mortgage subscriptions. Reduce the principal? Are you kidding me???? That is the absolute most immoral and illogical response to this mess. If anything, allow these people longer-term loans like 60 years (or whatever they can afford) and make them slaves to the loans for LIFE if they want to keep their houses. That’s fair.
Because we all know who will pay for the principal reductions: the tax payers. And I’ll be damned if my neighbors get half their loans paid for because they were irresponsible and in the end get to sell profiting from our tax dollars. Mr. Mortgage, you might not be dumb, but your moral compass is horrifically uncalibrated.
December 16th, 2008 3:07 pm
Kevin
There is valid theory behind dropping principle. The home holder is otherwise stuck for the next 25 years. The average turnover on a home is 7 years in normal times. All of these homes have effectively been withdrawn from the RE market without a principle reduction. The end result is that underwaterness is likely to result in foreclosure depressing home prices of everybody else.
The other part of the theory is that bank losses would be lowered overall by keeping the homeowner in place rather than throwing the home to the wolves of foreclosure for an even steeper loss.
Regardless of whether or not you like it, IT IS COMING OUT OF YOUR ASS ANYWAY as a taxpayer. The theory embraces the fact that taxpayer losses would lessened overall and help to put a stop to cascading values. Mr. M. only proposes a solution that leaves you with a chunk taken out of one ass cheek instead of two. Mr. M should not be condemed for placing a plan on the platter for you to comment on.
So question for you. If it lowered the overall burden to the taxpayer would you be for it or does the fact that maybe not so smart and greedy people would be “helped” overrides savings to the taxpayer?
My personal opinion is that long term, we are better off with defaults and renting as providing the greater capital injection to the economy by placing more spendable money in the hands of the consumer. This however increases the Federal debt and puts further pressure on home prices.
What is your plan BTW?
December 16th, 2008 3:23 pm
Kevin,
I can see why you think that principle reductions are immoral, but why illogical? Whether people lose their homes or the taxpayers pay for a principle reduction, the effects will be felt by everyone. The amount of money every pays in taxes will be distributed in one form or another regardless of where the money is directed so at this point, doesn’t it make sense to get through this mess as painless as possible for as many people as possible? What’s done is done and cannot be changed. Looking forward seems to be a better way to navigate than looking backwards.
If principles are reduced, consumers will have more money to spend which will stimulate the economy and help minimize the job losses. If principles are not reduced, consumers will have less money to spend causing a rise in unemployment and tax dollars will be used for unemployment benefits. This is one of many illustrations which can show how this economy will cost all taxpayers money regardless of the recovery path which is chosen.
I would compare all of the proposed solutions to the way CA lottery revenue is used. I believe that 1/3 to 1/2 of lottery revenue in CA is supposed to go to the public school system. While I believe that is true, it doesn’t mean that this is in addition to funds which were already being allotted to the schools when the lotto started. The state just reduced the original school budgets in the amount of lottery revenue. The money which was cut from the original school budget was then reallocated to some other program and the govt makes the lotto look like an improvement to school funding when in actuality, it is just another revenue stream for whatever they want. This is why I believe that no matter what the govt says the bailout plan is for, it is just a method of using more taxpayer money to finance whatever they see fit. Whatever they call the plan, it is primarily a name used for public approval and a rearrangement of funding sources by govt accountants. I feel that the amount each of pays in taxes will likely be the same whether they use the “bailout” money for banks, homeowners, social programs, or any other purpose the govt sees fit. Perhaps I am wrong but it is hard to imagine that the federal govt would work much differently than other levels of govt.
December 17th, 2008 12:53 pm
It’s illogical because it would be ungodly expensive. And as far as the immorality of it goes, it makes me want to throw up that anybody would promote this. All of my homeowner friends have houses at 5x+ their salary. They afford them just fine through roommates, live-in girlfriends, etc. They would ALL be recipients of principal reduction. Why on god’s green earth should these people get subsidized mortgages? Reducing their principal would let them profit off of stupid decisions and on our tax dollars. I cannot think of ANYTHING more infuriating than this.
December 17th, 2008 1:10 pm
Well Kevin its better than the Fannie Mae mod that goes live that makes people underwater debt slaves for life unable to move or refi. 40-year loans, teaser rate etc are back. EVERYONE GET READY TO DEFAULT!
http://www.mortgagedaily.com/GseModifications121608.asp
December 17th, 2008 2:38 pm
Bert:
“There is valid theory behind dropping principle. The home holder is otherwise stuck for the next 25 years. The average turnover on a home is 7 years in normal times. All of these homes have effectively been withdrawn from the RE market without a principle reduction. The end result is that underwaterness is likely to result in foreclosure depressing home prices of everybody else.”
Of course they’re stuck for the next 25 years. That’s what they signed on for. Should we bail out people that take out $100k loans for expensive cars because they too have dropped in value? And the effective principal reduction on homes foreclosed on is just fine. Somebody more responsible comes along and buys them at a more affordable price. Housing prices are WAY too high, and just eliminating foreclosures does nothing more than offer short term relief to those who bought at the market peak. It’s a really, really, REALLY stupid idea that solves nothing, punishes those who were responsible, and vastly rewards those who were selfish and irresponsible. There is not one single positive thing about this idea unless you’re an idiot that bought at 5x his salary and wants the taxpayer to foot the bill. If that’s the case, I and millions of responsible taxpayers would hold you in the absolute highest contempt.
“So question for you. If it lowered the overall burden to the taxpayer would you be for it or does the fact that maybe not so smart and greedy people would be “helped” overrides savings to the taxpayer?”
If it were fair to the taxpayer, I’d be for whatever the proposal. But bailing out idiots’ loans is NOT FAIR. The taxpayers aren’t on the hook for these houses. As far as I’m concerned, they should all be rewritten into 40, 50, and 60 recourse loans that these idiots HAVE to pay back. Their option of foreclosure is a great way for them to shed that weight of debt.
“What is your plan BTW?”
My plan is to own again when home prices are more affordable. They tripled here in about a decade, without any real household GDP increase. The argument that our economy benefits from high housing prices is the exact sort of bubbled mentality that got people to flip, refi, heloc, and treat their houses as ATMs. Let them foreclose or let them keep paying. DO NOT SUBSIDIZE THEIR LOANS.
Mr. Mortgage should be ashamed of himself. Not only does he want money to go to those that least deserve it, he’s promoting a system of propping up an overpriced housing market for years to come. I guess he’s never heard of Japan’s last seventeen years.
