Before we debate the merits (more accurately, the lack thereof) of the latest trial balloon of a plan being floated to rescue overextended mortgage borrowers, we need to consider a few not sufficiently discussed facts:
1. The problem is that banks are not making loan modifications as they did in the past. That is turn is due to securitization In the old days, including in the nasty (in the Southwest and Texas) housing bear market of the early 1990s, it was standard practice for banks to modify mortgages. That was not charity on the part of the bank but a cold-blooded economic calculation, that in the majority of cases, it would take a lower loss by changing mortgage terms than by foreclosing.
80% of mortgages are now securitized, however, and the servicers do not do mods in the vast majority of cases, despite over a year of tough talk, pressure, and various half-baked programs (Hope Now Alliance as the poster child).Why? Our belief is the big reason is the most obvious: servicers get pretty well compensated for foreclosing, but cannot charge (much if any) for the work of doing a mod. Servicers are also set up like factories, with highly standardized procedures. They are not set up to do anything on a one-to-one basis, lack knowledge of the borrower (no doc and low doc mortgages mean the initial files are skimpy, and I am told they are often a mess) and have no experience in assessing borrower ability to pay (ie, they never were in the credit-extension business). To top that off, many servicers have lousy relationships with their borrowers, and so borrowers would probably not be as forthcoming as they would need to be to work out a fair and viable deal (the borrower would assume anything could and would be used against them).
2. A foreclosure lowers the value of all other homes in the neighborhood. Readers have said that recent studies have found 5% is a typical level; anyone with better data or links is encouraged to speak up.
3. I am amazed that the banking industry is and remains opposed to the idea of letting bankruptcy judges modify mortgages. This is not a radical new idea; in fact, it is standard practice in commercial bankruptcies. And bankruptcy judges are not pinkos; most come from the creditor side of private practice and so would understand the banks’ viewpoint, but they are also pretty savvy about lender games-playing. Moreover, filing for bankruptcy has high personal costs; it is not something people do casually (anyone who thinks so I would hazard does not know anyone personally who has gone through bankruptcy, It is demeaning and isolating). So while any program of borrower relief has the potential for abuse, this one is a pretty unlikely candidate.
Moreover, it does NOT demand that servicers do something that they are not set up to do and are pretty likely to be bad at doing, And existing servicing agreements DO have provisions for how servicers get paid when the borrower declares bankruptcy, so servicers would not suffer under this approach.
But instead of admitting and addressing the securitization problem in a more direct fashion, the latest remedy has all the trappings of a costly workaround that does little to solve the real problem. In fact, it appears most likely merely to push the problem down the road a few years.
The proposed arrangement, at least as presented in the New York Times, is to offer borrowers lower payments for a few years (three seems to be the magic number) and only in very exceptional cases reduce the principal balance. What does that accomplish? It does nothing to improve the borrowers’ ability to repay, and with real wages stagnant since the 1970s, there is no reason to think most borrowers will be magically earning more in 2012. It is just about certain NOT to reduce the ultimate amount of foreclosures, just push off some until the relief expires.
With Alt-A and Option ARM resets kicking in at high levels in 2010 and 2011, all this program looks likely to do is delay the housing recovery further by giving temporary relief that will expire on the heels of resets petering out. Unless we have high inflation in the intervening years that erodes the real value of the mortgage and monthly payments, there is no reason to think with a deep recession just starting that most borrowers will be in markedly better shape in three years.
I am also bothered by the slant of the story, focusing on the resentment of those who might not get assistance, rather than on the practical shortcomings of the program. although it admittedly seems to be in the high concept stage and may not come to fruition.
In the Great Depression, one of my relatives ran the general store of a large island off the Maine coast. When people could not pay for food, he would take their deed. He wound up with all the deeds for the entire island.
He gave them all back when the local economy recovered.
From the New York Times:
As the Treasury Department prepares a $40 billion program to help delinquent homeowners avoid foreclosure, it confronts a difficult challenge: not making the plan too tempting to people like Todd Lawrence.
An airline pilot who lives outside Norwich, Conn., Mr. Lawrence has a traditional 30-year mortgage that he has no trouble paying every month. But, thanks to the plunging real estate market, he owes more on his house than it is worth, like millions of other people.
If the banks, which frequently lent irresponsibly, and many homeowners, who often borrowed irresponsibly, are getting government assistance, Mr. Lawrence says he believes sober souls like himself are also due a break.
“Why am I being punished for having bought a house I could afford?” he asked. “I am beginning to think I would have rocks in my head if I keep paying my mortgage.”…
“If the lunch truly is free, the demand for free lunches will be large,” said Paul McCulley, a managing director with the investment firm Pimco….
Government officials say that homeowner bailouts are not a gift. For one thing, they assert, most mortgages will simply be revamped so the monthly payments become affordable for the next few years. Reductions in loan balances, which are drawing the most attention, will generally be a last resort.
“This is not about trying to create fairness,” said Michael H. Krimminger, special adviser for policy at the Federal Deposit Insurance Corporation, which is working with Treasury on the latest plan. “The goal is to keep people in their houses.”
