That was exactly my thought. If cram down’s take center stage then the risk of cram down has to be factored into all future loans which means rates are jacked or you will need to buy cram down insurance when you get the loan lol. Each right given to the borrower is made up on the other end in higher interest. There is no free lunch.

Well, actually I just questioned that assumption. I didn’t out-and-out refute it. That said, I do have a sneaking suspicion that it isn’t the big cost saver that its proponents think it is.

>> They also fear a run on the bank kind of situation in terms of people who don’t need one will stop paying their mortgages and then ask for one anyway

Doesn’t this effectively fall under the Type II error category? This is a HUGE issue as the paper points out.

>> These fears can be alleviated through legal cram downs…

Cramdowns have one advantage of at least SOME discrimination in the decision to grant principal writedowns. I’m guessing it’s similar to a judicial foreclosure in that any assets outside of the essentials (primary residence, car, and retirement accounts, etc.) will be tapped out before principal reduction is granted. So it will be harder to game the system. But… other than that, cramdowns are a disaster. If done on any real scale, they will cause private lending interest rates to go through the roof (lenders will need to assign a substantial premium to the new risk of future cramdowns). Essentially, the only mortgage lender will be Uncle Sam. Not something I want to see happen.

>> I think the lenders worries are just that… worries. There is no data that suggest people will do what lenders fear.

You obviously don’t live in Southern California. My La-La Land compatriots will game the system like there’s no tomorrow. And no, I’m not proud of that.

That is not the reason at all. It can be shown very easily, as many here have already done, that principle reductions allow for far lower losses to the lender and provide a far better chance of not incurring re-defaults down the road.

The reasons are few but they are big ones including setting precedence being the biggest. They also fear a run on the bank kind of situation in terms of people who don’t need one will stop paying their mortgages and then ask for one anyway. These fears can be alleviated through legal cram downs because the public will except judges ordering them over lenders willfully giving them. This however proves to be more costly to the lenders in the long run, so lenders will in my opinion, eventually start to do them before it comes to that. Remember the lenders know full well which homeowners are candidates for bankruptcy long before they actually are. This gives them the opportunity to try everything else first before caving and doing a principle write down anyway in the end. It is the homeowners who will force this issue through walk aways and standing their ground on modifications that do not provide debt relief through principle reductions. We are already seeing this occur through the limited number of people signing up for modifications in their current form.

I think the lenders worries are just that… worries. There is no data that suggest people will do what lenders fear. People on the whole simply do not act in this manner. I am underwater as are many others I know, but nobody I know would stop paying their mortgages in hopes of a principle write down. First of all many peoples credit is stellar so why risk ruining that. Secondly most can afford their home comfortably and are not looking to sell. Thirdly it would not be worth it to go through all of that trouble to most. Lastly when looking at the numbers many of these folks would not qualify anyway so it would all be a waste of time in the end with a lot of risk and no reward. I just don’t see it, and I think lenders are just stalling to get the most they can before taking losses in this manner.

You guys have it.

The wild-card in the equation coming on strong this year is going to be unemployment. Wide-spread unemployment, as a result of both corporate & consumer belt-tightening (remember that GDP metric of 72% ‘consumer-spending’…?), will likely spread into geographic areas heretofore unaffected by the housing Fiasco.

Now keep this next ‘metric’ in mind going forward, because you’re going to hear a lot about it in the future:

In areas of the U.S. where there is sufficient industrial capacity to manufacture goods and export them, there will be vitality and home-price stabilization. Everywhere else, there is going to be wild volatility – with the trend arrow in a terminal downward position.

Why?

Because the ‘consumer’ is broke. And the trend towards savings and debt reduction has already started – i.e., there is not a high likelihood anytime soon, for the consumer to ‘re-ignite’ his fire for frivolous spending at the mall or car dealership…

Our ‘creditors’ meanwhile, are sitting on $Trillions of our debt-dollars and have an itchy finger to start spending some of those dollars on their own domestic economies – i.e., their collective appetite to invest(?) in our T-bills will likely diminish – perhaps rapidly, in the near future leaving us with – what? Consumer spending…?

This is reality. Mortgage finagling of any sort isn’t going to mean squat if you are unemployed. Is the picture of a ‘circuit’ starting to come into view?

And lastly: Don’t you loath being referred to as a ‘consumer’? Like a Pac-man – who eats everything in his path, but produces nothing??

Hey! That would be our (now Defunct) F.I.R.E. economy!!

Express our thoughts to our ‘representatives’…? We have friend. We have. And will continue to do so. At the same time, realize that the result of the last election cycle was basically a demand for ‘change’ (The remedial translation of which means: More GOVERNMENT), unfortunately.

It’s always has been and always will be, an uphill battle, but traction is being gained as we speak.

Peace -

C.C.

Regardless of the low opinions of the Boston Fed here, it’s papers like these that form the basis for public policy. Like it, or not.

I personally hope that the Government does not adopt a policy of forcing banks to do principal reductions (or any loan modifications, for that matter). It rewards imprudent behaviour, punishes prudent behaviour, and creates an enormous moral hazard going forward.

If private banks decide to do loan mods (with the approval of their investors, without coercion from Uncle Sam, and without the backstop of copious taxpayer dollars), then I have no problem with that. However, private banks and MBS investors — when free from Government intervention — don’t seem to like doing principal reductions. Maybe it really isn’t as cost effective as people here seem to think? To quote again from the Fed paper:

“Type II error is precisely the reason that lenders rarely ever engage in principal reduction.
One lender summed it up this way, “We are wary of the consequences of being known as
a bank that forgives principal…we have not to date forgiven any principal.””

Remember, 31% of the nation rents, 26% own their houses outright and a substantial percentage have LTVs less than 50% and thus are in no danger of being underwater. If you fall into one of these catagories (i.e., you’re in the vast majority), you might want to express your feelings about this matter to your representatives.

Principle write downs in mass will send the derivative world into a death spiral. Attaching a rider for a balloon payment for the difference between the original and new appraisal during a refi is the best that be hoped for even if the new mortgage is a 40yr term.

Just stall techniques, waiting for the consumer to start spending and buying again. It’s gonna be a long wait.

1) Mortgage service companies and their role in pushing for foreclosures.

Even further removed from the origination company, MBS holders, and trustees are the mortgage servicing companies, which are hired to collect payments and perform the day-to-day operations necessary to administer the loan. These companies will also be compensated regardless of the success or failure of the loan, and so have little incentive to help homeowners apply for loan modifications or otherwise save their homes.

2) Haven’t a lot of the losses already been written off by the big banks when they bought the failed banks? The big banks bought assets at pennies to the dollar and also, thanks to the Treasury dept. changing tax laws, were able to write off losses for their taxes on the losses of the failed companies that they were buying. I’m not sure it’s in the BofA’s, JP Morgan’s, etc. interest to spend the time and money to refinance or take a principal hit today rather than letting the houses fall into foreclosure, especially if there is a (good) chance that the US government will pay for the losses through bailouts, giving money to the homeowners, etc. I see no real incentive for the banks to make the effort to renegotiate any of the mortgages today.

It’s called a circle jerk.