Admin:
“Well Kevin its better than the Fannie Mae mod that goes live that makes people underwater debt slaves for life unable to move or refi. 40-year loans, teaser rate etc are back.”
Good, make them underwater debt slaves. They wanted the houses, they gambled on them going up in value, they want to keep them, let them have that option. It reminds me of three years ago when nearly everybody I’d meet that was buying a house bragged about how rich they’d get off of it. Sometimes people deserve to lose, and I can’t think of any better example than this housing market and the idiots that bought way more than they could afford and are now bitching about how unfair life is. I wish somebody would give me a half million dollars that I don’t have to pay back, and had a collective group of shoulders to cry on for sympathy.
December 17th, 2008 9:48 pm
Kevin Do you share the same moral outrage over the bailouts for AIG, Wall Street and Detroit?
December 17th, 2008 10:12 pm
I really wish this could happen. My husband and I bought our home in March 07. The Mortgage company had us go stated income and we could have easily gone full doc with ficos both well over 800. Plus we put 20% down.
All gone now and we are so upside down. I am angry for being uninformed, we should have sought more information. We are in loan that will become an arm in 3 more years and now we can’t refinance being upside down so much. We are ok for now but who knows what will happen then.
December 17th, 2008 11:06 pm
Kevin, while you would be delighted for people to go into 40-60 year recourse loans as punishment, that is just not going to happen.
What is going to happen is the banking industry is going to be sued and found liable for creating the bubble through their bad products and all the “losers” will be made whole again with additional payment in the form of punitive damages. I call it product liability…. Heck, even I am going to file a claim and I was not even in the game. You see, a shard went flying and hit me in the arm that required stitches….
December 18th, 2008 10:46 am
“Kevin Do you share the same moral outrage over the bailouts for AIG, Wall Street and Detroit?”
I am against all bailouts of any kind. But those bailouts are based on the premise that our credit markets and our economy will collapse. I don’t believe it or like it, but I don’t have the same moral outrage that I do regarding just giving selfish idiots massive amounts of money proportional to their reckless behavior.
“What is going to happen is the banking industry is going to be sued and found liable for creating the bubble through their bad products and all the “losers” will be made whole again with additional payment in the form of punitive damages.”
Who will be sued? Everybody had their hands in it. Will Greenspan be sued? How about Barney Frank? What about my stepmom who sold two houses at market peak and walked away with a fortune?
December 18th, 2008 12:53 pm
Kevin, I look at it this way. If you have a car and give someone the keys who is not responsible and they get in an accident, you could probably be sued as the owner of that vehicle. If you gave out millions of keys and they all got into accidents and nobody could drive to work because all the autos were broken and further all the auto shops were clogged with months of backlog to get these vehicles moving again, there would be economic impact to others as a result of your recklessness. Your problem is that you are unable to identify the owner of all these vehicles and who handed out the keys…..
On the other hand, I have no problem fingering the responsible parties…. The banks can pay for the next 40-60 years, 90% of all profits with a balloon payment of capital stock due at the end of the term.
December 18th, 2008 12:58 pm
This is not analogous to giving somebody the keys to a car. Nobody is injured from this. These idiots were loaned massive amounts of money – by other idiots – and won’t be paying it back. So who should be suing who?
December 18th, 2008 1:13 pm
Kevin
Well Kevin, I was thinking in an ideal situation, that due to the enormity of the losses and widespread damage, perhaps the State of California should sue on behalf of the State and its citizens. In the event the State were to fail in it’s fiduciary duties, I would think that it might be possible for a derivative action to come about.
December 18th, 2008 1:14 pm
And somebody that bought a bubbled house has nobody to blame other than themselves. I told everybody back in 2005 that wanted to buy “DON’T DO IT”. Their response: “Fuck you, I’m going to get rich from this.” They don’t deserve one red cent. Just like the idiots that gamble their money away at casinos, except these idiots were gambling the banks’ money away.
It’s fascinating that the homeowners are being pegged as some sort of victims when they have the opportunity to actually walk away from their loans.
December 18th, 2008 1:16 pm
California’s financial woes started before this housing crisis. And you didn’t hear any state or municipality complaining when the housing bubble hit its stride and they were making bank on all the action going on.
December 18th, 2008 1:28 pm
Kevin,
Yeah Kevin, but this is California and we are known to be suit happy and let’s face this simple fact, nobody sues when things go right, they only sue when things go wrong. Unfortunately, there is a whole other class of people who were harmed who never participated. This would be inclusive of migrant dishwasher and maid who had to go back over the border and accept a lower wage. They have rights too.
December 18th, 2008 4:29 pm
BertDilbert, are you trying to elicit sympathy from me for people that come in this country illegally and don’t want to stay when the economy rots? What next, sympathy for greedy homeowners? Wait, already got that one done.
December 19th, 2008 9:08 am
I’ve been telling people for the past year that principal reductions were the only way to go. I’m glad you took that idea a step further. Good read.
December 19th, 2008 10:52 am
Why not pay off my student and car loans as well? Give me $100k and then I’ll start shopping, boost the economy!
You people are so fucking stupid it’s jaw dropping.
December 19th, 2008 12:23 pm
Kevin,
Your bitterness possibly exceeds the taste of orange juice right after brushing your teeth. Your self-proclaimed dead-on balls accurate moral compass is admirable, but you have an apparant inability to grasp the big picture.
This housing market and economy could have a much greater social impact than the horror of offering bailouts and principle reductions to homeowners, banks, local govts, etc. While I don’t disagree with a lof of what you say, I would rather see people be able to stay in their homes to prevent more broken homes (divorces), increased crime, deterioration of neighborhoods, and other social ramifications which would hurt children. I don’t have a lot of sympathy for people who made bad decisions, and there are no shortage of them, but it pains me to see all of the kids who are being affected by this. Perhaps this is more of an issue in my neighborhood, but it hits home for me as my kids have seen several of their friends have to move away, the deterioration of local parks, increased graffiti and vandalism, etc. I don’t really want to pay more than I already do in taxes, especially when a lot of it will likely go to programs for deadbeats, but if it benefits my kids in the end it becomes a bit more bearable.
On a side note, how is it you have any school loans at all since your obvious intelligence would have warranted academic scholarships to cover your college tuition? Honestly though, thanks for making the blog a bit more interesting this week.
