Low Mortgage Rates to Spur New Wave of Defaults

Posted on December 26th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

Talk about unintended consequences.  The following is significant insight from the street level. This is especially important for those of you thinking that these low mortgage rates will lead housing and the consumer to the Promised Land. 

Everyone wants to refinance right now – that’s a fact. Home owners and loan officers around the nation have not been this excited in years over the low rates.  Purchases are far and few in between and require solid relationships, so most loan officers love a good refi boom – they are the easy pickens (until now). The media are actually quoting mortgage rates non-stop, which is a complete story in and of itself.

Loan officers and banks are very busy taking loan applications, as reflected in the faulty MBA loan application survey data (Mr Mortgage story out next week).  Loan approval times at some banks is at three to four weeks making for a two month start to finish process. Fall-out will be extreme over the near-term as brokers and borrowers switch banks three and four times trying to get the lowest rate available.  Trying to hedge this chaotic mess is a mortgage secondary marketing manager’s worst nightmare and can lead to significant losses.

Along side of being one of the biggest consumer ‘bait and switches’ of all time, this drop in rates should set the stage for a significant leg-up in mortgage loan defaults and leg down in house values and consumer / homeowner sentiment.

In my opinion, the government artificially pushing rates down this quickly not only will cost the originators plenty but quickens the pace at which the Alt-A, Jumbo Prime, and ‘Prime’ implosions could begin in earnest.

Please note that 4.5% never really existed unless the borrower wanted to pay thousands of dollars to buy that rate through points, which is rare. For a perfect borrower with a 740 credit score, 80% loan to value and no second mortgage attached the lowest that rates got were roughly 4.875%. Since then they are hovering around 5.25% to 5.50%.  This, from 6% before rates took their dive. I am not a believer that rates can sustain these low levels without .gov permanently ‘fixing’ them somehow. Left up to the mortgage bond market and there are just too many sellers over the past several months, especially on well bid days.

In the past the mortgage process involved getting a completed loan application, ordering the credit report and appraisal and processing the loan.  In a couple of weeks when the appraisal came back from the appraiser, the loan was submitted into underwriting for approval. Everything went smoothly because the appraisal always came at or above borrower’s estimates.

These days the process has changed a bit. Now the first thing done after the loan application is taken is to call the appraiser for a comparable sale check to see if the value at which the home owner states the house is worth is on target.

Therein lays the rub.

From early reports since rates fell sharply in early December, 80% of the loan applications are not getting out of the starting gate easily. Loan officers are all saying the same thing — that appraisals are not coming at value due because ‘all of the foreclosures and REO sales have taken the value down’. In the majority of these cases, this kills the loan.

The loan officer then notifies the borrower of the news and they are in disbelief. All home owners think that their home is worth the most on the block and I have been told that this is a tough pill to swallow. This brings the crisis home instantly.

Everyone trying to refinance into lower rates at once should hasten the national reality that the largest portion of the home owner’s net worth has evaporated in the past year. One loan officer I spoke with equated this call to a Doctor notifying a patient that they had a terminal illness.

The other three top reasons that loans are not making it out of the application phase are because of credit scores coming in too low, interest rates not really being what the borrowers are hearing hyped and Jumbo money is near all-time highs.

With respect to scores, many have been negatively affected by creditors bringing revolving lines down sharply over the past several months. If the outstanding balance is over the 30% and/or 50% threshold of the available credit it negatively affects the score. Lately, banks have been dropping available credit to just above the outstanding balance, which is over 50% and a large credit score hit.

With respect to rates, most borrowers do not have a perfect 740+ score and 80% and below loan-to-value meaning they do not get the rates being advertised. Even a small deviation in borrower profile such as a subordinated second mortgage, 700 credit score or 90% loan-to-value can result in a 100bps rate spike at least.  Only a year ago the latter profile would have been considered ‘Prime’ — their 90% loan-to-value today would have been 50% equity back then.

Lastly, Jumbo money both Agency Jumbo from $417k to $625k and bank portfolio over $625k are priced terribly in the 6.5% to 7% and 7.5% to 9% ranges respectively.  That is if they can even get the loan made. The problem with this is once you get out of the Subprime universe, a large percentage of Alt-A and Prime loans are over $417k.  The Alt-A, Jumbo Prime and Prime universes are on very shaky ground right now and these are the borrowers who could really benefit from a low fixed rate right now.

