Tuesday, October 28th, 2008 at 11:57 AM
More on HoHo
The “Hope for Homeowners Act of 2008 program is built on five principals:
1. Long-term affordability. The program is built on the idea, expressed by Federal Reserve Chairman Bernanke, that creating new equity for troubled homeowners is likely to be a more effective way to avoid foreclosures. New loans will be based on a family’s ability to repay the loan, ensuring affordability and sustainable homeownership.
2. No investor or lender bailout. Investors and/or lenders will have to take significant losses in order to benefit from the proceeds of the loans refinanced with government insurance. However, these losses would be less than the losses associated with foreclosure.
3. No windfall for borrowers. Borrowers will share their new equity and future appreciation equally with FHA. Borrowers will pay for the FHA insurance.
4. Voluntary participation. This will be a voluntary program. No lenders, servicers, or investors will be compelled to participate.
5. Restore confidence, liquidity, and transparency. Credit markets are fearful and frozen in part because banks and other financial institutions do not know what their subprime mortgages and related securities are worth. The uncertainty is forcing lenders to hoard capital and stop the lending necessary for economic growth. This program will help restore confidence and get markets flowing again.
I’m not sure lenders will agree that reducing the loan amount to 87% of the current value will end up costing less than a foreclosure, and because it’s voluntary for every lender except Countrywide and Indymac, how many lenders will bother? Foreclosure will sound like a better option in many cases where the homeowner is marginally qualified.
How many homeowners will be persistent enough with their servicing lender to procure a loan modification?
The government’s settlement with Countrywide stated that they must modify 50,000 of their loans by March 1st of next year, and 125,000 total in California. Countrywide needs to be reaching out to their current customers, and they’ll likely be cherry-picking the best candidates.
Those 50,000 are the winners in this deal. Who will they be?
The government said that you don’t need to be delinquent to qualify for an FHA-refinance. Countrywide and Indymac will probably first go after their borrowers who are current on payments, or just a payment or two down, then talk to the seriously-delinquents. Other lenders who aren’t as willing to cooperate, will likely go the opposite route, modifying those whose only other choice is foreclosure. Those who are current on their payments will probably “have trouble getting through” to their lender.
One more government scheme with seemingly specific intentions, but in reality not likely to offset the unintended results.
Posted on Tuesday, October 28th, 2008 at 11:57 AM in Loan Mods | 42 Comments » | 
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That’s interesting, so under this plan Countrywide could end up taking the haircut on people who were in no danger of foreclosure? If anybody I’d rather the benefits go to those people who aren’t defaulting, but how would that reduce foreclosures and keep more people in houses?
Is there anything to prevent such a person from immediately selling the house and splitting that 10% equity 50-50 with the government? Because suddenly this is an escape route for any homeowner currently underwater who can afford to keep the house. They can now sell and keep 5% equity rather than short sale or foreclose. The government pockets 5%. Like a fast track foreclosure which is win-win-win for everybody.
BDiego | October 28th, 2008 at 12:12 pmWith an estimated 2,000,000 homes headed for foreclosure ( http://money.cnn.com/2008/10/22/real_estate/help_for_homewoners/index.htm ), they had better pick up the pace!
“Lenders have been deluged with inquiries from interested borrowers, and the Congressional Budget Office has estimated that this program could help as many as 400,000 homeowners through September 2011, when the program ends.
“Meanwhile, two million families are expected to lose their homes to foreclosure in the next two years.”
E-leven | October 28th, 2008 at 12:15 pmSorry, I should have said 3,000,000 homes headed for foreclosure!
http://www.cnbc.com/id/27406627
E-leven | October 28th, 2008 at 12:18 pmYep, they’re reporting 80,000 California foreclosures in the last three months alone!
And to BDiego’s point, there could be a cottage industry borne out of this that pre-arranges the purchase once the FHA-refinance is complete. It won’t be much more than the ’steak dinner’ close for the homeowner, but it beats being underwater by six figures!
Jim the Realtor | October 28th, 2008 at 12:20 pmBDiego: “Moreover, the homeowner’s access to the newly created equity will be phased-in over 5 years.”
Kwaping | October 28th, 2008 at 12:28 pmThanks for the clarifications. I have to say this plan does at least give more predictability for some people. It does put some houses in a limbo of neither defaulting nor being able to sell. And with the split equity, it’s kind of like half renting and half owning.
