Well, any numbers are better than no numbers, I suppose. Still, once you're talking about $24B, the question has to be asked: what does this gain? Is there $24B of gain to society in general, or is this simply a bailout for the lenders whose loans will be taken over and modified?
But the overall issue remains: do workouts really improve the situation, or do they simply increase the pain by providing homeowners with perverse incentives to go delinquent? I haven't heard any significant answers to that question, and the more the government pushes for workouts, the more that incentive could become an issue.
Department-store operator J.C. Penney Co. said Friday its third-quarter profit fell by more than half as consumers cut back on spending and took fewer trips to the mall amid the deteriorating economy.
The company also said mall traffic in general has been weak so far this month and issued fourth-quarter guidance well below analyst expectations.
Why is the FDIC trying to take a lead role in mortgage modification again? Even the OTS would be a better fit
As for the assumptions, it looks like implied recovery rates and re-default rates are both understated.
33% may be a high historical re-default rate, but this is an exceptional economy with radically different mortgages/debtors. Spending a couple grand per mortgage is not enough to restructure it from one of the worst performing loans (it defaulted/would default very soon) to one that outperforms the average mortgage out there
Hard to believe that people will respond as expected, since so few have responded to current modification offers. This plan does not seem right somehow. I think FBs are looking for either a complete bailout or will walk at this point. With rising unemployment, homeowers are better off downsizing to what a single income can support.
Why is the FDIC trying to take a lead role in mortgage modification again? Even the OTS would be a better fit
OTS only has regulation over thrifts/S&L's, so it would take an Act of Congress to give them that authority.
FDIC has carte blanche to jump into the affairs of any depository insurance, even those to whom it's not a primary regulator, if it thinks it can save FDIC funds.
Anyways, where the hell is that $300B that we were all bitching about this summer? Did it disappear into the ether?
A friend owed $200,000 more on his house than he could get for a sale ($450,000 vs. $250,000). His loan had reset, and he was paying an extra $2,000 a month in payments. He could pretty easily afford the increase.
However, he had just completed a divorce, and didn't need a house that big, and didn't want to be saddled with the high house payment.
So he got the bank to short sell the house for $250,000, and he walked away with a "dinged" credit score and $3000 a month extra in his pocket (as he is now renting a house).
The point...at least in California, it has been socially acceptable (and even expected) to not make good on your mortgage, even if you CAN afford it.
I have a relative that is just walking away from his investment property. He can afford to carry it using his own income, but doesn't want to. It went back to the bank this month.
I have another relative that just stopped making payments on here Las Vegas condo, and is living there "rent free" until she can get a cheaper rental to live in. She is just going to "walk away" after extracting the "equity" from it last year.
I know of someone else who "extracted equity" from their house of 20 years, and now can't make the payments. They are going to find a new place to live, or live with their kids, pocket the money, and let the place go back to the bank.
The on-going debate has been (and will be), Can we take-off/put-on the tabe the Depression Scenario.
Everyone is now likening the US to Japan. I say no. Japan was able to ZIRP their way into a lost decade. The US, as "The Great Consumer" cannot ZIRP their way out of this mess.
My analytical half keeps warring with my instictual half about the Depression Scenario. Lots of anaysis shows it should not be possible. But my gut keeps telling me it is going to happen.
The speed and depth of the job-loss is daunting. The areas to which we can employ people to affect a recovery do not yet exist. Ang governement policy seems to keep aiming at the wrong target. At this point the govenement should be doing nothing but spending money to foster jobs. Period. Every day we do not do that is another day closer to Depression.
The price of white truffles has fallen 84%. Fine wines have dropped 65%. Lobsters are off 52%. Deflation has reached the City. It has engulfed housing and now threatens to spread through the broader economy, lodging like a virus in the British and global monetary systems.
Deflation is sometimes likened to Dante's Inferno. "Abandon all hope"once you step into that Hellfire. We are not there yet but Mervyn King, the Governor of the Bank of England, says it is now "very likely" that the UK retail price index will turn negative next year.
Actually, I think your stories are evidence that it's getting normal out there. People are acting in their best financial interest. Banks are also beginning to act as though every borrower is out to steal the loan.
So he got the bank to short sell the house for $250,000, and he walked away with a "dinged" credit score and $3000 a month extra in his pocket (as he is now renting a house).
The point...at least in California, it has been socially acceptable (and even expected) to not make good on your mortgage, even if you CAN afford it.
I have a relative that is just walking away from his investment property. He can afford to carry it using his own income, but doesn't want to. It went back to the bank this month.
Hank Paulson's Mom,
I live this stuff everyday...I help people sell short. Don't you see the difference in these stories though? In one case, someone negotiated a mutually beneficial deal with the bank (assuming they were honest to the bank about their ability to pay). And in the other case, someone just walked away.
Aren't these two very different scenarios?
The thing that I cannot understand is the repeated lame "loan modification" solution. Is anyone going to force the note holding investor to comply?
Frankly, Sheila just ought to open a lemonstand in every village and town and just start handing out the money. The heck with mortgages, obligations, whatever...
Banks are also beginning to act as though every borrower is out to steal the loan.
But yet Joe Sixpack doesn't get this. I got into an argument on another board when I stated "cramdowns will cause rates to rise for everyone", and no one else seemed to understand why that would be.
I have a couple of clients this could actually help. What do they mean "principal forebearance"? Are they gonna cut the principal or not?
or just wish it away for another day.
Why the hell not go for cram downs?
Most would not be helped.
The interest rate would have to be cut in half, even for a loan that already had a reasonably low rate of interest.
One of these things that is better for the bank than the person being "helped" - Really, if the low interest rate is limited, principal is not reduced, and your given 40 years to pay it off, are you not just a hamster spending more time on the debt wheel? Instead of having their loans modified, the people who this is suppose to "benefit" would be far better off defaulting and paying hundreds of dollars less per month on rent, instead of "owning" or more accurately oweing forever. Money completed wasted to try and prop us house values.
I have a couple of clients this could actually help. What do they mean "principal forebearance"? Are they gonna cut the principal or not?
or just wish it away for another day.
I think that is deferred principal payments...ie NEG AM.
