The stock market is staging a very peppy rally on the hopes for the Obama infrastructure plan and the auto bailout, but key bits of news point to the stubbornness of some of the underlying economic stresses.
We have long advocated mortgage modifications as a remedy that banks used fairly freely in the stone ages when they held the paper. While we have also been told that the mods being offered these days are often too shallow to give the homeowners sufficient relief (ie, the bank could offer a reduction in principal, rather than the more common, and lower effective reduction of merely providing interest rate relief, and still come out ahead compared to a foreclosure). However, the latest report from the Office of the Comptroller of the Currency may put a dent in efforts to find ways to offer viable borrowers sufficient changes in terms.
From Bloomberg:
Almost 53 percent of borrowers whose loans were modified in the first quarter of this year re-defaulted by being more than 30 days overdue, John Dugan, head of the Treasury Department’s Office of the Comptroller of the Currency, said today in remarks prepared for a housing conference in Washington….
The OCC’s survey represents institutions that service more than 60 percent of all first mortgages, or 35 million loans worth $6 trillion, Dugan said.
“In general, the third quarter report will show many of the same disturbing trends as other recent mortgage reports,” Dugan said. “Credit quality continued to decline across the board, with delinquencies increasing for subprime, Alt-A and prime mortgages.”
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Almost 53 percent of borrowers whose loans were modified in the first quarter of this year re-defaulted by being more than 30 days overdue, …
Coming to discover a little bit of a moral hazard there, no?
Always thought it was a bad idea. Basically the problem is 2-fold
1. Buyer should not have got the loan in the first place … lack of eligibility… inability to service the debt
this will not change with terms of foreclosure, it will be postponed .. especially with the job losses happening
2. asset (house) price was very high … the value of the asset has to be reduced … if the bank acknowledges it .. it would hit its balance sheet.
the only way out is allow price of the asset to come down to a level where credit worthy buyers will start coming in..look at reprots of chinese shopping … lot of other guys would….
asset price has to be stable first..
why can’t fed UNDERSTAND IT CANNOT PLAY MARKET AND REGULAOTR AT THE SAME TIME … ESPECIALLY WHEN ITS TOOLS ARE SHRINKING FAST AND THAT IT SLEPT ON THE WHEEL DURING THE BOOM…
I can never understand why people think that these “loan modifications” as are being (wihtout principal reduction) put forward are helpful to the mortgagee. Lowering interest just means that your a defacto renter, who will still take a loss when you sell (either an actual loss or less money earned if held in a savings acount).
O, of course, that was the whole point.
I’ve seen a loan modification that:
1. Reduced principal by $80,000 , on a loan under $500K
2. Lowered the interest rate for many years
3. Extended the payment term.
These are all good for the borrower, if he uses his head.
1. Found money for the borrower.
2. More found money, as his “rent” is probably way below market and certainly less than it was before.
3. He gets more free option to extend the loan.
It’s easy to see that 2. and 3. have a lot of value. If rates go up in the future, he could bank his money and pay the mortgage as slowly as possible, earning a spread every month.
What more can they do?? Even without principal reduction it’s a nice gift to the borrower and could be enough to keep some borrowers in the houses.
If Congress had learned from the Savings and Loans Crisis and regulated properly, the mortgage mess might have not taken place.
Congress should require down payments on homes and fixed rate mortgages to make future mortgage messes less likely.
Banks may want to turn many foreclosed homes into low income apartments and middle income apartments. Banks may want to turn many foreclosed homes into apartments for disabled Veterans and apartments for other Veterans.
The least that should be done to grow the economy and create jobs is the indexing for inflation of capital gains, interest from savings accounts, and dividends. If the capital gains tax is not indexed for inflation, people may pay the capital gains tax when they have actually lost money because of inflation. If people are less worried about inflation, they may save and invest more. If businesses are less worried about inflation, they may invest more and hire workers. If banks are less worried about inflation, they may make more loans.
If the federal government is serious about growing the economy and creating jobs, it should stop taxing capital gains, interest from savings accounts, dividends, and estates. Businesses will have an easier time obtaining loans and investments for hiring workers, plant and equipment, and research and development. People will have an easier time saving money for down payments on homes and fixed rate mortgages, college tuitions, and retirements.
The federal government should sell a lot of the land it owns to raise capital, reduce the national debt, help fund Social Security and Medicare, and do other things. Some of the money the federal government obtains from the sale of the lands should go to state governments. If you type federal government owned land on a search engine, you might be surprised at how much land the federal government owns.
Congress should consider allowing many casinos and hotels especially hotels for the wealthy to be built in many national parks. The federal government could obtain property taxes from these casinos and hotels, a percent of sales from these casinos and hotels, and a 5 percent rooms and meals tax from these casinos and hotels. State governments should obtain some of the money the federal government obtains from these casinos and hotels.
Article 1, Section 8 of the Constitution says Congress has the power
“To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures”
Congress should consider backing our currency with gold, silver, and other commodities.