December 19th, 2008 12:58 pm
What sort of end-of-the-world scenarios are we talking about? I hear a lot of these “destroyed neighborhood” excuses, but think they’re pretty empty. So a house goes into foreclosure, then is bought by somebody that can afford it and is responsible. What’s the problem with that? Aside from a large number of for-sale signs, I see no increase of graffiti, deterioration of parks, etc. I find it hard to believe that you all are really buying into this whole “rotting USA” depiction. Sure, just take $5 billion, reward the idiots that overextended themselves, and everything will be peachy!
I am going to go on a limb here and spell out where I think you all are coming from, including Mr. Mortgage. You guys are either so deep underwater that you’re promoting this very self-serving idea of bailing out idiots underwater, or you really believe it will help raise the values of your properties back to their overinflated peak bubble values. Bottom line: there is no way somebody would want our tax dollars to subsidize these irresponsible idiots unless they themselves are the ones getting the bailout.
I actually don’t have any loans. I’m the fool for living without debt, not buying into the market craziness during the bubble, and living within my means. So I don’t think it’s too self-righteous of me to believe that some greedy asshole that bought a $800,000 house on a $100,000 salary then refinancing to buy his Russian bride and two Benz’s should NEVER EVER geta $400,000 govt check to cover his greedy lifestyle and continue living like a reckless jackass. That is not a dead-on-balls moral compass accuracy, it’s the most basic notion of responsibility, humility and maturity that our parents shouldn’t even have needed to tell us.
December 19th, 2008 1:55 pm
Social ramifications; Crime, divorces, ‘The Children’, etc., are here already and about to go exponential as unemployment mounts and a broken value system based upon ‘victim-hood’ accelerates the process of social deterioration.
Given the ‘entitlement’ mentality of a great majority of the populace, it is seriously doubtful that the federal government – with all it’s agency programs and permutations, is going to allow kids to go without heat and starve without a roof over their head. Of course they may not be able to keep Mom’s & Dad’s together but… Stick around, I’m sure the social re-engineers have a taxpayer-funded program in mind for that too, just give it a bit more time.
Relief for underwater house-owners in some form is going to come. Whether it be allowed by the states themselves, or by federal decree. It may not come in a package of your discrete choosing, but it will come. And along with it, the strings (flowery word for: Chains) that government is wont to drape.
Like the current administration, but with a tinge more empathy towards the ‘downtrodden’ and ‘disadvantaged’ among us, the incoming administration has made it clear that “Deficits will have to wait…”
The remedial translation of which is: Squeaky wheels are going to get their $$ grease. And our taxitory and regulatory noose along with it –
There’s a tried and true old saying folks: We get the government we deserve. And we are about to get it straight, no chaser forthwith.
To some, this will be euphoric – just look at what happens to the market every time another bailout is proposed… To others, it is but another ominous sign of the road to dictatorial perdition via government mandate.
Peace -
C.C.
December 19th, 2008 3:49 pm
Kevin
C.C. and I are the same age and live in the same approximate area. I am going to say that he has seen the effects of what I have seen, areas that have become economically impacted which results in lower property values and rents. When this happens and prices take a sudden drop, people who live in crappy neighborhoods “move up”. You look around and say WTF, my neighborhood is going downhill!
You have every right to be pissed off. This whole episode in the life of America should never have happened. At the same time we can be pissed about the housing bubble, we just blew a trillion on Iraq, killed thousands of our troops, injured thousands more, damaged our military equipment and your tax dollars supported this action. We know for a fact that Americans are dumb, I submit Bush being elected for a second term as proof.
What we need to be able to do is say “That was really stupid, here we are and let’s move forward.”
I appreciate your posts because you are a shining example of what I am trying to show Susan. That is that there is a segment of people out there that are saying “If these people are given one lousy dime off the principal I am going to be mad as hell.”
December 19th, 2008 5:31 pm
Well at least I conveyed that opinion effectively, and “mad as hell” would certainly be an understatement. I just don’t understand why principal deferment isn’t acceptable. It does the same thing, makes the house affordable. They just don’t get to keep that money in the end. Sounds more than fair.
December 19th, 2008 6:39 pm
BertDilbert,
What’s wrong with people in crappy neighborhoods moving up? You seem to be frustrated that the housing bust has lowered the barriers of “economic segregation” which keep “those people” out of your neighborhood.
December 19th, 2008 6:51 pm
John
Well, before when you tapped the bumper of the car in front of you it was no big deal. Now when you tap the bumper of the car in front of you your insurance company gets a call from a lawyer claiming 5 neck injuries from people trying to game the system.
As a result, my insurance rate go up. My wallet has just become disenfranchised.
December 19th, 2008 7:02 pm
BertDilbert,
Let’s bring it out in the open. Many people live at the edge of their financial ability in order to keep distance from individuals in the lower classes who are doing the same.
December 19th, 2008 7:24 pm
John,
I am merely pointing out to Kevin what happens when the demographics of a neighborhood changes. Homeowners insurance is likely to go up as well as auto. I am not pointing any fingers, I am just saying it just is. As the nature and rate of insurance claims increase, the insurance companies have to raise rates in order to remain in business.
Personally I think CA is doomed for the next few years because CA has a more fluid population that tends to move in and out with economic prospects. This will worsen the state deficit as time goes on and raise the vacancy rate depressing values further.
December 19th, 2008 7:45 pm
BertDilbert,
This discussion raises the interesting question of whether the new neighbors are the real tipping point when deciding whether to walk. How many individuals are defaulting on their mortgages because they don’t want to live next to their new neighbors? Had they liked the social environment of their neighborhood, they might have continued paying the mortgage, even though they are up-side-down and in negative equity territory; but it is no longer worth it to them to continue to pay when they will have to live next to their new neighbors.
December 20th, 2008 12:50 am
John,
You 7:45pm post hits home for me. I have a home that I like with great neighbors in a nice neighborhood which is ~ $250k underwater. The home is about 3.5 times my gross income so it is affordable, although much more expensive than renting. As are so many people in my situation, I am giving the option to walk away some consideration. But the wildcard in the equation is whether or not we would be lucky enough to have the kind of neighbors that we do right now. We can let our kids play in the cul-de-sac and know that they will be safe because of the very family friendly neighborhood we have. This a bit different than considering walking because of bad neighbors, but the concept is the same.
