We wrote last year that some states were getting into the “save the homeowner” act. While states and municipalities are in theory in a much better position to implement this sort of program, their efforts as of our last sighting (November) had yielded little in the way of results. Nevertheless, the proponents hoped that the limited impact was due to the programs being new rather than ineffective. As we noted then:
Some state governments have implemented programs to rescue mortgage borrowers in danger of losing their homes. Eight states have committed a total of $900 million to these plans, but a Boston Globe article reports that the uptake has been very low, with only 100 families getting refinancings. If you assume an average mortgage of $300,000, that represents only 3% of the allotted amount. The experience of the states does not bode well for other refinancing initiatives.
What happened? Borrowers are believed to be desperate for any remedy other than foreclosure. Yet Massachusetts, which has the largest program ($250 million) has not refinanced a single mortgages. It isn’t alone in failing to make headway:
In Maryland, the first state to create a refinancing program, officials have found it so ineffective that they are considering shutting it down. The program has made just nine loans in about a year….. Ohio initially expected to serve one of every three applicants; officials say they have so far helped one in 15.
The intent of most of these is to catch borrowers who are likely to default when their loans reset. This construct has two main flaws. First, comparatively few borrowers fit the profile that the various states wrote into their initiatives. Second, lenders are often unwilling to write the mortgage down if the mortgage balance is higher than the market value of the house.
An article today in the Washington Post provides an update. Despite increased efforts, the non-federal initiatives are still inconsequntial, with the number benefitting trivial relative to the magnitude of defaults and foreclosures. And remember that ballyhooed agreeement with four mortgage servicers announced by California Guvernator Arnold Schwarzenegger, in which they’d freeze teaser rates for certain borrowers for five years? You haven’t heard much since then, with good reason. The servicers aren’t making the mods.
The new wrinkle is that various local entities are throwing sand in the gears, either blocking or delaying foreclosures. But that is no remedy. If lenders were wiling to write down mortgage balances, they could slow the timetable on their own to effect a workout.
If a borrower can’t afford to make payments, attenuating the process is the worst of all worlds. It keeps the homeowner from moving on, encouraging him to throw good money after bad, and by reducing the lender’s rights, it deters new sources of funding from entering the market. And with borrowers increasingly walking from properties with negative equity, this approach is likely to prove ineffective. Indeed, the evidence is increasingly that lenders, overwhelmed by defaults, are dragging their feet on foreclosures to defer the costs of the legal action and the property maintenance costs. So the solutions often presuppose a fact set different from the dynamic at work.
From the Post:
This month alone, Philadelphia’s sheriff delayed foreclosure auctions of 759 homes at the city council’s urging. Maryland extended the time it takes to complete a foreclosure. State leaders in Ohio recruited more than 1,000 lawyers to aid distressed borrowers….
Nine states have committed more than $450 million to “loan funds” aimed at refinancing the mortgages of at-risk borrowers, according to a study by the Pew Charitable Trusts….
Some states responded by creating loan funds they could use to refinance the most distressed borrowers. Pennsylvania created two new funds in November to cope with the recent mortgage problems…
Pennsylvania has refinanced 40 loans and negotiated principal reductions for an additional 38 under the two programs since they were adopted in November, said Brian Hudson, executive director of the state’s Housing Finance Agency. In most cases, lenders have agreed to cut the principal by 15 to 30 percent.
“That is not a bad effort” for a few months of activity, Hudson said.
But loan funds have financial constraints. These funds can help only a limited number of borrowers, and even then they tend to have the greatest impact in states such as Pennsylvania that have not been overwhelmed by foreclosures.
They are less effective in previously overheated markets — such as California, Florida and Nevada — where borrowers grossly overpaid for their homes and now owe far more than their homes are worth, said Michael Collins of the PolicyLab Consulting Group, a mortgage research firm based in Ithaca, N.Y.
Through their own programs, New York has refinanced only three borrowers since September, and Massachusetts has refinanced 12 since July. These two loan refinancing initiatives do not help borrowers whose mortgages exceed the value of their homes.
“Once people are in that situation, there’s not much that any state or local program can do unless the lenders make concessions,” Collins said.
A few governors tried pushing lenders to do just that. California’s Arnold Schwarzenegger attracted national attention in November when he announced that some of the state’s largest lenders had voluntarily agreed to temporarily freeze interest rates on some adjustable loans.
The results have disappointed consumer advocates. The number of loan modifications, which could involve changing either the principal or interest rate of the mortgage, declined 30 percent from November to January while foreclosures climbed, said Paul Leonard, director of the Center for Responsible Lending’s California office….
For troubled borrowers in California, foreclosure remains the most common outcome, the California Reinvestment Coalition found after it surveyed 38 counseling firms in December that worked with 8,000 borrowers. Even some of the lenders that pledged to work with Schwarzenegger did not come through for borrowers, according to the coalition…..
While the proposals wind their way through Congress, foreclosures keep mounting and local policymakers keep churning out ideas. An increasingly popular strategy is revamping the foreclosure laws in favor of borrowers.
Maryland has extended the timetable for foreclosure from 15 days to 150. Massachusetts has arranged temporary reprieves for more than 600 homeowners over the past year. Philadelphia is setting up a program that allows borrowers to get financial and legal counseling before auctions of their property are scheduled. The Ohio Supreme Court approved a mediation program in January.
Under the Ohio initiative, lenders who want to foreclose must first try to work out payments with homeowners. Only then will courts turn over the documents that companies need to sell the homes.
“That gives us leverage,” said Richard Cordray, Ohio’s treasurer. “To get what they need from our courts, they have to sit down and go through a mediation process as in all other civil cases. It slows down the process and gets everyone to the table.”…..
