Tuesday, January 13th, 2009 at 11:20 AM
More Loan Mod Madness
Will they just keep coming up with ideas until one works?
From cnbc.com:
http://www.cnbc.com/id/28638551
An excerpt:
“Taylor and the NCRC are proposing a new government program, using TARP money, whereby the government would “use its power of eminent domain to take troubled properties/loans from mortgage servicers and lenders, so large numbers of loans could be modified, writing down principal and interest rates. The loans would then be re-sold to the private market.”
The government would buy these loans at a “steep discount.” Eminent domain allows the government to take an asset where a public purpose is served, and it requires that they pay the investor the “fair market value” for it. NCRC claims the fair market value would be about 30-50 percent of the current loan value.
NCRC argues, “Discounting the purchase of these loans would strike a balance between assisting homeowners and ensuring that lenders, servicers and securitizers are not rewarded for financing and servicing predatory and price-inflated loans.” That discounted price would then “be sufficient to write down the loan balance of millions of loans such that they can be permanently refinanced or modified to ensure long-term sustainability.”
It’s not too crazy, no? I mean, if you’re of the opinion that these borrowers should in fact be saved and given back home equity that perhaps they gambled on in the first place. The cost, NCRC estimates, $50-$100 billion.”
Posted on Tuesday, January 13th, 2009 at 11:20 AM in Loan Mods | 33 Comments » | 
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If this goes through I give up. Homeowners are a protected class.
What about all the people that rent and pay higher taxes? Are we just the serfs?
shadash | January 13th, 2009 at 11:33 amThe article says that the properties will be resold to the private market. Does that mean it will be resold to the owner or to anyone interested? If the property is open to anyone, wouldn’t it force prices down faster and stop some of this nonsense with short sales, auctions, etc. It would also kick out the bums who couldn’t afford the loans to begin with.
Yes, property owners are a protected class. They always have been. Only property owners could be citizens in ancient Greece.
UnsureBuyer | January 13th, 2009 at 11:45 amThis is the opposite of my proposal, which is to re-institute debtors’ prisons. If we jail the losers, then their homes will be more quickly foreclosed, which in turn will facilitate the market’s price discovery.
Where in the world is Charles Dickens when you need him?
greenlander | January 13th, 2009 at 11:45 amTaking property by eminent domain at a “steep discount” is going to result in eminent domain compensation lawsuits. Expect NCRC’s own words to be used in that lawsuit to illustrate the government’s intentions. The irony is most lawsuits settle for a compromise value, and the government is beholden to follow through at any price a judge decides.
The biggest consequence of TARP is that Americans no longer believe in fairness under the law and the free market. We look to a financial dictatorship to micromanage businesses because they know better and have the (our) money to do it. It’s just like the Iraq construction money all over again.
BDiego | January 13th, 2009 at 12:18 pmI have a new loan-mod program that’ll work. It’s called “give the loan to a borrower who can afford it.” Also known as foreclosure.
sdduuuude | January 13th, 2009 at 12:20 pmPoor Dickens wouldn’t recognize what we’ve wrought. Besides we’ve got the opposite of debtor’s prisons. There the occupants keep paying but don’t get to keep the assets.
Rob Dawg | January 13th, 2009 at 12:24 pmRead the article carefully. The suggestion to exercise eminent domain applies to the mortgage loans themselves, not the real property. The govt. would take/buy the loan at current market rate creating a loss for the lender. The homeowner would come out clean with a newly adjusted loan at the expense of the lender (spelled taxpayers).
As for homeowners being a protected class, let’s modify that to include only those homeowners who took on mortgages while gambling that they could cover the re-adjust payments. Those of us homeowners who are not in trouble are as incensed that we’ll be paying for the new protected class.
LC Jim | January 13th, 2009 at 12:42 pmSo did they leave out the part where the government will then recapitalize the lender creating a cost well in excess of the $100B they cite.
Lets just keep hoping legislation gets postponed. I am thrilled that due to the budget impasse in Sacramento they may not be able to pass any more laws for a while.
LV Renter | January 13th, 2009 at 1:06 pmThis is America’s version of communism. You get to live in the house, but the government gets to decide if you keep it.
chuck
Chuck Ponzi | January 13th, 2009 at 1:44 pm> Will they just keep coming up with ideas until one works?
