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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Posted on December 3, 2008 2:13 PM
December 26th, 2008 6:37 pm
[...] news by unknown « Cash Back Mortgage [...]
December 26th, 2008 6:58 pm
House next to mine was for sale this past Fall for $295k. Broker told me an offer came in “very close to that.” Bank apprasal was done and it only appraised out to $255k. Seller decided to throw in the towel and go through with it at $255k.
December 26th, 2008 7:16 pm
(Con’t)
Which I may add, the $255k sale price that went through LOWERED my home’s value now. Maybe I should walk away????
December 26th, 2008 8:33 pm
I kept wondering how this would get worse, and I believe the panic you mentioned at the end of this post is exactly what this country will see. I, as a renter, will continue to get screwed, and these bubble buyers will continue to be locked into their house purchase so, as the media says so manipulatively, “people don’t lose their homes”.
I’m still waiting for the 175k house in Burbank. Thanks.
December 26th, 2008 9:16 pm
Mr. Mortgage, great insight into the unintended consequences of good news. In a nutshell, the new lower rates are going to turn into the breaking of a capsule of smelling salts to the underwater homeowner. This is going to turn into a wake up call…
December 26th, 2008 9:19 pm
No appraisal refi’s! These people are on drugs! We are going to be on the hook for all this toxic stuff. Now I see why they call it a depression.
December 26th, 2008 9:26 pm
in chess, i believe , they call this check mate !….any move they try and make is just a bad move…….principal balance reductions is the only move that MAY be left
December 26th, 2008 9:41 pm
Thanks, MrM.
December 26th, 2008 10:06 pm
How would the US on a macro level employ a principle reduction plan? It would have to apply to everyone with a mortgage, otherwise there would be huge unintended consequences. Straight % of outstanding mortgage? 25%?
December 26th, 2008 10:24 pm
I don’t think I would default right away if I was told I didn’t qualify for a refinance. I would call the servicer for my current loan and ask that my rate be reset to the current market rate – same result as a refi with no costs. You and I know in ordinary times this would get a borrower nowhere, but given the regulatory and political pressure to modify loans and the loss potential if the borrower does default, this might a reasonable outcome for all parties.
December 26th, 2008 10:43 pm
HousingRealist
We have two segments of society. Those that use banks and those that do not. I submit the proliferation of check cashing centers and payday loan services. Let’s assume that these people fall into the “renters” category.
Governor Schwarzenegger Launches “Bank on California” to Help Californians Open Bank Accounts
“Millions of families lack basic financial services like a checking account – and nearly half of California households do not have a savings account. According to Scarborough Research (2006), California is home to two of the top three areas with the nation’s highest percentage of residents without bank accounts – Fresno and Los Angeles.”
http://gov.ca.gov/press-release/11242/
Let’s also assume that bank bailouts and homeowner bailouts bypasses this segment of society… Let’s suppose that unemployment continues to rise. Do you see a potential for a problem here? We are setting LA to be another powder keg.
December 26th, 2008 11:41 pm
my money is on them seriously considering this radically destructive move out of sheer panic.
I sadly agree with you on this point.
Remember when rates were this low last time… around the start of the bubble? And nobody had the cojones to raise rates cause it would put an end to the party the bankers were having doing refis?
They REALLY seem like they’re doing everything they can to get it back to the ‘old days’ rather than learning their lesson from this grand experiment.
Great insight MrM. I woulda never thoguht of this stuff.
December 27th, 2008 12:07 am
The real crisis is that we are getting to the point in this country, where there is no more rule of law. Contract Law has been thrown out the window…
Think about all of the BKs, closures, govt.-take overs, and tax payer funded bailouts of the last year, people. If someone would have showed you that list at the beginning of 2007, you would have told them they were insane.
I really fear for our liberty and safety as we enter 2009. The things that will happen will be earth shaking, I fear.
One prediction I will make, is that Hank Paulson and Bernanke will make Madoff look like Mother Freaking Theresa….They are quickly robbing this country blind, with very little resistance.
Think about it…….
Then call your Congress person’s DC office and demand accountability
http://www.house.gov
December 27th, 2008 1:00 am
Kevin Kleen said, “I would call the servicer … and ask that my rate be reset to the current market rate… given the regulatory and political pressure to modify loans and the loss potential if the borrower does default, this might a reasonable outcome for all parties.”
“David” had the answer to that: “The real crisis is that we are getting to the point in this country, where there is no more rule of law. Contract Law has been thrown out the window…”
Borrowers signed a contract (a Note) agreeing to pay $x amount at X% interest rate. The servicers have contractual obligations to their investors. Mortgage-backed securities have clauses that typically only allow for 5% of loans in the pool to be modified. All this talk of willy-nilly modifications ignores the degree to which lenders’ hand are tied. Sure, investors may lose more in a foreclosure than in a modification. That fact does not, however, create a system (because a legally-binding system would be required) to allow for ad hoc modifications. If a servicer has a loan that goes into foreclosure, the bulk of the loss will fall on the servicer’s investors, be they FNMA or whomever. If that servicer elects, on the other hand, to modify the loan and the investors respectfully (or not so respctfully) decline to participate in the loss resulting from that modification, the servicer could suffer a much larger loss from being sued by their investors than if the foreclosure had proceeded. That is the essence of the suit by Greenwich Capital against Countrywide, the outcome of which is still unknown.
http://dealbook.blogs.nytimes.com/2008/12/09/behind-greenwichs-dispute-with-countrywide/
December 27th, 2008 1:07 am
Great article, Mr. Mortgage.
The analogy of how declining someone for having negative equity is like a doctor delivering a fatal diagnosis was excellent.
Another issue I’m seeing lately: If someone needs to borrow $500k to pay off their current indebtedness, the previous simple solution would have been to do a $417k first mortgage coupled by a second mortgage. Bada bing, bada boom. Now, even with a CLTV of 65 or less, low debt ratios and a high 700’s score, there are so few banks doing 2nd mortgages at all, that those who are are taking forever to approve them and feel free to charge higher rates than were promised initially.
An originator could plan on an taking 3 weeks to get a 2nd mortgage inplace, but given the substantial disparity in pricing between, say a 15 day lock and a 45 lock, the time delay becomes costly.
December 27th, 2008 1:54 am
Mr. Mortgage you miss the mark, again. In the real world the lower rates stimulates a whole new group of buyers. First time home buyers are coming out of the wood-works. The Central Valley (CA) is experiencing bidding wars on the dwindling supply. You refer to Macro-economics but fail to mention the fundamentals of Supply vs. Demand. If supply is dropping and demand is increasing what does that do to prices? Mr. Mortgage your answer should be “INCREASE in prices”. If prices go up people have equity. People with equity will refinance. Soon we will be back to people using their homes as a versatel machine and the economy will be back to “normal” !!!
December 27th, 2008 2:04 am
I had a friend take about $600k out (of his home $800k home back then) through a home equity loan. He invested all if it in mutual funds. Today all his multal funds AND home equity are wiped out.
Does anyone know anyone else who did this?
December 27th, 2008 2:35 am
Dan Correspondent
The Greenwich situation appears to be a claim for predatory lending and B of A/countrywide pushing a settlement off on the MBS rather than taking the predatory hit.
Outside of a predatory hit, I would think the servicer would prevail. The sticky part as I see it since there is precedence set for bonafide predatory claims, any mod with an immunity waiver on a mod would have a value to the lender. That means that any MBS trust that has a lender get an immunity wavier on a mod can claim that value received by the lender and make a claim for payment.
The claim will be that the waiver came at a cost to the MBS and thus the lender was unjustly enriched at the MBS holder’s expense.
Just my two cents. (I have no legal, banking or RE background)
December 27th, 2008 3:33 am
Great insight in this report.
As an international observer of the US market, I invite readers to consider how weird the US market is; relatively speaking.
1) Elsewhere generally in the world, a fixed rate loan is a loan for life. There is no refi because the people who supplied the capital will not accept early repayment.If you think about it you will see the US arrangement is all in favour of the mortgage borrower
2) Elsewhere generally in the world, the loan is recourse. that is it is a personal loan and you cannot send the keys back and forget about it. The banks will pursue you, perhaps for decades and make you bankrupt.In the US , the system encourages irresponsibility on a grand scale as people borrow extra on their homes to buy real things like cars, other homes or stocks, and then refuse to pay back the bank whilst not giving back the stuff the money was spent on. If you think about it you will see the US arrangement is all in favour of the mortgage borrower.
December 27th, 2008 3:59 am
@AC – I am the real world right now; the lowering of interest rates does nothing to stimulate my interest in buying. Two things do though: 1) Stable economy (my six figure job exists in 2010) and 2) slope of median house price is near negative and increasing.
Without the above, I stash cash and rent. In fact, the lowering of interest rates has hurt me; my money market accounts went from near 4% to barely a 1%. If I am negative next month (appreciation), I am pulling that out too…why wouldn’t I?
December 27th, 2008 4:08 am
Graham, You are exactly right. Also, the folks who file for bankruptcy or got their credit destroyed by a walk away, will have the chance to get their credit repaired and start all over again in a few years. Many well know U.S. businessmen have filed for BK and they are still worth millions. As an example look at the CEO of the once failed Long Term Capital Mgt. He went out and simply started a new hedge fund. It is the American way.
I had a frined who started their career at the old Wachovia bank. They were AAA and their motto was:
1. Soundness
2. Profitabilty
3. Growth
After they mergered with First Union into today’s Wachovia, the “soundness” part was discarded so they could keep up with all their competitors.
December 27th, 2008 4:19 am
I have another friend who owned a $3M house. I think he bought it back in 2005. Anyway, he financed it with Countrywide and he didn’t have to put any money down. His credit was outstanding and he had a very good job. After1 year went by Countrywide mailed him a letter saying his house was now worth $4.5M and said he was qualified for a $1.5M home equity loan. He knew there was no way his house appreciated that much in that short of time. So, he phoned them and took the $1.5M.
Last year he walked away and gave Countrywide the keys back. He owned a total of $4.5M to countrywide. All he paid was about 36 months of mortgage payments all at the low teaser rate. The $1.5M home equity loan was kept in his savings account.
Back in 2007 he said the house might really be worth $1.9M. He simply walked and got $1.5M for doing so.
I hear tons of stories like this. Where do all these losses go? They are huge loss and not tiny credit card or auto loan loss numbers. I don’t think we will see a rebound in the US economy for years until all this is digested in the system.
December 27th, 2008 5:25 am
@Dick – LOL…shorting a mortgage, good for him.