But yet Joe Sixpack doesn't get this. I got into an argument on another board when I stated "cramdowns will cause rates to rise for everyone", and no one else seemed to understand why that would be.
Some folks just can't understand that there are 2 sides to every transaction. It's noble of you to try and point that out, but if somebody doesn't get it on the first pass then it's like banging your head against a wall.
The two dozen employees of Eclipse Aviations service center at Albany International Airport were sent home today after the company was unable to make its payroll companywide. This was a total surprise, said John ODonnell, the airports chief executive officer. Were hoping they will identify a funding stream quickly. We do want that operation here. Albuquerque, N.M.-based Eclipse, the first to market a new generation of six-seat, very light jets, told employees at its factory in Albuquerque that it had encountered last-minute problems getting financing to pay them for the past two weeks of work.That announcement left many employees feeling frustrated and angry, according to the Associated Press.
"Money completed wasted to try and prop us house values."
That is the ONLY thing that would begin to make any difference to the banks. Owning a shit load of assets tied to those prices that they are unwilling to write off (write down? yes but that makes the wrong assumption that you will write them up at some point) is the only real solution to what faces the banking system at present.
Not that I am for it but this was apparent even last year.
When you have banks that don't want to sell and use the excuse of distressed pricing inputs you have a stand off....what else is there left to do then to try and re-inflate values?
I think that is deferred principal payments...ie NEG AM.
No it is not. The deferred principal basically becomes a ballon payment, due with the final installment. The loan is amortized the same way a balloon note is amortized, it does not negatively amortize, that, is the principal balance does not increase over time.
READ THE DAMN article. And when you finish, then read this Tanta post. Then come back with questions, plz thx.
Hank Paulson's Mom
So he got the bank to short sell the house for $250,000, and he walked away with a "dinged" credit score and $3000 a month extra in his pocket (as he is now renting a house).
What about the tax liability on the 200,000 loan forgivenes?
The loses are real. Somebody has to foot the bill. If the government gets this to work, they are shifting the expense from the investor to the home owner.
That home owner is probably making an unwise investment (or recommiting to an unwise investment). That home owner may never be able to retire or send her kids to college.
It's interesting to see the sea change regarding how "homes" are viewed by their owners.
Up to 2007, they were seen as an asset that should be nurtured (granite countertertops) and protected as they provided both shelter and return on investment.
Now, at least for many, they are a liability where any improvement is considered "good money after bad" and an anchor that limits our flexibility.
So long as the latter view prevails, there will be little that FDIC/lenders can do to entice the owners to hang on to what is now seen as an albatross.
Even with this proposal, it would be more transparent -- and less risk, for the FDIC to pay (33% x 50% x [$200,000 - $mkt value]) up to $33,000 up front in principal reduction on the average loan, than to guarantee 50% of any post-modification loss to the bank
Remember, their version of principal reduction just pushes it out to a balloon payment at the end, so that the amount guaranteed is half of the underwater value. On a $200k mortgage, that is 40% underwater that would be a implicit $40,000 subsidy to the mortgage owner if it redefaulted
The program wide numbers would be worse as it is the largest mortgages that also have the biggest % underwater relative to the mortgage amount
dp:"Don't you see the difference in these stories though?"
Yes, I do, and I agree. However, my point was that, in the past, there was a social stigma associated with not paying off your mortgage, especially if you weren't facing financial hardship due to job loss or sickness. Now, it's almost expected of you to walk away or sell short, even if you can afford to hold on (eg there is social stigma with not walking away).
Which brings up another point. "Experts" told us that we couldn't have a country-wide housing downturn, because to have a downturn, you have to have significant job loss first. Well, the economy proved them wrong. The problem is, we now are starting to have significant job losses. Think what that will do to the housing market. And how do you modify a loan so that someone who is out of work can still "afford" it? And would that person want to still be saddled with payments when they are out of work?
No need to scold. I have read, and re-read Tanta's post. And, yes, principal forebearance is not negative amortization. I made a flippant, and inaccurate commnent.
However, traditional forebearance arrangements do change the amount owed. I have a customer who has (previously) modified his loan twice. His principal balance has gone from around $95,000 to around $132,000.
He has never refinanced. He just keeps loan modifying his way to negative equity.
I appreciate your diligence, but no one likes to be scolded on thread.
One last thought on massive, large scale loan modifications...how much (or little) of these modifications (including principal forbearance) have already been priced into MBSs? If large scale forbearance started "working", would the value of current MBSs tank even further, and even more rapidly? Would it be a systemic shock?
Price discovery is probably a good thing in the long run...how would it affect the short and medium run?
... I just heard on the news that three cities are requesting bailout,er handout,er TARP money?
Philly, Phoenix, and Atlanta?
Just what the Sam Hill is going on?
Comrade Baron Von Helmut III | 11.14.08 - 1:11 pm | #
Things are quickly deteriorating due to the "moral hazard" issues.
Phoenix: Relative bought house. Re-fied many times, buying toys, etc.,. Recently walked from the house, keeping the toys.
California: Friend bought house. Hasn't made a payment in the last 12 months.
It's all downhill from here. I honestly believe we have passed the point of no return. Everyone realizes that it's now a giant looting party, and you should smash and grab what you can.
I can just imaging them driving their little clown cars and tricycles around the floor of the exchange. Hey, they have a high ceiling, how about overhead acrobats?
Now the NYSE in not just a casino, it's the Circus freaking Circus!
Rumor is that there's a "town hall meeting" at C on monday.....and Count Vickula has just given the dreaded reassurance on liquidity and capital levels.
EvilHenryPaulson writes: Even with this proposal, it would be more transparent -- and less risk, for the FDIC to pay (33% x 50% x [$200,000 - $mkt value]) up to $33,000 up front in principal reduction on the average loan, than to guarantee 50% of any post-modification loss to the bank.
Wouldn't facilitate the looting of the state coffers as efficiently.
OTR: "What about the tax liability on the 200,000 loan forgivenes?"
The tax liability was temporarily legislated away during one of the previous bail-outs.
So, if you bought a house for $250,000, and it "gained" $250,000 in value, and you refinanced, and pocket $250,000 and spent it on vacations, jet skis, Hummer H2s (one for you and one for your spouse), and plastic surgery, and later had to short sell for $250,000 due to falling prices, you would owe no money on the equity you "extracted".
