Tuesday, February 17th, 2009 at 6:01 AM
ObamaPlan
The preisdent will unleash his mortgage/credit crisis rescue plan tomorrow in Phoenix.
Here’s the L.A. Times idea of what it will include:
In using Arizona as the backdrop to announce his housing plan, Obama is choosing a state hit hard by foreclosures. In January, more than 4,500 homes in Arizona were repossessed, the third highest number in the nation, according to RealtyTrac, a company that collects foreclosure data. Last month, California ranked first.
Obama has dropped hints about the broad outlines of his housing plan, estimated to cost $50 billion to $100 billion. Speaking in Elkhart last week, he said he would push for a new law that allows judges to rewrite the terms of a mortgage for homeowners who land in bankruptcy court.
Without such a law, people are being forced into “foreclosure who potentially would be better off, and the bank would be better off, and the community would be better off if they’re at least making some payments, but they’re not able to make all the payments necessary,” Obama said.
The following day, in Fort Myers, Obama outlined an arrangement in which banks would accept lower payments from homeowners in return for an equity stake once housing prices recover.
A Democratic congressional aide said Monday that Obama’s housing plan will have two pieces. One will involve changes in law that can only be made by Congress — such as empowering bankruptcy judges to restructure mortgages. The other will involve actions Obama can take by executive fiat.
I know two homeowners who have told me that they have received a loan modification from their lender. Their tax rolls don’t show any new recording of loan documents, so if that’s the norm, the lenders aren’t leaving any public evidence of who is getting a break from loan modifications.
Those who are in bankruptcy are public record, though not on the tax rolls. Will those who opt for the equity-share program get a new trust deed recorded? They should, anyone who has a stake in the outcome of a sale would be crazy not to record their interest.
We’ll keep an eye out for how the equity-share program gets handled – they don’t have to record a new deed, the lenders could mention it when they get notified of the future sale. If nothing new is recorded, we’ll never know who benefitted.
Wasn’t there going to be accountability this time around?
Listen carefully tomorrow to hear if there is going to be any public tracking of the equity-share program. Without public scrutiny, how will we know how our tax dollars are being spent?
At what point will the taxpayers revolt?
Posted on Tuesday, February 17th, 2009 at 6:01 AM in Bailout | 70 Comments » | 
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So a person that can’t pay their mortgage in 30 years. Suddenly has 60 years to pay? This is complete crap!
Just foreclose on the deadbeats and get someone in the property at a lower price that can pay the mortgage.
This is outrageous! I work 2 jobs and save every penny and can’t yet afford a traditional 20% down 30 year fixed in the area I’d like to live. Yet people that bought with no down payment AT ALL (because they purchased with funny money 2-3 years ago) are going to receive the same monthly payment that I have.
On the plus side gold is flying through the roof currently at $970 per oz. I think the world is starting to see what the dollar is truly worth.
shadash | February 17th, 2009 at 6:10 amShadash,
Still outraged? Right fully so. I lost my job two weeks ago but we are sitting on three years of emergency funds to our mortgage and NO debt. That is how you do it right. Yet all provisions go the other way to help those that didn’t do the ‘right thing’. I say let the buzz saw cut hard and deep, but it is not going to happen. Still, I’m not going to walk away. I had some friends come to my house a few years back and they laughed at my rabbit ear’s (I’ve since got basic cable). They also laughed at two of my older cars while they drove newer ones (every 2 – 3 yrs). I tried to give one to a buddy to help him save money a year ago knowing what was goign to happen and because he was highly leveraged. He balked at the idea because the car didn’t have electric windows. We were all laid off at the same time – who is laughing now.
3clicks from da Beach | February 17th, 2009 at 7:10 amI work 2 jobs and save every penny
The mortgage plan is the least of your or anyone else’s worries. As we speak, the Federal reserve and the government is stealing your savings by 0% interest rates and huge government spending. Which will soon lead to huge inflation and another bubble in some sector of the economy. Don’t believe me? Guess what happened the last time the FED cut interest rates to 1% and we had record government budget deficits. I remember something about historic housing bubble, a credit bubble, and record inflation in commodities, but I’m sure things will be different this time around.
no bubble here | February 17th, 2009 at 7:21 amIt’s one thing if someone holding a loan decides it’s in their own best interest to do it, but I have a major disagreement with rewriting the principal on anyone’s loan by the govt.