December 27th, 2008 10:08 am
As a mortgage finance consultant I am amazed (not really) at what I see taking place in out current refi market. Loan officers are taking loan applications and quoting rates at 4.875% with zero points. Can someone as of 12/27 actually get a mortgage at 4.875% with 0 points. As of last week rates increased 4 days in a row off of there low of 4.875% for a 30 year fixed. Now my company offers a concession to the loan officer of up to 1.25% to either assist with reducing the rate or earning a larger commission. But our actual rate is 5.5% with 0 points.
Deceit, lies and fraud with continue no matter what the government does. We have a morally bankrupt lending industry that cares about one thing and that is “GREED” and at whose expense.
Mr. Mortgage is correct about the actions of a loan officer. After speaking with a client the second thing that I do after pre-qual is contact my appraiser and ask for comps.
The article is funny but true. Loan officers are dying on a daily basis. Everyone is fighting for refi business. We actually must work to get the purchse business while holding on with a hopeful stream of refi business. Not everyone will make it through this lengthy rough period. Realtors still expect miracles from the loan officer. They need to grab the smelling salts and face reality or get out of the business themselves. Oh how I wish the really stupid and foolish real estate agents with not a clue would fall by the wayside.
Low rates, low appraisals, low property values. What is next? Oh that’s right higher foreclosure rates.
December 27th, 2008 10:32 am
AC – with no due respect, I have never missed the market since I started by research firm late 2006 to shed light on all of this. I heard people like you call me stupid when I shorted Thornbug at $27 – they said their paper was AAA. Hahaha. I heard the same thing about the investment banks and Fannie/Freddie. Especially Fannie/Fred when I put out my sell opinion mid 2007 at their all time highs. In early 2007 people said ‘Pay Option ARMs have a lot of time and will never default like Subprime’ when I was calling them ‘worse than subprime’. Finally everyone said ‘people treat their home as a place to live and not an investment’ and I said otherwise – which is why the neg-equity effect is so dangerous.
The reality is that supply is surging and there is no ‘whole new group’ of buyers. Please dont listen to Cramer and Doug Kass who only think supply comes from home buidlers.
There are millions of vacant homes and millions more in the foreclosure pipeline. There are even millions more than that who want to sell but cant now because they owe more than the home is worth. Come Spring they will all list their homes in hopes of a short sale. Builders are still building faster than the pace of sales and the Alt-A, Jumbo prime and Prime mortgage defaults are just starting to surge, which will lead to many times more foreclosures/inventory than we saw in the past – remember most actual foreclosures to date are only from the small subprime universe.
The fact is AC we had near a 70% home ownership rate leaving 30% to buy. Move up buyers are gone because they cant sell for the downpayment or cant qualify even for the home they live in using todays sound underwriting guidelines. The only groups left to buy are first time buyers, renters and investors, the weakest groups historically.
Investors actually have been buying foreclosures all of the way down and have gotten their faces ripped off. Rents are dropping like a rock. Many of these ‘investments’ are in or will be in foreclosure as well.
The baby boomers were the group to buy housing and now they have been destoryed in real estate and the stock market. They are in no position to buy.
By the way a ‘normal’ economy is not 2003-2007 when people used their homes as an atm machine. We will never get back their. When we come out of this, if we come out of this, it will look much closer to 1950 than 2005. Take a look at a city skyline, perhaps Vegas. You will not see this change noticeably for 20 years. We are done. Now all of gthe excess capacity in all asset classes will get used slowly over the next next two decades and get old. Then something will come around to create another financial bubble that allows us to refresh the nations resi and commerical real estate.
December 27th, 2008 10:59 am
Sorry for all the “friend” stories.
I have another friend who bought their house for $475k three years ago and has been trying to sell for the past year for $466k. They are looking for a larger house due to having a kid. Their realtor tells them, “Sell Low. Buy Low.”
When I was thinking of buying in 2002 and the broker I was using tells me, “they (house prices) never goes down.”
These fuc*ing agents kill me.
-Dick
December 27th, 2008 11:13 am
Excellent breakdown. Americans will understand the only way for an economy to truly work is to spread the wealth. Unfortunately, the lesson will be hard learned.
Our economic model for the last 30 years has been eliminating good paying jobs in exchange for cheaper imports. We no longer have enough good paying jobs to keep that model going, and the result is what you see. Compounding this was avarice and greed from those that benefitted most from the economic model. The framework from structured finance was a scam from the beginning. Debt based derivatives will make the fallout hundreds of times deeper than 1929 – 1939.
It is hard to believe those at the top did not know what they were creating. There is a lot of evidence to suggest they knew exactly what they were doing.
December 27th, 2008 12:34 pm
Any appraisers care to comment? These were issued to address “concerns” in late 2003….
http://www.frbsf.org/banking/letters/2003/1105.pdf
http://www.frbsf.org/banking/letters/2003/1105a.pdf
December 27th, 2008 12:57 pm
Outstanding summary and predictions, Admin. Each time they move to artificially jack up the market, they scare me (somewhat) into believing that things will stabilize. They will not…at least for a decade.
You summed it up very succinctly.
December 27th, 2008 1:04 pm
Mark aka Mr. M,
You nailed it – This will cause many more borrowers to default. If nothing else to see what type of modifications they could receive. I personally know of dozens of borrowers who can afford their payments have stopped paying to see what type of modifications they can receive; most could afford their payments at least from their savings. Instead of social acceptance of loan fraud; we will have social acceptance of loan defaults. Massive loan mods will not work and the failures of loan mods is already widely proven.
Besides those who will intentionally default; those who never purchased a home they could not afford will avoid taxes or commit other crimes.
It is time we accept reality. Our nation is bankrupt. We must demand that rule of law is restored or we will soon be living under martial law. We can survive bankruptcy, but not anarchy.
The “king pins” who created this crisis must be indicted and disgorged. Fraudsters whether executives or homebuyers should not be bailed out at the expense to our Treasury. Perhaps the borrowers have a cause of action against their loan originators who should have qualified them. Per the broker/lender contracts the loan originator and ultimately the broker is required to obtain and analyze the borrowers income to determine the loans they can afford. This is required regardless if the borrower applies on a stated/ no-doc loan. If the loan originator encouraged the borrower to commit fraud the L/O and broker should be liable. PERIOD. Many of the L/Os were direct employees of the banks. Legal assistance and a streamlined process should be made avaiable to these borrowers.
“It is settled, however, that “If the realizable likelihood that a third person may act in a particular manner is the hazard or one of the hazards which makes the actor negligent, such an act whether innocent, negligent, intentionally tortious or criminal does not prevent the actor from being liable for harm caused thereby” Richardson v. Ham 44 Cal. 2d 772, 777 (1955)”
The Executives essentially laid out the plan and paid hitmen whether they were their own employees or independent brokers to enslave borrowers in debt. Unqualified borrowers were temporarily more profitable than qualified borrowers. Unqualified borrowers thought they were also scamming the system and thus were not as concerned with high interest rates, fees, prepayment penalties, home prices and most importantly needed a steady diet of cash out loans to maintain payments.
Most qualified borrowers had locked in historically low rates in 2003 and the remaining business was from buyers and or unqualified borrowers. Clearly, the fraudsters removed supply and grossly inflated home prices.
Although outstanding mortgages did explode from 2003-2007 they paled in comparison to the amount of churning. Outstanding mortgages grew from $9.4 trillion in 2004 to $14.6 trillion at the end of 2007.
The State of California’s complaint against Countrywide provided the following loan growth available at http://www.michaelblomquist.com/casespending/CAvCFC/FAC.pdf ¶ 28 “Countrywide generated massive revenues through these loan securitizations. Its reported securities trading volume grew from 647 billion dollars in 2000, to 2.9 trillion dollars in 2003, 3.1 trillion dollars in 2004, 3.6 trillion dollars in 2005, and 3.8 trillion dollars in 2006.”
This growth was unprecedented, especially in an increasing interest rate environment. Countrywide’s annual volumes made the staggering growth in outstanding mortgages appear uneventful. Nationwide outstanding mortgages grew by a whopping 5.2 trillion from 2004-2007 and Countrywide equaled 73% of that total in 2006 alone.
Let’s face it loan mods are not about keeping borrowers in homes they are about artificially maintaining inflated home values. Inflated home values will keep all disposable income servicing mortgage debt instead of in other more productive investments.
If all of this fraud and corruption occurred in a supposed “free market” imagine the damage from our new socialist reforms. The $350 billion is not accounted for and Paulson wants his hands on the next $350; no thanks Hank.
We need to demand that rule of law is restored if our Nation is going to survive.
We should get the word out for everyone to stop making payments in January of 2009 and continue to not make payments until the king-pins are indicted and disgorged.
It should be everyone’s New Year resolution to get more involved in our Republic – government.
December 27th, 2008 2:11 pm
The last shoe to drop on the real estate industry is just around the corner. Brace youreselves….
I’m an Appraiser and just recieved word from my State Licensure board that the feds finalized the HVCC (Home Valuation Code of Conduct) which will be enacted March 1, 2009. This means no Broker, Loan Officer, nor Processor will have any contact whatsoever with the Appraiser. You will not have the ability to choose your Appraiser, know who the Appraiser is (their temperment/education/experience, etc), or will you have the ability to get a “comp search” to see if the loan is going to even fly in the first place. Believe it or not, “comp searches” were never technically “legal” to do as they are considered an appraisal. But, we all know they were done on every loan ever made to make sure the loan was even going to work before people invested their time and money. As well they should be. It’s good for the consumer and eveyone else involved.
So now, all the work that goes into preparing someone’s loan may very well be all for nothing as nobody will have any idea if the loan will work until the lender lets you know if the value came in okay or was way off!! Can you imagine the fall out this is going to have?! Not to mention how pissed-off the borrower is going to be when they find out they have no loan and that they are also on the hook for the appraisal fee as well. Or, even worse, they refuse to pay the appraisal fee which means YOU, the Loan Officer, must pay it and then attempt to pursue the borrower yourselves thereby making you a quazi credit collection agency, but without getting paid to do so of course. This is going to get ugly folks!!
I’m not even on the loan side of this and I know this is going to be the death blow to the industry. The feds continue to do this kind of thing without ever putting even one brain cell into the possible ramifications of their idiotic grnad plans. This really appears to be the feds way of getting rid of Brokers for good through what they believe is a sneaky backdoor move.
Call on your Congressmen and women right now BEFORE they enact this stupid ass thing people!! They are trying to “assasinate” YOU!!! Believe it!!!
December 27th, 2008 3:33 pm
[...] Low Mortgage Rates to Spur New Wave of Defaults Mr. Mortgage. Whether or not you buy the conclusion, a useful discussion of the impediments facing borrowers trying to refinance. [...]