The most equity you can ever really own is 50%.
BDiego | October 28th, 2008 at 1:12 pmMy reading of the act leads me to belive that only conforming loans can be modified (or, loans must be conforming after modification to the newer, higher 2008 limits).
Does anyone think differently ?
FuturesWatcher | October 28th, 2008 at 1:23 pmI disagree with your assertion that Cwide will go after their most current first.
It would be in their best interest to dump their worst performing loans to the FHA. They are better off collecting interest on the performing loans and getting recoveries through FHA on the non-performing loans.
LV Renter | October 28th, 2008 at 2:01 pmThe rates below are from Wells Fargo Bank.
Jumbo loans just hit 10%
As of 10/28/2008 04:16 PM Eastern
Product Interest Rate APR
Jumbo Loans – Amounts that exceed conforming loan limits
30-Year Fixed 10.000% 10.187%
15-Year Fixed 9.250% 9.520%
10-Year ARM 9.625% 8.677%
5-Year ARM 7.875% 6.765%
FHA – loan limits vary by county.
Nathan | October 28th, 2008 at 2:03 pm30-Year Fixed 7.000% 7.749%
Futures watcher
They need to conform to FHA standards, not the traditional GSE conforming you are thinking about.
FHA limits are definitely no more than conforming loan limits and they also have debt to income requirements (you know those oppressive outdated ratios
).
LV Renter | October 28th, 2008 at 2:05 pmGiven that 10% rate is for the new Jumbo, in most cases near $700K+
LV Renter | October 28th, 2008 at 2:15 pmLV Renter,
Thanks. I was wondering if these loan mods could help support the higher end. Now I don’t think so since there is a hard limit to the loan amount.
FuturesWatcher | October 28th, 2008 at 2:27 pmNo worries
The higher end is still supported directly by the banks until they hit their recast limit on their Pay Option ARM.
When you think about what a well to do family earning $250K/year in terms of mortgage and then you relize they have $1.5MM in mortgage debt it is really scary.
LV Renter | October 28th, 2008 at 2:48 pm2010 will be interesting when we start to hear about those families saying they have no savings and now they are going to lose their home.
LV Renter | October 28th, 2008 at 2:49 pmIs there anyway of finding out how many homes purchased in the last 5 years in a certain area (Carlsbad, Encinitas) were investment properties?
garbler | October 28th, 2008 at 3:05 pmHoHo reminds me of asylum in the immigration debate. Nobody cares about millions of honest Americans who want to buy these houses, the same as nobody cares about the millions of honest immigrants waiting in line to legally enter the country. How about amnesty for honest Americans and honest immigrants first, before we talk about bailouts for everyone else?
BDiego | October 28th, 2008 at 3:21 pm80,000 California foreclosures in the last three months alone
And I still cannot get my hands on one? What a sick world.
Todd | October 28th, 2008 at 3:41 pmIf we don’t do anyting and wait until housing prices hit 1998 levels, unemployment will be 15% and nobody will be in line waiting to buy a home…. We need these programs to prevent a depression. It’s not about what’s fair and unfair, but about the welfare of a country about to enter depression. Foreclosures and drops in home prices create a vicious cycle with one feeding the other. To me, the question is do I want to keep my job or buy a cheaper house with an income that I won’t have because our country is in a deep deflationary depression…. I would rather let people about to foreclose get a good deal (perhaps unfair), then end up having housing prices and stock market drop another 20% landing us in the Great Depression II. Drop in housing prices lead to trouble for banks which lead to tighter lending standards which lead to businesses not able to borrow money which lead to lay offs which lead to foreclosures and ultimately more price drops…the vicious circle.
SD Observer | October 28th, 2008 at 4:07 pmShould I be calling Countrywide about my 5.75% 30 year fixed jumbo? Or do I need to be delinquent first? Sigh..
Stephen Waits | October 28th, 2008 at 4:15 pmGarbler
Rich Toscano of piggington.com argues that almost all homes ought in SD in the last five years were bought as investment properties.
If you purchase an home that yields interest and tax payments in multiples of its equivalent rent it was partially based on speculating that prices would continue to rise. Further many of these people have not been margin called (Pay option ARM recast) and are still in their homes.
Remember the saying, “If I do not buy now I will never be able to buy”
That being said the NAR reports that somewhere between 30 and 40% of purchases from 2003 to 2006 were investments or 2nd homes.