If anything at all is going to be done by the govt, low interest mortgages that are available to all, including normally disqualified “troubled” mortgage holders, new buyers and holders of mortgages in good standing is still the way to go. Letting underwater borrowers refi the full balances of primary residences at affordable rates as well as “normal” borrowers means that investors and flippers who only care about the appreciation will still walk away, leaving a core of borrowers who actually see their houses as their homes and want to go on living in them no matter what.
GeneK | February 17th, 2009 at 7:53 amMan, I did the wrong thing by paying my mortgage on time, putting down 20%, and never pulling out cash for cars and cruises. Sad.
Todd | February 17th, 2009 at 8:07 amIf everyone led “responsible” lives like Shadash and 3Clicks and saved, the US GDP would be SIGNIFICANTLY smaller than what it is — and that would mean, much higher unemployment, much lower standard of living.
The US economy is built on the idea that we shall be spending way beyond our means. I just can’t get over the fact that about 70% of our GDP is personal spending.
So heres the question…should we as a country just get used to lower standards of living and higher unemployment — or can this ponzi scheme be extended for another 20-30 years or so? Would the Chinese/Russians keep holding on to US$ debt (as anything otherwise would be catastrophic to their economies?) and so we won’t have inflation?
ParadoxOfThrift | February 17th, 2009 at 8:08 amI think the one thing that may save us is that even if the govt rewrites “troubled” zero-down $900k mortgages to the homes’ current values in the $600k range, the homes will probably still end up in foreclosure and their new values recorded when the owners can’t make the payments on their new $600k balances.
GeneK | February 17th, 2009 at 8:14 amI go back and forth on this stuff. On the one hand, rampant greed and speculation should be punnished. On the other hand, having a house drop 40-50 percent in value because your neighbors are assholes isn’t really fair either. Plus, like it or not, there was mortgage fraud and near-fraud where people got into loans with terms that were different than they expected and payments they couldn’t afford if they went to med school and became a doctor.
I know this is an unpopular position in San Diego, but I trust Obama and his advisors to come up with a plan they believe will work to stabilize the market. Whether or not it will, we’ll see.
Personally, if I were king, I would reverse a lot of the Bush anti-bankuptcy positions and amend the code to allow a judge to alter the terms of a mortgage. I’m a lawyer, and I’ve done corporate restructurings and seen note/debt changes work wonders long term. Of course, this assumes the debtor can afford the house at reasonable new terms. If not, then removal is still the best option.
Former RB Resident | February 17th, 2009 at 8:24 amInflation, Inflation, Inflation–They are going to eventually have to print money–Add a zero folks–Buy some Real Estate at some time during this down-turn. Inflation WILL be here.
Local Boy | February 17th, 2009 at 8:43 am“On the other hand, having a house drop 40-50 percent in value because your neighbors are assholes isn’t really fair either.”
But that’s not why home values dropped. They dropped because there was never any reason for them to go up in the first place (except maybe for the “asshole” neighbors who couldn’t really afford to bid them up). It’s been a good 8-10 years now since there was anything going on in the real-world economy that could legitimately explain a rise in home prices that exceeded the annual rate of inflation.
GeneK | February 17th, 2009 at 8:51 amParadox,
You bring up an interesting point. I have never been an early adopter but I do not save every penny like Shadash =P I realize I may not be the ‘perfect’ consumer, but I contribute in different ways most people don’t look at i.e., I don’t suck up gov’t subsidies, use food stamps, use low income programs. But I also contribute to local shelters and donate a number of goods when they no longer serve a useful purpose to me to others. I have also created jobs for others in the past. That said, I would rather let the economy grow at a much slower rate rather than have this bang and bust. History repeats.