December 27th, 2008 3:54 pm
Michael Blomquist said:
“It is time we accept reality. Our nation is bankrupt. We must demand that rule of law is restored or we will soon be living under martial law. We can survive bankruptcy, but not anarchy.”
Michael: Many of us not only ‘accepted’, but have lived in reality – for a long time. Much longer than any of the recent financial bubbles of the past 25 years…
Martial law or blanket nationalization both, are coming in due course. Why?
Because in addition to the ‘normal’ human vices of avarice & envy which, can be contained within a spirit of mutually agreed upon standards (rule of Constitutional law), what cannot be contained is an entitlement mentality and its deadly spawn of ‘victim-hood’ status, bred in large part by the government/special-interest complex.
As economic conditions deteriorate, the finger pointing in all directions intensifies and scapegoating begins in earnest, the entity standing at the ready to fill the void left by irresponsible conduct will be:
Government
Many say this is not a bad thing as ’something must be done.’ But that something or someone, in true entitlement, victim-hood fashion, is action from anybody but themselves.
I strongly agree with your position that we as individuals need to become more involved in our Republic. And by use of that word, it tells me that you understand the key difference between our system of government, and ‘democracy’ which we are force-fed by idiots who know nothing of Liberty.
This whole mess will likely turn into the biggest contest for individual freedom the country has yet known. And I’m not talking about the ‘liberty’ to buy a house, drink a beer, go on vacation or do naughty things to your boyfriend on top a parade float down rolling down main street at Noon. The aforementioned activities are what most dumbfounded-dipshits have come to understand as Freedom.
Along with the upcoming floor the feds are likely to put underneath the deflationary spiral of home prices in the near future, will also come a heavy hand of intrusion and regulation of your lives like you have never seen before.
Get ready for ‘Change’. Not the change government is going to bring (and you don’t want, trust me), but the kind of change you’re going to bring by getting involved to reduce the size and scope of what brought us to this precipice in the first place.
Peace -
C.C.
December 27th, 2008 5:46 pm
C.C. I could not possibly agree with you more. We will see the first hints of uprisings and protest soon enough in the OC. This is one of the areas in this country you do not want to mess with. A volatile region of vast differences of which the have’s and have not’s are always at war as it is. I sense this area will be one of the hardest hit in terms of violence and people standing up and screaming what the heck is going on? This area will simply not tolerate what is coming down the road for them. A median income in many areas of around 50K and median home prices that escalated to around 500K (10X) in many areas will leave many homeowners frustrated and more than willing to let people know about it.
What so sad is the amount of people still in denial in this country and that still think we are nearing a bottom and still think that their homes are worth so much more than they realize. This awakening to realization will be a very bitter pill (as Mr. M. points out) to swallow for many, many Americans. It is this very awakening that is going to thrust this country into shear turmoil as the housing downturn continues on it’s path of destruction.
Alt-A, Jumbo, Prime or whatever makes no difference now. We are all going down together at this point. With no move up buyers (as Mr. M. again points out) the pyramid scheme stops dead in it’s tracks. Lower interest rates do nothing at all in this scenario in terms of helping out. We simply need things to play out. With the continued poor policies of our Government stalling this from taking place it is merely extending the time it will take to have everything correct itself and adding a much larger cost and hence burden to our society and the children within it that will be left to pay the piper for these errors.
With all of that being said I do believe America will pull out of this as we always have in the past. I think some changes we shall see take place are long overdue in terms of getting back to our roots so to speak. My only fear is what direction Obama takes. He has hired a lot of qualified people around him in my opinion, but what he said on the campaigne trail will vastly oppose what really needs to be done. In fact most of it will only serve to make matters worse in housing and the overall economy in my opinion.
We need principle reductions and fast. They are the only thing that will solve the problem at hand. We need to stem foreclosures and stop walk away’s and without principle reductions it cannot be done. This is why I stated in past post that they are being discussed right now in Washington and as soon as they are viable to pull off (through Fannie and Freddie) they will be. Before or after Obama doesn’t really matter now, but they must be done and done soon. This country can ill afford the implosion Mr. M. speaks off now that all of these bailouts have been insituted. The tax payer and the country will take an absolute beating. We have now been backed into a corner with only one escape. People will welcome them over the alteranative once they truly understand the scenario at their feet in my opinion. We shall see…
December 27th, 2008 5:53 pm
Yes,
‘no appraisal’ refi’s are exactly what the Fed Treasury and FHA would consider a prudent and rational response to the panic the regulators feel. They will increase the tax payer risk to any level they deem necessary to alleviate their panic. They set the agenda with Bear Stearns, AIG, and all the other banks that needed rescuing and propping up.
I wonder of the Treasury might want to backstop/guarantee and artificially price fix all these homes at mark-to-make-believe prices, so the FHA and other lenders can get on with their very important business of extending credit and lending
December 27th, 2008 7:03 pm
@ CC and Blomquist, too few people understand our forefathers intentionality with regard to the Republic. It will soon be time to reclaim the Republic and state rights ~ after the Obama experiment/New New Deal expands the government to an even larger grotesque proportion.
And back on the new 4.5% mortgage target: a few of my friends had been considering walking away from their mortgage too. Their plan was to use their good credit to buy a new but similar home for half price and then walk away from the overinflated home they own. They will be further incentivized with these new low long term rates.
December 27th, 2008 7:07 pm
A comp search can be done with access to the MLS. Not that tough, really. But I have to believe that lenders are getting tougher on Appraisers to be “conservative” in their appraisals.
I have to agree with MM. The fed govt will start to allow refi’s without an appraisal. Since it will be all to obvious that getting an appreaisal will not only kill the deal, but also make the owner very aware of the market value.
Thanks MM. As usual, very nice work!!!
December 28th, 2008 2:46 am
There are many good points why no appraisal re-fi’s might make some sense in this market. One is it would improve the cash flow of the consumer, perhaps making them feel better about their situation, even if they are upside down. It could also pump more money into the economy via this increased cash flow. Lastly, as long as the borrower isn’t getting any additional cash out and these are just rate and terms,how is a lenders risk increased? In fact, for the above reasons, it may reduce their risk and perhaps even give them an additonal level of security by the new loan being recourse now.
Look, I think too many people, including Mr M, are thinking that there is only one magic bullet that will fix this issue. Fact is it will take many options including low rates, no appraisal re-fis, mods, principal reductions,etc to address the problem. When a borrower calls in to find out that they may not be able to qualify for the rate they thought they should, then these other options should be discussed to the extent they are available as well as other options (ie renting their current res out, moving to a smaller place effectively perhaps increasing your monthly cash flow,etc). We all need to be problem solvers.
And to those of you speaking of violence, uprisings,etc really need to get off this board and others like it that only spin doom and gloom and get more balance in your life. Your lack of faith in human nature and America’s resolve is disturbing and lacks a historical basis.
December 28th, 2008 10:02 am
No Michaelphelps – say it aint so. There is nothing good that can come from doing 150% refinances using tax payer money to fund it.
Accepting a refi with no appraisal means you…
-acknowledge the full debt regardless of the value of the home;
-waive all rights to fraudulent or predatory lending claims in the future;
-turn your loan into a full recourse loan that could follow you for life even if you choose foreclosure down the road;
-remain underwater, full-leveraged, renter for the rest of your life (in most cases);
-will save no money at 38% housing debt-to-income ratio plus all other debts;
-may not discharge any of this mortgage debt through any bankruptcy even after foreclosure;
If widely accepted by home owners, this will ruin the American consumer and make housing a dead asset class for decades. If you are in a serious negative equity position when signing these forms, as most are, remember that you will:
never be able to sell your home
never be able to buy a new home
never be able to rent your home due to owner occupant provisions
be responsible for the full loan amount even if the value of your home keeps dropping for the next 10-years
There is nothing different between these and a mortgage modification that keeps them upside down for years. BUT, now the mortgage mod gets shoved directly onto the tax payer because these loans will be unsalable for any price.
December 28th, 2008 11:27 am
why do i have a feeling the fire departments better start practicing, as i think they will be very busy in the upcoming years
December 28th, 2008 1:03 pm
michealPhelps said : “There are many good points why no appraisal re-fi’s might make some sense in this market.”
I find this statement troubling to say the least, as it was one of the reckless policies persued by the mortgage industry to get unqualified buyers into overpriced real estate. Suggesting this to be a tool to provide some sort of improvement to an already underwater home owner’s situation does makes no sense to me. Nothing personal here micheal..just an observation.
December 28th, 2008 1:06 pm
sorry for the typo should have read
December 28th, 2008 1:09 pm
Michaelphelps, it is indeed that historical basis of which you speak that I am referring too. You seem to forget that history has a way of repeating itself, and if we are not careful that is what will happen. My personal faith in human nature to not stand ideally by while those that govern us render our country financially useless is the exact faith I speak of. You appear to be one of which lives in a fairy tale land looking through rose colored glasses with pie in the sky ideals. The housing bust that Mr. M. continues to speak of, and with near perfection I must add, is bringing this entire country down with it. Listen to yourself speak on the need for no doc refi’s to solve the problem at hand. If you were schooled properly in the dilemma that we are in then you would realize that is what got us where we are at today in the first place. You advocate as many a fool does, to repeat the pattern from which we came. The way out of this is not the way we came in, but rather an entirely new approach is needed. One that does not place us in even more debt and thus cause us to be even more reliant on Government assistance to be saved. As each day passes with a continued outlook such as yourself, we fall further in debt as a nation. Bailout after bailout in an attempt to stave off the destruction in wealth through the fall in real estate values only further deteriorates our nations ability to heal. Their is an answer but it will be costly and it is not one of political favor. Principle reductions is the only solution in my opinion and until they are done we will financially fall further and further as a nation. People with views such as yourself only continue to enable it to exist as a solution and a very wrong one at that.
December 28th, 2008 1:33 pm
@ Michaelphelps
You overestimate America’s resolve. Let me quoteth the disclaimer: The Past is No Guarantee of Future Performance. Our country of do-gooders since the time of Wilson who went to war to end all wars and we have been fighting the world ever since. along comes FDR to improve the US economy. Most of his programs were abject failures that were discontinued during his term. Those programs that outlived him such as Social Security in 1935 is a flawed model that will be insolvent by 2030. LBJ’s flawed medicare program in 1935 will be insolvent by 2018.
The self-deluded do-gooder US government has spent the last three generations trying to improve our lives by giving us entitlements to all sorts of free lunches. Guess what happened, Americans became soft and mushy. No longer are they thrifty, self-reliant and independent. They are insolvent and can’t fend for themselves. Given this historical backdrop, one’s faith in America’s past resolve is misplaced.