This harsh reality could spur a new wave of defaults and walk-aways from borrowers that were not considered at-risk before.  This takes the crisis into the ’Prime’ universe very quickly because Prime borrowers represent the majority of new refi applicants. This new wrinkle brings the Prime Implosion to the forefront much quicker than my original, more linear time-line of Subprime to Alt-A to Jumbo Prime then Prime with some overlap.

Additionally, when borrowers with Jumbo loan amounts over $417k find out that 30-year fixed rates are anywhere from 6.5% to ‘unavailable’ the reality that that they are stuck in that loan and likely that home indefinitely will set in. The macro-economic effects of this are unknowable.

With underwater or ‘near’ underwater home owners that are unable to sell or refi totaling 42% nationally and about 65% to 70% in the bubble states, this news is not surprising. However, it likely will be surprising to the media, analysts and markets when the facts get out in a couple of months.

In a nutshell those that don’t need the credit can get it and those that do can’t.  This is the perfect credit crisis storm – one which low rates can’t fix.

The only thing that can be done to get money into borrower’s hands quickly is to waive appraisals for Agency and FHA loans as Lockhart has suggested.  That is of course if the borrowers are ignorant enough to consider this option. “James Lockhart, Fannie and Freddie’s regulator, said last week they were considering waiving the requirement to get new home price appraisals before refinancing loans they hold – a move that could greatly increase the scope for refinancing.”

I see ‘no-appraisal’ refi’s as devastating as the Fannie/Freddie loan mod push going on right now, which I wrote about a couple of weeks ago.

Fannie/Freddie: Come Get Your Loan Mod and Pay For Life

‘No appraisal’ refi’s are a disaster that takes the housing crisis to an entirely different level because now the tax payer will be on the hook for trillions in mortgages that are essentially very risky, underwater, unsecured credit lines. Nobody will ever buy these loans or securities derived from them. 

That being said, given all of the reasons above why no major refi-boom will ensue as rates drop and how panicked the politicians, banks and regulators are over housing my money is on them seriously considering this radically destructive move out of sheer panic. At this point in time, I see little chance of a permanent solution being brought forth, which I outline in ‘My Case for Principal Balance Reductions’.-Best Mr Mortgage

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121 Responses to “Low Mortgage Rates to Spur New Wave of Defaults”

  1. Once banks really start taking write downs on principle, ALL of their borrowers will default to get a write down. Why wouldn’t they? Also, modified loans are defaulting again at rates of some 50% or more for the simple reason that most borrowers, once they have been given an inch, will next want a mile. This is human nature. If the Jones’ next door got a write down, why not me too? The bank will be carrying a bad loan, forever in perpetuity as the same borrower defaults again and again looking for further concessions — and why not? Their credit is already shot, they have nothing to lose. As a bank, it is a much cleaner deal to get the deadbeats out, take the writeoff of the loss, and start fresh with a new buyer — at least you have a shot at a new buyer who will continue making payments. As a investor, no way am I willing to buy paper on which the debtor has defaulted already. Newly generated loans might have a shot of being sold at decent prices, but the old stuff… forget it.

    Look around. If you pay attention to the people buying now, many are looking for their “out.” They will get into the new cheaper (better) home, and ditch the old one with the higher mortgage. And most of them will do is with the help of “equity” they pulled out of the home they are ditching!

    There is alot more pain to come. I have been shopping for a SFR in a high end area of California for the past 2-3 years, and I have seen all this and much worse happening, and not just in the low end low FICO areas.

    All the government interference is just making me stay on the fence longer, as I wait for the other shoe to drop.

  2. Negative equity does not equal “paper losses” but real monetary losses and hardship to those experiencing the loss.

    Wealth is classified as an excess of profits after expenses are paid off, only homeowners who aren’t experiencing negative equity are losing wealth whether real or imagined, everyone else is just losing.

    Paper losses do not effect other industries to contract/layoff/close their doors due to imaginary paper losses in the economy as real monetary losses or contraction DOES.

    BertDilbert:

    Thank you for the fishing poles, I am still learning how to fish…

    Adding Admin and all others to the discussion:

    Meanwhile each percentage point of decline in housing prices is directly affecting an almost equal percentage point in “declining” activity in the economy due to a multiple of factors, mostly connected to housing. As you both stated, the MEW is no longer able to compensate (hide) the decline in the GDP. and people are being frugal in their spending habits. The USA is over leveraged and in debt, on a corporate and personal level.

    I will say it again, maybe because I am to old to change, in real estate it is all about location not about income.( I am not a real estate agent or broker, but my dad was for over 70 years and I listened and learned, ps he is still living, 96 today)

    Why should “5” borrowers earning five completely different incomes be allowed to purchased and retain a home in “Prime location of California” which at the market peak was $700,000?