I may be wrong, it's been a while since that modification made news...
It seems like they are just postponing defaults with these programs and rewarding the investors in the mortgage with an inexpensive, albeit partial, hedge on their investment.
They free up some of the borrower's cash flow, which is great until the borrower commits that money to paying a different kind of debt, and then they are back to square one, and their house has not come to have any more value to them as a result of the modification.
yfactor:"Everyone realizes that it's now a giant looting party"
I concur. Those that don't live in the big bubble areas might not see the behavior as much, but out here in housing bubble land we are seeing it become the new normal.
And how can I blame them? The banks and investors were stupid enough to give them free money. The government was too 'compassionate' to tax them on it.
When widespread looting is going on, it often pays to be among the first out with your booty.
Agreed, Bond Girl. I can't see how this makes sense, unless they are counting on consumers redirecting cash flow into more short-term consumption, at the cost never owning their home unless massive inflation bails them out of the balloon.
Of course, not many things are making sense to me lately.
dp: "I'm pretty sure it excluded refi's and investment property."
It's H.R. 3648, The "Mortgage Debt Relief Act of 2007"...I'll have to look up the provisions...I believe that investment property is not be covered, but that refis of principal residences are.
So if someone has done a refi and or heloc, depending on how much $ was extracted, short sale not an option.
They are better off going the fc route.
You can bankrupt your way out of deficiency but not the IRS.
"it had encountered last-minute problems getting financing to pay them for the past two weeks of work"
If you need financing for this, anyone would have to be stupid to lend it. Where's the BK announcement? They are obviously insolvent. Incompetent management.
A quick reading indicates to me that any principal residence that was purchased with a loan under $2,000,000, refinanced or not, is eligible for the exclusion.
The Littlest Mandarin:"I think the word you want is "corrupt"."
Systematic Loan Review by Participating Servicers: Participating servicers would be required to undertake a systematic review of all of the loans under their management, to subject each loan to a standard NPV test to determine whether it is a suitable candidate for modification, and to modify all loans that pass this test. The penalty for failing to undertake such a systematic review and to carry out modifications where they are justified would be disqualification from further participation in the program until such a systematic program was introduced.
Does anyone seriously think this provision will be enforced, given the time-critical nature of the process? And if not, why not give up the worst loans to review, and take the value at the courthouse steps + 50% of loss by the gvt, where "loss" is a term of art for (actual loss + every possible fee ever invented by man).
If I'm considering buying a new place, will the FDIC work with me through rate reductions and principal forbearance to make sure that I'm not paying more than 31% of my income?
OK, I'm really an amateur at this, but my quick read of the act is that the non-taxable portion only applies to acquisistion indebtedness, not cash-out refies.
From Mortgage Debt Relief Act of 2007:
(2) QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS- For purposes of this section, the termqualified principal residence indebtedness' means acquisition indebtedness (within the meaning of section 163((3)(B), applied by substituting $2,000,000 ($1,000,000' for$1,000,000 ($500,000' in clause (ii) thereof) with respect to the principal residence of the taxpayer.
Any loan modification or stimulus proposal motivated by "...imperative to provide incentives to achieve a sufficient scale in loan modifications to stem the reductions in housing prices..." is doomed to failure, a colossal waste of taxpayer money, and counterproductive to helping the economy recover. Wanted: a government who works for the people, instead of against them; please deliver to 1 Fantasy Way.
" Danny writes:
Problem number 1) House price declines shouldn't be stemmed.
Danny | 11.14.08 - 2:20 pm | # "
Exactly correct...it's a much needed correction that the power structure is fighting because the power structure created it and the power structure will fall unless they prop it up.
The truth is these mortgages are not and never will be worth what the creditors would wish that they were. I'm actively seeking a critique of the
following program which I sense is inevitably where we'll have to end up and the sooner we do the less paid there will be all around.
The federal government(using its power of eminent domain for the public policy purpose of reestablishing our economy) should buy these loans at a price equal to the proceeds the lenders would get upon likely foreclose. This is effectively FMV(fair market value) of the house less $40,000(approximate costs of foreclosure). If this is not done these likely forecloses will become inevitable at progressively lower prices amongst an ever larger slice of America. The federal government should then lend to the current owners under current market terms to 100% of the current market value of the property without owners having to qualify beyond demonstrating that their loan is current. The homeowner should be in the driver's seat in this operation. They should get to choose the time of this recasting of their current loan. The federal government in order to reinject equity and to provide a cushion for possible future price decreases should partially forgive this new loan at a rate of 1/2 of 1 percent for each month of on time payments until the aforementioned $40,000 is reached. Through this method we reestablish equity in homes, cushion against future price drops(not all housing markets will correct at the same rate).
Who loses?
The current lenders- both banks, Wall Street and those who bought their trash. Effectively these "investors" will be bailed out since this program would liquefy the mystery meat that's now on their books and they'd get cash. It might not be as much as they'd hoped for, but it would be reinvestable and so should be stimulative for the economy. We've poured hundreds of millions into the pockets of the banks and Wall Street already and they are the ones who should take primary responsibility for this disaster.
Who wins?
The consumers and producers of America, and through them the world.
We stop the sounds of wallets closing. We provide a floor for house prices. We reestablish a housing market.
What does this cost the federal government?
Zero. (Except for future loses on future foreclosures which are likely to be moderate assuming consumers choose to refinance at or close to the bottom of this bust.)
The thing that I cannot understand is the repeated lame "loan modification" solution. Is anyone going to force the note holding investor to comply?
dp | Homepage | 11.14.08 - 1:10 pm | #
In general, the note holding investor agreed to comply when he bought the note, as long as the modifications are made with the intent of maximizing the total proceeds from the loan. Tanta and others beat this to death a year ago or so; it's probably in one of the übernerd posts.
I don't see legal action by investors against a servicer's participation in a standardized loan mod program like this ever getting off the ground unless the modification clearly violates some covenant in the securitization agreement. The presumption that the servicer acted with the investors' interests in mind is going to be very strong.