December 28th, 2008 1:47 pm
@ Mr. M,
I have visited your blog on occasion b4. Yves Smith from Naked Capitalism referred me to this post. This is an exceptionally good post because it underscores so well the intentionality of Bernanke, Paulson, and other do-gooders trying to save the economy from sinking further into the morass they created. The intentionality is explicitly to put the taxpayer at unlimited risk. Let us not forget that fact here folks. Forget about the upside down over-levered homeowner for a moment and remember this about our do-gooder government, Federal Reserve, policymakers, lawmakers, US Treasury, and other agencies: collectively they been putting us the taxpayer at unlimited risk after their mistaken goal to put everyone into a home (no matter the cost or risk) blew up on them. We are the patsy’s here folks. If you wonder who the bagholder is in this equation, who the greater fool is in this situation, look in the mirror. If you see a taxpayer in the mirror, it is YOU!
December 28th, 2008 2:03 pm
@ Stu, “People will welcome [principal reductions] them over the alteranative once they truly understand the scenario at their feet in my opinion. We shall see…”
You are wrong here. Understanding never dawns on us until after the fact, which will work against your premise. We typically never arrive at the best solution until after exhausting all the wrong (easy) solutions, and even then, the belated response is not always a good one. Consider the Homeland Security” and “Patriot Act” in response to 9/11. Consider also FEMA’s belated response to hurricane Katrina. Those tens of thousands of trailers the gov’t bought are still sitting stacked up on lots unused.
No, we will choose every rotten despicable choice possible unless as and when folks like you and I and Mr. M stand up and say NO.
December 28th, 2008 2:33 pm
Mr M, I think people lose much credibility when they use terms like “never” as you like to throw it around. Truth is, you don’t know. There are plenty of people from the last down turns who lost equity and their homes only to regain it and/or go on to buy a home. There were people like you then mongering to the moment in fear telling them they were doomed for life too. There are few absolutes in life despite your attempts to show that housing has the market on them now.
In regards to the other points and the implications to the homeowner, yes they have to consider those items in exchange for what they are recieiving. Again, not one solution is going to fit everyone and some will chose not to take this one. But for some, it may be a piece of the puzzle that saves their home. It seems that most of your posts only deals in extremes in terms of solutions and emotions. I am not buying them.
December 28th, 2008 2:35 pm
Excellent posts as always Mr.M and great dialouge.
Maybe I mised something here but, who exactly is going to cut the cheque for principle reductions?
Someone has to pay.
December 28th, 2008 2:41 pm
5755hsa, lets be clear here. I am not advocating putting or keeping unqualifed people in homes. I am saying that there is a piece of good business out there where people qualify for their homes in ALL areas EXCEPT the appraised value. By waiving the appraisals requirement (or heck, even do one but just ignore it for valu sake) we would be putting these well qualified people in a better position mentally and financially to remain in their home while things work through and pump some money back into the economy while doing so. This wil allow the market to deal with those truly unqualified that will lose their homes without unneccessarily dumping inventory on the market where there is a viable option with qualified and willing clients. To me its one of the biggest no brainers out there.
December 28th, 2008 2:47 pm
stu, read my reply to 5755 as to what I am advocating. I never said no doc loans and again, this is not new debt the qualified people will be taking on, it is existing debt that they have already been making the payments on despite higher payments and little or no equity. We are talking about helping those that aren’t tanking, that will probably take the savings in payment and either save it or spend it appropriately. These are the ones that you want to help because they can help themselves.
BTW, who do you think will ultimately pay for the principal reductions, especially en masse, as you and others advocate?
December 28th, 2008 4:39 pm
My Esteem-able Gents,
We are Broke. We are broke (collectively) as individuals and long over-broke as participants in a body of government. Credit card defaults-on-the-near-horizon, followed by auto-loan defaults in few months, exacerbated by existing student loan defaults and every other manner of debt-slavery all the same.
This house of debt-cards is coming down. You can try to policy-wonk it away, you can try to wonk-the-numbers every which way ’til Sunday – it won’t matter. The intentions are admirable surely. Susan comes to mind here. But it’s tossing a sandbag at a 30 foot wave.
In order for us to start anew, the great unwind of the century must be allowed to find its level – with all of the attendant suffering present and yet to arrive. To try and prop it up with fix here and patch there, isn’t going to work. Doing so will only magnify the end result, in addition to tightening your already slack-deficient chains bound to government servitude.
Much good will come out of this – but only if the market is allowed to swallow the corruptness and inefficiencies borne of a bloated, bureaucratic nightmare that is our government.
This mortgage problem spans well beyond ‘mortgages’. It is a systemic problem of a debt-based economic mentality, brewing for the past 25+ years.
Fear not whether a principle reduction or some other form of a ‘Floor’ is put under this clay house – it doesn’t matter. This spring has been sprung and nothing is going to put it back to the way it was; Home values, borrowing ability, spending ability – all of it.
It’s Done. Flog the ’solutions’ to death if you like. Just make sure you got some cash put away because that’s all that’s going to matter for the near term. Time and the market process will work out the rest – assuming we don’t drill ourselves into authoritarian rule in the meantime.
Peace -
C.C.
December 29th, 2008 12:17 am
I’m in complete agreement with what C.C. just said. I can understand everyones, (and this sites), attempts to fix this problem, but as Mr. M has already stated, we are watching one class of loan fail after another, a virtual chain reaction of the market.
The only historically proven method to fix things has been a market correction of everything, (loans, house prices, CC, etc.). Trying to fix that by putting a floor on a bubble just isn’t going to work no matter what fix you are in favor of.
I’d just like to see this site expose the cover up and the unworkable solutions that are keeping this market from finding a true bottom. Isn’t that what this is all about? Finding a bottom or a place where first time buyers and move up buyers will start buying again?
This workout is really going to take 10 or more years if these banks get assistance that allows them to protect the bubble prices on their REO’s. You see I’m all for principle reduction to take effect, I just want it to happen after they forclose so that the house is available to everyone, (i.e. The Market), not just the lucky few, (nieve, crafty, or crooks), that bought when it was easy to get a loan.
My own personnel pet peeve, I see a 12 month forclosed Jumbo home loan at $650k on a home that sold for $325k in 1998. Every 3 months they drop the price $5k. Everyone knows that they won’t get any offers but the Real estate agent, appraiser, and the bank keep up the value of the neighborhood by keeping that unsold home price higher then the “market” will pay. This housing crises will really go on for 10 years unless we quit fixing things and really let the market take it’s course. I understand it’s tough but IMHO I really think that is the only solution that is going to work.
December 29th, 2008 2:10 am
They let the “market” correct “naturally” at the beginning of the Great Depression and when they realized that was a bad idea, it was too late. And since when is a “principle reduction” not some kind of outside-the-market action? Very few reasonable and knowledgeable professionals don’t feel that some kind of intervention is needed although, as seen even by this small sample, there are many thoughts as to which action to take.
December 29th, 2008 2:31 am
How can the market be stopped? Send every house hold $100K for 5 years in a row. That may put a floor in the house market. The bottom line is that it’s a bursted bubble, humpty dumpty, if you will. I dont see how they can go back in time. Prices are coming down, period. Unemployment rising, wealth effect stuck in reverse gear. The house of cards is coming down.
December 29th, 2008 3:04 am
No “solution” is going to prevent the ultimate outcome of the drop in asset values here – it will just slow the angle or rate of value decline. If the economy had held up (although so much of it was artificially debt-induced that it stands to reason that if housing market tanked it would not hold up) some solutions may have slipped a floor or other fall-breaking device in the process. But with jobs disappearing this is only going to get worse.
Two other thoughts: (1) I think as we go into 2009, we are going to see a greater resistance to any “solutions” by the national populice. While the housing problem has hit virtually all areas of the country to some degree, this is largely a California, AZ, NV, and Florida problem with a few other acute problem areas. It’s pretty clear that California is the epicenter for all of these bank failures and issues with MBS. Pretty soon, it’s going to be hard to get as many congressional votes from the Midwest and South to bail out California, both homeowners and the state itself.
(2) While I do not subscribe to the “Armageddon” view of the country and social unrest, everyone needs to look around and picture their neighborhoods at a house value of 25% less (on average in the US) and determine if they want to live there in leaner times. I’m lucky enough to be in a land-limited pocket of a major metro area with good schools and stable upper-middle class neighborhoods where values are still actually rising (although flattening) and where employment is not an issue as of yet. But elsewhere in the metro area you see cheap suburban homes with small lots thrown together and you can envision a suburban ghetto in about 5-7 years. Some of these lower-end subprime to Alt-A neighborhoods are going to be absolute warzones in a few years when many of them are turned into Section 8 or other subsidized housing. When investors or the government become the buyers of these homes and can’t find decent renters, they’ll all go to the voucher programs and absolutely decimate these areas. You’ll have cities like Paris where all the suburbs are ghettos.
December 29th, 2008 3:41 am
JJ
I think there is a good chance that President Bush is going to declare a state of emergency and resolve the situation prior to Obama stepping into office. The Fed does not want it, it is endangering their institution. Congress does not want it and every institution is being drawn into the TARP.
The H.4.1 statement from the Fed was not released on Friday. True that President Bush signed an executive order proclaiming a Federal holiday for executive branches on the 26th but under the same circumstances in 2003 the Fed released the H.4.1.
Right now I am holding this condition highly suspect.
It is also possible that this could be done on an international level.
December 29th, 2008 3:45 am
CC:
Thank you for thinking of me with your kind thoughts. I hope your holiday was good.
December 29th, 2008 5:30 am
Hello everyone,
Most of your comments were very well written, I wish I could write and express my point as well.
Just a one reply:
While the bubble states have been affected by almost 50% declines in property values, the majority of the non-bubble states have also been affected. The national decline in housing prices from its peak range from 23-29% according to what index is being used.
I invite all of you to research exactly how much the market has “corrected itself” so far in your state.
Suffolk County, New York:
My house was valued at $425,000 in August of 2005. As of October 2008, it was valued at $300,000. That is a 29.4% decrease so far.
The above fiqures came from my local Multiple Listing Service.
This does not take into account, two homes that recently sold 12/08 for $205,000. and $249,000. within .10 mile from me. Both sales will reduce not only my house but my neighbor homes as well, who might be mortgaged higher making them underwater.
Most economist are predicting anywhere from 15% to 30% additional decline in housing prices for 2009 alone without any governmental intervention/interference in the market due to the massive defaults / foreclosures occurring.