Still, he acknowledged, “a lot of people are angry because they feel some people are getting something they don’t deserve.”…
Though hard numbers are scarce, estimates are that foreclosures will surpass one million this year. Losses on home loans are piling up faster than banks can deal with them. First Federal Bank of California said this week that as of June 30 it owned 380 foreclosed houses. It managed to sell 329 of them during the third quarter but acquired another 450.
This sense of rapidly losing ground underlies the urgency behind the Treasury’s new plan, which is being developed even as various homeowner bailouts that were announced earlier are just getting under way.
A White House spokeswoman, Dana M. Perino, said on Thursday that the plan was not “imminent” and that several different proposals were being considered.
“If we find one that we think strikes the right notes and could meet all of those standards that we want to protect taxpayers, make sure that it’s also fair and that it would actually have an impact, then we would move forward and we would announce it,” Ms. Perino said.
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I’m pro-socialism but even I feel disgusted for bailing out people who bought into this home as credit garbage. Absolutely no one has taken responsibility for this mess as usual. As a responsible renter this scheme hurts me even more then a responsible home owner.
Too big to fail should be replaced with too big to prosecute.
I don’t understand why this part of the problem, foreclosures, has taken so long to be dealt with unless the government is now afraid that they’re going to have to deal with this problem at the other end otherwise,e.g.,AIG’s CDS’s.
As for the plan, the news keeps being there’s going to be a plan. Why do they keep announcing this prior to unveiling an actual plan? There’s going to be a plan. Good for you.
I just feel that I’m missing something. By the way, has anybody studied the effects on property taxes in the seriously hurt areas?
Don the libertarian Democrat
Fwiw, the Mortgage Bankers Association claims that Ch 13 cram-downs would raise mortgage rates and lower LTVs.
There’s a popular meme today that lenders make out better on mods than on foreclosures. That of course is going to depend on the property, location, and LTV. The MBA wants the maximum recovery decision to be made by the lender/servicer rather than the court. I for one am not convinced by Sheila Blair that servicers are making bad economic decisions, at least not as a general rule. Numbers I’ve seen in papers by Joseph Mason suggest that mods were not common in previous housing recessions and that mod’ed mortgages re-default about 40% of the time (and as Mason points out, experience with nodocs is likely to be much worse). If a borrower has no equity the chances of a successful mod plunge, and obligating the lender to make a gift of equity to the debtor ain’t gonna improve mortgage availability.
The alternative to amending the bankruptcy code would be for the gov’t to make a gift of money to troubled homeowners directly (just think of them as ibanks), but that’s political dynamite. Shifting the cost onto the lenders via Ch 13 is politically easier but is going to make a sector recovery much more difficult.
Steve,
If we are thinking of the same paper, Mason did not go back to the 1990-1991 recession, which is really the best comparable. Lenders knew communities and the declines in some markets were bad, although not as bad as today. 1990-1991 is really the only period that comes close to a selective housing recession post the Depression.
I was not convinced by Mason’s paper, and some academics I know are of the same view. The sample he looked at made pretty shallow mods. Alot of these so-called mods were not mods in the traditional sense at all, merely payment catch up programs for borrowers who were behind.
If you are not talking principal reduction, you are not going to make enough of a difference in payments to have a meaningful impact. His sample does not prove his conclusion convincingly. All it establishes is that small reductions in payments don’t work.
I’ll agree that a lot of borrowers are in too deep, but EVERYTHING I have heard from mortgage counsellors (the ones I know locally talk to their peers elsewhere in the nation) is the mods offered now are utter BS, too little to change outcomes, way way less than the bank could offer and still have a win/win.
The prospective losses, between foreclosure costs and decline in general property values mean that banks can offer very substantial principal reduction and still come out ahead.
And as for the Mortgage Bankers’ Association, consider the source. If someone can prove that theory to me based on what happens with commercial real estate, where those supposedly-terrible-to-future-borrower mods happen, then I’d listen.
In fact, the credit card industry disproves that theory. Look at all the cheap credit that got handed out prior to the 2005 bankruptcy reform, when Chapter 7 was available to those who wanted to avail themselves of it and was reasonably debtor friendly.
Yves,
I think part of the problem comes down to defining `come out ahead’. Suppose a lender is facing either foreclosing with a 60% recovery, or reducing P to 85%. This simple scenario really isn’t. First, what is the remaining term of the loan? Second, is the interest on the modified loan the same? Third, what is the probability that that the modified loan will redefault?
Some lenders will prefer the 85%, because they can’t absorb a write-down to 60%.
Others may conclude the probability of redefault is high enough to make the 60% preferable.
There are many other considerations that could play in the decision. My point is that it is very difficult to generalize.
Most of the homes selling now in CA are foreclosures, which suggests that cram-downs would need to approach foreclosure pricing to be viable.
Sheila Bair wants to drop both P and I to hit the magic debt service number of 39% of household income; but it doesn’t take much insight to realize that $60 at current mortgage rates will earn more income than $85 at 3% or 4%. I’ll believe her approach when the IndyMac loans that FDIC has mod’d can draw prime prices.
On the CRE comparison, cram-downs are allowed, but I wouldn’t say they’re the rule…any CRE owner who’s given a personal guarantee (like Macklowe) will hand over the keys before trying his luck in Ch 13.