    Borrower #1 earnes $120,000. and bought the home at a 5% fixed rate., current
    Borrower #2 earnes $90,000. and bought the home under an adjustable rate., current
    Borrower #3 earns $60,000. and bought the home under an adjustable teaser rate, deliquent.
    Borrower #4 earned $80,000 and bought the home for $475,000 but lost his job, deliquent
    Borrower #5 can’t prove his income but bought the home in 2002 for $400,000., current

    All five qualified under the previous mortgage products issued AND borrower #1 and 2 AND 5 are current. Borrower #3 purchased under the impression that they could sell and make a profit ( refinancing they knew would increase the monthly payment which they couldn’t afford) and borrower #4 unfortunately lost his job.

    Under your plan, the following homeowners would remain:

    Borrower #1 using the 28% ratio would have the principal lowered to $435,000.
    Borrower #2 using the 28% ratio would have the principal lowered to $305,000
    Borrower #3 using the 28% ratio would have the principal lowered to $180,000.
    Borrower # 4 would be foreclosed
    Borrower #5 would be foreclosed.

    Under your plan only borrowers #2 and 3 earning the least would not be underwater since the LOCATION experienced a 50% decline in value,the most qualified borrower# 1 would pay more for the house. Fair?

    Under my plan borrowers 1, 2 and 5 would remain in the house and have a reduced payment on the principal balance ranging from $315,000 to $343,000.(they are paying their payments on time.(reward)
    Borrower #3 should have remained a renter
    Borrower #4 would be given a 6 mth reprieve to obtain another job or they also would be foreclosed on.

    The value of the area would be $350,000.maximum for ALL homeowners under my plan and would stablized. Under your plan, the market would continue to decline especially since value doesn’t count only income.

    Under most of the comments posted here, none of the above borrowers would be allowed to remain homeowners even though three pay their mortgage on time. ( 3x income) Without regard to the additional insult/result to the market.

    You both are extremely smart, as well as most other “posters”.

    Mr. M in projecting what is the next “product” to fail and DB in realizing that housing affects most other industries and how. In fact, you are both brillant with most aspects of the financial markets, WHICH I LACK, except for the basic understanding that location is the key to real estate and mortgage underwriting. We should talk.

    Which is why appraisals are needed for the required principal reductions based on the location of the property not the borrower’s income. ( if two people earning $100,000 each bought a house on the same day for $350,000 in AB district and $700,000 in CD district, two different areas in the same state, under your plan the reduction would be the same based on borrowers income not the location)

    Bert, you spoke of “advisors” and what is missing or needed is the working stiff that sees what real estate is about at its core. Real Estate locations are divided by “classes” whether right or wrong, the appraised value of different areas backs this up. (McMANSIONS ARE FOR THE HOMEOWNERS WHO CAN AFFORD THEM, not the employees flipping burgers who wants the area) even though past mortgage products allowed for this change. I am not insulting anyone when I say that people of the same “class” tend to graviate toward the same area. (maybe some would like to be included in that area, but the “old” rule was being able to afford it)

    My nuts and bolts of mortgages and real estate are simple and correct but they lack the grease of the financial markets to work, I am asking politely for constructive suggestions/ideas to make the entire plan work with the entire economy in mind. I have and am trying but there are so many un-intended and intended consequences of the “rules” outside of mortgages and real estate.( example- I am un-sure if my plan would show “banks” as insolvent or benefit them , even though I allow for them to take up to 3x the actual monetary loss on their balance sheets and tax purposes for the principal reductions needed and required) Does this need to be amended?

    Note to CC and other like minded individuals, the USA does not need to advocate a depression,
    or a riot, what it needs is intelligent individuals who advocate for a positive change, which most of you show in your writing ability, whether I agree with your opinion or not.

    It doesn’t matter whether that change corrects the last 5, 10 or 25 years, WE THE PEOPLE OF THE USA ARE CAPABLE AND CAN DO IT, especially if we believe.

    I am not a democrat, but when re-reading the above statement, it sure sounded like I am. So I will have to amend my policital stand point to state I am a citizen of the USA and proud of it.

    I understand and can decipher real estate and mortgage underwriting to apply to the majority, which is homeowners (69%).

    I truly need you both and others to round out the insight needed to accomplish:

    1- relief
    2-reform
    3-restructure

    the above three are what Paulson and the FDIC are stating what is needed, I believe there should be a fourth “r”

    4- recover–not to what was, but what should and can be

    I wish every a Happy and Healthy New Year.