I talk to the other dads on the street, and they all agree that they would walk if it were not for the people around us. To answer your question though, I am pretty confident that we will all walk because the savings would be too great to justify staying put.
A related question…Most of us have the same mortgage company as there were very attractive incentives when we bought. If we submitted a principal reduction request to our lender as a group (6 of us share the same lender), would they take it more seriously? We have talked about submitting a letter together and stopping payment unless they modify us. Some of us put down as much as $125k but realize that we would recoup that money much much faster by walking and renting for a few years than if we stay in our current underwater homes. Even with that much skin in the game, it may be the best financial move to make at this time. If a lender (or servicer) was put to a decision and faced multiple foreclosures all right next to each other, would it change their stance? As a side note, we have talked about going door-to-door in our subdivision (~300 homes) and inquiring as to how many other families are considering walking to increase our “power in numbers”. I can’t imagine how a letter like this from potentially 25-30 homeowners in one square mile would be received by a mortgage company.
Additionally, we all submitted a reduction in value form to get our property taxes reduced and the county responded with a ~5% value decrease when in reality our homes have gone down 40-50% over the past 12-18 months. The same type of letter would be sent to the assessor’s office to get them to give a realistic tax bill. Each of us pays 8-10k a year in taxes so an honest deduction is a significant amount of $.
All opinions are more than welcome, even the haters.
December 20th, 2008 7:28 am
Partyboy
You said.
“I talk to the other dads on the street, and they all agree that they would walk if it were not for the people around us. To answer your question though, I am pretty confident that we will all walk because the savings would be too great to justify staying put.”
I am going to go for the low blow, reach down to the bottom of the barrel, I am going to bring the children into this….
While it does not appear to be factor in your case, people pushed to the edge on the house payment are going to have stressed relationships, more arguments about money and unfortunately since these things can be spontaneous, they can happen in front of the children. I don’t have a statistic to pull, but I am going to say that the divorce rate will be higher as well.
Let’s move beyond the stressed relationship caused by strained finances and lack of a savings pool. Let’s fast forward into the future, your kids are looking at graduating high school. Where is your collage education fund? When you take the best case scenario, housing prices will go down through 2011 and applying the average 3% annual just above inflationary gain, if you are 200k underwater on your home, you have zero chance of drawing down on your home equity to make that happen.
At 200k underwater, your house has ceased to perform as a forced long term automatic savings bank account. Further, as I understand it, if you have negative equity, you cannot refinance and take advantage of today’s lower rate. (Somebody please tell me this isn’t so.) This would certainly serve to increase the chance of someone walking.
Something to consider talking about with the other dads on your street, is what would the size of your children’s future collage education fund be walking verses not.
In a normal 3% average annual house appreciation world, you would be stacking away 15k per year in home equity on your 500k home. Supposing that your child was 8 years old and would need collage expenses in 10 years, you would have accumulated (annually compounded) approximately 172k in home equity.
The home equity potential for a collage fund at 200k underwater has now been obliterated all together. How is it possible that you can be the provider for your child’s higher educational needs? OK, so since we can no longer count on home equity, those needs are going to have to come from a savings account (or other investment vehicle).
Now consider walking with 10 months free rent in your current location. What is that savings after deducting moving expenses? How much are you going to save by not paying the property tax bill when it is due? Consider it Federal Grant money that is due you as a result of their failure to regulate.
If your neighbor thinks your scum for walking, tell him to send his complaints to the Senate Banking Committee, the Federal Reserve System, and the Securties and Exchange Commission. You’re only doing this because they failed and after all, it’s for the children.
Now let’s suppose you walk. You have your Federal Grant money as a starter for a new down payment, plus you are renting for half the money and that annual property tax bill is someone elses problem. Keep in mind here that rents are going to continue to go down as flight from CA increases with higher unemploymnet and the new higher taxes leading to higher vacancy rates.
In three to five years you will be able to rebuy with 20% down and if we are anything like Japan, house prices will have continued to fall the entire time. Truth of the matter is, in five years we could still be posting on this blog with evidence that “bottom” is still somewhere off in the distance.
December 20th, 2008 8:47 am
Bert,
I appreciate the comments and all of these issues are things I have considered. I do have two children and do have college financing plans as well as concerns.
My personal financial situation is not as dire as many other situations certainly are. That being said, when I take a step back and forecast the next 5 years of staying in the house compared to walking and renting, the difference is staggering. I had absolutely no desire to buy and sell if my home appreciated but I did not anticipate the home falling into the abyss and essentially becoming a trash recepticle for money which could be better spent elsewhere.
Speaking of college tuitions, I wonder how many young families such as mine will have any money at all to help their kids pay for college in 10-15 years. I’ve said it before, but I think that the economic consequences of this housing mess are relatively small when compared to the far-reaching social ramifications you touched on in your post. I think it is too soon to look at actual data as the social implications seem to lag the economic ones, but I am morbidly confident they will be something we can measure in the next 5 years.
If you have any comments as to whether or not a lender would take a group of “homeowners” requesting serious modifications more seriously than individuals I would love to hear them.
December 20th, 2008 10:00 am
Partyboy
I certainly was not implying that you did not have these items under control and I was careful to start out that this was probably not your situation. I just wanted to point out the “lost decade” and how “walking” could minimize it. I also wanted to point out that the future level of education of our nation could be impacted but never got into that. It could also impact the future careers of people who have chosen higher education as their profession, as we will now have a deficit of projected future money for collage due to the “missing” home equity and inability to save by the masses.
In other news, a “California Burning” update. I talked about the ports of LA and Long Beach before as being the primary consumerism trade conduit for the nation and how that was the number one employer in CA. I believe that I also touched on the Marine Exchange reporting that Ship Bookings for the first six months of 2009 are down 30%. Just as steel production is a reliable gauge for future output of an industrialized nation, a consumerized nation’s GDP can likewise be determined by the number of inbound loaded containers. I am not in anyway claiming that a potential 30% drop in ship traffic will translate into a 30% decline in GDP but let’s face it, this will have a substantial impact on retailers as well as trade related jobs in CA.
On yet another front, the state has decided to stop funding all construction jobs. This is going to be a tough bite for unionized construction workers. Let’s however look at why they likely came about that decision. First they do not have the money. Second and more importantly, they are likely expecting to take infrastructure spending off the state budget and fund that with Obama bucks, taking construction out of state taxpayers hands entirely.