“Hello, ABC Bank.”
“Hi. I took out a home loan with you a few years ago and I’m in default. I’d like to discuss modifying the amount and terms of the mortgage.”
“Um, we only service the loans we originated. We sold them long ago, so since we’re not the actual owners, we have no ability to modify them.”
“Oh. Well, who did you sell my loan to, and how can I reach them?”
“Oh, geez. We sliced it up into a thousand pieces and sold those everywhere. Some are probably owned by German pension funds, Swiss hedge funds, a few hundred other banks, the Chinese government. Mr. Mugabe of Zimbabwe may own a few slices. Would you like his telephone number?”
Click.
“….I maintain that the original buckets of Subprime, Alt-A, Jumbo Prime and Prime Conforming don’t have much relevance any longer and they are just all ‘loans’. This is because with such a large percentage of higher rated programs containing interest only, limited documentation and high CLTV features, these borrowers will behave much differently than thought with such negative market influences.
Even full doc, 20% down, 30-year fixed borrowers behave badly when upside down 50% in their home and half of their monthly gross income going out each month to debt. We see large scale downgrades of Alt-A, Jumbo Prime and HELOCs consistently now, which proves the point. Remember, a 95% CLTV, full-doc, interest only, 5/1 ARM, qualifying at interest only payments with a 50% debt-to-income ratio was and still is considered ‘Prime’ at Wells Fargo for example….”
http://mrmortgage.ml-implode.com/
Title: Prime Borrower ‘HELP’ Requests Surge
Steve,
The loss severities you are using are too low. Banks recover 60-70% in a normal environment.
Foreclosures run $50,000. That estimate is pretty widespread. The bank also has to continue to pay taxes and interest (he also has to pay any past due taxes) and maintain the property. If the mortgage owner is a servicer, it has to pay the interest on the mortgage for at least 90 days after default to the trust. Some agreements also require them to make principal payments during that period.
And of course, these days, some angry tenants throughly trash the house before departing, making foreclosure recovery even worse than local market norms.
That is a long-winded way of saying the bank has much more downside in foreclosure than you are giving them credit for.
As for commercial real estate developers, the ones I know have not given personal guarantees. Macklowe is a serial near bankrupt who also blew up a building illegally in the middle of the night. The guy ought to be in jail, and the banks were correct to be plenty tough with him. And you don’t have to be a commercial developer to own real estate in corporate form. Some people choose to own their investment properties that way.
One large elephant is being overlooked in all of this discussion.
According to Denninger at Market Ticker this new proposal is like those that came before.
Any renegotiated mortgage would be a recourse loan, making the ‘homeowner’ responsible for paying off the mortgage or being subject to various penalties.
Anyone that accepts the terms of a ‘reworked mortgage’ with a new recourse clause is acting in a foolish manner, imo.
As Denninger points out, the ‘owners’ would be better off to walk away.
‘Stop Paying Your Mortgage Today’
…snip…’If your next door neighbor lied about their income to get their house, or took out an exotic “Option ARM” mortgage and can’t afford their payments, they will get a big fat bailout.
You will, in fact, get his mortgage bill.
Unless you intentionally default, in which case you will still get to pay taxes, but you won’t pay your mortgage, and thus, you won’t pay twice.
Your neighbor who goes for the government’s “deal”? He gets it in both eye sockets. See, a refinance, which this is, converts your mortgage into a recourse loan. That means if you take their “great deal” and then default later on (e.g. you lose your job in the upcoming Depression) your wages can be garnished forever and, if you earn more than the median income, you can’t even get rid of the debt in bankruptcy.’…snip…
http://market-ticker.denninger.net/
A three year payment rate ease does nothing for homeowners, but it isn’t intended to do so: it is all about the financial state of MBS holders. If they do cramdowns to ~40% of homeowners income, the MBS holders are, many of them, dead—as of today. The latter large institutions are expecting to be recapitalized and plump again in three years time on the Guvmint’s Save Our Capitalists Wealth Transfer policy. At that point, MBS holders are more likely to want to clean house, either doing cramdowns from a position of strength, or as likely foreclosing en masse with some Federal program also in place to allow them to write off chunks of the loss against their taxes. The above is, of course, speculation, but it is how I read the situation. MBS holders are stalling because they _can’t_ do cramdowns and stay solvent, and the plan is for them to be bailed by the Guvmint, and then clean up afterwards. The homeowners are of no consequence to the plutocrats. And of course, the plutocrats got access to public bailout _without strings such as mortgage mods_ ‘because it’s and emergency.’
What I would like to see along about Summer 09 is a mortgage holders payment strike. . . . But that would take some political organization, and in the US of A we are in it for ourselves, it would appear.
I am all in favor of a streamlined mortgage mod Federal statue, carefully crafted, and have raised that issue before here in comments. But no one on any side of this issue is talking this up yet. For now, everybody with a body part snagged up in the gears of a bad mortagae not is screaming for help getting their wealth out intact. And we won’t get any real solution until the rest of us tell ’em they only way out involves losing more than some skin.