    PS it doesn’t have to be my plan but one that works for the majority, improving the economy and the daily living of the majority. I do understand there will be losses/hardships experienced by some, but it needs to be reduced.

    Again, Happy New Year to all.

  3. great post Susan – how does disposable income fit into your equation. Please email your full plan again – MrMortgageTruth@gmail.com – I will spend a couple of days with it and this post and come back at you with a critique. There is more than one way to skin a cat.

  4. here is what will happen if they dont put a good plan in place.

    Mortgage ‘Cram-Downs’ Loom as Foreclosures Mount
    http://online.wsj.com/article/SB123068005350543971.html
    By MICHAEL CORKERY
    Mortgage lenders who wake up Thursday with a New Year’s hangover are likely to face another headache soon: The effort to give bankruptcy judges the power to rewrite mortgages is gaining steam.

    The banking industry hoped the mortgage “cram-down” measure died when Congress removed it from the $700 billion bailout bill that passed in October. But it has been gathering momentum in Democrat-controlled Washington, as evidence emerges that current voluntary foreclosure-prevention programs are falling short.

    More on Mortgage Modification

    A number of different proposals have been floated to assist ailing borrowers and stop the flood of foreclosures. Here’s a look.
    Find foreclosure prevention services, by state.
    Mortgage-relief programs to help stressed borrowers.

    In a cram-down, a judge modifies a loan, often reducing principal so a borrower can afford it. Lenders hate it because they have to absorb the loss. Bankruptcy judges currently have the ability to modify certain personal loans and even mortgages on vacation homes, but they can not cram-down mortgages on primary residences.

    Even staunch opponents acknowledge that mortgage cram-downs for primary residences are likely to be as part of Congress’s economic-stimulus package in early 2009. The National Association of Home Builders used to reject any bill with a cram-down provision outright. Now it is saying the measure is worth a look.

    President-elect Barack Obama and his incoming administration aren’t disclosing details of the much-awaited foreclosure-prevention plans, but during the campaign Mr. Obama called for closing the loophole that prevents bankruptcy judges from restructuring mortgages on primary residences. Lawrence Summers, a top economic adviser of Mr. Obama, publicly voiced support for bankruptcy reform before his appointment.

    “To the extent that nothing else is working, bankruptcy cram-downs are becoming more likely,” says Rod Dubitsky, head of asset-backed-securities research at Credit Suisse.

    The latest embattled foreclosure-prevention program is Hope for Homeowners, which was approved by Congress last summer and supposed to help 400,000 homeowners. Only 357 people have signed up so far for the voluntary program. The Department of Housing and Urban Development, which is administering the program, acknowledges that it has been encumbered by high fees and narrow eligibility requirements.

    Associated Press
    With efforts to stem home foreclosures stagnating, mortgage ‘cram-down’ efforts seem destined to re-emerge under the new Congress. Here, a foreclosed home for sale in Lakewood, Colo., in September.

    Another government program, FHASecure, was intended to help 80,000 homeowners who had fallen behind on their payments after their adjustable interest rates reset. It has helped only 4,100 delinquent borrowers refinance since September 2007 and will stop taking new loan applications as of Wednesday.

    Mortgage lenders also are modifying tens of thousands of loans without government help. But often this hasn’t solved the problem. A report last week by the Office of the Comptroller of the Currency and the Office of Thrift Supervision found that nearly 37% of mortgages modified in the first quarter of 2008 were 60 days or more delinquent after six months.

    “It is absolutely clear that voluntary modification is just not working,” says Rep. Brad Miller, a North Carolina Democrat. “Every plan that Congress has passed, we do it and nothing happens.”

    Mr. Miller intends to introduce a mortgage bankruptcy-reform bill Monday, the first day of the new session. Illinois Democrat Richard Durbin plans to introduce a similar bill in the Senate.

    Lenders warn that mortgage cram-downs will lead to higher interest rates and down payments, as banks seek to mitigate future losses from judicially imposed write-downs. They also are concerned that the reform measure would add to the losses they have already sustained from the housing crisis.

    “Our members have modified 2.8 million loans,” says Francis Creighton, chief lobbyist of the Mortgage Bankers Association, which opposes cram-downs. “Could we do better? We are trying to do better.”

    Proponents of bankruptcy reform say that previous modification efforts are falling short because they have focused on spreading out payment terms and forestalling delinquent payments. But that hasn’t cured a big part of the problem: that one in six houses is now worth less than its mortgage. Only programs that reduce principal amounts are likely to restore equity to millions of homeowners, they say.