LV Renter | October 28th, 2008 at 4:26 pmBusinesses can’t borrow money because banks are over-leveraged and unraveling their losses, not because they’re tightening lending standards. Both are the result of failed lending models, one isn’t causing the other. Lending standards used to be far tighter, and the economy was phenomenal compared to it is now.
The Great Depression happened two years after the housing bubble, and continued for decades after a massive bailout. A bailout does not prevent Depressions any more than it causes it. The purpose of the bailout was not to avert a depression, it was to save people who would have gone homeless. The difference today is, people who would be helped by any bailout now have more than enough income to rent, and there are millions of Americans lining up to buy their houses at the right price.
Put in other words, there are people sitting in obscenely overpriced houses but with otherwise decent incomes. Certainly more than enough to rent with money left over.
Welfare used to require that you can’t own property. Bottom line, we’ve now extended welfare to homeowners.
BDiego | October 28th, 2008 at 5:07 pmI agree that banks are overleveraged and unraveling their losses. But I don’t understand what you mean by “one isn’t causing the other” What isn’t causing what? Banks would never have tightened lending standards if home prices did not fall.
Many argue that the Great Depression occured because the bailout package came too late. If the government had acted earlier, like in Sweden (and not like in Japan), a massive depression could have been averted. We don’t know if this will happen again, but I think that’s the government’s hope.
The people may be able to pay rent now, but if we let housing prices continue to free fall, our economy will shrink to a point where many will no longer have the means to rent. They may have to move back with their parents, reduce spending, and cause more shrinkage in the economy. We are already seeing that…
Given how far prices have fallen in SD, if prices flatten out and we let time and inflation do the rest, it might be a lot better for the economy in the long run…
SD Observer | October 28th, 2008 at 5:43 pmBDiego speaks the truth.
Stephen Waits | October 28th, 2008 at 6:00 pmLV,
Maybe Countrywide won’t go after the best customers – but if they did they could at least plow through a bulk of them in order to hit the 50,000 before March 1.
The clerks and supervisors in the loan mod department have to be working around the clock. March 1st is 103 days away, or roughly 75 business days.
50,000/75 = 667 closed loan modifications per business day.
Jim the Realtor | October 28th, 2008 at 6:54 pm“Some states have actually frozen foreclosures, but this offers only temporary respite, as Massachusetts recently found out. After imposing a 90-day notification period before foreclosures can be initiated, a quiet summer was followed by foreclosures shooting up 465 percent in September.”
SD July trustee sales = 2285 x 465% = 10,625
Jim the Realtor | October 28th, 2008 at 6:59 pmSD Observer,
Sorry I should have clarified, I was saying that tightening mortgage lending standards (i.e. income verification, higher down payment requirements) is not causing banks to stop lending to businesses. Both issues are caused by toxic loans. So it is not a vicious cycle involving lending to business vs. lending to homeowners, the two are independent problems and one will be solved long before the other. There definitely are vicious cycles, but not between these two.
Now “If only we threw more money at it sooner” is getting old. Before we’ve even spent one penny of the last bailout we’re talking about the next bailout. And you do realize that Paulson has already abandoned his “must have” plan in favor for a UK style bailout? You know, the plan he said we had to pass or else we were doomed? Turns out that plan was so bad we aren’t even going to try it anymore. Even Paulson no longer drinks the kool aid on “Throw as much money at it as fast as possible”.
“They may have to move back with their parents, reduce spending, and cause more shrinkage in the economy.”
A purely consumer driven economy is an unsustainable pyramid scheme, and that’s exactly what we’re seeing failing. People were borrowing money to spend. Warren Buffet put it perfectly when he said he could hire 10,000 people to paint his portrait for the rest of his life. But that money would be a complete waste and would be a fake and unsustainable GDP, not a real economy. Those 10,000 people could be developing medicine, manufacturing useful goods, even building houses.
Playing musical chairs by handing money around is an unsustainable ticking timebomb. It’s as sound as killing cows to feed the flock. You just can’t spend your way to prosperity, only borrow it. How many more HELOCs will we take out on America before we realize we’re actually setting ourselves back even more?
Bottom line, Warren Buffet said it best. Teach people to fish, not buy them fish. The first is a sustainable economy that repays itself. The latter is a consumer driven economy funded by HELOCs.