The Deninger point is misleading. First, in some states (and I think CA is one) mortgages are recourse. Second, between the fall in rates in the early 2000s, which led to simply massive levels of refis, and the fact that half (yes, sports fans, half) the subprime mortgages were cash-out refis, there are fewer people than you think with purchase money mortgages.
The biggest protection isn’t that mortgages are legally non-recourse or not. De facto, they are. Banks assume that people who do default are broke and they cannot squeeze blood out of those turnips.
I also note these Deninger links are on more than one post here today. I am not keen about blog promotion (the anon is a dead give away) disguised as comments.
And I am REALLY not keen about the logic it embodies. If people on any scale take that viewpoint, it worsens the housing/bank woes spiral. So you are screwing me, basically, to get your house cheaper, because actions like that make the taxpayer bailout tab bigger.
And a society where people do not honor their commitments is another banana republic indicator. I am not a fan of people who advocate cheating or otherwise screwing the commons to advance their personal bottom line. This is no different than encouraging people not to pay taxes, except most people are afraid enough of the IRS not to do that.
Future links to that site from readers not logged-in will be deleted.
Government officials say that homeowner bailouts are not a gift. For one thing, they assert, most mortgages will simply be revamped so the monthly payments become affordable for the next few years. Reductions in loan balances, which are drawing the most attention, will generally be a last resort.
If the purpose of home ownership is that a home owner brings more stability to a neighborhood than renters and a home of any type provides a roof over one’s head, then WHY is this plan a problem? The people whose original loan amount were modified would have an unfair advantage over others in their neighborhood who did not get the modification when/if housing values began to go up again.
Existing home owners in trouble should only get a lower monthly payment but NOT a reduction in their original mortgage amount. To do otherwise would penalize all the people who made the right choices.
By maintaining the original loan amounts, these troubled home owners would pay the price for making their poor decisions while still having the roof over their head in a supposedly more stable neighborhood. They would essentially be renting until they caught up on their original loan.
Sounds like a win/win to me.
JoJo,
The math does not work in a low interest rate environment unless you lower principal. You cannot make deep enough payment reductions. In the higher interest rate environment of the early 1990s, you could. Play with a mortgage calculator or an HP 12-C.
And there was plenty of unfairness. but no one is going to incur the costs to do the due diligence. I know of cases where the mortgage broker promised 30 year fixed and presented a mortgage at closing for an option ARM. The borrower, a PhD mind you, did NOT understand that the broker was not working for the borrower and therefore trusted that the broker had provided what was promised and signed without reading. The Wall Street Journal has also reported that it took some borrowers had mortgages with the wrong terms presented to them at closing three times. Once is an error, more than once is policy, that is, institutionalized fraud.
So I am not one to assume that one can so easily draw lines between deserving and undeserving. I do think the powers that be ought to go frontally after the real problem, the servicers. If you are going to mess with contracts, I’d rather go after the real problem. I do not know why there is so much sanctimoniousness, particularly since the securitization market, ex the government guaranteed type, is not coming back anytime soon, if ever. It depended on third party guarantees which will no longer be issued.
But the other issue is efficiency versus fairness. It may not be fair to help these borrowers, and there are tons better programs (my favorite is still Dean Baker’s Own to Rent, which needs some tweaking, but directionally makes a lot of sense). And I have not been a fan of these help the homeowner programs. But letting housing overshoot on the downside in this correction (which it will, trust me) is massively more costly than sensible intervention. But again, the focus should be on getting mods made that make sense, that a bank would do if it were in control of the mortgage.
I don’t see how such a scheme could ever be “fair”, e.g. vis-a-vis responsible people who saved and showed disdain for the frenzied homebuying and price spiral because they rightly saw it as totally nuts.
These claims that we must do something to help people stay in “their” homes make me laugh. When they start talking about “families” I want to puke. It used to be patriotism was thought to be the last refuge of a scoundrel; now with the mortgage mess it’s families.
A post about the truly astounding growth in the deficit this year, as well as what is projected for next year, including what percentage of federal tax revenues will be going to service it in the future, would be appreciated. I don’t remember seeing a single piece saying it is morally wrong to burden future generations with this crushing debt, which will directly cause their earnings to be coerced from them and, increasingly, turned over to foreigners.
Yves said “And there was plenty of unfairness. but no one is going to incur the costs to do the due diligence. I know of cases where the mortgage broker promised 30 year fixed and presented a mortgage at closing for an option ARM. The borrower, a PhD mind you, did NOT understand that the broker was not working for the borrower and therefore trusted that the broker had provided what was promised and signed without reading. The Wall Street Journal has also reported that it took some borrowers had mortgages with the wrong terms presented to them at closing three times. Once is an error, more than once is policy, that is, institutionalized fraud.”
Having worked in technology sales for many years, I have seen many,many people who did not know what they are doing get taken by salespeople. You have to be a fool to believe that any salesperson has your best interests as their primary concern.
Regardless, it is incumbent upon the buyer to fully understand what they are signing on for. The salesperson does not want to lose the deal. If the terms presented are not the same as discussed, then you need to demand that they be changed or walk away.