Congress should eliminate the Federal Reserve or veto many of its decisions. If the Federal Reserve continues to exist, two members of the United States House of Representatives and 2 United States Senators should sit on the board of the Federal Reserve. If 3 of these members of Congress wants a Federal Reserve decision to be vetoed, it should be vetoed. If the majority of the members of the United States House of Representatives wants a decision to be vetoed, it should be vetoed. If a majority of the United States Senate wants a decision to be vetoed, it should be vetoed.
I ran for United States Senate from New Hampshire in 2002. My website is http://www.myspace.com/kennethstremsky
The homeowner going through the loan modification process also has lost access to the home ATM machine and probably other credit sources. They are in effect the carney in the coal mine for what is ahead for many consumers, living off real earnings vs credit and asset inflation. Cash availability becomes the number one item so modern DTI numbers based on a asset inflated economy make no sense when credit rationing removes liquidity from the participants. The hallmark of deflation is the importance of cash and without available credit resources the consumer needs to find the most cost effective housing options.
Looking at it from the glass-half-full side, at least half of the modifications DID work, and that kept a lot of people in their houses and paying on time. I think that’s a good thing, though the mortgage co’s will kvetch that it isn’t working, hoping to go back to evicting people into the snow. Of course, when your economy gets over half a million newly unemployed in one month, it’s going to be bad, even if home prices were rising up until now.
This economy is much akin to a multiple gunshot victim: we’ve stanched the bloodflow from one severed artery, but there are 3 others that need to be tended to. I wouldn’t then say, “see this direct pressure didn’t work, because he’s still bleeding over here and here.” The point is that you’re not done saving the patient yet.
One problem here may not be mods per se, but the near complete lack of borrower knowledge versus past cycles. In the past, mods were done on a case-by-case basis, the lender had knowledge of the community and could assess borrower commitment (a huge intangible). Here most mods are done on a mass basis, and someone who is desperate will take any lifeline thrown at them.
That is a long-winded way of saying I believe that more borrowers could be salvaged via deeper mods and better assessment, but the “better assessment” seems very unlikely to happen. And the near-absence of evaluation of individuals is, not surprisingly, producing random-looking outcomes.
In order to be considered for a loan mod you have to be in such dire financial condition that you have no reserves left. I would assume that many people are trying to use the loan mods to buy some extra time in hopes of selling the property. The talk of “moral” hazard is double edged. If you do the “right” thing by killing yourself to pay for a house that has a mortgage far higher than it’s real value at the cost of educating your children of getting needed medical care is that moral? Should people put their obligations to banking institutions before all else?
I would guess that a reduction in the actual loan and not the rate would provide better results for numerous reasons buried in my previous paragraph.
Besides lack of credit liquidity the homeowner going through a MOD probably is a two income household and the DTI so based. With large layoffs in the service sector one or both sides of the income based could face job loss in the future and without any credit resources to tide them over its default again.
Use the downturn to end mortgage interest deductability…helps the treasury and stops the incentive to overbuy.
Replace it with a principal residence is capital gains free.
Use the market downturn to get rid of this drain on the treasury. I dont know a sane economist out there that thinks this is a good tax break.
It will only get worse …
Was it 533,000 jobs we lost last month ? How many of those, who are now mortgaged home owners will now lose their house. And the unemployment situation only looks to get worse.
The gov is way behind the curve and continues to throw good money after bad.
We need to nationalize the banks or there will be more perfectly viable companies going down due to lack of credit.
What we need now are programs that save jobs. Existing jobs are easier, faster and cheaper to save than creating new jobs. I have proposed Medicare for All. Through this I believe we can save hundreds of thousands if not millions of jobs.
This saves jobs right away, especially in the public sector in states and local governments.
This re-capitalizes business especially manufacturing but also any business currently employing many people.
Strings could be attached such as a no layoff rule whereby companies would run 32 hour workweeks paying for 40 supplemented by the paid health insurance. States would be mandated to take any extra money and use it for unemployment benefits and or pension fund replenishment.
Medicare for All would also make our businesses more competitive at home and abroad. All the other G7 nations have government sponsored health insurance giving their businesses a subsidy.
We need an FDR bank holiday and Medicare for All ASAP …
Ha! “principle reduction”.. Honestly, I can’t wait.. When this country thinks it is necessary to give a principle reduction to the most irresponsible folks in America, it will be beautiful day for all the academics who promote this daily.. A principle reduction for a small percentage of the mortgage holders in this country equals a waterfall of defaults that no professor or economist or some “know it all” newscaster will input into their “mathematical” equation. Who really thinks a responsible and prudent neighbor will stand by and watch someone else get a principle reduction and smile and say “isn’t that sweet” they refinanced their house multiple times and bought all those wonderful toys and now my tax dollars will bail them and I will just continue to give and give and be charitable, all for the greater good… Little do these academics and Washington folks who never get out understand, this move will not only bankrupt America financially but it will be the last straw and bankrupt America morally. I would call this “wipe out” of anything that may be left in this country we might call good, charitable and responsible. I just dare the government to do this. At least we will be able to add to the dictionary what a “modern day revolution” definition will look like.. I guarantee anyone it will not be pretty. And to think they are worried about the financial health of this country. Can you imagine what this country will look like with the highest crime rate in history?? Of course not…
Go ahead… “Make my day”!!! Give those homes away… Just dare ya…. You can bet I will figure out how to take advantage of the deal of the century someway, somehow…
:-)
From the distressed borrower’s side of the ledger, the OCC news is profoundly bad. It should scare the lenders, banks and hedge funds into intransigence with Congress and the incoming Obama Administration.