This would lower my area to approximately $210,000. Would New York be considered a bubble state then? How many other bubble states would be added to the list? How many more homeowners would be underwater?
The market is not correcting itself, the over-supply of foreclosures are lowering the market values and will CONTINUE to lower values.
Remember the “market” didn’t increase without outside assistance in the form of easy credit, it is not decreasing naturally either but as a result of the easy credit being withdrawn and the foreclosures being sold under what the “market” was.
It is my opinion that letting the market correct “itself” as dictated here, it will over correct on the depression side.
Japan let their real estate market correct itself, while it attempted to correct/boost their banking industry instead, the residential real estate market loss 90% of their value and it remains there today.
FYI-commerical real estate loss 99% of its value. FYI- Japans society in general had savings while USA society in general does not.
Personal request- IMHO definition Thank you and enjoy your day
December 29th, 2008 6:22 am
Actually these loans were available all over the U.S. The bubble States acquired the title simply because in those areas they really went crazy. There are numerous pockets all over the country where you will find lots of bubble pockets. In addition, (according to Mr. M), you will find a large group of people who also didn’t get caught up in the bubble pre-2000, and don’t have any intention of selling their home now even if this lasts for 10 years. They are the bedrock here.
I Zillow’d your area of New York and saw houses similar to the rates you quoted, $425k in 05, $300k now, this was just a random sample but when I looked at the price in 97-98 when the bubble started building, I saw that those same houses were selling for $185-$200k. In and “investment market” when I see my investment go up over 100% within 8 years I’m not all that surprised given all the strangness we’ve seen lately to see it go back down 100%.
I’m sorry as can be that these homes/investments didn’t work out as I know it’s hurting lots of people right now. I’ve had some equities take tumbles and just disapear during this same time frame so I know how it feels. It’s just that no matter how many fixes we apply, they will not benifit the majority in the same way a natural market correction will. People forget that the true causes of the Depression were gov’t fixit’s on other aspects of the market. It wasn’t a housing meltdown that started it but many people forget that a number of fixes of the new deal actually made the depression last longer.
December 29th, 2008 10:02 am
Simple question – The lenders will foot the bill and not the tax payers as we are doing today with all of these bailouts. REO sales are often 30%-60% less than the value of the mortgage paper being held. If you’re a lender holding paper on a 500K home for example that will only fetch 250K-300K in a distressed sale then why would you not write down the value by 100K and redo the loan at a 30 year fixed rate keeping the homeowner in the home and holding paper worth something still? The home is only valued at 400K so the homeowner could walk at a huge loss to he bank or they can stay with a more affordable home loan. This is not playing with the numbers but rather making a practical decision by the lender to save themselves from total collapse if foreclosures and walk aways continue on a wide scale as they appear to be doing. To me personally this is a no brainer for the lenders and results in a win-win.
Michaelphelps, you asked who will pay for the principle write downs? Please see above and I would add that some lenders will go under anyway and due to the Government involvement and use of future tax payer revenue to bailout many of these lenders we will foot the bill for some of it. We can’t change that because it is too late now, but we can stop the silliness and put an end to further collateral damage by stopping these wasteful actions and allowing the companies themselves to take the losses. The companies that we can save at that point we save and those that clearly are too far gone we let go under. At least we would then be throwing money at the right lenders and not simply tossing a blanket over everything.
This is all about enduring the least amount of damage from the fall in home values to the homeowner. Everyone cannot possibly be saved and we know that, but we must target those that make sense to be saved and not try to save everyone. Home prices must be allowed to fall and find their true value (income / Rent) based on historical guidelines that have always worked in the past. Principle reductions are not only a way to get there, but also a way of slowing down the foreclosures and walk aways. It is those REO sales that are crushing comps and home values for not only existing homeowners but the mortgage paper these banks hold as well. The more we see distressed sales the more we see losses across the board. It’s a lose-lose to keep allowing this to occur. We will over correct as a result of this as well and that will cause even more damage than what should actually occur in a more orderly fall.
We must act in a prudent and practical manner that has the best overall affect on homeowners and the housing market. We need to keep people in their homes and at values that properly reflect true value. The sooner we do this the better of we will all be as a country. As bitter of a pill this is to swallow for some it is the best possible, and in my opinion only, solution to this downturn in the housing industry. If this is not done then what we are witnessing today will continue and in fact ramp up at a very sharp pace as we see moratoriums come to an end, homeowners walking away in much larger numbers and foreclosures in the multi-millions in 2009. We cannot afford to allow this to happen due to the overall damage it will ultimately cause to this country.
December 29th, 2008 10:11 am
[...] Low Rates Fuel New Defaults [...]
December 29th, 2008 1:19 pm
KurtA:
We are not experiencing a natural market correction, but the result of the easy fantasy financing era ending (less borrowers) and the over-supply of homes due to REO’s and potential defaults. The deflationary cycle or market correction is the supply and demand theory of business in reverse, that was engineered by under-regulation of government and the greed of Wall Street for additional profits.
Supply and demand is what fuels the market price, the creation of a massive supply of borrowers allowed for a higher demand of homes increasing the price. This did not occur naturally nor is the reverse occuring naturally.
While I wish that the current situation never happened, it did, I believe the doing what is best for the majority should be the number one concern of our government.
As you can see, BertDilbert and CC, totally disagree with my proposal that structured principal reductions based on appraised values, reducing the homeowners who are underwaters debt is the fairest way to correct what lenders and government allowed to transpire.
Since you Zillow’d my area, you will also see that the median income for my area is $92,510. Using the 3x income rule would make homes in my area valued at $277,500. The current quoted value is $300,000 but what is actually selling is under that value, see last post. As the market correction continues, my area will over correct, how many more are there?
How many people are affected by the current state of housing? Is it more than the number of executives at the financial businesses?
December 29th, 2008 2:12 pm
“Personal request- IMHO definition Thank you and enjoy your day”
IMHO=In My Humble Opinion
December 29th, 2008 2:14 pm
Not many appraisers still doing free “comp searches”. They are under the gun too for this illegal activity. And, let’s face it, most of the crooked appraisers are out of the industry anyway. Also, you need that documentation in your loan file that the house is not worth enough to do the loan. A verbal value won’t cut it and no appraiser will back you up and risk his/her license. Without that value documentation you are violating fair credit laws (unless you use another excuse that can be documented for declining the loan). As a lender you had best CYA as borrowers will complain at the drop of a hat to the regulators if they think they are being cheated.
December 29th, 2008 2:19 pm
For the record the HVCC does not take effect until May 1 (not March 1). The final rules are not out yet. They tell us it will be published in the first weeks of January. It is most likely that any lender selling to the GSEs will require some form of firewall between the LO and the appraiser. The form of that firewall is at the heart of the debate (ask any appraiser). We have already seen this with Wells and soon Chase. Most broker files are re-processed and double checked now anyway. In the future, brokers are likely to be little more than referral agents as lenders will not trust their documentation.
December 29th, 2008 2:26 pm
Mr. M,
Another great post. While I agree with your opinion that principle reductions are the only way out, the question remains, who will pay for it? I have read several options and opinions on your site as to who should bear this burden but have another for consideration.
Why not have the lenders simply match the borrowers payment each month in the form of a principle reducuction and do so in proportion to the amount the owner is underwater. For example, if an owner is 50% underwater, each payment the owner makes is matched by an equal loan reduction. If the owners pays $2500 each month, the bank lowers the principle by an equal amount. If 25% under, a 50% match each month, and so on and so forth. So a $500k mortgage on a home worth $250k (assuming interest only) goes down by $30k over the course of a year (if mortgage payments are $2500). This way, the owner is getting a principle reduction but only if they continue to pay. If the loan was a fixed rate with P&I being paid each month, the balance would go down even faster. If the borrower is in a home they cannot afford anyways, the bank will foreclose. This could be a solution which slows foreclosures and strikes some sort of balance between borrowers and lenders sharing the burden.
It’s not perfect but it would help the homeowners hit the break even point (money owed = home value) much sooner. It seems like a big reason to walk away is that walking helps an underwater owner recover their losses much faster than toughing it out in their current home. This plan would help to close the loss recovery time gap between walking and staying. Assuming home prices are at today’s values 8 years from today, this would help owners breakeven around that time and actaully have a chance to own their home some day, something several people have no chance to do if nothing is changed.
Comments?
December 29th, 2008 2:26 pm
Susan
Be fair, I gave my reasons as to why it would not work. The only solution will come by executive order and not through congress because by the time congress is done trying to fix a package that benefits CA and addresses compensation for their states it will be 2010 and just over halfway through the crisis.
We could possibly get a currency exchange that would reduce debts by 50%, old dollars for new dollars or something creative. We are not Japan so those going on the Japan theory will likely be proven wrong.
I am just starting on the thought of Executive order principal reductions and how that might work so this is all fresh thought and rough on the edges so to speak.
I am not against your ideas, I think they are good and have basis. I look at theories as a fully threaded bolt. The nut has to run smooth all the way to the head. Here we have multiple bolts and I have nuts jamming up as I try to work it through. When a nut jams, we have to start again and try to work the nut down.
When it runs smooth to the head, then we have good theory. Theory is not fact but presents a possible solution. Sometimes we have multiple theories which presents multiple possibilities as to what really happened or is the likely outcome.
Since it is already proven that you have a brain, I want to hear what you have to say.
December 29th, 2008 2:27 pm
Hi Susan,
A keen observation on your part:
“It is my opinion that letting the market correct “itself” as dictated here, it will over correct on the depression side.”
You are 1000% spot-on. Over-correcting is what markets do. It is their nature. Markets are people, personalities, virtues and vices First, numbers, analysis and logic, 2nd.
A changing market will never revert to the mean before swinging (Wildly) to the opposite first. And in the wake of these wild swings, Asset and wealth destruction on an epic scale – as we’re experiencing now, is the Rule.
And this is precisely why ‘targeted’ programs – while sound in theory, prove useless in practice for the aforementioned reasons relating to markets, given my statements above.
You are witnessing a ‘Wave’ right before your eyes – in real time. A wave of actualities and sentiment An unfortunate element of this drama is that ‘fairness’ becomes a casualty within the larger scope of the overall ‘cleansing’ process.
It is my belief, as pointed out in previous posts, that something will be done regarding principle reductions or some other form of re-working the system – up to and including a full Nationalization of the home mortgage market. As a result of a ‘wave of sentiment’ referred to in this post, the latter solution is likely to be implemented.
Our society at large is not the same self-sufficient type of populace that it was in the earlier Depression. The demand for ‘action’ on the part of a 3rd party (Government) will prove too great to resist. The entitlement caste combined with the ‘I’m a victim’ mentality will simply not allow defaults (to increase) and housing prices (to decline) much longer.