They’ll keep coming up with ideas that don’t work. They’re making things much worse. Why would anyone expect government to fix things? History shows this is impossible.
Stephen Waits | January 13th, 2009 at 2:11 pm“Re: The irony is most lawsuits settle for a compromise value, and the government is beholden to follow through at any price a judge decides.”
It’s true that it will lead to takings lawsuits, but, actually, all takings cases against the federal government must be prosecuted at the United States Court of Federal Claims, which is not an Article III court, and, it is at least constitutionally permissible (if not politically feasible–not sure) for the legislature to enact legislation limiting takings claims arising from the TARP or some other such program Congress may authorize.
It will be a mess, but there are legislative means to make it less likely that it will be an unholy mess that lasts for 30 years. Of course, the Supreme Court still gets to review such legislation and, in at least some cases–most notably Winstar v. United States–they have sided against the government, affirmed Court of Federal Claims review of certain financial claims against the government. The Winstar claims (arising out of changes to the banking laws related to the S&L crisis) have been continuously litigated since 1995 and they aren’t likely even half way done. So notwithstandint the above, it could be an unholy mess in court.
The good news: maybe it will serve as a reminder for a generation of homebuyers that housing prices can go down, when they open the WSJ every year or so and read about the latest big court case involving the TARP.
lgs | January 13th, 2009 at 2:56 pmInteresting idea. I’m willing to try anything to keep give the market some traction on this greased slide.
Don’t get me wrong, speculators are a problem and there is some moral hazard in bailing out people, some of whom might be investor types who got greedy, or flippers who over-leveraged in the first place. But, at some point responsible owners are getting smoked. Jim had a La Costa street last week that had 25% of the houses in foreclosure. Let’s say you were one of the other 75% who was resposinble and bought within your means. What do you do when you watch the street decline both in terms of value and in terms of lifestyle. At some point, buying toxic loans saves neighborhoods, not just houses.
Former RB Resident | January 13th, 2009 at 3:03 pmSome of these people should read Atlas Shrugged before it is too late.
http://online.wsj.com/article/SB123146363567166677.html
“For the uninitiated, the moral of the story is simply this: Politicians invariably respond to crises — that in most cases they themselves created — by spawning new government programs, laws and regulations. These, in turn, generate more havoc and poverty, which inspires the politicians to create more programs . . . and the downward spiral repeats itself until the productive sectors of the economy collapse under the collective weight of taxes and other burdens imposed in the name of fairness, equality and do-goodism.”
Anonymous | January 13th, 2009 at 3:04 pmWhat do you do when you watch the street decline both in terms of value and in terms of lifestyle?
How many people who bought on that street in La Costa that would have qualified/afforded without selling their previous house at bubble prices or lax underwriting standards? Even considering that, the government can’t ensure that even good decisions you make will always work out in your favor. This means that people who thought they were being prudent will lose money.
JordanT | January 13th, 2009 at 3:37 pmFormer RB Resident (and Jim),
I think it would be an excellent case study to take the homes on that La Costa Oaks street and see:
1). How many were purchased with less than 20% down?
2). How many loans were neg am and or arm type products?
My gut feeling tells me that those 4 homes were the beginning of the “domino” effect and that the foreclosure numbers will escalate in this neighborhood.
Jim- Do you have the ability to research the ltv’s and purchase loan products for that street?
Turnack | January 13th, 2009 at 4:03 pm>>
But, at some point responsible owners are getting smoked. … What do you do when you watch the street decline both in terms of value and in terms of lifestyle. At some point, buying toxic loans saves neighborhoods, not just houses.
<<
Let me present a different viewpoint towards the saving the neighborhood angle.
The 25% whom were irresponsible and financially insecure are now being purged from said neighborhood.
In their place are most probably the near opposite. I’d prefer to live around stable, financially responsible families. I think that would provide a more ideal environment to raise a family. In particular the financially responsible part.
While initially painful, perhaps this in fact… saving the neighborhood?
Just something to consider.
sdnerd | January 13th, 2009 at 4:03 pmI am not sure about the latest proposal mentioned in this article, but an important piece of federal legislation recently reintroduced which appears likely to get passed this year as part of the Obama stimulus package is a modification of the current law with respect to “cram downs” in chapter 13 bankruptcy cases. Under current law, BK judges are not permitted to modify Real estate mortgages in bankruptcy. It appears that this aspect of the law is likely to change and allow BK judges to permit “cram downs” of real estate mortgages to the current value of the property and modify them accordingly as part of a plan confirmed in chapter 13 bankruptcy.