RB,
Right or Left, just to the right thing – Carter, Reagan, Bush, Clinton and Bush let’s not go there. We obviously have fundamental differences and it starts with this:
OBAMA: It’s not that I want to punish your success; I just want to make sure that everybody who is behind you that they’ve got a chance to success, too. I think when you spread the wealth around, it’s good for everybody.
3clicks from da Beach | February 17th, 2009 at 8:58 am“It’s been a good 8-10 years now since there was anything going on in the real-world economy”
Guess you’re right. I really miss the Pets.com sock puppet.
GameAgent | February 17th, 2009 at 8:58 am@GeneK,
True enough. But, a big part of the plunge is irresponsible lending and borrowing. If everyone bought houses they could afford and stopped the using of the house as an ATM then maybe this wouldn’t have happened as much.
But, like I said, I go two ways on this. On the one hand, I feel some concern for destroyed neighborhoods. On the other hand, I also get the sense that the people who buy in these new neighborhoods are all assholes (in the sense I used before).
When I bought my current house in 2007, I was cleared up to a loan about double what I ended up taking. We saw a lot of McMansions. We met a lot of McMansion owners who were unwilling to negotiate and generally got a bad vibe about the people who lived there. (Why does an IT support guy own a 1.4 million dollar house? or Why are several rooms of this house unfurnished or have no curtais – always a clear sign of distress, BTW.)
In the end, we wanted land over house size and found an older, mellow neighborhood. Number of sales since we bought- two -both estate sales. Number of foreclosures, NODs, etc- zero.
Former RB Resident | February 17th, 2009 at 9:15 amShould have voted for Ron Paul!!!
doughboy | February 17th, 2009 at 9:18 am“OBAMA: It’s not that I want to punish your success; I just want to make sure that everybody who is behind you that they’ve got a chance to success, too. I think when you spread the wealth around, it’s good for everybody.”
Why does government need to “spread the wealth around”?
How about instead of government trying to be everyone’s savior it just takes less taxes dollars from it’s people and hires less government numbnuts to do the kinds of jobs private industry can accomplish for half the price and at a profit!
Are you your own person? I’m tired of this nanny state that rewards the idiots.
shadash | February 17th, 2009 at 9:20 amAlthough the dotcom had many of the boom/bust characteristics of the housing bubble, what distinguishes it as “real-world economy” is that after the dust settled, some of the new businesses created in it continued to profit and employ people, and businesses have continued to invest in maintaining and improving the internet infrastructure. Even the sockpuppet had enough value left in it for someone to recycle it (see http://www.barnone.com). And, of course, if you lost some money in the bust (which I did), the govt didn’t jump in and try to keep the value of your dotcom stocks inflated for you.
Compare that to the housing bubble, where every home that gained “value” will eventually lose it all back, the overstock will be sitting around lowering everyone’s property values for decades, the government is running around like headless chickens trying to “fix” things, and can anyone point to any US homebuilders still building homes and reporting profits?
GeneK | February 17th, 2009 at 9:33 am“Why are several rooms of this house unfurnished or have no curtais – always a clear sign of distress, BTW.”
Just to make the point that there’s no such thing as “always,” my first home had an essentially empty room in it for 15 years. I started out as a single buyer looking for something I could afford, which in my mind meant 2 brs, but ended up finding a 3 br “fixer” in a neighborhood I would otherwise never have been able to afford for the same price. For a while I kept my tools in it while I worked on the house, but it wasn’t until I got married that I finally had a reason to furnish it.
GeneK | February 17th, 2009 at 9:40 am@shadash
Clearly numerous big govt spendings have been hugely successful to the economy in the past (freeways, internet, just to name 2), and many others have been hugely wasteful as well.
There are no general answers here. That kind of logic leads us to the “with us or without us” kind of silliness. Its a matter of degree. If your marginal tax rate were 70%, I think most people will agree that its too much. But what if the marginal tax rate was say 15%, would you say its “too much”?
Similarly, I do think the govt has some duty to “spread the wealth around”. Does it mean go to the extent of saying everyone shall have the same wealth? Of course not, but a “more perfect union”, does require “more equal opportunities” and “more equal wealth”. Its again, a matter of degree. The gap between the haves and have-nots in this country has never been wider and a correction is indeed called for.