BDiego | October 28th, 2008 at 7:11 pmMany argue that the Great Depression occured because the bailout package came too late.
———————-
And others argue that the Great Depression was caused by a credit bubble, just like today’s recession/depression.
When we allow the economy to stray so far from fundamentals, and fight every correction with more credit, the eventual outcome is a very nasty recession/depression. This was a CREDIT bubble, not a housing bubble — high housing prices were an effect of the credit bubble, much like high oil, gold, agricultural commodities, stocks, bonds, etc. The prices of ALL these things ran up during this past decade, but housing was the one thing that was obvious to the Average Joe.
Pumping more credit in order to fight the correction of the credit bubble will cause far more damage and extend the recession/depression. The best thing we could hope for is a **quick and painful** fall to the bottom, so we can sooner build our way back up. We need to focus on the REAL economy, not housing and stock prices. We need to move away from the debt-based economy and work on production and innovation in REAL products that people need.
Until people can clearly define the problem, we will not be able to solve the problem. So far, nobody in power is correctly identifying and defining the problem.
CA renter | October 28th, 2008 at 11:07 pmSD observer
I hear you when you say you want a program to avoid the great depression II. So if we accept we need some sort of stimulous, then shouldn’t we create a plan that gives the rewards to those who were prudent vs. those that were not?
What I would like to see is a bail out that gives grants to those of us who did not buy, are not leveraged and did pay taxes over the past 5 years with the caveat that the grant must be used to buy a home. This achieves goal #1 — helping put stability into the housing market.
Of course goal #2 — making sure those people who were not prudent, barrowed too much money are not in the streets, is not addressed by this. But this is easy to solve to. For those who are being foreclosed, who bought much more than they could afford offer grants to pay for the cost of moving and deposit on a rental in exhcange for allowing someone who was prudent to buy the house at the prevailing market rate.
And then this would expose the banks who would have to accept short sales — but we already have $750 billion for the banks.
Problem solved. Of course it means those poor poor victims who spent way too much and were in homes they should never be in must move out into what will almost certainly be lower level diggs — but at least they have a home over their heads.
And by the way this would be very good for real estate agents — volume of transactions would go up and while prices would correct down to sustainable levels, at lease there would be more sales and volume, not price, is the key for a good real estate practice.
Bob | October 29th, 2008 at 8:54 amSD Observer
I am going to throw a wild card out there that most will disagree with. Lower home prices are good for the economy.
No doubt it is different. The days of equity extractions to buy luxury cars and take luxury vacations are over. Those jobs and the mortgage brokers that executed the equity extractions may be permanently eliminated.
However, lower housing prices, prices low enough so that someone could move to SD and not feel the need to be a mortgage broker is good for the economy. Jobs that produce goods and services other than equity extractions and bottle service at a DT club will be good for the economy.
It will be a painful transition, but a neccessary and beneficial transition.
LV Renter | October 29th, 2008 at 9:25 amYou can find out how many houses are for investment by going to the county acessors office and finding out if they took out the $7,000 homeowner exemption.
Of course people wouldn’t lie to try and save $70 per year.
All of these bail out programs are just delaying the time the recession will be over. It is Japan 1990s and the U.S. in the 1930’s. We should do what the government did in the early 1920s. Government should do nothing. Take the pain for two or three years and it would be over. Instead we will draw out the pain for many years.
worm | October 29th, 2008 at 9:25 amDoes teh government settlement state C-wide needs to modify 50,000 of their customers into FHA cramdown products. I do not think so.
Countrywide can meet many obligations just by reducing a loan from 11% to 6% on customers that have the ability to pay the contracted principle amount.
They will then dump the really bad stuff that needs a principal reduction onto the FHA.
LV Renter | October 29th, 2008 at 9:28 amThey should just make foreclosures illegal and get it over with.
Kwaping | October 29th, 2008 at 9:37 amKwaping.. I hope that’s a joke!
Stephen Waits | October 29th, 2008 at 10:14 amI absolutely agree that both consumers and banks need to deleverage and move towards healther balance sheets. But the question is how to do we that?
My thought is: Do you just take the drugs away from a drug addict and leave him with no support or do you help him by putting him in rehab and providing him the support he needs? I think our economy needs rehab…it’s too dangerous to just take the drugs and walk away….