    “You have to deal with the systematic problem of underwater mortgages or you are not going to stop foreclosures,” says Harvard University economist Martin Feldstein, who has proposed his own plan to help homeowners with negative equity in their homes, which involves mortgage principal write-downs and replacing part of the original mortgage with a new, lower cost loan.

    Proponents of bankruptcy reform also note that millions of troubled loans aren’t being addressed by current modification programs because they were carved up and sold to investors as securities. Mortgage servicers have been reluctant to aggressively modify these loans because they have been unsure of their legal rights.

    The mere threat of mortgage cram-downs could break the standoff between mortgage servicers and mortgage investors, which has slowed aggressive loan modifications. Investors may be more willing to go along with industry-driven modifications when facing the threat that a judge could ultimately order the amounts of loan principals reduced, forcing them to eat bigger losses.

    “The servicers can argue we have to give this to the borrower otherwise they will get it in bankruptcy court,” Mr. Dubitsky says.

    Lenders argue that loans modified by bankruptcy judges often have high rates of default on the new payment plans. “We should be working on keeping people out of bankruptcy not pushing people into it,” says Mr. Creighton of the Mortgage Bankers trade group

    Bankruptcy reform is likely to be one of many proposals that Congress considers as part of comprehensive foreclosure-prevention effort. Another element is likely to be one that FDIC Chairman Sheila Bair has been proposing. Under her plan, the government and lenders would split the losses on modified loans that go into default.

    Some economists are urging the new administration to go even further. Mark Zandi, chief economist at Moody’s Economy.com, proposes that the government subsidize the bulk of principal write-downs to the tune of $100 billion, about four times as much as Ms. Bair’s program.

    —Nick Timiraos contributed to this article.
    Write to Michael Corkery at michael.corkery@wsj.com

  5. […] Low Mortgage Rates to Spur New Wave of Defaults (Mr. Mortgage) […]

  6. I think the rate and term refinance without the appraisal is the way to go – with this caveat only. Must be a 15 year mortgage or less. That way people will acutally start paying down the principal and eventually the home will end up with equity – thus making a viable product to sell as an investment instrument OR the people will eventually be able to sell themselves out of their situation. This way the investor in the mortgage gets paid off eventually – at least getting thier principal back. It might actually start to turn this thing within a few years and force people to pay down thier mortgage instread of spending thier extra cash on lattes.

  7. Excellent article Mr. Mortgage and some great feedback in the comments. In the end, I believe consumers are pretty smart and that is what you are starting to see… they are getting it. The bought into promises that lenders were going to provide assistance with loan mods. When they crunched the numbers, those loan mods make no sense. So, no matter how much you lower the interest rate, buying a home in a declining market makes no sense. No matter how much you lower the rate on a loan modification, if you still owe 150k more than the house is worth, that does not make any sense.

    All of the comments about commitments and breaches of contract also make little sense. People have been breaking commitments and breaching their contracts for hundreds of years. The case law in these areas is so big you need a single library just to keep track of it all. The folks that walk away from these things that make no sense are acting completely within the confines of contract law. No question, they are breaching their contracts. They have a right to do that and the only impact is those that are within contract law. Those consumers are balancing that risk and choosing to walk away.

    With that being said, that leaves someone with the losses. That would be lender’s investors/shareholders. Not much they can do about it… within contract law. Trying to shame consumers is long gone in the discussion. The losses are now real… which is the point I think Mr. Mortgage is making. What I outlined is the reality. Want to change it? Start doing principal reductions. If you don’t… well, get ready for more and more losses until this plays out.

  8. Survey after survey over the past decade showed that a high % of homebuyers purchased a home not just as a place to live, but thought of the purchase as a good investment. Many home buyers knowingly and deliberately bought more house than they could easily “afford” because they thought their home would appreciate in value; they knew that the appreciation would be exempt from capital gains; and they viewed buying a bigger home would be a better investment that either buying a smaller home and saving more, or renting. Now that their investment has fallen in value, many are calling for lenders to forgive part of the loan. In other words, folks are saying (1) if the home investment increases, home buyers win; and (2) if the home investment loses, home buyers are bailed out. If that is the new rule, then should the capital gains tax on home appreciation be 100%?