And for all the silly conservative criticism of Obama’s comment, EVERY administration (regardless of party) has tried to “spread the wealth”. What else do tax brackets do???
ParadoxOfThrift | February 17th, 2009 at 10:07 amHousing Solution Proposition—Gov’t offers buyers a 10% second mortgage towards any new purchase—an 80-10-10, with the US Govt. holding a 2nd mortgatge—better than just giving money away, eases the financing crunch, adds new demand into the marketplace to help stabilize things.
Local Boy | February 17th, 2009 at 10:23 amWhat’s happened in the last 8-10 years in San Diego County? How about huge population growth?
1990 = 2,498,016
2000 = 2,813,833
2008 = 3,146,274
That’s why there was a run-up in prices better than inflation.
As for inflation; we are in a seriously deflationary cycle. Can’t really charge more if most people are out of work and saving. As home values go down so will wages.
As for the outrage; get over it. Nobody here was pissed-off watching a trillion dollars in borrowed money spent in Iraq. At least this money will be spent here.
Mozart | February 17th, 2009 at 10:39 am“And for all the silly conservative criticism of Obama’s comment, EVERY administration (regardless of party) has tried to “spread the wealth”. What else do tax brackets do???”"
According to…
http://en.wikipedia.org/wiki/Tax_bracket
“Tax brackets are the divisions at which tax rates change in a progressive tax system (or an explicitly regressive tax system, although this is much rarer). Essentially, they are the cutoff values for taxable income — income past a certain point will be taxed at a higher rate.”
Tax Brackets != Spreading the Wealth Around
What tax brackets are is a progressive disincentive for people to earn larger and larger amounts of money. In the United States this is countered with tax loopholes and ways to skirt tax obligations. But, that’s besides the point.
Why do you assume that government is the only way to solve our economic problems? That’s basically the liberal thought process. Government produces nothing. (other than occasional pubic works projects like bridges and roads) Think about it… When was the last time you said to yourself “I’m really hungry I hope the food at that new government restaurant is going to be good.” I promise you it will NEVER happen. Private businesses create wealth and opportunity government consumes wealth and deprives people of liberty.
shadash | February 17th, 2009 at 10:53 amInflation WILL come. Obviously we are now in deflationary times, however, I am talking within the next 5 or 10 years.
Local Boy | February 17th, 2009 at 10:54 am@ shadash:
a progressive taxation system (adopted by all administrations in my life..), inherently spreads the wealth. It takes more from me (if I earn more) and spends on everyone. Thats just the way it is…
regarding your restaurant example…in numerous developed countries (e.g. Canada), you quite often say, “I broke my leg, I will go to the new govt hospital”, and evidenced by the fact that they spend less and have better life expectancies and infant mortalities and other metrics of health, I will argue that they are doing much better than the options here in the US.
Blanket statements like “government consumes wealth and deprives people of liberty” I think are demonstrably false..
ParadoxOfThrift | February 17th, 2009 at 11:03 am@Genek, Another reasonable critique of my comment. “Always” no, but alarm bells, yes. I remember I once looked at huge house that was 50% empty and all the stuff was guy’s stuff. “Dirvoce”, we thought. Nope, the couple had moved to the country, but the guy kept the city house for work while it was for sale.
And for the record, I wasn’t trying to start a political discussion, its just that having been raised in RB, I know its pretty conservative in San Diego, north county, especially. I’m not, so I was actually trying to deflect the issue. People are entitled to dislike the plan and Obama, (like I said, I’m pretty liberal and I’m not really sold on the plan), but I would rather we focus on the moral hazard aspects vis a vis economic stability aspects of the plan and not just call everything socialism, which doesn’t really move the ball forward.
Former RB Resident | February 17th, 2009 at 11:03 amFor all of you waiting for the government to rush in and “fix” this mess, dont worry, they will continue to kick the ball around until the market heals itself. Live below your means, not above them.