Might this be inconvenient or cause you to lose the deal? Yup. But if you don’t, then you wind up where some of these people are now. As to not understanding what you are signing – ignorance is no excuse. If you are buying a house that cost many hundreds of thousands or even millions of dollars, then hire an attorney for 3k to review the documents and explain them to you. Why anyone spending this kind of money would complain about an extra 3k is beyond my understanding, unless of course you are trying to buy way more than you can really afford.
I still say that if you modify some people’s loan amounts and not others, they you create an unequal advantage, almost a 2-class neighborhood of those who got the mod and those who didn’t. This difference could be worth hundreds of thousands of dollars. How do you reconcile this without penalizing the people who did not make poor choices?
…so the monthly payments become affordable for the next few years.
How does this even remotely make sense in a globalized economic environment that has seen incomes stagnate, or even decling in real terms, for most of this century, especially so for the kinds of marginal buyers who benefited disproportionately from (ahem) non-conventional mortgage underwriting over the last few years? Is that trend expected to somehow miraculously reverse itself? In the teeth of a recession? Enough so that — voila — in a few years these people will be able to make the full payment themselves?
The math does not work in a low interest rate environment unless you lower principal.
Unfortunately this is not about fiduciary responsibility. It’s about politics and being seen as doing something proactive to help “American families” stay in “their” homes. Barf.
eh,
You are really choosing not to listen to what I am saying, but to stay within the narrow purview of your beliefs. Fine.
Every, and I mean EVERY experienced real estate investor, community banker, and mortgage counsellor I know insists that mods can make a great deal of sense and used to be provided by banks pretty frequently, but based on an assessment of borrower viability. This is NOT charity. This was STANDARD INDUSTRY PRACTICE by profit-making institutions through down cycles and recessions. They are now NOT being made due to the stupidity and rigidity of the securitization process, in particular, bad incentives as far as the servicer is concerned.
Find a way out of this box, not sentimentality but trying to find to pick the less bad option among options available. Now having said that, a lot of the approaches the feds are latching on to are expedient and not likely to work well, but I would NOT be so hasty to dismiss the general concept.
Jojo,
With all due respect, look at the role real estate brokers play. Who do they work for? Technically, the fee is paid by the seller, but it comes out of the buyer’s payment. Most buyers think of the real estate broker as working for them.
Similarly, securities brokers DO work (in theory) for the customer and have fiduciary duties to them, even though I would personally not trust most retail brokers and have trouble with that construct.
The very use of the term “broker” weirdly serves to confuse many customers and make them think of the mortgage broker as being like a real estate broker. Mortgage counsellors say that their customers almost without exception thought the mortgage broker was working for them.
Yves,
Thank you for your generous response. You make good points. And it is true that I have a sort of ideological, even visceral, opposition to…
This was STANDARD INDUSTRY PRACTICE by profit-making institutions through down cycles and recessions.
This is fine. Private — i.e. “profit-making” — institutions can do mortgage workouts until the cows come home. I might not even object if the government were to facilitate that, e.g. with small tax incentives (I’d have to see the proposal). What I object to, and will not ever agree to, is taxpayers — including future generations — being coerced (i.e. you’ll go to jail if you don’t pay) into participating. Because we all know where that will end up: more debt, more taxes going for nothing but debt service, including increasingly right into the pockets of foreign holders. That’s not what I work and pay taxes for. Look, I’m not a finance person. And I am not unsympathetic to the extent of the problem, as well as the human cost of it all. But this is just the way I see it. It’s a basic issue of right and wrong.
And you still have the best finance blog going.
And BTW, I am one of those persons who saved and did not participate in the nuttiness. Now I either have to 1) speculate on the markets (I am getting better at it), or 2) be content to earn a pittance on my savings (maybe given inflation nowadays it’s even a negative return). All so the Fed can make creative use of the alphabet to save the economy — or AIG, whatever — from the consequences of that which should never have occurred in the first place.
Don
State and local governments bet on property values (and therefore, property taxes) going up just like everyone else. If property taxes take a dive, expect waves of pension and muni bond defaults and/or drastically reduced local government spending. If the feds do what it takes to prop property values up, the local governments are saved – for now – but the resulting economic distortions are worse than the disease, and we face a repeat of the crisis just before elections in 2012.
What it really comes down to is that our system of governance has been broken for decades, but it worked in spite of itself in a tremendous boom economy (’45 – ’70’s) and continued to appear to work in the following credit bubble.
The government officials don’t have any substantive plans other than saving their own tushies. They only have two modes: borrow/spend, and tax/spend. Not spending is simply out of the question. Which is why I must respectfully disagree with Yves on the morality of defaulting on debts in this society. The debts of the wicked and slothful are being forced onto everyone else by government fiat. Look out for number one, that’s what everyone in Washington including your savior Obama is doing.
Yves – I think you are dramatically underestimating the amount and degree of popular opposition to any sort of plan that reduces the amount of principal owed for struggling homeowners, and in a democratic society it just isn’t going to fly.