    And for folks whose housing investment (yup, the home they live in was an investment) has soured: if there is a principal writedown and the home’s value later appreciates, do folks think they should benefit from that once soured investment? How does THAT make any sense? If the new rule is you don’t have to pay all of your mortgage debt if your home’s value falls below your mortgage, then who is going to make a mortgage loan unless (1) the buyer puts 30%+ down; and (2) the buyer agrees not to take out subordinate financing without the first-lienholders approval. That is the mortgage system of the future if principal writedowns become mandatory.

    By the way: the logic of principal writedowns applies to other forms of consumer credit. There were plenty of no-money down car loans, and a car is critical for someone needing transportation to get to work. So if a car’s current value is below the current car-loan balance? Principal writedown! And what about how the easy credit-card lending, where banks sent out card solitications to virtually everyone, and consumers, not fully understanding how high the interest rate could get, got in over their heads. The answer? Principal writedowns!

    Your REM (Real Estate Mortgage) proposal will result in a very REM-like” result: “It’s the end of the mortgage world as we know it, and (you) feel fine!”

  9. Tom Lawler… in virtually any other market, I would be in complete agreement with you. In reality, the big difference here, lenders may have no choice. Its about self-preservation. In normal markets the risk of not paying and letting the lender repo the car or a lender foreclosing on the home was the check in the system. The message to lenders is simple, consumers are willing to accept the risk of negative reporting for a while. No matter how you slice and dice that reality, in the end, consumers are walking and that is leading and going to lead to major losses by lenders. If lenders want to stop the losses, they are going to have to adjust their rules by reducing loan balances. Otherwise, they should stop the complaining, they are getting exactly what is lawful and consumers are facing the negative impact.

    My long term fear of this current process is that consumers are becoming more insulated from the negative feelings associated with bankruptcy and foreclosure. The stigma of bankruptcy and foreclosure are no longer becoming the psychological weapons of lenders to get consumers to honor their contracts.

    In essence, this is empowering consumers to see that when they collectively act, they can get things done that break from tradition.

    This is like nothing I have ever seen in my life and career.

  10. Mortgage Litigation Expert:

    This line from you:

    “The stigma of bankruptcy and foreclosure are no longer becoming the psychological weapons of lenders to get consumers to honor their contracts”

    Should be a banner at the top of this blog. For herein lies the answer – not simply for ‘home’-owners, but for every stinking step up the ladder, right to the top (Goldman Sachs and JP Morgan, who dictate financial policy to the government – always have and always will, until Marie Antoinette is finally beheaded – again.)

    It also brings to mind the quote from Benjamin Franklin:

    “When the people find they can vote themselves money, that will herald the end of the republic.”

    The ‘people’ are indignant at their political leadership. However, while the proletariat points fingers, a few of those otherwise righteous indignant fingers, are pointing right back at them…

    A fish rots from the head down. New beginnings sprout from the fertilizer of the rot.

    By the inherent truth in your quote, we have not sufficiently rotted yet.

    Peace –

    C.C.

  11. Susan, How exactly is it that the government is supposed to represent the homeowner when the government has taken an investment position in the banks? Giving something to the homeowner is now taking something from the banks, something the government has decided to invest in.

    That is why your fourth R is missing. Maybe it should be restitution, but it looks more and more like the government can’t take a position for the home owner without taking a position against its investment. Further, siding with the homeowner forces the loss on the bank, making further investment in the bank necessary if only for the sake of protecting its investment.

    What you have here is in essence is one lawyer representing both sides. Unfortunately the government which is supposed to be looking out for its citizens is siding with the banks. You saw the politicians scream when it comes to wages and bonuses of the banks but will you see them pass a law that banks receiving taxpayer bailout money cannot make political contributions?

    So we have yet another burr on a thread. The government cannot present itself as impartial in this situation. Suppose that you got a piece of paper in the mail and you were being asked to serve on a jury. During the selection process you mentioned that that not only did you receive money, but had an investment with one of the parties involved. Either situation in itself would disqualify you. Let’s then call it for what it is, a double disqualification.

    So let’s suppose Susan that you have the perfect plan. So good of a plan that it comes with a halo over the top and a golden seal approval. What is going to happen is this not going to come up to your liking after they have had their way with your plan.

    You are going in up against a stacked deck. The only way you are going to walk away with the spoils is if you have a gun with big bullets and can do some fast and clean shooting. Supposing you don’t have an affinity for firearms, maybe you could try walking into the game with a big fanged primate on a leash. You might not have a leash available so that could get ruled out. Third option is you have this really big gorilla outside the door and this really big guy is going to get really nasty with everybody if you do not come out a winner and tear the place up.