The problem is that this is likely to turn into a case of monkey see, monkey do. City and county budget committees are likely going to recommend the same move. It is an entirely brilliant move, unless of course you are a Unionized construction worker, in the cement/aggregate industry, building materials and other related construction support businesses.
How long is this total dry spell going to last? Due to budget shortfalls, quite likely until the actual money is in hand from the Federal government. I have not talked to any of my contacts in civil engineering to see if things there are getting put on hold until Obama bucks arrive. If so though, that would further delay until actual construction, as engineering needs to be performed prior to going out to bid. I will make contacts next week to follow up on this.
December 22nd, 2008 6:15 pm
Here’s the deal guys. In a nutshell. The banks allowed this mess to happen by, 1, subprime – This was EQUITY BASED lending at birth. That means, we forgive your lousy credit if you pay more DOWN and a higher rate. This has been around since the early 90′s and before. It had worked until greedy banks / wall street decided their returns would be higher if they slowly removed equity from equity based lending. Then they sold it to investors as totally “secured” by real estate. 2, “no doc” lending. Also in it of itself, is not terrible. Someone who’s self employed having several income sources, substantial DOWN payment, and stella credit should be spared from the financial proctogy exam. Especially since banks don’t even have the necessary talent anymore in their underwriting depts to know how to even read these docs. 3. Banks drilling appraisers for their whims and getting away w/ it. Push it up, push it down, etc… They need to be supervised by someone OTHER than the banks – period. 4. Exotic mortgages, how about psycotic mortgages. Negative am? What greedy bastards came up w/ this. I’ve been in the mortgage bus for 15 years, well 13 if you don’t count the last two, b/c my income is below minimum wage. I have never sold one of these p.o.s. to someone. I need to sleep at night, sorry wall street. As far as how to fix the mess. Real easy. If banks want TARP $, reduce their interest rate by 2% effective immediately on all their mortgage loans. This probably around where markets rates are anyway- and banks won’t lend so……. This will keep the leaving the keys on the counter and walking to a minimum. It would also stabilize values. Now the current values, at least where I am in Florida are artificially deflated. In other words, if you gave me land for free, access to a GC, also for free, I still could not build the same house for the same dollars as what current sales are. One of the basic principles of appraising is that adaquate financing is available, it’s NOT. Another is comparable sales should not be distressed properties, also untrue. Our government is doing everything it can, however, is confused about what that should be. That’s my bitch for today. I’m not sure this is not already beyond repair.
December 27th, 2008 11:06 pm
So we bought early in 2007 putting 28% down on our home. The builder put us in a 5/1 arm and values have dropped 50% here. We weren’t offered any other options and didn’t know to seek them out. This is my 4 step up home. The builder also had us go stated income when we could have easily gone full docs even though we are self employed. We did it for our last home. We should have done more homework but our past experiences we were able to trust the lenders we were dealing with.
We feel like they took us for a ride and should write down some of this neg principle especially give how much we put down. They made a lot already(almost half of what the home is currently worth).We also paid extra on our principle the first 9mos in the home, stopped when things started looking so bad.
So we tried to do the right thing, no lying on our application but we are victims anyway since we are unable to refi in this current mess.
December 31st, 2008 12:00 pm
Mr. mortgage, I fully agree with your basic position that losses in inflated housing will have to be eaten, the only question is who is going to eat that unappetizing dish, the lending industry or the general public. The thought occurred to me that there is a possible way for the banks stuck now with unsaleable homes with inflated mortgages to start to emerge from their self inflicted problem. Which is to convert those unsaleable homes into rentals, preferably renting to those already occupying the houses who can’t possibly meet the monthly mortgage payments, but could rent at a fair market price. People who bought homes with nothing down, got into those ludicrous repayment schemes where they weren’t even paying all of the monthly interest but were adding to principal of the debt, etc., never were home owners in any conventional sense of the word. They were just, as someone remarked a while ago, renting with an option to buy, and have chosen not to exercise that option. I know that banks are not keen on being land lords, but if the only option is to foreclose, lose tens of thousands in that process, then have to put on the market a depreciated house which could be vandalized and will rapidly lose what value is left, they aren’t benefitting from that either.
January 2nd, 2009 4:08 pm
IT LOOKS LIKE ROUBINI READS MR MORTGAGE
Debt Destruction through Principal Reduction
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Rich Hartmann – Miss America | Dec 12, 2008
From time to time, I’ve been told that I ramble on too much, or that I’m a little too wordy, longwinded, tedious, etc… In an effort to be a bit more concise, I’ll get to my point! (HA… yeah right! Buckle up!)
You can’t save the economy, without saving its most important part! The GENERAL PUBLIC (the consumer, producer, service provider). In a nutshell, the problems we face are: Too much Debt, Too little credit, and no transparency between the two. (In order to further break that down, we have to look at the way this affects the following 2 groups: Wall St and Main St. …and how the problem is addressed by The Powers That Be and the dollar that was. …but we’ll get to that later.)
Plain and simple, the average person is in over their heads. …and we have to throw out our grandparent’s book on what needs to be done. We are in unique times. Deflationary trends will rear their heads in the world of excess, but inflationary trends will emerge in the world of necessities. With the cost of living, surviving, and thriving becoming so expensive, those without “SHOULD” drive the cost of everything down. …but the levels of debt owed are far too vast to be absorbed by the overburdened system. Since the consumer, wall st, and the government are already so overspent, they no longer have the buffer of existing credit to meet our current obligations.
Faced with this catastrophe, the options that have to immediately be addressed are to add credit and destroy debt. The Powers That Be (TPTB – The Government, Fed, Treasury, SEC, FASB, etc…) have gone to great lengths to save the Monoliners, Banks, Credit, Financial Firms, Insurers, Auto, etc… in grand socialist fashion. In short, where they had too much debt, TPTB eased the burden of debt obligations by taking debt off the hands of Corporate America. Where they had too little credit, TPTB provided liquidity in every conceivable way and slashed interbank rates to keep markets from freezing. …and where transparency issues existed, TPTB absorbed the toxic mess, and placed it in the vortex of Unknown Financial Obligations (UFO’s), where they will disappear from existence, but someday, magically reappear as a long term gain. (…while looking and smelling like freshly printed dollars which no one will question 10/20/30 years from now.)
By saving Wall St, we have temporarily saved the arms and legs of our economy… Now it is time to save the body. Main St!