Once this goes into effect, there will be all kinds of principal reduction modifications closing. In order to get one though, one will need to file for chapter 13 bankruptcy and get a plan confirmed. Or, credibly threaten the lender with BK in order to get a loan mod with principal reduced.
Kingside | January 13th, 2009 at 4:16 pmAnybody know a good bankruptcy lawyer?
LC Jim | January 13th, 2009 at 4:31 pmThis might not be quite as crazy as it first sounds. Seizing the loans at their “current value” (whatever that turns out to be after all the lawsuits) would put an end to the practice of loan holders putting off taking big losses by letting the deadbeat homeowners indefinitely live rent-free in (and seriously neglect) the properties. As the deadbeats soon find themselves underwater again because the “current value” of their once bubble-priced property continues to decline they’ll most likely default again. As long as the new buyers of the loans don’t have yet another bailout plan to fall back on, they may be more motivated than the current loan holders are to get on with foreclosures and replace the deadbeats with more responsible homeowners ASAP.
GeneK | January 13th, 2009 at 4:31 pmWell personally I think it’s a terrible idea, as it rewards behavior that should be discouraged (speculation, living beyond your means) and punishes behavior that should be encouraged (living within your means).
If something like this did pass, at the least I hope that the write-down would be paid back out of future appreciation of the house. I.e., if $200k of a loan is nullified by the government, then when the house is sold, the first $200k of appreciation (inflated by the intervening consumer price index) would go back to the government. If there is appreciation over and above that, then I’m fine with the excess going to the homeowner. No way this would recover the costs to the taxpayers, but it would be something, and at least it would prevent those homeowners from getting paid twice for their behavior.
Dwip | January 13th, 2009 at 6:11 pmFormer RB Resident wrote:
Let’s say you were one of the other 75% who was resposinble and bought within your means. What do you do when you watch the street decline both in terms of value and in terms of lifestyle.
It’s not only a matter of buying what you can afford; a buyer should also consider whether or not he is overpaying.
We were able to afford a house at peak prices, but refused to buy because prices were too high. We didn’t want to see our down payment decimated in the bubble burst, so we decided to rent. This option was open to anyone who bought during the peak, but they chose to gamble on ever-rising prices instead.
At some point, buyers — those who bought within their means and those who didn’t — need to take some responsibility for their own due dilligence. We are not running out of land, and the Boomers, rich foreigners, and other sundry “rich” people are not going to save us from our mistakes. A simple glance at local incomes and rents could easily show that prices were (and still are) much higher than they should be.
It is not the responsibility of the taxpayer to keep prices artificially propped up. It’s the high prices that caused the “foreclosure crisis” in the first place. By trying to prop up the prices, we are only creating more future foreclosures as prices will continue to spiaral downward until price/income and price rent ratios come back into balance. Mind you, rents and incomes are under pressure right now, so that’s also worth taking into consideration.
CA renter | January 13th, 2009 at 6:12 pm“No way this would recover the costs to the taxpayers”
If eminent domain is used to take the loans from their current holders at current market value and they are immediately resold to new private loan holders at the current market, then the current holders are taking the loss and the cost to the taxpayer is essentially the procedural costs of the eminent domain process.
Yes, there is the philosophical downside of rewarding the deadbeat homeowners with a second chance, but if they still can’t qualify for the reduced loan under conventional standards they’ll just default again, and if they bought the house as flippers they’ll probably still walk away when the new loan owners tell them they have to start paying again on homes whose resale is continuing to decline. Then the homes will finally become available for purchase by new owners who can actually afford them.
I mean, it’s not as if we really think this would halt the decline in home prices, or that the deadbeats would suddenly become responsible payers if only they got loan reductions…right?
GeneK | January 13th, 2009 at 6:38 pm“I mean, it’s not as if we really think this would halt the decline in home prices, or that the deadbeats would suddenly become responsible payers if only they got loan reductions…right?”
Right. As much as these stupid ideas anger me (for all the reasons mentioned above,) I think GeneK’s comment here is exactly what we need to keep in mind. It won’t work.
The Blur | January 13th, 2009 at 7:31 pmIt will cost 50 to 100 Billion….really?? It would cost more than that just to bail out the county of San Diego’s upside down mortgages.