    Bill Gross used the big gorilla outside the room approach. This quote is actually from Mr Mortgage.

    “On a sidebar, I maintain that these ‘announcements’ are not so much about lower rates for you and me. Rather better executions for Bill Gross and Foreign Central Banks who are stuck with trillions of Agency mortgage paper and have been sellers for months in favor of US Treasuries. I am sure you saw Bill Gross threaten the Treasury on national TV before the Fonie and Fraudie bailout. Essentially he said ‘fix Fannie/Freddie bonds or I will tell my large clients not to buy anything for a long time’. Within a couple of days F&F were in conservatorship and their debt ‘effectively’ backed.”

    Essentially in this situation, you need to find your big gorilla that you are telling them is waiting outside the door….

    Where is your gorilla?

  12. BertDilbert:

    Truthfully my proposal started as a letter (Rant) to S.T.Paulson about not giving the banks a bailout to correct their mistakes, let them fail. The proposal was written in September, prior to most of the financial meltdowns.

    The gorilla was the federal government.

    Unfortunately, you are right with your post about the government siding with the banks, but nothing is permanent except death. There can be change.

    The “liquidility” given to banks was and can still be the gorilla. As you stated, the gorilla holds the purse-strings and the legal framework to change laws, rules and regulations.

    The proposal was “modified” to reflect REQUIRED conditions on ALL forms of the liquidility being provided. (lenders particpation in the massive refinancing needed by hiring additional personnel,the allowance of tax savings on writedowns/losses up to 3x, reduction of ALL management personnel in salaries and the elimination of all bonuses while any company was benefitting from liquidility or tax savings from the taxpayers.)

    The government still has the capability of being a HUGE gorilla with all of its laws, rules and regulations availability plus the purse-strings.

  13. Susan

    Here is an example of the gorilla in the other room, it is a side by side of Bush. In both speeches he paints the gorilla.

    http://www.thedailyshow.com/video/index.jhtml?videoId=186052&title=clusterf#@k-to-the-poor-house

    The gorilla was used with Bernanke and Paulson when they went before congress, using technical language to give them expertise power, giving them total control and throwing the gorilla behind it.

    Bill Gross used the gorilla in saying that “I am going to tell my customers not to buy treasuries.”

    What is the gorilla if the government does not go along with your plan?

  14. Susan, in short, to simplify the “gorilla”, it is fear. It can be made up of one big gorilla or lots of little gorillas. While you may have spent a lot of time on the mechanics of your plan, you need to ensure that you spend as much time on the gorillas.

    Basically it is like this. You are presenting a plan asking them to change. The motivator of that change will be the gorillas, not the plan, the cost of not acting. They may be aware of all the gorillas, but it does not hurt to remind them. You can probably come up with some gorillas that they have not even considered.

    Bottom line it is going to be the gorillas that sell the plan.

  15. BertDilbert:

    My original Big gorilla was the government.
    With a back up of capitalism.

    Now I see, maybe I will have to use the economy as the Big gorilla. I will have to give this some more thought to expand on it though.

    But I still believe most of our government would be in favor of letting the banks take their own losses (capitalism) with some guidelines (consumer protection of all underwater homeowners) and persuasion (incentive of 3x tax writeoffs and balance sheets for principal reductions), especially after the fall out from the initial 700 Billion Dollar Bail Out.

    The economy (people) are not confident in spending, when their assets are losing values, their jobs on are the brink and other than gas prices are not decreasing, especially since for the past few years borrowing against our future is how our economy was fueled. The USA does need a stimulus plan but also a stablization plan from housing values over-correcting.

  16. I have come up with the BertDilbert high school drop out plan that does not require submission to congress or banker approval. I will be working on it over the next several days.

  17. Chase has a formerly $1.6 million foreclosure next door priced at $835k with no special in-house financing terms. It’s a dead duck advervesly affecting my home next door once (too) valued at $1.6 million. (Mine is also financed by Chase.) In as much as they’ll never find a buyer absent their willingness to write a loan with just a sizable down payment to qualify, I’m thinking of asking them to agree to waive the due-on-sale clause so that I can seller-finance by incorporating Chase’s existing mortgage in to a CFD. It they decline such a seemingly reasonable request and I walk, then they failed take reasonable measures to mitigate their damages. My credit should not suffer as a consequence.

    I wonder if Chase is so stubbornly naive as to risk my taking a walk because I realize that w/o – being able to offer seller financing – I will have no competitive advantage.

  18. BertDilbert:

    We are the same, but I obtained a GED.