Principal Reduction: (aimed at primary residence)
To immediately address the needs of Main St, debt must be destroyed. Obviously, the overspent consumer can no longer spend without availability of, or access to, credit and current debt obligations. The subsequent obligatory pullback by the consumer will directly feed the deflationary spiral, which then can only be absorbed through inflationary printing by TPTP. (more quantitative easing via ) 0% rate, and T-buy backs)
The most direct way to avoid this death spiral and put money back in the pockets of the consumer, while at the same time, reducing debt obligations, is through principal reductions of debt. Time is of the essence as every day that this is not done exacerbates the speed and depth at which our economy will fall. There is a multiplier affect, which requires immediate action to put the necessary floor down. Currently, the “wait and see” reactionary approach by TPTB, have us trying to save those already in trouble, rather then taking the proactive approach of saving those who will inevitably be in trouble. (I’m not saying those who are in trouble are not a top concern, but rather they need to be tended to in a manor that addresses the future problems first. Like on an burning airplane, you put the oxygen mask on yourself first…. Then you can help other. Otherwise, you’re just compounding the problem.)
Perhaps a better analogy is, when addressing the Tsunami of debt that our country is in, you don’t put up a wall to block the tidal wave that already came in! You put up a wall to block all the future waves that will be coming!!! For the wave that already came in, you sift through the wreckage and repair what you can. In an effort to help the public, TPTB have spent a great deal of time and money working on providing aid for those already in foreclosure. Unfortunately, they have failed to build the wall that is needed to stop the next tidal waves of foreclosures and bankruptcies! The compounding of losses as the concept of waiting for someone to go into foreclosure/bankruptcy is far too late in the process to help.
How Principal Reduction Works?
If you bailout every bankrupt person, then responsible people will choose not to pay. You can NOT create fail/reward system. A balanced approach is needed. With that said, to stem further risk of escalating bankruptcy/foreclosures a mathematically modeled approach needs to be taken where the percentage of money owed on primary residences can be reduced by a factor greater then the next projected overall net loss within the spectrum of the consumer’s reduction of spending + obligations.
In a prior article, (http://www.rgemonitor.com/globalmacro-monitor/254144/friends_romans_countrymen_lend_me_your_ears) I used hypothetical 10% and 20% reductions to draw how this works. What I stated was that many of the underlying secondary market securities have already been written down this much or more already. (many by up to 80%) By reducing the principal value of these assets even further, it would seem to that this would cause these securities to take additional hits. …but this is not the case. A “less is more” approach will actually raise the amortized value of the securities, as their likelihood of being repaid increases.
At the same time, when Main St feels the “rolling stimulus” of reduced the monthly bills, the immediate capital/credit inflow will flow to the following places:
1. Pay off debt
2. Saving
3. Spending
4. Under the mattress.
For the first 3 scenarios, you have cash flowing back into the system, thus feeding the “less is more” concept. “Debt repayment” will help aid putting a floor under default or the confidence/fear of default by investors. “Savings” will immediately recapitalize the banks, thus helping start an upward cycle. And “Spending” will start to resume when fear resides and credit exists. Unfortunately, “under the mattress” will have to be addressed. (this can be done through increased bank rates and raising of FDIC caps or restoration of confidence in the fact that the first 3 scenarios are once again working.)
For the portion of written down principal, TPTB would create “open receivables” in equal amounts. (TPTB could even securitize these severely distressed assets, much like the Tobacco Bond Debt. I wouldn’t be in favor of more securitization… but at least the perverse incentive would be in aiding the economy to recover to the point where even the open receivables were potentially paid off. Investing here would be a true investment in the future/confidence of the net worth of the economy. That’s far better then requiring people to smoke, just so debt can be repaid!!!)
VOLUNTARY!!! Not MANDATORY!
The concept of this stimulus plan is voluntary but equal. For those who do not want to participate (for fear of reducing the “principal value” of their home further) they do not have to participate. Alternative stimulus should be provided for their responsible behaviors of spending within their means. (Unfortunately, they will eventually come to the realization that their asset isn’t worth what they paid for it or what they felt it should be worth, as the market currently dictates. Their prudence through “potential” house price recovery could pay off, if the market was to return. (which is most likely through a “less is more” theory/reality)) For example, those whom have paid off their MTG debt, or choose not to write down their principal: a tax break can be created to reward them annually (similar to a STAR reduction).
For all those that choose to reduce principal, an open receivable is kept on the books for the length of ownership of the home. If the housing market was to recover and you were to see a windfall, the open receivable would have to be paid prior to seeing a profit.
For example, You have a $200,000 mortgage. TPTB writes down 10%.
* TPTB creates an open receivable for $20,000. (which TPTB could then securitize as skin in the game for aiding a recovery focused on the broad US economy)
* The homeowner now has a $1,140 monthly payment as opposed to a $1,266 payment, saving them $126 per month which gets infused back into the financial system (This is your “rolling stimulus plan”. For a typical $417,000 conforming loan, the savings would be $264 per month.)
To look further down the road, if the housing market were to recover, this is what would happen. You sell your $200,000 home (which you were only paying on $180,000) for $230,000. Instead of walking away with a $50,000 profit (230k – 180k = 50k) you would have to pay off your open receivable first. So you’d walk away with $30k (or maybe less if interest is added???)
In the event, that the market continued to stay depressed, the likelihood of you selling your house at a loss (or flat) versus just filing for bankruptcy/foreclosure would be significantly diminished by the parallel difference between the equity owed versus the current market price. Let’s say, you were somewhat responsible, and put 15% down on the purchase of your home. ($200,000 price, $30,000 equity, $170,000 debt.) In addition, let’s say the market dropped by 40%. Your house would be valued at $120,000. In order to keep the homeowner’s skin in the game, rather then walk away from the negative equity, TPTB will need to lessen the 30% difference of $170,000 owed versus the $120,000 value. If say a 15% Principal Reduction was set, owing $145,000 on a house that you paid $200,000 for, would leave less of a risk of homeowners walking away, and promote potential sales. At the same time, that homeowner would see their monthly debt burden reduced by nearly $150.00 a month. That’s $150, this month, next month, the month after that, and so on. That’s your “rolling stimulus”. When 150,000,000 homeowners see this reduction of debt, it pans out to over $250,000,000,000.00 billion in new liquidity, and destroyed debt per year. (which like I said earlier, will be printed regardless, as a necessity for replacing the fictional monopoly money (of finance) that has already left the system. (The “monopoly money” will be further explained in the future post on “The Financial Industry’s overgrowth”. – still in pre-production)
Which ever way the market goes, the issue of “transparency” where homeowners are holding “illiquid assets” (their house) is addressed as their debt is less, their credit is more, and the glut of unsold houses reverses course due to the momentum in price discovery of a bottom. (this bottom is unattainable right now as people cannot come to grips with the reality of where the current market prices are at versus their equity owned)
***Interest Rate Reductions for Homeowners***
TPTB have already floated around the concept of mass interest rate reductions for homeowners. In theory, and mathematically, this concept looks the same as Principal Reduction, but is flawed. It lacks Incentive! It does NOT put equity in the homeowners hands in relation to their debts. In sum, it only addresses the credit side of the problem.