I am the furthest thing from a libertarian right-winger, and even I have serious reservations about this. I would completely support government sponsored/guaranteed refinancing of all of these exotic ARMs into 30 year fixed mortgages, and I’d support temporary payment suspension for the unemployed. But reductions in principal of 30% for some subset of the population and nothing for everyone else is a non-starter. “Responsible” people who are not struggling to make ends meet WILL stop paying their mortgages if that were to happen. Obviously the government would not be able to force a cramdown for all homeowners were that to happen. We’re going down a dangerous path here.
The comments in this string reflect a significant rhetorical pattern and problem that is, in turn, characteristic of the culture at large: namely, all or nothingism.
In order to establish and promote a position on this important topic, each comment tends toward distilling the problem into absract simplicity. For example, and only paraphrasing here, “we should reject any proposal that rewards those who made risky/bad choices and, in doing so, punishes, those who were more prudent”. Or, “since the entire system is corrupt and bad, let’s all revert to Hobbes and have a war of all against all by walking away from contracts” Or, “lets do mathematical models of the entire situation and figure out the theoretically most efficient solution”. Or, “don’t give me any song and dance about families because we all know there was serious speculation going on here!”
This pattern of distilling things down in support of a preferred position is not ‘morally bad’. And, it is inherent in human discourse. We all do it all the time.
Unfortunately, though, it is at odds with complexity. And we face a seriously complex situation.
Instead of aggregating points of view into the single ‘best answer’, we cannot — nor will reality align with — ‘one approach’. Even today, as inadequate as the allowed solutionS are, those are plural, not singular.
Indeed, a reason the bankruptcy reform makes sense as ONE among MANY approaches is that bankruptcy allows for differentiation in approach.
We need many solutions to the many different contexts. And, in proposing, selecting and implementing those MANY solutions, we need to emphasize flexibility and customization instead of one size fits all.
In addition, as Yves rightly points out, we need to understand and respect what various players actually know how to do. The servicers, for example, do NOT have the core competencies or financial incentives to suddenly become customized agents for modifications based in actual affordability. Others, though, such as the nation’s best nonprofit housing groups do have such competencies. And, as mentioned, bankruptcy courts would be able to access this – as would other programs so long as those programs are not voluntary on the part of servicers/lenders/security holders.
Furthermore, the absence of any serious effort to gather specific information is another strong pattern inherent in all the various proposals over the past year or so. This, in turn, merely fuels the all-or-nothing quality of our discourse. Without serious efforts to get the information — on the securities side as well as the home owner side — we short change the effectiveness of proposed solutions.
This entire mess gives wonderful vent to feelings. Each of us can shout out loud about how fundamental fairness will — with certainty — get violated. And, indeed, it will.
The same, though, might be said about choices and actions in hospital emergency rooms. It would be sad, though, if all ERs were eliminated and banished unless and until the ‘fundamental fairness’ could be worked out in a way in which all people — 100% — were in agreement.
We face a messy situation. And, there are no clean single answers to a messy situation.
It would be useful, then, for each person who comments to offer up one or more exceptions to the general rule being proposed. For example, “I am against any approach that would permit pure speculators to benefit. But, I recognize that there are real families at risk and so support approacheS (plural) that distinguish between those two kinds of home owner situations.”
Or, “I believe that, over time, bankruptcy option would raise mortgage rates, although not as much as the inflated MBA says. Still, I recognize that today’s situation is not one where we face tons of folks in the market buying homes. So, let’s reform bankruptcy with a sunset provision and tie our choice about extending the reform in part to whether or not and by how much the reform actually does increase the cost of homeownership.”
And so forth.
Doug
I don’t see very much mess in this situation. Banks lent recklessly. What happens when you give money to people who don’t have the means to pay it back? You lose it.
Bankers knew they were lending recklessly and tricked the rest of the world into financing their bonuses through the use of MBS’s and derivatives.
The rest of the world was tricked because they were greedy and lazy. You can’t con an honest man.
In addition, none of this would be possible if banks were not allowed to create money they don’t have.
The entire system is broken and everyone in every level of finance should be run out of town on a rail.
Without Goldman Sachs and other investment banks you’d raise capital through the Internet. The major exchanges like NYSE can be run on a small handful of modern computers. There is no way to justify the massive deployment of human capital to these financial shell games.
Everything else is people talking their book.
Not that I think any meaningful kind of change is going to happen, because it would pauperize a lot of rich parasites, which is why I continue to play the markets as they exist today.
This, like so many other topics discussed here, is very complex.
As a real estate lawyer, I have personal experience (anecdotes if you will) that confirm many of Yves’ assertions from this thread and prior posts this week:
1. Residential mortgages are “de facto” nonrecourse. This seems demonstrably true. It is not just that most defaulting borrowers are broke; it is that the cost of getting a deficiency judgment in many states would outweigh the revenues generated by the deficiency judgment.
2. Mods were “standard industry practice.” Yes, I have seen this over and over again, but it was almost always done privately and confidentially. The last thing any institution like a bank needs is to have its customers organize and get proprietary information. I represent condo developers, and let me tell you, if the buyers organize before closing of the units, the developer is in big trouble, because the buyers are not rational and they will demand totally unreasonable changes if they leverage themselves as a group. Having the government intervene here is similar to having the customers aggregate with a new advantage in information. Like what one person said in the article, if you now know exactly what you need to do to get a better deal, you would have “rocks in your head” not to exploit that information.