The end result will be a quasi-fascist government and a currency with a value in the $.50 USDX region.
But hey, who cares right? Save the homeowner and put some spending money back in his pocket at the same time to ’stimulate’ the economy.
Apologies for my cynical nature, but it’s served me pretty well.
Peace –
C.C.
December 29th, 2008 4:57 pm
Partyboy:
Your proposal if I understand it works as follows:
For both the homeowner who is current or deliquent but underwater.
If the homeowner had a $500,000 mortgage at 5% whether fixed or adjustable, the monthly payment of $2,684.11 would be paid by the borrower on a $250,000 home.
The principal reduction given by the bank to the homeowner would equal the monthly payment. It would take the homeowner roughly 7.75 yrs to reach the current home values of $250,000 with no further decreases in value. (versus 20 yrs at the present mortgage arrangement to obtain a mortgage balance of $250,000) The homeowner would be at 100% loan to value after the 93 months, they still couldn’t sell or refinance without the bank accepting further monetary loss. Question: at this point in time, the additional matched payment reduction stops correct? Then for the homeowner to owe approximately the same as below, they would have to continue to pay $2,684.11 for an additional 150 months.
My Proposal has the bank taking the entire loss for the 50% principal reduction from day one. The homeowners monthly payment is reduced to $1,342.05 and the principal balance at the end of the same 93 months would be $215,964.84, if the homeowner was current.
I am not a math major so I just do simple math- the homeowner pays $181,550 in interest to the bank over the course of 93 months to obtain a $68,450. net dollar amount principal reduction.
Logically, the homeowner should walk from this deal.
Does your idea stop the massive foreclosures which are currently from 1- negative equity and 2- unaffordability without counting in the current recession or the growth in unemployment (which wil rise as less spending money is available, more layoffs)
But I am extremely glad to see that you are considering ways to improve the USA economy.
BertDilbert:
Thank you and I apologize if I don’t recall the post where you stated the reasons my plan wouldn’t work. The gist of the plan has been typed into this website several times, the actual detailed working plan is 46 pages. I did try to work the “nuts” smoothly.
If you have any suggestions, I am open to them.
December 29th, 2008 5:00 pm
I think the Feds should buy down the mortgages with another TARP and then refinance the loans. A $200k mortgage, less 30% buy down, is now $120k and affordable for the borrower. It’s not fair for people who made good decisions with their money but Obama is going to spend the money anyway so why not reduce the mortgage balance?
December 29th, 2008 5:10 pm
Woops, 40% buy down!
December 29th, 2008 5:43 pm
Susan
My plan for getting your plan to work would be slightly different from your approach. For instance, instead of sending it to all the congressmen, I would find out who is on the advisory committees in the banking sector and make the presentation to them. If they like it, then they would make the presentation to the congressmen as a solution and you are making it happen through an existing relationship of whom they turn to for advise and answers.
I have not seen your whole plan, but I would likely rewrite it to make the appeal from a banking standpoint fix approach rather than a homeowner fix including a title that would grab the bankers attention so they look at it.
If they like it, then they will rewrite it to make it appeal to the other parties so that they can get what they want, but at that point, it is their problem to rewrite your plan with that appeal.
That would also give you an opportunity to interact and obtain banker positions and problems and what would be acceptable. It is actually a more direct approach, as if a congressman actually read it, they would likely pass it off to people in the advisory committee to see what they think.
Basically you would be turning your idea over to the bankers and giving them the opportunity to take your idea and turn it into their idea.
I would concentrate on why people are going to walk because the mentality of a homeowner was they were buying an investment and not a home and expound on that so that they can grasp that part of this problem, that the home buyer was expecting a profit and now sees the house as investment that is only going to decline in value, they see the banks as selling REO as working against their investment position.
That would be my approach to your plan, the only thing it is kind of like stealing, you are getting the congressional access for free and you would likely be overcome by guilt.
December 29th, 2008 6:03 pm
stu, how many of these mortgage “cram downs” do you think the banks could take without making them insolvement and having to have the FDIC step in? The taxpayer would ultimately pick up the tab again in your scenario.
December 29th, 2008 6:11 pm
Susan, good points about this not being a “natural market” correction. It was not “natural appreciation” that got us where we were at and therefor needs some type of intervention. As I mentioned, not one method will fit all. I think we help those that have the best shot of surving first (again, perhaps those that qualify for a lower rate in every area except LTV for rate and term refis), do some type of mod or perhaps a “silent second” with an sharing of future appreciation on the neg equity piece of their mortgage on those that are underwater and are having trouble making payments for others and then just let the inevitable defaults do their thing and deal with those as they come. This will allow the housing inventory to be managed a bit while things stabilize. Most of all it will buy time which is really what the best medicine is right now, time.
December 29th, 2008 7:14 pm
The banks are already functionally insolvent so making them take any hit will do nothing other than create more panic runs on the banks and keep the death spiral going. I presume that at the highest level in this country, the banks have already told Paulson and others that any cram-down of principal reductions will result in financial Armageddon.
December 29th, 2008 7:34 pm
To me this bailout plan should be thrown open to anyone who wants in without any pre-conditions, including investors. Actually these pre-conditions only incentivise more people to indulge in lies and fraud. It is astounding how illogically a lot of seemingly intelligent people think.
The main reason for the foreclosure to me is that people are not able to pay their mortgages for myriad reasons. A temporary reduction in the monthly payment for everyone should go a long way in stopping this flood of foreclosures. I am not advocating any other concessions like principal write down or lowering the rate of interest either – just reduce the monthly payment for a couple of years, may be even 5 years.. and tack on the difference to the principal balance of the loan.
Another suggestion is to be able to switch the mortgage loan to a different real property, this would help people who need to move for whatever reason and who want to buy a home at their new place of domicile and are willing to take on the responsibility of continuing to pay the mortgage. This should allow both a move-up and move-down option, since no 2 homes can ever be priced the same in 2 different cities!!
How difficult is it to implement these 2 suggestions? No pain to the tax payers. No distress sales of homes. Do you all think that the housing market would stabilize in less than a year if the above 2 simple suggestions are implemented.
December 29th, 2008 7:58 pm
Once again. 31% rent. 26% own outright. Many more have LTVs of <50% and are in no danger of being underwater.
Mass principal writedowns are political suicide (and that includes mass principal writedowns by “private” banks which have sold their souls to TARP).
It will not happen on any meaningful scale without having significant strings attached (e.g., future equity sharing, etc.) Get over it.
December 29th, 2008 8:38 pm
Susan
Let’s suppose that you were making the banker approach. You give your proposal a title something like:
Loss Mitigation in Accelerating Negative Equity Conditions for Residential Mortgages
OK so you have worked the nut one thread down the bolt. Let’s suppose that your proposal handles the situation beautifully for halting the negative equity slide. On that issue you hit a bulls eye and everyone loves your idea. We advance the nut down another thread…..
OK so what happens to the balance sheet when the banker comes up a couple hundred K short on the writedown? I came up with the Enhanced Evergreen Tax Credit to move you to the next thread. Basically that was a zero interest T bill in disguise. Being that we are in a deflationary environment, zero interest has a real rate of return.
Supposing that you throw out the enhanced credit idea, you still have to move past this thread or the bank becomes insolvent. Your proposal? Remember if the banks go insolvent the taxpayers lose their “investment” in preferred shares LOL.
December 29th, 2008 11:59 pm
[...] 30, 2008 · No Comments This blog entry by MrMortgage explains how lower mortgage rates may, paradoxically, hasten the spread of default and foreclosure [...]
December 30th, 2008 12:04 am
TeddyBearNeil
Well the problem seems to be that a lot of people got in because they were looking at housing as an investment and the investment is no longer there. Walking is the better investment unless the bank wants to turn it into an investment again. Being that we likely have another three years or more of falling prices based on resets and bank inventory, you would have to figure your upward appreciation from that point.
Economically speaking, if everybody walked, the consumer would be in a better position due to more pocket change. What is good for the consumer is good for America and what is good for America is good for the world….
Lower property values means lower property taxes, less money for down payments and lower debt burden. Basically we get affordable housing, something government has been striving to obtain for Americans for several decades.
Wallmart was the king of lower prices, kept turning them back. America has just become a big Wallmart for housing. I saw one proposal recently where we should open up our immigration and let foreigners in to buy up all the housing, citizenship in exchange for helping us out with a few houses to lower our vacancy rates.
If we let in enough foreigners, it would force up rents to where rents were higher than the existing house payment making walking a less desirable proposition.
December 30th, 2008 12:05 am
[...] News Low Mortgage Rates to Spur New Wave of Defaults What Happened to the American Dream? The Housing Market Will Improve with Lower Prices, not Lower [...]
December 30th, 2008 1:32 am
Wow, that’s a long string of posts! First, if one reduces a mortgage loan balance in a “mod”, it is a “principal” reduction, not a “principle” reduction. Second, folks who borrowed to buy a home on expectations of future price increases should have to pay back the full amount of the loan. Should folks who bought stocks on margin, and then have seen a 40% decline in their stock portfolios, get a “principal” reduction on their margin loan? NO, of course not! What many folks are arguing is that if lenders forgive a boatload of principal on mortgages, then in home prices finally stabilize and then start to move up, then may actually make money. Sure, that would help with them; but if that’s the “new rule”, what lender in their right mind would extend credit collateralized by a home’s “value” if, whenever that value falls, part of the debt is extinguished? Various “principal reduction” proponents are arguing that the folks who bet on real estate and have made a bad bet should have their loss erased, while folks who bet on stocks or other investments who made a bad bet don’t get a similar bailout. If one follows the logic of the principal writedown proponents, folks who made stock investments that went sour despite historical return predictions should get a bailout as well.
If someone overpaid for a house and is now way underwater, the best they should ever get is to be able to get out without having to take a bigger loss. Principal bailouts jeopardize the whole future lending system.
December 30th, 2008 2:53 am
Tom Lawler
tHe bancs dexided thay wovld be reconsible for anY loszes per Stete lAw whin thay made the Laon. All they cared about was making a number for their bonus checks. Banks let you in on the deal with 20% down and they cover the rest in normal markets. In this market you could go in with no money down. If the banks made non recourse loans then the property is their collateral for the loan. The bank gets to repo the property if you don’t pay.