What would be particularly interesting to see is what portion of those 53% redefaults were proactive loan mods (i.e. no prior delinquency) vs reactive loan mods (i.e. in delinquency/default). My gut is that the preventives fared much better than the reactives.
We’ll also start seeing more and more loan mod situations where the lender will demand good-faith deposits prior to agreeing to the mod…especially where a the loan mod app effected a debt service moratorium while the app was being considered.
BWare
http://www.SubprimeLoanAnalysis.com
@Mara said “Looking at it from the glass-half-full side, at least half of the modifications DID work, and that kept a lot of people in their houses and paying on time.”
At least for 6 months anyway. But what will happen in 12 months?
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And here’s a banking related humor [lol]:
Louis C. K. – Broke
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“Louis C. K. – Broke” might have been enjoyable without the gratuitous cursing. (Is it just an insecurity thing with comedians like that, or has language devolved outright during that past decade or two?)
As someone who is attempting to go through a modification, here are the issues I am encountering:
1. Bank does not wish to cut interest rate.
2. Bank does not wish to extend term of loan.
3. Bank does not wish to forgive any payments.
4. Bank does not wish to defer any payments to end of loan.
They have claimed that the reason for doing so is that they are constrained by the terms of their securitization agreement from doing so.
However, Bair at the FDIC has seen the securitization agreements, and basically stated that all of the bank claims are false–they have the right to do any of the above to maintain the value of the underlying asset.
In addition, my bank in question has recently entered into an agreement with several state’s attorneys to do any and all of the above for homeowners who were oversold their mortgages. (I, however, did not qualify for the program, as my credit was too good then, and is too poor now to qualify for a refi).
BWare–banks have REFUSED to do any proactive mods with me–in fact, their employees have counseled me to go 60+ days delinquent so that additional modification programs are available. Re: anonymous about being tapped out financially–basically, if I had held back about $50K before going to foreclosure/default, I could have bought my way out of many troubles–but that would have been unethical and deeply immoral.
"If the federal government is serious about growing the economy and creating jobs, it should stop taxing capital gains, interest from savings accounts, dividends, and estates."
Actually, interest, dividends, and capital gains shold all be added to income and taxed at the same rate. Estates should be taxed at progressive rates of up to 50 % after an deducting an adjusted amount. The adjusted amount should equal the 1975 amount adjusted up by the same amount as the minimum wage.
That out to take care of the f#%^&ng republican assholes who are still trying to peddle their caca. These POS caused this mess and should absolutely get to pay for it, down to their last dime. You break it you buy it.
Adding to Fraud Guy’s comment – I notice no definition of what constitutes a “loan modification.” My experience has been that the bank offers loan modifications of (1) increased interest rate, (2) lumping all overdue fees and late fees and b.s. fees it can into the principal, thus increasing the principal, (3) tacking on some obnoxious balloon payment at the end, and (4) demanding a huge good-faith payment up front.
Why are 53% of loan modifications failing? I’d want to look at the loan mod first.
On a related topic, Obama and other Dems (and California’s erstwhile Republican Gov.) are proposing a 90-180 day foreclosure moratorium. In the press reports on this I have not seen any estimates of what this would do to delinquency rates, or even mention of the idea that they would rise as a result of a free-riding option. My guess is that they would rise even more than a first estimate might suggest because otherwise good actors might stop paying as a form of social protest against the inequity of bailouts. Say 30% non-payment during moratorium? Any other estimates?
Mods will continue to fail because of the same old s… MORTGAGE SERVICING FRAUD. We are never going to get out of the woods until Feds seriously crack down on servicers, particularly i-bank subsidiary servicers who manufacture defaults for in house trading proft.
EVERYONE JUST WALK AWAY!
Most borrowers do not default until they have a significant income curtailment event (job loss, divorce, illness, etc.) and exhaust their resources. Lenders (if they respond at all) provide a modification that leaves no slack for future problems. So, any hiccup in the borrower’s income is sufficient to send the deal back into default.
It is estimated that it could benefit 3 to 4 million homeowners from the new modification procedures. So how do you qualify for the Mortgage Modification? Check the website http://mortgagemodificationprogram.blogspot.com
to see if you qualify. I was in trouble I am glad I did check it before I talk to my mortgage company and it worked – John Mayer, California
Thanks for posting this info article.