The article left off the footnotes -
the LTV can be determined by BPOs - Broker Price Opinions. Instead of getting an appraisal by a licensed and accountable appraiser, they are going for the cheap and dirty. More disaster. Oh, and BPOs for pay are illegal in multiple states, but then again who follows the laws? FDIC: FDIC Loss Sharing Proposal to Promote Affordable Loan Modifications
Why doesn't the government just offer a refi program with a rate of 4% that would make a difference in the economy, re-liquify and stimulate AND be a lot cheaper than all the other "bailouts."
Real Estate is the source of the problem, let's directly address the problem.
It sounds like you're starting to come around to my plan... a $50,000 credit per taxpayer on a new or existing mortgage. It could be applied as principal to people underwater.
I seriously think that the only way out of this problem is through inflation. Eventually, we'll have wage inflation which will be hard to control.
A one time goverment bailout... spread evenly to everyone... is probably the most fair.
Merely because someone is bright does not mean she or he always makes the right decision. Case in point: Ms. Sheila Bair. I acknowledge that Ms. Bair is bright, not to mention persistent, but wish she could see that her plan, if enacted, would harm society. Her plan encourages homeowners to default. Further, her plan encourages lenders to dump their bad loans on the rest of us, given that instead of eating 100 percent of the inevitable loss, the lenders could cut their loss by 50 percent, since the government (i.e., the taxpayers) would absorb the remaining 50 percent of the loss. On the other hand, as we all know, including Ms. Bair, we would merely be piling a few more billions of debt onto the next generation's books. And after all, that generation will simply do the same to the following generation, right?
People are just walking away. As an appraiser who specializes in foreclosures, 90+% of the properties I see were never owner occupied. A lot of these loans were liar loans and stated that they were to be owner occupied. Worked on an FHA refi yesterday, owner took out over a $100k in equity 2 yrs ago, bought all kinds of new toys and cars. He now knows that the property is upside down in value and he is going to walk away on a short sale. Gets to keep the toys. Where is the fairness in that?
Don't look for any help from the Government, they are so full of crap - the banks are not helping anyone, the FHA is not helping anyone, Hope now is not helping anyone, and Hope for Homeowners is a total joke:
Don't fall for their BS - how many programs does it take to stop a foreclosure?
And I am not talking about flippers and investors, I am talking about families who wer told they could afford more house than they really could, at terms they could never satisfy, all the while assuming the bank had some kind of fiduciary duty to the borrower to not screw them over - and eventually the bank, stockholders, and the taxpayer in general.
first fifth third?
That Mercedes ad is pure glod.
Jobless claims jump unexpectedly to 7-year high - [2008-11-13]
Ok alright....the unexpectedly is starting to get a little old already!
Lies, damn lies, and statistics...all applicable here.
helping 2.22 million loans/household
at a cost of 24.4 billion
that's giving away 11K per household... how about offer a rebate of that much money to new homebuyers to take over the mortgage instead?
And what about the cost of sharing for loss? 0.7million will still foreclose, so what is FDIC's "sharing of loss" mean?
I would say the estimates of the impact of this program... a bit optimistic.
Back in later 2007 "In predictions supplied to USA Today, Lawrence Yun predicted that there would not be a recession in 2008."
Lawrence Yun Watch - Follow the NAR's hack as he denies the housing bubble and crash
Well, any numbers are better than no numbers, I suppose. Still, once you're talking about $24B, the question has to be asked: what does this gain? Is there $24B of gain to society in general, or is this simply a bailout for the lenders whose loans will be taken over and modified?
But the overall issue remains: do workouts really improve the situation, or do they simply increase the pain by providing homeowners with perverse incentives to go delinquent? I haven't heard any significant answers to that question, and the more the government pushes for workouts, the more that incentive could become an issue.
O/T and re-post from last thread:
Department-store operator J.C. Penney Co. said Friday its third-quarter profit fell by more than half as consumers cut back on spending and took fewer trips to the mall amid the deteriorating economy.
The company also said mall traffic in general has been weak so far this month and issued fourth-quarter guidance well below analyst expectations.
Why is the FDIC trying to take a lead role in mortgage modification again? Even the OTS would be a better fit
As for the assumptions, it looks like implied recovery rates and re-default rates are both understated.
33% may be a high historical re-default rate, but this is an exceptional economy with radically different mortgages/debtors. Spending a couple grand per mortgage is not enough to restructure it from one of the worst performing loans (it defaulted/would default very soon) to one that outperforms the average mortgage out there
Hard to believe that people will respond as expected, since so few have responded to current modification offers. This plan does not seem right somehow. I think FBs are looking for either a complete bailout or will walk at this point. With rising unemployment, homeowers are better off downsizing to what a single income can support.
What did we get for the $300B "HOPE" bill?
Why is the FDIC trying to take a lead role in mortgage modification again? Even the OTS would be a better fit
OTS only has regulation over thrifts/S&L's, so it would take an Act of Congress to give them that authority.
FDIC has carte blanche to jump into the affairs of any depository insurance, even those to whom it's not a primary regulator, if it thinks it can save FDIC funds.
Anyways, where the hell is that $300B that we were all bitching about this summer? Did it disappear into the ether?
It hurts me, the renter looking to buy. Every trade has opposing sides. But I don't mind sharing a little.
A friend owed $200,000 more on his house than he could get for a sale ($450,000 vs. $250,000). His loan had reset, and he was paying an extra $2,000 a month in payments. He could pretty easily afford the increase.
However, he had just completed a divorce, and didn't need a house that big, and didn't want to be saddled with the high house payment.
So he got the bank to short sell the house for $250,000, and he walked away with a "dinged" credit score and $3000 a month extra in his pocket (as he is now renting a house).
The point...at least in California, it has been socially acceptable (and even expected) to not make good on your mortgage, even if you CAN afford it.
I have a relative that is just walking away from his investment property. He can afford to carry it using his own income, but doesn't want to. It went back to the bank this month.
I have another relative that just stopped making payments on here Las Vegas condo, and is living there "rent free" until she can get a cheaper rental to live in. She is just going to "walk away" after extracting the "equity" from it last year.
I know of someone else who "extracted equity" from their house of 20 years, and now can't make the payments. They are going to find a new place to live, or live with their kids, pocket the money, and let the place go back to the bank.
It's getting strange out there.