3. “Tanta has often stressed that the idea that people voluntarily walk from their homes is very much exaggerated by the media.” Although I knew many in early 90s Los Angeles who did walk away, I know that I and *most* of my homeowners friends were underwater by 10-20% and almost none walked away. Certainly, those who kept their jobs simply would not risk a default unless the gain was huge; it never seriously crossed my mind that I would walk from my house as long as I kept my job, no matter how underwater I was. It was those who lost their jobs that defaulted or walked away. Now, if you think this through, having the government make the serious consequences of default much less likely by establishing a standard mod program would, I think, give the working types who didn’t seek mods in the early 90s to seek them
now. Having this class of people seek mods might be just as bad, or worse, for the country and the economy than having no mods at all. We have to investigate this trade off before we can make an informed decision.
Just a few thoughts. Great blog.
Just curious…how did your relatives pay for the food they sold for deeds? Most general stores, i.e. any business, does not have adequate cash or access to credit in recessionary/deflationary times. That’s a great story, but not realistic to the majority of business that require cash-flow (not deed-flow) to survive.
If foreclosures lower housing prices in the whole area, homeowners could petition for tax reductions. This would seem a clear problem for the expenses of local government.
Don the libertarian Democrat
fattyK,
Most people in that area in those days fished, plus had a garden (admittedly short Maine summers), maybe some chickens, sometimes a cow or raised the occasional pig. So they would be buying a much smaller proportion of their total food consumption from the store than people would today. Flour, sugar, fill in the blanks.
I assume they had savings that weren’t in a bank that failed.
I doubt whether many would object to mortgage holders in negative equity having access to mortgages at lower interest rates, provided the excess interest is accrued to be paid later. Anything else and a feeling of unfairness will cause a political backlash, not that it seems to have stopped them so far. The lender/mortgagee relationship appears to have significantly eroded with time and I wonder whether the day of the local mortgage agent with local knowledge will return. The current plan certainly smacks of kicking the can down the road, but hasn’t that been the case with most of the actions taken so far.
Fundamentally US default rules are significantly different from other countries rules. Generally across the world if you fail to pay your mortgage you are declared bankrupt. Which means you loose everything including your pension, car, tv etc, except your tools of trade, clothes and immediate living cost. You are still expected to contribute to your debt and you pretty much have no chance of getting a loan or mortgage for 10 years minimum. Default and Bankruptcy are not things you want to contemplate outside the US.
Maybe if US rules had been a little different house buyers would have thought a bit longer before over extending themselves.
Yves, there are more obstacles to mods than just the incentives you mention, although I certainly won’t deny those are operative.
1) Most securitisation docs specify the situations in which servicers are allowed to even attempt a mod (eg default or reasonable expectation of imminent default), and cap the total number of mods in a given pool (typically at 5%). The Treasury/ASF fast-track scheme was designed to provide a standardised way of complying with those requirements, but they still can’t get around the cap without getting the noteholders to agree to a change in the documentation.
2) Such a change is relatively unlikely in most cases, given that noteholders are affected disparately by mods. Senior noteholders would rather foreclose and write off the principal, as that preserves excess spread and is what the various triggers are designed to deal with. Mods that reduce the interest rate while preserving most or all of the principal are better for junior noteholders, but weaken the protection for senior noteholders. Servicers are contractually obliged to act in the interests of noteholders, and they can’t favour one class over another – hence the paralysis. I suspect the only way to get mass modifications will be to indemnify servicers from lawsuits, which could introduce its own perverse set of incentives.
I’m not sure how reduction in principal is not charity. Isn’t it free money? OK, you might have to spend hours on the phone with the lender, weeping and wailing, but after you’re done, it’s free.
If it comes to the principal reductions, I’ll go out and buy the biggest house I can get, and default.
Some Famous Russian General said “Quantity has a quality all its own.” Scattered, small-scale mods in the mortgage principal can (and were, in the historical examples you cite, Yves) be absorbed into the social and economic system. Mass reductions in principal, on this unprecedented scale, would cause a social cataclysm. Not the good kind. And I’m as left as it gets. Bizarrely (for me, I mean) I find myself feeling the only solution is to let the car crash. I just don’t see any regulatory or govermental solution is possible.
"PMorgan to Modify Mortgages to Limit Foreclosures (Update1)
http://www.bloomberg.com/apps/news?pid=20601087&sid=a95WHBbBgk54&refer=home
By Elizabeth Hester
Oct. 31 (Bloomberg) — JPMorgan Chase & Co., the largest U.S. bank by market value, plans to modify terms on $110 billion of mortgages and forgo foreclosure proceedings on all real-estate loans while the changes are implemented in the next 90 days.
The offer extends to customers of Washington Mutual Inc., the savings and loan JPMorgan agreed to buy last month, the New York-based bank said today in a statement. Loan modifications may include interest-rate or principal reductions. The bank said it will establish 24 regional counseling centers to provide face-to- face help in areas with high delinquency rates.
This might interest people.
Don the libertarian Democrat
Disclaimer:
I know little of finance. I’ve been sitting in the same small house for 20 years, and I wasn’t even tempted to “buy up” during this or any other bubble.