Quantitative Easing: By taking the drastic measures they have, TPTB have played a high risk game of chicken with the value of the Dollar. When our financial system started to systemically implode, the dollar and all financial companies based in dollars fell with it. The markets dropped as the fear struck the players and well informed financial communities. Eventually, when that fear became reality, and losses started to be felt around the world, the losses around the world balanced out. The subsequent flight to safety saved the US Government, and its entire economy.
The current confidence boost in the power of the dollar has given our current financial decision makers a false sense of confidence. Now that economics has taken over the mainstream media and further educated the masses on large parts of the existing problems, the general public has grown tense. Already gripped with fear, and having seen the value of their general investments cut in half, the public is now too well informed to a blatant devaluing of the dollar. If the government is serious enough to take the next steps in “Quantitative Easing”, I believe they run a serious risk of sliding down a slippery slope of trust and good faith in the value of the currency in relation to easing our country’s financial burden by inflating our way out of the debt.
The precedent of printing credit without parallel debt destruction becomes cyclical, and hyperinflationary. (Since all solvency issues with the government will be averted through printing) The “ground level fear” of “what has value” that exists on the street will no longer just pit the USD versus import/export products like oil, foreign currency, cheap labor. The reality is: “what has value” will be revised from financial engineering to putting food on your plate. This is reality. Right now, in the current environment, this potential risk is significantly upped if Quantitative easing takes place. We saw oil rise to $147, (when it is currently at $45), which begs the question: Will food be next? Why not? Why is oil capable of inflating by over 200% of its current value, while rice is not? Especially, when hoarding is much easier of food products by the general public.
Playing with the confidence in the value of the dollar is NOT a healthy risk right now!!! Quantitative easing could work if the core (the body and head) of our economy was stable. Currently, the backstop of our economy only owns debt and illiquid assets. As the net redemptions, expenses, losses, etc… continue to grow, the more bad news and debt reality hits. This will cause more obligations, larger bailouts and greater outflows. (Take a moment to work through the logic.) This is a doomed process through liquidity injections alone as the only reasonable solutions would require so much liquidity that hyperinflation would be a guarantee. The time is now. Debt Destruction. It’s time for the public to call upon TPTB and demand it for our economic salvation. Without this, and fast, I fear what’s around the corner. The second the general public is saved, I will be prepared to start giving real investment advice. Until then, our economy is walking blindfolded through a nuclear minefield!
Thanks for listening… now it’s your turn to talk.
All the best, Miss America – Rich Hartmann
p.s. If you believe… Then do you part and spread the word!
January 2nd, 2009 5:03 pm
Let’s go ahead and pay everybody’s student loans too. They’ll be able to spend more. And their cars, we have to pay down the balance of their cars, they’ve depreciated. And while we’re at it, let’s put everybody in subsidized mansions as well. Let’s take every person that loses in Las Vegas and give them a winning lottery ticket. After all, why should anybody have to pay for their debts and decisions? This is the single worst idea I’ve ever heard of that people are taking seriously. I thought that was Mike Huckabee’s “fair tax”, but this is a thousand times worse.
Do you people want this because you have an absence of morals? Did you buy near the market’s peak, and for self-serving reasons want taxpayers to pick up the tab? I cannot imagine anybody wanting this without personally gaining from it. Can you honestly tell me you’re for this and you yourself wouldn’t gain?
January 2nd, 2009 5:44 pm
I am ALL for it and dont see how i would be gaining by getting BACK my 20% CASH deposit that i was PONZI schemed out of….
January 2nd, 2009 7:47 pm
Kevin,
You just can’t seem to see the forest for the trees. Save your moral outrage rants, they are not providing analysis, lucid thought or alternatives. And in case you hadn’t noticed it, the taxpayer has been bailing out the financial sector, (and others) for quite some time.
January 2nd, 2009 9:03 pm
Jacktar
Everyone is going to vent from time to time and all that does is tell us that it remains a charged issue. Everyone is also going to vent based on their particular position in this housing crash game be it high price, low price, above and below water, renter verses owner etc.
We can all gain value from vents, and turn them into useful information as to whether something might be politically acceptable or not. At the same time, we have to accept that we are not all built with analytical minds, that is just the way it is.. We can’t change that. We have 4 types of minds to deal with in life and only one of those types of minds are analytical. Within the 4 groups we have 4 subsets giving us a total of 16 basic mind types.
In short, that means that however you are viewing it, there are 15 mind types viewing it another way, leaving us totally outnumbered in any given situation. I myself have not figured out how to overcome this outnumbering, other than to observe that it makes life “spicy”.
http://www.typelab.ru/en/1.1.types/club.html
January 2nd, 2009 9:40 pm
Jacktar
It’s not just a moral outrage. How can we shoulder a debt of trillions of dollars? If the largest single economic strong horse we have – housing, as Mr Mortgage has advocated to be bailed out for just such a reason – is in need of a full-on subsidization, how can we weather that? It’s impossible. It’s laughable. I mean it when I say that if we do that, we should just as well bail out auto and student loans too. After all, it’s all about creating spending power, right?
I stand by my challenge. Those that are really in favor of this immoral, financially impossible, and communist plan of paying off principal with taxpayer/federal money: Which of you would not stand to gain? If I bought near peak market as I assume some of you have, I might silently be for such a plan, not that I think it would “fix” anything other than my balance sheet. So I guess I can empathize with people that want to pass off their bad investments on taxpayers. But I don’t sympathize. So who here has no chance of gaining a cent from the principal reductions? Why would you want to pay for idiots’ loans?
January 2nd, 2009 9:57 pm
Can I ask a few questions?
When you reduce these principal amounts, where does the amount that was reduced go?