“I’m not at all pessimistic that we’ll make a real dent in this problem,” said Cordray, who took office a year ago. “It’s just that we’ve got many bad loans to work through.”
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Where’s my handout to buy a house and get a breaK?
the country has gone done the tubes. The US peso is toast if this continues.
We wrote last year that some states were getting into the “save the homeowner” act.
I guess that sounds better than ‘save the debtor’. Probably for the same reason whenever I hear the candidates (especially Hillary Clinton) talk about the ‘mortgage crisis’, they usually phrase it more or less as ‘we must do something to help American families’. I mean, who wouldn’t want to help out a nice family? Besides me.
I don’t mean to frown any excessive frowns on the issue, but there is simply NO solution to the bad mortgage problems that exist as they are presently constituted. The problems are too diverse; there are too many lenders, and worse diffused standing with respect to the actual mortgates; the volume of property is, well, _vast_. That’s just on the lender side. Borrowers have many and various problems so there is no one-size or even middle-of-the-curve solution to implement. These mortgages need to be, literally, re-negotiated one at a time. But it gets worse: with asset values plunging to well south of the face value of many loans there is no sane way to ‘save the loan’ as written. You want the lender to eat 40% of the loan?; it might be easier for _them_ to walk away—or there may be now ‘lender’ to walk away, they’re dead. For troubled mortgage holders, it’s a big blot on their credit, a life-changing event. For lenders, it’s often going to be a blot on an x-ray; a life-ending event.
Don’t expect a fast resolution to this issue; three years from now, we’ll still be unwinding it, in my view. Federal legislation does nothing to solve the problems. ‘The guvmint buys all notes?’ They don’t got that kind of dough.
The government can’t solve the problem—but the government just might be able to _change_ the problem. Here is the outline of a coherent solution process; it won’t happen, and I’m not going to propose offhand the means to get there, but since this all is a mess, and we’ll have some time to kick arouond issues, here is one way to go about it. Take the market or appraised value of the property as of a set, market top date; oh, March, ’07 for an index. Now take 60% of that: this is the new value of the property. Take the loss, and apportion it between mortgage holder and lender based on their equity shares as of today; this means most, but not all of the writedown goes to the lender. Many mortgage holders will end up with negative equity, but at much lower total dollar value; the property is worth less, but by the same token the amount which will have to spend to pay it off and own it clear is much less, too. That’s a situation which may keep an owner willing to stay in the property and pay off that smaller negative equity; they take some loss, but they can end up with whole credit and a home, not a bad outcome. Refi the loan into a traditional loan structure. If the owner can’t meet _that_ payment, well the loan is dead anyway, we’ve done all we can. The advantage to the lender is that they now have an asset again, rather than a rotting, unoccupied structure against which they owe taxes after foreclosure costs in a horrible property market without viable mortgage lenders and huge inventory overhangs.
No one forces this solution on either party to a locked up, upside down squat, but it’s a package deal, go/no-go, with little or no side dickering over terms: you go to court and say, “We both agree to this change in our pre-existing contract by the terms of the Somebody Help Me Jesus Act of ’09,” judge raps the gavel, ever’body clap hands, and walk out the door with chins up and best foot forward. Once a mortgage holder at a viable payment is signed on, the lender can sell the package or hold it to term, but the mortgage is a tradable instrument again at known value. This is for first liens only. I have no solution to propose for second and third mortgage situations other than the Darwinian solution: stupidity means your equity dies stillborn without reproducing.
Rather than a total loss-loss, cut cards and do a re-deal, but ‘automate’ the process with shared pain.
Don’t like it? Let’s hear your plan.
Here is an addendum for the above proposal, for non-foreclosure situations. Supposing that you were one of the few responsible borrowers who actually got an loan they could afford, no further liens, but now with a 40% decline in value you will be massively underwater. However, you can still afford your payment, so the loan doesn’t go into foreclosure, and as things stand _you alone_ are expected to bear the full burden of the loss. You can’t refi or sell without paying out the full losss now upfront, either. If you go in to your lender and ask them to write down the principle, and share the loss, you’ll hear, We lent X amount; you can pay at y schedule; we expect to recover X amount: no deal.
Well, that’s a capital loss, right? It isn’t reasonable that you, or anyone get to write off _all_ of that loss against your taxes, but it could be established that for homes sold over thus-and-so years which experienced a loss of value of y% a capital, something well less than half the total loss can be written off against taxes over a period of time; a substantial mitigation even so. If you, the mortgage holder claim the loss, however, the lender has to immediately write down the collateral and with it the loan value, even though over time more than the collateral is worth is going to be paid. On the other hand, if they renegotiate the loan, they (the lender) can claim the capital loss over time.
This is less than ideal. It requires public funds (the capital loss against taxes). It may be hard to find a formula getting the mortgage holder out of the neg eq prison, too. Also structuring the accord so that it was as automatic as possible with as little room for maniupulation by either party would not be easy. The key is that the trigger should be placed in the hands of the one currently taking the loss, the mortgage holder, giving the lender reason to share in the loss. Under no circumstances, though, should the whole value of the asset depreciation be laid off on the US Treasury, though. Something like a third should be the max, with the actual parties to the contract splitting the rest, one way or the other. The time period to qualify for this should be only at the very market top, perhaps ’02-’07, still a huge portion of outstanding mortgages, but.
For the latter case it might be expected that the value of the property would recover over the amortization period (say 30 years usually). So it’s only a problem if the borrower wants to sell the house.
Richard,
An interesting solution, but ponder this: the problem that I see with any solution is that they make sense on paper if and only if we are at the bottom of housing prices. Let’s say that my friendly lender and I cut a deal and then my house falls by an additional 15%? There is no net gain and I am just as likely to walk. Additionally, this is punitive to responsible home owners who have either no mortgage or have a high equity percentage (like me).
Andy