That said, I do feel obligated to comment on the tone of many comments that came before.
While fairness, or unfairness of any interest or principal bailout or cram-down or whatever for underwater mortgage holders is a real concern, I believe we need to consider how the situation arose for many of those who are now suffering and who are now the subject of some pretty cold, third-party discourse here. In truth, many people bought over their heads in the housing market because they had no practical alternative. If, for instance, you moved into my area of the country, perhaps in the service of those employers who tout the value (to themselves) of a “highly-mobile workforce”, then you paid too much for anyplace you found to live. Here in sunny Central Florida, the boom was that bad — period.
And for those who — rightly — criticize the notion that a house is good investment, rather than just shelter from the rain, think about why buyers might believe this. With declining real wages, pensions disappearing into the gaping maw of executive compensation, ruthless employers driven to maximize their quarter to quarter profits by downsizing, “rightsizing” and outsourcing, why wouldn’t you believe that a house was the only remaining way to stash away income for a retirement on Social Security? My savings account is losing money — my 401k is in the dumper, why wouldn’t I try to jump on board the Real Estate Express?
You don’t need to get drip compassion for “families”. You only need to look at the realistic options folks had, and what they were sold by the self-interested people at the top of an increasingly steep income pyramid.
So when you discuss the justice, or injustice of bailing out those in financial need due to the demise of the housing bubble, please keep in mind that we’re not always talking about greedy people who made greedy decisions. Often we’re talking about ordinary folks who found themselves dire circumstances of high payments and job loss not entirely through their own actions.
Anonymous @ 3:29
Home buyers signed off on mortgages 2004-2007 they couldn’t afford for many different reasons; maybe they were unwilling buyers in a seller’s market, or maybe they were enticed by the prospect of high returns in an economy that seems rigged against the small investor, or maybe they committed mortgage fraud. That’ll all get worked out in the courts if we let the system work the way it’s supposed to.
The issue of buyer motivations is entirely separate from that of banks KNOWINGLY lending money to parties they knew would not be able to pay.
The banks must be made to pay for this.
Even if it means destruction of our oh-so-precious financial “institutions”, which in case you haven’t noticed aren’t doing a very good job anyway.
People will still trade with each other when the Wall Street dinosaurs are rotting in the ground. The elderly will be taken care of in their old age, children will be protected, food will get onto the table, houses will still be built and lived in. You don’t need an intact financial system to make this happen.
Those are the facts. Everything else you hear about the ‘crisis’ is from people angling for bail outs, and their sycophants.
Michael Krimminger, special advisor for policy at the FDIC is still operating under the old paradigm that the “goal is to keep people in their homes.”
This is a natural extension of the original program of making homes affordable for everyone so as to make it possible for everyone to realize the American dream. The original program was a mistaken goal, and attempting to realize it has turned nightmarish.
Naturally the new goal to now keep them in their homes is equally nightmarish and a form of denial that the former goal was a pie-in-the-sky pipedream.
It is disturbing that policymakers won’t just simply admit they were wrong and that it was one big-ass mistake.
To tell the truth, new policy measures ought to say, “hey it was a nice idea, it didn’t work, let’s help you walk away from your home that you can’t afford and help find you a living arrangement that will be within your means.
Ms. Perino and other spokesman are beginning to really irritate with their blabber about wanting “standards to protect taxpayers.”
it is high time these spokesman drop the pretense of fairness in their speeches.
The sound is like that of the screech of a chalkboard.
RK,
I learn from you everyday:
The goal is not to keep peeps in their homes as FDIC’s Krimmenger’s soundbite would like us to believe. the goal is to buy time, (which I knew) for the holders of the MBS securities who are relying on the stall tactics b/c “they can’t do cramdowns and stay solvent.”
But even three years, five years, doesn’t matter, it will just delay the day of reckoning for the mbs holders if it parallels the experience of the 1930’s (which it should imo). As Homer Hoyt wrote in his 1933 book “slowly but inexorably the speculator in real estate is ground down.”
The lesson in Chapter 14 of Hoyt’s book is even more troubling, namely that a stock market crash actually worsens the housing crisis. After the recent stock market crash we just had this indicates we should expect the downturn in the real estate market will be extended beyond our expectations.
But your reference to “plutocrats getting access to public bailout” is the wrong word. What you are really describing are the “kleptocrats” expropriating funds from the taxpayers.
We can help get you approved by the DRE for a Advance Fee Agreement. http://www.loanmodseminar.com
Yves,
In 2004, Dan Immergluck and Geoff Smith at the Woodstook Institute estimated the effects of each foreclosure on adjacent property values at 1%. That study, while dated, did focus on a period of concentrated foreclosure activity in Chicago in the late 1990s and is probably the closest thing I’m aware of that can approximate the scale of the current crisis. Even so, their analysis focused on a context of generally rising property values. Good luck finding a methodology that could peg a relationship between foreclosure and property values in the current environment (where value is essentially a fiction).
http://www.woodstockinst.org/publications/download/risky-business%3a–an-econometric-analysis-of-the-relationship-between-subprime-lending-and-neighborhood-foreclosures/
– Fillay