I would love for it to adjust quickly and have us “move on with it” but my fear is that if let things spiral out of control…i.e. those that are too big to fail FAILS… we might not only damage our economy but also our reputation in the world permanently…We may come out of this recession (or depression)a different country, a country with far less influence and credibility.
SD Observer | October 29th, 2008 at 11:41 amworm,
The pain of The Great Depression lasted more than 2 or 3 years. It was more like 10!
Here’s an interesting take (with some nice illustrations) on why we won’t see deflation, but rather disinflation, perhaps stagflation.
http://www.itulip.com/forums/showthread.php?p=57193#post57193
This is what worries me and takes me back to JtR’s question about what would get me off the sidelines. If we were moving along in a ‘normal’ capitalistic economy, it would be easier to predict what would happen to prices. The problem is all of this intervention (bailouts, stimulus, freezing foreclosures, etc…) makes it impossible to predict where things will settle, let alone in what direction they’ll head.
No thanks! I won’t be buying any big ticket items any time soon.
E-leven | October 29th, 2008 at 1:16 pmIf we take the focus off of housing, and redirect our efforts toward the real economy (jobs), then I would have no problem with the bailouts/stimulus.
The problem is that they are trying to cure addiction by giving the addict more (and harder) drugs.
Low housing prices are a GOOD thing. They enable people to spend more money in other parts of the economy — without the debt component.
We desperately need to maintain/build our infrastructure, and we need to focus on innovations in energy and healthcare, among many other things. There is so much to do, and so many ways we’ve let ourselves get behind…all because we’ve spent the past ten years wasting our money, time and energy on housing.
CA renter | October 29th, 2008 at 1:21 pmCA Renter,
That’s just not true. WE may have been wasting time/$/energy on housing, but those that actually directly pay for the infrastructure (read: government) have been enjoying the income and property tax boon just fine and not spending it on housing. I’d like to know where the infrastructure would be now had the state NOT had this massive growth in revenue from income/prop tax. Just imagine!!
And that’s why ALL state politicians should be absolutely skewered for blowing that opportunity to make good with an extraordinary pile of cash they had (and still overspent and don’t have jack to show for it). And now we revert back to *normalcy*… I can hear everyone whining now about how it’s just not enough, and revenue collection is way down, blah blah blah. It’s not down, it’s that it was UP too much before.
Anonymous | October 29th, 2008 at 7:41 pmYou know, it’s funny how so many here seem to visiously root for collapsing prices. I wonder if you also equally root for tax revenues to crumble (which is a consequence of that), and for the state (and Fed) govt to raise your tax rates to offset this loss… Hmm.
Anonymous | October 29th, 2008 at 7:45 pmAnonymous,
Yes, the consequences of falling property and sales tax revenue are important concerns. Additionally, as a former govt employee — and currently married to another — the consequences are understood exceptionally well.
A few years ago, I was sending e-mails and letters to local governments, cautioning them about overspending, even asking them not to approve pay raises for municipal employees nor approve any non-essential capital projects. I directed them to local and national bubble and finance blogs, and asked them to do some serious research before they made spending decisions, as the revenues they were getting would probably be of a very temporary nature.
Personally, I have no problem paying higher taxes…IF I knew the money would be spent wisely. There is no doubt that govt entities have very poor money-management skills, in general, and need to be kept on a much tighter leash WRT spending. I could tell lots of stories…
CA renter | October 29th, 2008 at 11:03 pmCA Renter,
I’d pay more tax, too, under those circumstances. Pity we’ll never see that!
As someone in institutional finance, and approaching an early retirement-lite, I’m often tempted to work in govt somewhere “to help”. But from the sound of it, I’d be wasting my time!
Aztec ("Anonymous" above) | October 30th, 2008 at 6:35 amAnonymous,
Government should not raise taxes, they should curb spending!! They are guilty of the same bad fiscal judgment as the citizens that spent more than they earned or could afford.
E-leven | October 30th, 2008 at 1:45 pmBut from the sound of it, I’d be wasting my time!
—————
Unfortunately, you’re probably right, but it never hurts to try. You can certainly offer and show them how you can help. The problem is many govt workers are politicians, in every sense of the word, and they have very BIG egos. In government, the control issues and territorial in-fighting are something to behold.
I’ve actually seen how changes can happen even if one person stands up for what’s right — but you have to keep fighting, and it’s not going to be pleasant.
CA renter | October 30th, 2008 at 3:44 pm