BigWaveDave | February 17th, 2009 at 11:09 am“What’s happened in the last 8-10 years in San Diego County? How about huge population growth?”
An 11.8% population increase from 2000-2008 fueling a near-doubling of home prices from 2000-2006?
Maybe JtR can provide some figures for how many new homes were built in SD County during this period. Higher housing prices with rising population makes perfect sense in a place like the SF Bay area, where most everything not already built on is reserved for open space and applying for a permit to add another bedroom brings out NIMBY protestors, for SD County we’re talking about an area where local governments never saw a housing development they didn’t like.
I would argue that building bigger and higher-end homes because people could get inflated loans is a better explanation for rising prices here than just more people, especially when local incomes weren’t rising at a rate anywhere near that of skyrocketing home prices.
GeneK | February 17th, 2009 at 11:15 am“And for the record, I wasn’t trying to start a political discussion, its just that having been raised in RB, I know its pretty conservative in San Diego, north county, especially.”
That’s for sure. When I lived up north I was usually seen as slightly right of center, but here I’m practically a bleeding heart liberal.
GeneK | February 17th, 2009 at 11:18 am“Nobody here was pissed-off watching a trillion dollars in borrowed money spent in Iraq.”
I was majorly pissed off about it, starting before it happened. But I wasn’t here then, so you probably do have a point there.
GeneK | February 17th, 2009 at 11:21 amParadox,
I can name three friends (yes I see and talk to them on a regular basis). They as well as their relatives come to the US to get successful operations for their cancer, hip and even simple ACL surgeries. Are you kidding me, go to Canada? Get cancer, go to Canada and you tell me how their health care is.
Regarding population growth. I bought at the peak 2006 and I didn’t over spend though we qualified for a much bigger house. Like RB, we bought in a location we wanted to live. Sure there are REOs around me, but not so much compared to other areas. So I don’t think population growth as much to do with run up in pricing as much as the greed and ignorance of those involved in the selling, financing, marketing and building of homes the past 5 yrs.
3clicks from da Beach | February 17th, 2009 at 12:41 pmBut GeneK, you forget about Gilroy, Hollister, Livermore, Novato, etc. Same deal up there. Same traffic, same growth, same reckless sprawl. I can relate to what you say about the politics.
Real Estate is a perpetual cycle of bubble and overshoot, bubble and overshoot.
I do think scarcity amplifies value more than just the numbers for increase in population would indicate. Most will go ballistic when I write about build-out, but it is happening. Just wait until water gets more expensive and/or they stop issuing water meters. Won’t matter now, but it will eventually.
Mozart | February 17th, 2009 at 12:46 pm3clicks – check out this website: http://profilewarehouse.sandag.org/profiles/est/reg999est.pdf
San Diego County population growth 2000-2008 was 11.8%.
San Diego housing stock increased 9.6%.
You are right that values were mostly boosted by loose lending, I agree. But, growth was a major underlying factor in appreciation.
Mozart | February 17th, 2009 at 1:04 pm@3Clicks:
Public Policy is never (and should never) be made on exceptions. If you have lots of money, you can pay top dollar and get top class treatment here in the US. So what? I know people Americans who go to Tijuana to get root canals and I’ve read about people who go to India to get hip replacements. Does it mean those places have better health SYSTEMS??
So tales of your 3 friends doesn’t change the fact that Canadians spend (much) less on health care and live longer. You brought up cancer — why don’t you get the facts first (the following article has an entire section devoted to cancer..). Also keep in mind they are spending about half of what we do per capita.
http://en.wikipedia.org/wiki/Canadian_and_American_health_care_systems_compared
Anyway…we digress….from real estate…sorry Jim.
ParadoxOfThrift | February 17th, 2009 at 1:07 pmIt’s true that outlying areas around the SF/SJ area grew a lot because of population growth. Southern Marin County, though, has been in the same no-growth mode as the rest of the Bay Area for decades, so growth to the north has been in Northern Marin and Sonoma. In the west the population spilled into the Central Valley, and to the south in the communities you named.