If this amount of mortgages 1.5m could be helped by the total amount available mod. amount then methinks we wouldn't be in such dire straits.
tell me how this helps the problem??
Ah...check please!
Ciao
MS
The on-going debate has been (and will be), Can we take-off/put-on the tabe the Depression Scenario.
Everyone is now likening the US to Japan. I say no. Japan was able to ZIRP their way into a lost decade. The US, as "The Great Consumer" cannot ZIRP their way out of this mess.
My analytical half keeps warring with my instictual half about the Depression Scenario. Lots of anaysis shows it should not be possible. But my gut keeps telling me it is going to happen.
The speed and depth of the job-loss is daunting. The areas to which we can employ people to affect a recovery do not yet exist. Ang governement policy seems to keep aiming at the wrong target. At this point the govenement should be doing nothing but spending money to foster jobs. Period. Every day we do not do that is another day closer to Depression.
I would like to direct everyone's attention to a 'classic' Tanta post on the implications of 'principal forbearance':
Calculated Risk: IndyMac Mods: Principal Forbearance Vs. Reduction
The price of white truffles has fallen 84%. Fine wines have dropped 65%. Lobsters are off 52%. Deflation has reached the City. It has engulfed housing and now threatens to spread through the broader economy, lodging like a virus in the British and global monetary systems.
Deflation is sometimes likened to Dante's Inferno. "Abandon all hope"once you step into that Hellfire. We are not there yet but Mervyn King, the Governor of the Bank of England, says it is now "very likely" that the UK retail price index will turn negative next year.
The Automatic Earth
Oh dear, Tanta, we need you . . . or rather
Oh. Dear Tanta we need you.
It's getting strange out there.
Actually, I think your stories are evidence that it's getting normal out there. People are acting in their best financial interest. Banks are also beginning to act as though every borrower is out to steal the loan.
This is healthy. Painful, but healthy.
Oh dear Tanta, we need you.
Something on "Power Lunch" is going to have to change before too many lose their lunch. Sound off.
Going to be an interesting finish this week.
So he got the bank to short sell the house for $250,000, and he walked away with a "dinged" credit score and $3000 a month extra in his pocket (as he is now renting a house).
The point...at least in California, it has been socially acceptable (and even expected) to not make good on your mortgage, even if you CAN afford it.
I have a relative that is just walking away from his investment property. He can afford to carry it using his own income, but doesn't want to. It went back to the bank this month.
Hank Paulson's Mom,
I live this stuff everyday...I help people sell short. Don't you see the difference in these stories though? In one case, someone negotiated a mutually beneficial deal with the bank (assuming they were honest to the bank about their ability to pay). And in the other case, someone just walked away.
Aren't these two very different scenarios?
The thing that I cannot understand is the repeated lame "loan modification" solution. Is anyone going to force the note holding investor to comply?
Frankly, Sheila just ought to open a lemonstand in every village and town and just start handing out the money. The heck with mortgages, obligations, whatever...
Banks are also beginning to act as though every borrower is out to steal the loan.
But yet Joe Sixpack doesn't get this. I got into an argument on another board when I stated "cramdowns will cause rates to rise for everyone", and no one else seemed to understand why that would be.
Sorry if this has been posted, but I just heard on the news that three cities are requesting bailout,er handout,er TARP money?
Philly, Phoenix, and Atlanta?
Just what the Sam Hill is going on?
Anthony Sanders, Arizona Finance Prof:
"Why not let banks fail?"
I saw an advert in today's WSJ print edition for "previously owned" private jets.
Also, a new airline just started up here in Santa Monica. They are flying small turboprops for short hop travel at very reasonable prices.
With yesterday's WSJ came a glossy printed brochure for Marquis jet. $125K for 25 flight hours with no charge for positioning the equipment.
It's going to be a different world before long.
I have a couple of clients this could actually help. What do they mean "principal forebearance"? Are they gonna cut the principal or not?
or just wish it away for another day.
Why the hell not go for cram downs?
Most would not be helped.
The interest rate would have to be cut in half, even for a loan that already had a reasonably low rate of interest.
One of these things that is better for the bank than the person being "helped" - Really, if the low interest rate is limited, principal is not reduced, and your given 40 years to pay it off, are you not just a hamster spending more time on the debt wheel? Instead of having their loans modified, the people who this is suppose to "benefit" would be far better off defaulting and paying hundreds of dollars less per month on rent, instead of "owning" or more accurately oweing forever. Money completed wasted to try and prop us house values.
Fresno dan - Agree!
It may worth keeping an eye on 13-week Treasuries, and 26-week, 52-week...
^IRX: Basic Chart for 13-WEEK TREASURY BILL - Yahoo! Finance
Not good!
I have a couple of clients this could actually help. What do they mean "principal forebearance"? Are they gonna cut the principal or not?
or just wish it away for another day.
I think that is deferred principal payments...ie NEG AM.
No principal reduction as I understand it.
But yet Joe Sixpack doesn't get this. I got into an argument on another board when I stated "cramdowns will cause rates to rise for everyone", and no one else seemed to understand why that would be.
Some folks just can't understand that there are 2 sides to every transaction. It's noble of you to try and point that out, but if somebody doesn't get it on the first pass then it's like banging your head against a wall.
Oh wait, maybe this is what the yield curve really looks like:
^IRX: Basic Chart for 13-WEEK TREASURY BILL - Yahoo! Finance
What do they mean "principal forebearance"[sic]?
Lawyerliz, do you ever bother to RTFA?
Well said Fresno Dan. That is exactly what this plan does. It's a sneaky debtor's prison.
Credit crisis and private plane news from my local airport.
The two dozen employees of Eclipse Aviations service center at Albany International Airport were sent home today after the company was unable to make its payroll companywide. This was a total surprise, said John ODonnell, the airports chief executive officer. Were hoping they will identify a funding stream quickly. We do want that operation here. Albuquerque, N.M.-based Eclipse, the first to market a new generation of six-seat, very light jets, told employees at its factory in Albuquerque that it had encountered last-minute problems getting financing to pay them for the past two weeks of work.That announcement left many employees feeling frustrated and angry, according to the Associated Press.
I am 'short' residential real estate.