Is it immediately vaporized?
Ameliorated?
Absorbed – and if so, by whom?
Does anybody out there take the ‘hit’ on the amount sawed off?
What impact does doing this have on bond holders?
Does it impact nobody and everything is fine?
Win/win?
When we save main street, who is ‘we’?
Thanks.
Peace -
C.C.
January 2nd, 2009 10:44 pm
To “book report” Roubini, he said:
Dear America, (congress treasury president Fed)
You saved the arms and legs and forgot the heart!
And maybe so. We then go into principal reductions. The essence of the benefit of the principal reduction is putting more money in the hands of the consumer in which propels the nation back to recovery. In his example, the consumer saves $126 per month on a principal reduction to propel us forward with our consumer economy. Roubini, you come up short! $126 does not even begin to solve the problem!!
Here is the real deal. TPTB already said that they are going to save the arms and the legs, it is a given. That means that any loss to the bank is going to go to treasury debt!
Now here is the BertDilbert high school drop-out solution to the situation. First off there are no homeowners, mostly debt holders for this situation. People have this crap idea in thier mind that because they signed a contract they are homeowners. Never happened. I call it a home owner when a majority interest has been obtained. Even if they drop the principle down to market, it still doesn’t make it a homeowner.
I say let them walk, they will in most cases save well over $126 per month. In many cases 10 to 20 times your capital injection of “new money”. In the end Roubini, this is what it is about “new money”! The whole idea behind lowering interest rates is to allow refinance to free up money to propel the economy forward.
California is the H bomb state. It has over supply and likely population drain which means we are not going to have a housing shortage anytime soon. Your talking saving the house that they do not own even after principal writedown for $126 and I am talking $1,260 plus in hand. Which Roubini, is going to pull the economy out of the toilet faster? $126 and a house you don’t own or $1,260 and a house you don’t own?
Walk and save is the far superior option. When the consumers health and the nations is resuscitated, the consumer can get back into a house for far less money and in a superior position than a principal writedown now. The end result is a consumer down the road with far less debt, the pressure of the payment removed and a rejuvenated cash balance each month.
How do we do this? We bust out the million dollar plates from the engravers vaults, the treasury can print them up and give them to the Fed. The Treasury can then give the Fed Treasury notes to use as backing for the currency released. The released notes can go to the vault at bedrock under the NY Fed stored with all the monetary gold as loaned assets to the banks to cover the loss on the defaults and stand as bank assets to keep them with sufficient capital requirements to keep them out trouble.
As long as America is destined to be the consumer of the world, money in the hand is king, a house propels nothing. A walk away today will be a winner tomorrow, for themselves, for California, for the USA and for the world.
The end result four years from now is that the walk aways are going to be laughing their asses off at the ones who stayed and “got something” from a principal reduction! This is one of those situations where “saving” the consumer is the wrong thing to do. If there was a housing shortage, that would be one thing. It is the blantant oversupply that makes this the better move.
January 3rd, 2009 12:28 am
“The essence of the benefit of the principal reduction is putting more money in the hands of the consumer in which propels the nation back to recovery.”
Hmmmmmmmm…. why not just mail cash to every person in the country?
Oh yeah, just those that gambled on real estate.
January 3rd, 2009 1:09 am
I guess my take on principle reductions is more pragmatic. The RE market (right now anyway) is the foreclosure market. Additional foreclosures will with have a downward effect on housing prices. If I held the note on a house and my options were to either: A) get the property back and attempt to sell it in a depressed and over saturated market or B) take a haircut on the principle and continue to receive cash flow. For me, it’s option A (continued cash flow trumps).
Granted, their are many more variables to a real world calculus, but I think you get the drift.
I think Bert’s got it nailed from the borrowers perspective. If I’m over 20% upside down in a house, it’s a slam dunk from a financial analysis point of view to walk (after living rent and property tax free for as long as possible). This being a rational option with a non-recourse mortgage. Real life tends have many more intangibles in the mix. ie: wife loves the house/neighborhood, stigma, uprooting kids, etc.
January 3rd, 2009 1:42 am
“why not just mail cash to every person in the country?”
Probably would have been cheaper and less complicated if the guvmit just paid off everyone’s mortgage thereby freeing consumer spending power and recapitalizing the banks at the same time. I’m sure someone here will point out how the TARP is a superior plan..
January 3rd, 2009 2:43 am
The best thing to do is to do nothing. Let the market work. What kind of message does it put out if we use taxpayer money to reward the greedy liars who fraudulently bought a house they could not possibly afford? Let them rot I say.
January 3rd, 2009 3:11 pm
“Let the market work.”
The banks (and others) have already been bailed out by the taxpayer. Why shouldn’t the taxpayer get some relief as well?
January 5th, 2009 10:43 am
JackTar, I’m a taxpayer. What relief would I get? Let’s see… I didn’t buy a house I couldn’t afford, I don’t owe more thank my house is worth, in fact I’m a renter and don’t own at all. Answer: I get ZERO relief and will pay for idiots’ mortgages with my tax dollars.
I see nobody thus far has said they support tax payer subsidized principal reductions that wouldn’t personally stand to benefit from it. My theory thus far holds true then. You all in favor of this disgustingly immoral plan would essentially be receiving checks for hundreds of thousands of dollars. How noble.
January 5th, 2009 5:14 pm
Your probaly going to paying much more in taxes (at least in California). Declining property values equate to declining property tax revenues. Sales taxes are going to rise, new taxes on previously untaxed services, new fees (taxes) will sprout out of the woodwork. The legislature can possible see its way clear to cut any spending. This is one of the consequences that will affect mortgage debt slaves and renters alike. Accelerating foreclosures will only compound this problem.
January 5th, 2009 5:29 pm
I can accept higher property taxes. Is that it? Is that the horror that’s so worth avoiding that we should just give trillions of dollars to the most irresponsible borrowers out there? Oh the horror, higher property taxes!
January 5th, 2009 6:02 pm
Not property taxes since they are tied to declining property values. My property taxes went down last year and will likely be reduced again this year. So the government will be looking for new sources of revenue. Howbout a sales tax on rent? Sounds good to me and you don’t seem to be concerned about it either. Just as long as we don’t allow a loan modification under any circumstances.
January 6th, 2009 12:20 pm
Loan modifications are fine. Principal reductions are not. Let them do 40, 50, 60 year loans if these “poor homeowners” really want to keep their houses.