In your case of saying that if they bought the property with the intent to profit then they should have to pay, that would leave you with the burden of proving the buyers intent. I can see the cause for action now…
Cause for Action
Bank X claims that buyer purchased a home from our bank and did so with the intent to profit at some point down the road. We recognize that under State law that our loan was non recourse and our right to recovery was limited to foreclosing on the property and selling it. Regardless of the law, we feel that the because of the buyers intent to profit overrides all other factors. Our bank and our industry maintains the highest standards and we submit the following document to the court as proof.
http://seattletimes.nwsource.com/html/nationworld/2008565733_wamu28.html
And so you get the lawsuit and hand it to the lawyer, the lawyer responds back… “Not only does the bank not have a case, it was my clients intent to purchase a home for a residence.”
Anyway Tom, your complaint is not with people walking, your complaint lies with the Federal Reserve Bank of San Francisco which is responsible for monitoring conditions of this district and reporting those conditions to the Board of Governors of the Federal Reserve. That is the starting point, they meet 8 times a year. If the SF bank says “We did our job and reported these horrendus things that were widespread throughout the industry” then you move on to the Board of Governors. If the Board of Governors say “Bush told us to lay off” then you followed the responsible party all the way to the top. If the president is the one responsible, then we can blame it on the damn fools that elected him. Everyone should have figured out he was a “taker” after the Haliburton deal. Why should Americans now be surprised when they find out that they have been “taken”?
December 30th, 2008 5:11 am
BertDilbert:
The second nut, I borrowed an idea of S.T Paulson’s, allow the bank/investor to write off 3 times the dollar amount of loss for tax purposes, as well as their balance sheets during three years, it is their own decision to take it all at once or over 2 or 3 years. It is only transferable if the bank is merged, or sold, expires after 3 years.
Is there a third nut?
December 30th, 2008 6:36 am
“BertDilbert”
I perfectly understand your logic, but my simple submission is that in this season of housing crisis, it would be a lot better if we don’t try to make judgements on the motives of people who bought homes. I believe now is the time to Act in a simple and straight forward fashion and clean up the mess.
December 30th, 2008 7:03 am
Hello all,
Here are some responses:
What lending system? If your referring to banks, principal reductions on under water properties is the consumers protection, or another way of looking at it is, the recall of a defectic product the mortgage itself.
This site and all media information has more than proven, the upside and the downside of housing prices is a direct result of the lending practices of banks with the investors full knowledge. In a capitalist state such as ourselves, when a product is defectic, the issuers are responsible for the correction.
Our government and private companies researched the main reason for an increased in foreclosures and it was not because of the borrowers inability to pay the monthly mortgage payment, it was negative equity.
Mentally you put homeowners in a no win situation, there is no light at the end of the tunnel especially when combined with having to struggle to pay the mortgage payment, which is the number two reason for defaults.
Most walk aways can afford the payment, it is loss of their financial well being/survival, or their own equity loss versus paying for the profit of the mortgage holder. Survival versus accountability/responsibility, which would you choose?
When you invest in stock markets, there is the possiblity you can lose money and you know it, that is why some call it “playing the market”. Plus you have the PERSONAL power to withdraw or change your stocks, not so with homeowners. Their house is usually their biggest investment in their future, whether it was considered a short or long term investment. There is totally two different mentalities.
Strings/conditions attached, equity pay down remains the borrowers, equity appreciation is the banks/investor for the same amount of time, 3 years, that the bank/investor is allowed to write off up to 3x the loss.
There will be no “winners” in the proposal, housing prices will not inflate to market peak levels without special financing being re-introduced into the market again or borrowers incomes in general have to increase ALOT because the supply and demand theory including mortgage underwriting involves affordability/incomes.
The proposal changes the concept of purchasing a house to a home to live in long termed, not as an investment, that is why it is only geared toward owner occupied homeowners.
Well there is an exception in the plan for investors that legally purchased the property as an investor on the application and rental income was used for qualification purposes in the mortgage underwriting. They also are entitled to a principal reduction especially since rents should also be decreasing.
The plan is not geared or benefits the speculator who purchased at a banks/homeowners loss looking to make a quick buck.
The plan erases alot of the liberal underwriting by allowing CURRENT paying homeowners who are underwater the opportunity to refinance without income verification. Two conditions- negative equity and the new monthly mortgage payment is lower than the current. Rationale if they are affording the current one on time, they are a good credit risk.
The deliquent homeowners must qualify with ratio’s and proven income, some will still be foreclosed on, not just the liars but homeowners who fell on “hard times”.
The plan:
*puts more money into the economy from lowering the monthly mortgage payments,
*reduces the inventory of homes by eliminating all adjustables and / or underwater homeowners
*reduces monthly debts enabling the paying off of other monthly debts such as cc, student/car loans etc
*reduces number of bankruptcies, if the homeowner receives a principal reduction, a bankruptcy will be extremely hard to obtain without a medical reason and be able to retain the house)
*stops the moral hazard of becoming deliquent to obtain a “government modification” since every underwater homeowner is entitled to the correction/product recall
*stops walking away from the property easily, there is a 10 year penalty placed on the homeowner who received a principal reduction from obtaining another mortgage who walked away after receipt.
*stablization of the housing industry from further declining prices.
*protects further loss in equity of homeowners who have no mortgage or not in danger of becoming underwater.
*creates jobs
December 30th, 2008 7:16 am
Admin:
My apology and gratitude for taking up alot of your space with my plan instead of yours, it is your web-site.
As I stated previously I am not able to cut and paste my responses on the web-site to an email to send you, if you prefer I can send you the “plan” for your review.
Thank you again, and I hope you and your family, everyone has health, happiness and prosperity for the coming year.
December 30th, 2008 8:30 am
[...] Low Mortgage Rates to Spur New Wave of Defaults [...]
December 30th, 2008 9:59 am
Michaelphelps, you asked the question:
Stu, how many of these mortgage “cram downs” do you think the banks could take without making them insolvent and having to have the FDIC step in? The taxpayer would ultimately pick up the tab again in your scenario.
This is my point exactly and I am glad you bring this up. This is the issue at hand and what makes my stance on principle write downs that much stronger. Right now the Government is throwing money at all banks across the board. Billions upon billions of future tax payer dollars (our children’s future tax dollars) are being wasted as they are not being directed where they need to go. We need to stop this immediately and aim any future money at companies that will in fact exist down the road. Do not be naïve enough to think all of these banks will fail. Many will go under and in fact it may be in the thousands before all is said and done. We have over 8,000 banks in this country so I think we will be ok just the same.
Currently the lenders are taking hits each and every time you see a foreclosure or walk away. A subsequent distressed sale adds losses of anywhere from 30% – 60% on average to their books. While the Government passes our tax payer money out these lenders are continuing to take their bloated salaries and big bonuses on our future generation’s backs. Many will eventually go under and leave the tax payers exposed to their losses. Now let’s take another more intelligent look at this.
Principle write downs will add losses to the lenders books but at 10% – 30% on average. These losses are a far cry from their current losses that they are experiencing without principle write downs. Now let’s direct the bailout money to lenders that are capable of absorbing these losses over time with assistance and assure ourselves that not only will the tax payers be paid back, but that our future tax dollars are being wisely used. At the same time let’s direct the principle write downs to those parties that also are capable of staying in their homes and not defaulting down the road anyway.
This does not have to be nearly as complicated as some are making it out to be. For example use this as a rough guideline (obviously needs some work, but you get the idea). You start with the largest (too big to fail) banks like BofA for example.
1. Is your mortgage and heloc (if you have one) held by the same institution we are currently working with (see list)? If so go to 2.
2. Contact that lender and have them send out an appraiser at your cost. Once completed go to 3.
3. How much do you owe on your mortgage? How much do you owe on your heloc (if you have one)? What was the appraisal for? If the appraisal is lower than the mortgage and heloc combined (if you have one) go to 4.
4. Submit a (1) page document to the lender with all the above information and copies of all documentation (i.e. mortgage, heloc, appraisal, W2 (2 years), pay stubs (2 months), a list of all outstanding debt (CC, Auto loan, School loan etc) and accompanying paperwork, and a copy of your banking statements (2 months) and a recent copy of your credit report.
5. If you qualify for the guidelines the lender has set then you receive an immediate principle reduction to bring your loan within the parameters set by the lender and a 30 year fixed rate loan for that amount at current interest rates. Closing cost will be split between the lender and homeowner evenly.
Guidelines would include but not be limited to the following:
1. What percentage must the borrower be under water by? Maybe this figure is derived by the data from collected applications to make sure you get the biggest bang for your buck. Write downs would range from 10% – 30% on average.
2. Can the homeowner afford the new payment amount (should be within the 30%-35% range of income I would say).
This gets the ball rolling at least and with both the mortgage and heloc with the same lender it will be very fast to get going with this. Add some additional rules and guidelines for people who are not with the same lender for both and go from there. Quick, easy and palatable by most that are affected. The key is to remedy as many as possible and as quickly as possible before they either default or simply walk away. It needs to be simple but effective at the same time.
December 30th, 2008 10:21 am
JJ and Coast is toast, without principle reductions we could face financial suicide in this country. This isn’t a case of why we shouldn’t do it but rather why we can’t afford not to do it. How do you think the landscape will look a year from now with another 3-5 million foreclosures on top of the 2 million this year and 1 million the year before that? What will our country look like with 25 million empty homes littering the countryside? This situation cannot be compared to anything else because homes are visual and pieces of property. This is not stocks or bonds which are pieces of paper, but places where people live, and families are being raised. Homes need to be taken care of and looked after or they deteriorate. Take the worst areas in this country and consider that as what you will look at and drive by each and every day of your life. Talk about poverty, despair, crime, homelessness etc. If we have mass defaults like it appears we will have if nothing is done, then that is what we all could potentially have to look forwards too. Do you want to take that risk? Do you want to see that sort of blight come to this country on a wide scale? So your neighbor gets 50K written down from their mortgage, big deal. At least they stay in the home, keep values stable in your neighborhood, and remain homeowners. This is more about what needs to be done and not when do I get mine. Everyone needs to start worrying about what we may end up looking like down the road and not who is getting what over whom. We screwed up as a country and many stood by and watched or even participated in it. Now we must all band together and solve the problem. We can also start electing new officials in Washington to assure this doesn’t happen again anytime soon at least. They are as much at fault as anyone else in this mess and they need to be shown the door.
December 30th, 2008 11:26 am
Dear Stu
More homes on the market will cause prices to collapse and therefore make the houses more affordable.
25 million homes will not be empty for long once prices come back down to historic fundamentals. Quit trying to reward the irresponsible by giving them principal reductions.
December 30th, 2008 11:47 am
Stu-
To some degree your simple guideline has happened to me. I got word that my loan holder, Wachovia, wanted to get their Option Arms off their books, which were being held by them(Step 1).