Maintaining 1.40 times rational prices of residential real estate is only good for the folks who are ridiculously 'long'.
The program is averse to my interests!
When do I get rewards for avoiding moral hazards, rather than rewarding the hazardous actions?
I guess Sheila is really hot for that Treas Sec job.
Negative am? Negative am? Are they crazy?
Don't answer that.
I think that nobody will be helped by this, especially those who actually try it!!
What ever happened to that short selling ban? What was that all about? Who benefited? What next capricious policy must we endure?
"Money completed wasted to try and prop us house values."
That is the ONLY thing that would begin to make any difference to the banks. Owning a shit load of assets tied to those prices that they are unwilling to write off (write down? yes but that makes the wrong assumption that you will write them up at some point) is the only real solution to what faces the banking system at present.
Not that I am for it but this was apparent even last year.
When you have banks that don't want to sell and use the excuse of distressed pricing inputs you have a stand off....what else is there left to do then to try and re-inflate values?
Not going to work but it sounds good.
Ciao
MS
What next capricious policy must we endure?
Don't ask questions you don't want the answers to.
12th Percentile writes:
"Credit crisis and private plane news from my local airport."
Yup, not good news for airplane manufacturers. Used airplanes are the market now.
Geoff-
Banning shorts was all about removing arbitrage opps. from hedge funds.
Meant little to everyone else.
Ciao
MS
I think that is deferred principal payments...ie NEG AM.
No it is not. The deferred principal basically becomes a ballon payment, due with the final installment. The loan is amortized the same way a balloon note is amortized, it does not negatively amortize, that, is the principal balance does not increase over time.
READ THE DAMN article. And when you finish, then read this Tanta post. Then come back with questions, plz thx.
Hank Paulson's Mom
So he got the bank to short sell the house for $250,000, and he walked away with a "dinged" credit score and $3000 a month extra in his pocket (as he is now renting a house).
What about the tax liability on the 200,000 loan forgivenes?
The loses are real. Somebody has to foot the bill. If the government gets this to work, they are shifting the expense from the investor to the home owner.
That home owner is probably making an unwise investment (or recommiting to an unwise investment). That home owner may never be able to retire or send her kids to college.
This is "screw the little gal".
Re: "I guess Sheila is really hot for that Treas Sec job."
I do not understand when people state that the foreclosures are costly to the banks.
These banks made BILIONS of dollars. Congress just passed more tax breaks. The Banks write off their losses.
These financial banking prostitutes
made money, are making money because they keep raping the system.
Pleaaaase.........
What next capricious policy must we endure?
Shoe checks are now mandatory before placing a trade.
OnTheRun writes:
What about the tax liability on the 200,000 loan forgivenes?
I'm pretty sure this was temporarily excluded from tax liability.
It's interesting to see the sea change regarding how "homes" are viewed by their owners.
Up to 2007, they were seen as an asset that should be nurtured (granite countertertops) and protected as they provided both shelter and return on investment.
Now, at least for many, they are a liability where any improvement is considered "good money after bad" and an anchor that limits our flexibility.
So long as the latter view prevails, there will be little that FDIC/lenders can do to entice the owners to hang on to what is now seen as an albatross.
For this to work it will have to inclued a huge propaganda campaign. Psychology has changed and people are thinking about the numbers these days.
Or is the short sale tax liability only on the amout above the original sale price of the property? Like if they had done a re-fi.
"Shoe checks are now mandatory before placing a trade."
But only if you look like a "terist"...
Funny stuff bill
Ciao
MS
Even with this proposal, it would be more transparent -- and less risk, for the FDIC to pay (33% x 50% x [$200,000 - $mkt value]) up to $33,000 up front in principal reduction on the average loan, than to guarantee 50% of any post-modification loss to the bank
Remember, their version of principal reduction just pushes it out to a balloon payment at the end, so that the amount guaranteed is half of the underwater value. On a $200k mortgage, that is 40% underwater that would be a implicit $40,000 subsidy to the mortgage owner if it redefaulted
The program wide numbers would be worse as it is the largest mortgages that also have the biggest % underwater relative to the mortgage amount
dp:"Don't you see the difference in these stories though?"
Yes, I do, and I agree. However, my point was that, in the past, there was a social stigma associated with not paying off your mortgage, especially if you weren't facing financial hardship due to job loss or sickness. Now, it's almost expected of you to walk away or sell short, even if you can afford to hold on (eg there is social stigma with not walking away).
Which brings up another point. "Experts" told us that we couldn't have a country-wide housing downturn, because to have a downturn, you have to have significant job loss first. Well, the economy proved them wrong. The problem is, we now are starting to have significant job losses. Think what that will do to the housing market. And how do you modify a loan so that someone who is out of work can still "afford" it? And would that person want to still be saddled with payments when they are out of work?
Interesting times...
This is classic:
NYSE, New York Stock Exchange
"cue the sound effects"
Ciao
MS
2005 was the Ownership Society
2008 is the pwnership Society
Way to go wall street. Way to go Greenspan & Bernanke. Greed and free money have ruined our eCONomy and country in less than two decades.
You'd think by now the fed & CONgress would realize that "free" money ain't free.
Shnaps,
No need to scold. I have read, and re-read Tanta's post. And, yes, principal forebearance is not negative amortization. I made a flippant, and inaccurate commnent.
However, traditional forebearance arrangements do change the amount owed. I have a customer who has (previously) modified his loan twice. His principal balance has gone from around $95,000 to around $132,000.
He has never refinanced. He just keeps loan modifying his way to negative equity.
I appreciate your diligence, but no one likes to be scolded on thread.
One last thought on massive, large scale loan modifications...how much (or little) of these modifications (including principal forbearance) have already been priced into MBSs? If large scale forbearance started "working", would the value of current MBSs tank even further, and even more rapidly? Would it be a systemic shock?
Price discovery is probably a good thing in the long run...how would it affect the short and medium run?
... I just heard on the news that three cities are requesting bailout,er handout,er TARP money?
Philly, Phoenix, and Atlanta?
Just what the Sam Hill is going on?
Comrade Baron Von Helmut III | 11.14.08 - 1:11 pm | #
Things are quickly deteriorating due to the "moral hazard" issues.