    Oh and then some college and a nursing degree. Obviously you obtained something too.

    I want to thank you and invite you to see your responses to your posts to me, I really appreciate the insight. It is at the bottom of MR. M’s invite about modifications working or not.

    My gorilla is consumer protection for the underwater homeowner with total withdrawal from governmental bail out to banks and investors including guarantees. Putting capitalism to work.

    Please obtain my email from Mr. M with my permission to receive a complete copy of the proposal. I will also be amending it, hopefully reducing the 46 pages to less than 15.

    Till then take care and again thank you for your insights.

    Susan

  19. BertDilbert:

    Gorilla= something to Fear

    Your right, my gorilla is still the government with its ability to change/mandate the consumer protection rules.

    The little gorillas you asked about are 1-Frugality of the average citizen, 2- increasing unemployment and 3-the recession are all working in favor of my plan versus a substained recession or should we call it the next depression coming.

    Our government should be fully aware that the middle class, homeowners represent 69% of the population, this includes most of your private businesses which account for almost 70% of the working class.

    The more they disregard the homeowners, the more citizens save their money, the more money that is not spent, the more layoffs, the more the economy contracts, until what.

    My plan is not a cure-all but it is a start or aid creating over 500,000 temporary (3 to 4 yrs) jobgs until the stimulus package actually takes effect, but bottom line it does protect housing from decreasing further given time for “changes” to be made in jobs in the USA created.

  20. Susan

    Gorilla has to be something that generally threatens them in one form or another. Threatening with “poor economy” threatens the people, not specifically TPTB. To them, poor economy only means printing more money, indebting the people.

    Let’s take our current situation. Obama wants a trillion in stimulus, the states want their trillion and the budget has a trillion short before anything. That is the starting line up. That three trillion divided by 113 million households comes to over $26k per. Figuring that Obama is going to end up a trillion short every budget adds another three trillion, giving us a grand total of 52k per household of new debt.

    We still have to add your 2 trillion or more to “fix” the mortgage mess. That totals 9 trillion or around 70k per household indebted at the national level in the next four years.

    The BIS says that 60% of the worlds savings went to fund the US deficit prior. With the world down, there will not be that level of savings. More so with the rest of world trying to fund their own bailouts. This means direct monetization, but we still have to pay the money back or default on our debt. Since every year we need “help” again, all we are going to do is build until our debt becomes a joke and subsequent fail.

    Darn, I seemed to get sidetracked off of gorillas! I asked Mr. M to pass my e mail off to you a while back. Did you get it?

  21. BertDilbert:

    No, I did not get your email yet, but I will be looking for it, thank you.

    I am not adding the 2 Trillion or so, to US Debt but taking it away from corporate profits or balance sheets really.

    Let’s take that 2 Trillion or so defective mortgage loss to the banks not the government, that results in monthly savings for roughly 11.2 million homeowners and use it in the economy or in savings accounts, doesn’t that help the US economy as well?

    To do my plan of refinancing roughly the 11.5 million underwater homeowners over a 4 year period would create approximately 500,000 temporary jobs including but not limited to, processors, underwriters, appraisers, title searchers, attorneys, closers, accountants, regulators.

    These employees would be earning money able to save, spend and pay taxes, all which will be stimulating the economy and increase government revenues (they wouldn’t be draining our resources in unemployment or other forms of aid and some of them would be homeowners as well).

    The gorilla is the governments change to protecting the banks to protecting their US citizens by mandating that all underwater homeowners must be corrected to present day market values.

    The gorilla will come when, the governments realization comes that the financial industries can not substain the economy of the USA, and there needs to be other industries created and fostered that can maintain and grow the work force of the USA including manufacturing.

    Another gorilla, is the public’s realization that savings and living within their means which is currently being done and still changing, will result in less frivulous/unnecessary money being spent in the economy has resulted in contracting overall other industries (supply and demand, layoffs).Protection of their own household wealth and budgeting.

    Another gorilla ,is it won’t matter that credit is freed up, the majority of the public doesn’t want unlimited access to credit and it won’t get unlimited access as it has in the past boosting the economy’s GDP, they are afraid, Confidence.

    As I stated before, all previous issued guarantees issued to the financial sector will be withdrawn. New guarantees will be issued on NEWLY issued loans including student, auto, business,and mortgages that are underwritten with prudent lending decisions for a limited time.

    As in any budget, both or either increasing the income (revenue) and decrease the spending (aid and employees) must occur to balance. While my plan does not address the entire global picture, it does help with one aspect of it, housing.

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