I contacted them and they sent out an appraiser(they paid for)(Step2)
STEP 3 probably already applies to most of Southern California.
I submitted a loan app, debt sheet, W2s, bank statements (Step 4)
I am still waiting on STEP 5. It has been almost two months. I have heard they are trying to get the loan into FHA. Maybe this is standard op procedure for banks now with home loans. Originally I heard the deal would be to pay down my interest rate on the FHA part of the loan at $729500(to some debt/income ratio I could afford on my salary). The remainder I owed would be rolled into a 0 coupon note that I would have to start paying on in three years(about $250000).
But because they didn’t close the deal by the end of December, the FHA part of the loan will have to go down to somewhere near($600000) and the 0 coupon will now be about $380000. So if I sell at anytime I assume that the 0 coupon is a recourse loan, and I will have to be able to at least make $380000 in profit just to break even.
This is all “without” principal reductions. Since credit doesn’t seem to mean much anymore, I have very little stopping me in messing up my stellar credit with a WALKAWAY. Why would I want to be indebted $380,000 “after I sell my house”! Especially since the housing market will take many years to get back on an upward swing.
I don’t look at my situation as a “bailout”. I think that the banks were criminal in the way they handed out loans. It artificially inflated the house I purchased, and everyone else’s in So Ca. Now it is time to payback the harm they have caused with reductions.
I am afraid when they come back to me with a new loan, that the deal may not even be as I described above. Who knows. I probably will wait and see if reductions do happen. I think that financially it is the only thing that would make sense in my situation.
If I am thinking about walking away from a house once valued at 1,500,000….and now zillowed (I know not an exact value) at $750000, I am sure that others in So Ca are thinking the same thing.
December 30th, 2008 11:56 am
the program is called ‘The Green Earth Project’ for some strange reason and it stinks. It is the same as FDIC and the GSE’s. Go back through the blog and see below.
Wachovia’s New Pay Option ARM Plan – ‘The Spend’ (25)
Posted on October 8, 2008 7:22 PM
December 30th, 2008 12:01 pm
admin-
That story was what brought me to Mr.M when I googled my situation. I have been a daily reader since!
Wachovia’s New Pay Option ARM Plan – ‘The Spend’ (25)
Posted on October 8, 2008 7:22 PM
December 30th, 2008 12:14 pm
Wow in CA, so if I understand your situation correctly it is broken down as this. You currently owe $729,500 + $250,000 = $979,500 and you estimate the home is worth $750,000. So in my scenario you would need a principle write down of $229,500 to bring you in line with current market conditions. The lender if you walk will take a hit on the paper of roughly $440,000 if you use .65 on the dollar return through a REO. So your lender has 2 options from where I sit. Either give you a principle write down of $229,500 and hold the performing paper at a value of $750,000 or watch you walk and take an ultimate write down of $440,000. Seems like the former would be the wiser choice (providing I did that correctly). Also who is to say they will get .65 on the dollar anyway in this market. They could wind up getting .40 and take a massive loss comparative to what your principle write down would be. Off course some would argue they could get more than .65 too, but most would agree I think, that a principle write down in your case makes perfect sense. I know I would be offering it to you if I were your lender.
December 30th, 2008 12:33 pm
Thanks Stu. I am still waiting to see what happens.
They could make the deal a bit more easier to swallow if they made the zero coupon non recourse. Maybe they are anyway, but like I said I assume that it is a recourse loan. I just don’t know because it has been very quite on any information being sent my way from Wachovia during this whole process.
If I got a fixed loan, and a non-recourse on the whole package, at least I don’t have the debt hanging over the house and me, if I walk. Of course it would lock me into this house for years, unless I want to ruin my credit and walk.
Still means that people looking down the road, would have to decide either I keep the house for years until it turns a profit(to keep my credit intact), or walk now, ruin my credit, recover my credit over several years, and then buy a house that is priced correctly in value, and start building equity and profit(with the ability to sell when I want).
December 30th, 2008 1:14 pm
TeddyBearNeil
Neil, Take a breather for a moment away from the housing crisis and let’s look at a chart of the effects of Mortgage Equity Withdrawal (MEW) on GDP. When Greenspan dropped interest rates, everybody refied their homes, putting money into the consumers pocket. The important thing to note is that without MEW, GDP was very anemic.
http://bigpicture.typepad.com/comments/2005/12/chart_of_the_we.html
Now that is just the effect on GDP, of people pulling money out of their homes. OK, so you have the picture of GDP ex money extraction from housing.
Now let’s do something else. Let’s subtract the GDP effects of the housing industry. That would be construction, building supplies. Now let’s plug in the front line real estate industry. That would be appraisers, real estate agents, termite inspectors, title people, mortgage brokers, loan officers, and I probably left a bunch out!
Now let’s look at the huge fees made by banks making all of this happen and add in the huge Wall Street fees. Let’s call all of this money the back line.
There is yet another line. That is taxation revenue from all of this “economic success”. That money creates jobs and spending at the government level, which filters out into the general economy giving GDP an additional boost.
Now it is time to total it up. MEW + construction + Front Line + Back Line + taxation spending. SERIOUSLY, go back and look at the chart again, showing the effects of MEW and mentally withdraw the added effects of the housing bubble, the other four horsemen.
Suddenly we do not look very good from a GDP standpoint at all! With the false stimulus removed, the USA is unmasked. What does this tell us? First it shows that like peak oil that everyone is familiar with, we had reached a stage of peak USA. Only false stimulus could further the appearance that we were a growing nation.
What else does this do? It shows that the housing bubble was a symptom and not a cause in and of itself. The Federal Reserve had shot its load with lower interest rates and had hit the wall in its ability to generate jobs and economic support. That means that economic stimulus had to come outside monetary policy under the control of the Fed.
When we look at the Federal Reserve mission statement, we see that the Full Employment Act (Humphrey Hawkins) trumps safe and sound banking.
Something to think about.
Admin: in reading, do me a favor and fling this to Dr. Housing.
Susan: I got this saying… “Teach a woman to fish and she needs you no longer, she now has the ability to hunt and cook!” However I am going to step over the line here and hand you the fishing pole…. http://www.google.com/search?hl=en&q=%22copy+and+paste%22&btnG=Search
December 30th, 2008 3:32 pm
I’ve wondered how many homes in CA are owned without debt.I’ve seen the national number thrown around of 26%, but in states like FL and CA, is it accurate? If it is, then at least 50% of the CA and FL homes have debt. (Just because a house is a rental does not mean it does not have a debt against it.)How about multi-family apts as well as Commercial RE?
Of this 50%, how many have LTV’s the preclude then from ReFi’s? If we could get accurate numbers, calculating the problem would be a lot easier.
My guess is that with HELOC’s and Refi’s running rampant in the last 8 years, that most of these homes have a debt level that would not meet the LTV needed to Refi. And just wait until this time next year! Oh boy, it’s gonna be bad!
December 30th, 2008 6:22 pm
BertDilbert, interesting read and I would like to add that Obama’s stimulas package is totally inline with your thoughts on GDP. Like Cuba the USA counts Government spending as part of the GDP. That is what they are politically looking for here. This is obviously silly when you take into account that the government doesn’t produce anything. Throughout history it has been proven time and time again that job creation via the Government does nothing to stimulate the economy due to this fact. In essence the spend (i.e. tax dollars) – growth (i.e. manipulated and non sustainable growth = zero. They simply cancel one another out like move up buyers and their affect on inventory levels.
MEW is effectively zero as of last month. The first month and point in time where it has been negative in years. That produced the profound affect on retail sales where we saw the largest decline in retail sales since 1970. People should not under estimate the affect that negative MEW will have on the overall economy. In fact Government spending will be one of the few bright spots (I can’t believe I just said that) in Q1 of 2009. That and healthcare, and that is only out of neccesity. In some ways it is a blessing that the Boomers generation are getting old (I can’t believe I just said that either) or our economy would really be in trouble.
Case-Schiller Index came out today and showed record declines in all sorts of areas. I think it is without question the “Best” tool available to show trends in housing. Those trends while being a 2 month lag display a 3 month rolling average that is quite sobering. I can only imagine what February 24′th’s index release of Decembers numbers and 4′th quarter rolling average will show.
Will the Fed bailout the Government before all is said and done? I am hearing that kind of talk of late and that in of itself is a very scary premise…
January 1st, 2009 8:55 pm
Forget about principal reductions! The investors, including you and me through mutual funds and pension funds, bought these securities because of the potential for higher dividends, along with taking more risk.
The borrowers and all parties knew just what they were doing. The borrowers were looking for “free money” in a rising real estate market. Encouraged by Congress and, in the case of banks, the CRA, lenders did these non-qualifying (by conventional 34% of income standards) a FAVOR. In many cases, of course, both these borrowers and wealthy homeowners seeking to trade up to even greater housing “wealth” levels, lied on their documentation and committed federal bank fraud. As usual, the Congress and the FBI ignore these serious crimes by individual borrowers.
Let the houses foreclose as necessary! It is not so traumatic. It is no different than my having to move because my landlord raises my rent at the end of the lease, which, as all renters know, is a yearly anxiety we go through.
Finally, this is the ultimate case, as Shiller points out in 2005 edition of “Irrational Exuberance”, of mere “paper losses”. The borrower never really had this “wealth” to begin with as it represented fictional “bubble” values. As Shiller also notes, we are all better off as housing prices return toward rational values as normal people can once again TRULY afford a house, and everyone can buy more house with the same dollars.
January 2nd, 2009 3:14 am
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.
January 2nd, 2009 6:35 am
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.
January 2nd, 2009 10:22 am
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.
January 2nd, 2009 10:44 am
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
January 2nd, 2009 5:38 pm
[...] Low Mortgage Rates to Spur New Wave of Defaults (Mr. Mortgage) [...]
January 2nd, 2009 6:50 pm
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.
January 2nd, 2009 8:07 pm
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.
January 2nd, 2009 10:33 pm
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!”
January 3rd, 2009 12:37 pm
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.
January 3rd, 2009 1:12 pm
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.
January 3rd, 2009 10:27 pm
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?
January 4th, 2009 3:30 pm
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.
January 4th, 2009 4:31 pm
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?
January 4th, 2009 5:42 pm
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.
January 6th, 2009 4:25 am
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.
January 6th, 2009 9:40 am
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.
January 6th, 2009 10:51 pm
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.
January 7th, 2009 4:03 am
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
January 12th, 2009 5:51 am
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.
January 12th, 2009 11:34 am
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?
January 12th, 2009 2:43 pm
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.