But in all those cases, the two-hour-plus commute over bridges and mountain ranges because there’s no Coaster and no I-5 has been a major factor in motivating people to continue to bid up housing in the Bay Area proper’s better places.
What’s really going to stick it to prices in many outlying Bay Area communities is that just as happened here, much of the income that carried the housing boom was people making money off the boom, and during that same time the tech sector did not see a significant upswing. So there are few techies with money standing by to step in and scoop up bargain houses, and the few there are all want to live in Palo Alto rather than Hollister, Ceres or Fairfield.
GeneK | February 17th, 2009 at 1:18 pmNo sweat Paradox, there’s latitude here on rainy days…
I like Mozart’s stat, you can’t blame the run-up on incoming folks if the housing stock went up at virtually the same pace. Guys like Alan N. say that we’ll need to keep building, but I think we’re close to being done. As kids grow up they can just stay in their parents’ house.
I can’t believe water is as cheap as it is!
Big business in the new world:
- windmills
- water well drilling
- grow-your-own farms
The question that keeps bugging me is: Does the current government intend to bankrupt the USA to solve their debt problems?
It worked pretty well for Orange County….
Jim the Realtor | February 17th, 2009 at 1:18 pmOC couldn’t print $$$$. The US can and Will–easier than BK.
Local Boy | February 17th, 2009 at 1:28 pm“The question that keeps bugging me is: Does the current government intend to bankrupt the USA to solve their debt problems? It worked pretty well for Orange County”
And the state as a whole…
One thing you can blame the general increase in housing cost is the size of the houses themselves. A big house on a 1/2 acre costs nearly as much to build as the same house on 1/4 acres. No one wants a modest house. Everybody apparently wants a castle, and as much castle as the zoning laws will permit on thier plot of earth. Dirt is cheaper to build than a three story house and a 4,000 sf house is going to cost more than a 2,000 sf house. i would say you don’t need a house this big, but if the kids never leave, then you might…
Former RB Resident | February 17th, 2009 at 1:39 pmIn the town I lived in up north, we constantly heard people complain that they “couldn’t build anything” as far as housing was concerned. It was true that many, many applications to build new homes were being turned down, but the average existing house in the area was 2000 sq ft or under, and once when I attended a planning meeting and asked how many homes of that size had been turned down, nobody there could remember the last time anyone had filed for a permit to build one that small.
GeneK | February 17th, 2009 at 1:46 pmJtR,
You ask “At what point will the taxpayer revolt”…?
HOW CAN YOU ??? (revolt, that is
)
Just not paying taxes is the only thought that comes to mind, but doesn’t solve anything since it only increases my personal tax burden.
So – seriously – any good ideas on a revolution?
Golf Girl | February 17th, 2009 at 2:23 pmI was thinking of going to Phoenix tomorrow and protest in person, but they have him in a very controlled environment. The gig is at Dobson HS, and there will only be 300 tickets available – and none are on Craigslist.
I’m guessing that he’ll fly in by helicopter, so just standing outside won’t do any good.
I need to paint a protest sign on the football field?
Jim the Realtor | February 17th, 2009 at 2:28 pmJim- I don’t think the builders actually kept up with population growth and were always behind the curve. The initial scarcity was a big part of the fear and overreaction that contributed to our local bubble. Not the sole reason, but a significant factor that could repeat itself and set the stage for another run-up. But, I don’t see that happening anytime soon.
Mozart | February 17th, 2009 at 2:38 pmJtR,
That’s a cute idea, but how about something more far-reaching?
Grass-roots movements seem to be the thing these days, and a couple of email chains might do wonders…
Golf Girl | February 17th, 2009 at 2:45 pmEmail chains are too easy for politicians to shrug off. I’m talking about a revolution.
Let me think on it, do you have any other ideas?
Jim the Realtor | February 17th, 2009 at 3:22 pmJim, why would you want to start a revolution? While this plan isn’t perfect, by any stretch, doing nothing is simply not an option if we want to find some level of recovery in the next couple of years. I’m not just talking about housing, but the whole economy.