Golfproz | January 13th, 2009 at 7:38 pmI wonder what mortgage rates would be after this went into affect for new loans? 25%? 30%? Would anybody still give loans where the homeowner gets upside down and the Government has a precedent of forcing eminent domain.
No_Such_Reality | January 13th, 2009 at 9:57 pmNo, on second thought this just galls me.
Kick the people that can’t afford what they promised to pay OUT!
No_Such_Reality | January 13th, 2009 at 9:59 pmLC Jim,
The article points out that in order to apply eminent domain, the lawyer would have to show that “a mortgage is in fact a piece of real estate”, i.e. that the government in fact is seizing property (the physical house itself) when it takes over a mortgage. If the government is “only” taking over a mortgage and not ownership to the property, the article actually concedes eminent domain could not apply.
This is why earlier in the article it specifically refers to “power of eminent domain to take troubled properties/loans from mortgage servicers and lenders”. Notice not just loans, but the claim to the property.
So a tangental question is, is it possible to exercise eminent domain on a contract alone? It seemed apparent that the idea is to take over the property with contract and make up new terms to give back to the “tenant”.
BDiego | January 13th, 2009 at 11:39 pmThat’s one reason the plan will fail. The other is the part about reselling the loans to the private market. Anything that moves bad loans out of the hands of their current holders, who are not foreclosing because they don’t want to admit their loss, or some government agency whose goal is to not foreclose for political reasons and into the hands of new private holders who buy them at discounted “market” prices will inevitably result in more foreclosures, not fewer, because the new holders will want to kick deadbeats out faster to avoid or minimize future losses as the property values continue to decline.
Entropy is at work in the real estate market, and anything that is done to try to “save” prices will only have the result of driving them lower by scaring away potential buyers who could afford houses at current prices.
GeneK | January 14th, 2009 at 6:34 amYes, property owners in ancient Greece were a protected class. They OWNED their property. We have created a protected class of debtors (and creditors). Encouraging home ownership is one thing, but it has gone so far beyond that now. We are encouraging people NOT to own homes, but to rent them from banks, rather than renting them from other types of landlords. Notice that you are not going to get bailed out if you lost equity on a property that you OWN.
Rational expectations | January 14th, 2009 at 9:18 amGeneK: I mean, it’s not as if we really think this would halt the decline in home prices, or that the deadbeats would suddenly become responsible payers if only they got loan reductions…right?
Agreed. It’s hard not to be really irked by the idea though, even if it’s unlikely to work.
Dwip | January 14th, 2009 at 11:55 amAll the ideas that the govt is likely to try to reduce foreclosures and shore up prices will be irksome. None of them are likely to work.
GeneK | January 14th, 2009 at 3:08 pmI’m not entirely dismayed by the idea — in fact, I had it myself about a month ago.
The biggest problem remaining with the housing markets is that many prices — especially in certain areas of California — simply remain too high for the present market (consisting of prospective buyers and lenders) to bear. Mortgage securities holders, however, are in many cases in a kind of denial — refusing either to work out loans, institute prompt foreclosure proceedings, or discount their REO sufficiently to clear the market. Why are they doing this? Quite possibly, they know they’re sunk if they mark their assets to market, and are holding out hope for some kind of change — perhaps yet another government bailout program.
The eminent domain idea is basically an attempt to cut the Gordian knot, and force the securities holders to accept a market price for their assets. They don’t want to mark to market? Fine. Let the court in an eminent domain proceeding do it for you.
Thomas | January 14th, 2009 at 6:07 pm“The eminent domain idea is basically an attempt to cut the Gordian knot, and force the securities holders to accept a market price for their assets. They don’t want to mark to market? Fine. Let the court in an eminent domain proceeding do it for you.”
This is the part that I think is “not as crazy as it first sounds.”
If I were trying to work it, I would calculate the “market value” of a “troubled” mortgage by taking the current market value of the house and discounting another 20% (for the required down payment to convert it into a conventional loan). If the current holders balk, give them 30 days to sell the loan to someone else at a higher price if they can.
The downside is, once the mortgages have been taken, the govt will probably not foreclose on the deadbeat occupants any sooner than the current loan holders and would probably try to impose some foreclosure restrictions on any private parties it resold them to.
GeneK | January 15th, 2009 at 8:57 am