Phoenix: Relative bought house. Re-fied many times, buying toys, etc.,. Recently walked from the house, keeping the toys.
California: Friend bought house. Hasn't made a payment in the last 12 months.
It's all downhill from here. I honestly believe we have passed the point of no return. Everyone realizes that it's now a giant looting party, and you should smash and grab what you can.
MS writes:
"This is classic:"
I can just imaging them driving their little clown cars and tricycles around the floor of the exchange. Hey, they have a high ceiling, how about overhead acrobats?
Now the NYSE in not just a casino, it's the Circus freaking Circus!
Bread and circuses indeed.
Rumor is that there's a "town hall meeting" at C on monday.....and Count Vickula has just given the dreaded reassurance on liquidity and capital levels.
See you at $5 C....
Ciao
MS
EvilHenryPaulson writes:
Even with this proposal, it would be more transparent -- and less risk, for the FDIC to pay (33% x 50% x [$200,000 - $mkt value]) up to $33,000 up front in principal reduction on the average loan, than to guarantee 50% of any post-modification loss to the bank.
Wouldn't facilitate the looting of the state coffers as efficiently.
Good posts in this thread. Good reading.
OTR: "What about the tax liability on the 200,000 loan forgivenes?"
The tax liability was temporarily legislated away during one of the previous bail-outs.
So, if you bought a house for $250,000, and it "gained" $250,000 in value, and you refinanced, and pocket $250,000 and spent it on vacations, jet skis, Hummer H2s (one for you and one for your spouse), and plastic surgery, and later had to short sell for $250,000 due to falling prices, you would owe no money on the equity you "extracted".
I may be wrong, it's been a while since that modification made news...
I may be wrong, it's been a while since that modification made news...
Hank Paulson's Mom |
I'm pretty sure it excluded refi's and investment property.
It seems like they are just postponing defaults with these programs and rewarding the investors in the mortgage with an inexpensive, albeit partial, hedge on their investment.
They free up some of the borrower's cash flow, which is great until the borrower commits that money to paying a different kind of debt, and then they are back to square one, and their house has not come to have any more value to them as a result of the modification.
Chinese math
S&P real earnings now only 19% higher than they were in 1966.
Chart of the Day - www.chartoftheday.com
yfactor:"Everyone realizes that it's now a giant looting party"
I concur. Those that don't live in the big bubble areas might not see the behavior as much, but out here in housing bubble land we are seeing it become the new normal.
And how can I blame them? The banks and investors were stupid enough to give them free money. The government was too 'compassionate' to tax them on it.
When widespread looting is going on, it often pays to be among the first out with your booty.
DP and Hank's mom
Thanks for clarification. That was my understanding too. Thanks.
Agreed, Bond Girl. I can't see how this makes sense, unless they are counting on consumers redirecting cash flow into more short-term consumption, at the cost never owning their home unless massive inflation bails them out of the balloon.
Of course, not many things are making sense to me lately.
dp: "I'm pretty sure it excluded refi's and investment property."
It's H.R. 3648, The "Mortgage Debt Relief Act of 2007"...I'll have to look up the provisions...I believe that investment property is not be covered, but that refis of principal residences are.
Hank Paulson's Mom writes:
The government was too 'compassionate' to tax them on it.
I think the word you want is "corrupt".
So if someone has done a refi and or heloc, depending on how much $ was extracted, short sale not an option.
They are better off going the fc route.
You can bankrupt your way out of deficiency but not the IRS.
Double that plus some cool whip and animal crackers.
"it had encountered last-minute problems getting financing to pay them for the past two weeks of work"
If you need financing for this, anyone would have to be stupid to lend it. Where's the BK announcement? They are obviously insolvent. Incompetent management.
ew thread
Text of the "Mortgage Debt Releif Act of 2007":
Read The Bill: H.R. 3648 [110th] - GovTrack.us
A quick reading indicates to me that any principal residence that was purchased with a loan under $2,000,000, refinanced or not, is eligible for the exclusion.
The Littlest Mandarin:"I think the word you want is "corrupt"."
You say toe-may-toe, I say toe-mah-toe...
Systematic Loan Review by Participating Servicers: Participating servicers would be required to undertake a systematic review of all of the loans under their management, to subject each loan to a standard NPV test to determine whether it is a suitable candidate for modification, and to modify all loans that pass this test. The penalty for failing to undertake such a systematic review and to carry out modifications where they are justified would be disqualification from further participation in the program until such a systematic program was introduced.
Does anyone seriously think this provision will be enforced, given the time-critical nature of the process? And if not, why not give up the worst loans to review, and take the value at the courthouse steps + 50% of loss by the gvt, where "loss" is a term of art for (actual loss + every possible fee ever invented by man).
HPM,
I don't believe that is the full resolution. We need to look at section 109-110. I can see it in my head, I just can't find it on the net!
If I'm considering buying a new place, will the FDIC work with me through rate reductions and principal forbearance to make sure that I'm not paying more than 31% of my income?
IRS & states should "take back" the interest deduction used for '05, '06 & '07 for those that walk.
OK, I'm really an amateur at this, but my quick read of the act is that the non-taxable portion only applies to acquisistion indebtedness, not cash-out refies.
From Mortgage Debt Relief Act of 2007:
(2) QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS- For purposes of this section, the termqualified principal residence indebtedness' means acquisition indebtedness (within the meaning of section 163(
(3)(B), applied by substituting $2,000,000 ($1,000,000' for$1,000,000 ($500,000' in clause (ii) thereof) with respect to the principal residence of the taxpayer.
Additional note to above...
Cash-out refies would qualify to the extent that the cash was applied to improvements to the property.
Maybe if you put the Hummer up on blocks in the driveway, that qualifies.
Any loan modification or stimulus proposal motivated by "...imperative to provide incentives to achieve a sufficient scale in loan modifications to stem the reductions in housing prices..." is doomed to failure, a colossal waste of taxpayer money, and counterproductive to helping the economy recover. Wanted: a government who works for the people, instead of against them; please deliver to 1 Fantasy Way.
And reading further...
The loan has to be secured by the property. How do HEL's fit in to this? Are they typically secured by the property?
Picosec,
You're right, refi qualified as acquisition indebtedness, cash out refi doesn't unless it's all put into improvements.
dp - isn't that short for...nevermind.
I apologize for the scolding tone. Lawyerliz had me worked up.
Forget "incentives" for the banks, fix Chyapter 13 and let homeowners shove a modification down their throats, if the homeowner is underwater.
Problem number 1) House price declines shouldn't be stemmed.
It's never going to work...millions are upside down more than 20%.
word on the strizeet is that Sheila's got bids for IndyMac, any guesses who it ends up with?
" Danny writes:
Problem number 1) House price declines shouldn't be stemmed.
Danny | 11.14.08 - 2:20 pm | # "
Exactly correct...it's a much needed correction that the power structure is fighting because the power structure created it and the power structure will fall unless they prop it up.
word on the strizeet is that Sheila's got bids for IndyMac, any guesses who it ends up with?
Shnaps | Homepage | 11.14.08 - 2:41 pm | #
McDonalds
The truth is these mortgages are not and never will be worth what the creditors would wish that they were. I'm actively seeking a critique of the
following program which I sense is inevitably where we'll have to end up and the sooner we do the less paid there will be all around.
The federal government(using its power of eminent domain for the public policy purpose of reestablishing our economy) should buy these loans at a price equal to the proceeds the lenders would get upon likely foreclose. This is effectively FMV(fair market value) of the house less $40,000(approximate costs of foreclosure). If this is not done these likely forecloses will become inevitable at progressively lower prices amongst an ever larger slice of America. The federal government should then lend to the current owners under current market terms to 100% of the current market value of the property without owners having to qualify beyond demonstrating that their loan is current. The homeowner should be in the driver's seat in this operation. They should get to choose the time of this recasting of their current loan. The federal government in order to reinject equity and to provide a cushion for possible future price decreases should partially forgive this new loan at a rate of 1/2 of 1 percent for each month of on time payments until the aforementioned $40,000 is reached. Through this method we reestablish equity in homes, cushion against future price drops(not all housing markets will correct at the same rate).
Who loses?
The current lenders- both banks, Wall Street and those who bought their trash. Effectively these "investors" will be bailed out since this program would liquefy the mystery meat that's now on their books and they'd get cash. It might not be as much as they'd hoped for, but it would be reinvestable and so should be stimulative for the economy. We've poured hundreds of millions into the pockets of the banks and Wall Street already and they are the ones who should take primary responsibility for this disaster.
Who wins?
The consumers and producers of America, and through them the world.
We stop the sounds of wallets closing. We provide a floor for house prices. We reestablish a housing market.
What does this cost the federal government?
Zero. (Except for future loses on future foreclosures which are likely to be moderate assuming consumers choose to refinance at or close to the bottom of this bust.)
FFDIC: I'm lovin' it!
The thing that I cannot understand is the repeated lame "loan modification" solution. Is anyone going to force the note holding investor to comply?
dp | Homepage | 11.14.08 - 1:10 pm | #
In general, the note holding investor agreed to comply when he bought the note, as long as the modifications are made with the intent of maximizing the total proceeds from the loan. Tanta and others beat this to death a year ago or so; it's probably in one of the übernerd posts.
I don't see legal action by investors against a servicer's participation in a standardized loan mod program like this ever getting off the ground unless the modification clearly violates some covenant in the securitization agreement. The presumption that the servicer acted with the investors' interests in mind is going to be very strong.
The article left off the footnotes -
the LTV can be determined by BPOs - Broker Price Opinions. Instead of getting an appraisal by a licensed and accountable appraiser, they are going for the cheap and dirty. More disaster. Oh, and BPOs for pay are illegal in multiple states, but then again who follows the laws?
FDIC: FDIC Loss Sharing Proposal to Promote Affordable Loan Modifications
Why doesn't the government just offer a refi program with a rate of 4% that would make a difference in the economy, re-liquify and stimulate AND be a lot cheaper than all the other "bailouts."
Real Estate is the source of the problem, let's directly address the problem.
It sounds like you're starting to come around to my plan... a $50,000 credit per taxpayer on a new or existing mortgage. It could be applied as principal to people underwater.
I seriously think that the only way out of this problem is through inflation. Eventually, we'll have wage inflation which will be hard to control.
A one time goverment bailout... spread evenly to everyone... is probably the most fair.
Merely because someone is bright does not mean she or he always makes the right decision. Case in point: Ms. Sheila Bair. I acknowledge that Ms. Bair is bright, not to mention persistent, but wish she could see that her plan, if enacted, would harm society. Her plan encourages homeowners to default. Further, her plan encourages lenders to dump their bad loans on the rest of us, given that instead of eating 100 percent of the inevitable loss, the lenders could cut their loss by 50 percent, since the government (i.e., the taxpayers) would absorb the remaining 50 percent of the loss. On the other hand, as we all know, including Ms. Bair, we would merely be piling a few more billions of debt onto the next generation's books. And after all, that generation will simply do the same to the following generation, right?
People are just walking away. As an appraiser who specializes in foreclosures, 90+% of the properties I see were never owner occupied. A lot of these loans were liar loans and stated that they were to be owner occupied. Worked on an FHA refi yesterday, owner took out over a $100k in equity 2 yrs ago, bought all kinds of new toys and cars. He now knows that the property is upside down in value and he is going to walk away on a short sale. Gets to keep the toys. Where is the fairness in that?
It's every homeowner - er, home-borrower - for themselves!
Message to Distressed Borrowers: You Have to Help Yourselves « Your Mortgage or Your Life…
Don't look for any help from the Government, they are so full of crap - the banks are not helping anyone, the FHA is not helping anyone, Hope now is not helping anyone, and Hope for Homeowners is a total joke:
No Hope for Homeowners – Foreclosure Prevention Program Falters « Your Mortgage or Your Life…
Don't fall for their BS - how many programs does it take to stop a foreclosure?
And I am not talking about flippers and investors, I am talking about families who wer told they could afford more house than they really could, at terms they could never satisfy, all the while assuming the bank had some kind of fiduciary duty to the borrower to not screw them over - and eventually the bank, stockholders, and the taxpayer in general.
Such crap we put up with now!
"33% may be a high historical re-default rate"
The American Securitization Forum claims redefaults are running at 44%, so it's not high at all.