Former RB Resident | February 17th, 2009 at 3:54 pmWhy would any person/institution in their right mind loan money now knowing a court can override the terms of the loan at their whim? This will cause lending to grind to a halt. The road to hell paved with good intentions, going on 50 years now
Kong | February 17th, 2009 at 3:55 pmFormer RB, I’m just a big fan of revolutions!
In this case, as we discussed here before, they are going to throw trillions at this mess before they are done. If we’re going to throw, let’s throw at the fixes that’ll make a difference:
1. Buy down the mortgage rates on purchase loans only so everyone can benefit if they find the right house to buy.
2. Waive the resets/recasts – the ARMs will work themselves out over the long haul.
3. For those who can’t afford their newly reset payment, lock in the teaser rate – that’s what they signed up for. If they can’t afford 1%, then foreclosure is for you.
4. Make short sales harder – make the exiting owner sign a promissory note for part or all of the amount owed, and see how many people jump on the short sale bandwagon.
Jim the Realtor | February 17th, 2009 at 4:03 pmMy current 30 year fixed is 6% I want to be able to refi at, let’s say 3%. Why? Because I want to do, and just pulled that number out of the air because it sounds good and I want to get “mine” from this handout, I want it,I want it,I want it, I want it. Squeaky wheel, squeaky wheel
Zowie | February 17th, 2009 at 4:09 pmI am currently overseeing the servicing of thousands of loans in our portfolio. I have looked at this from both an investor and servicer perspective.
The judgment we use in considering whether or not to modify a loan is based on the net present value of the different possible outcomes: 1) modified terms including the repayment under the modified terms or 2) foreclosure then REO then liquidation.
We don’t let emotions get involved in the decision. Calling the borrower a good guy or bad guy is irrelevant. Whether the borrower made a bad decision in the past (i.e. bought too much) is irrelevant. What matters is the NPV of the future cash flow.
Under this reasoning it makes sense to write down loan balances in certain cases. Some people will complain that this creates moral hazard or that it punishes people that did pay, but if viewed from a financial analysis, it is logical. There are many borrowers that are underwater and behind on their loan but they still want to stay in their house if possible. If the payment they can afford is more than the house can be liquidated for, then it makes sense to modify that loan.
I am sorry if you don’t like the reasoning but we are not making a decision on your loan.
Securitization Expert | February 17th, 2009 at 4:20 pmJim, Those are all reasonable suggestions. Number 4 is tricky. Presumably personal recourse would still be 86′d in bankruptcy.
As for randomly refinancing for a lower rate, I have a 6.25 jumbo. Maybe I could get lower, but it would have to be a lot lower to make it worth the recording tax I gotta pay here.
Former RB Resident | February 17th, 2009 at 4:22 pmOnly problem is banks ar now “playing with taxpayer chips…”
Securitization Expert,
I understand your logic and for banks not taking the TARP money have at it. Obviously, you have to live with the risk of redefault in your scenario so not sure how you are building models for that..
My problem with your reasoning is that when a bank takes TARP money they are now using taxpayer dollars to make these “one-off” decisions which invariably reward foolish behavior. Sorry-can’t support that logic/policy.
Booter1 | February 17th, 2009 at 4:31 pmSecuritization Expert is right, as long as the note holder is making loan modification decisions without the use of taxpayer funds. Those who hold the notes and are willing to take the loss are the only ones who should be able to decide to modify principal; in such cases the decison is entirely between mangement and its stockholders.
Zowie is joking, but a 3% refi to someone whose 6% fixed rate is not “troubled,” or a 3% purchase rate for someone with a good down payment is probably the best move for housing; it would relieve the bitter feeling that people who have done things the right way have that they’re being penalized for it, and it would put spending or homebuying cash in the hands of people who have already proven that they know how to use it.
For anyone whose loan is underwater who still wants to stay in the house and make payments, limit the help to those who bought houses to live in by using Jim’s #3 to make the monthlies affordable without modifying the principal; and anyone who bought purely for the expected appreciation can just turn in their keys so the houses can be resold at market to people who can afford them and intend to live in them.
GeneK | February 17th, 2009 at 5:04 pmWe live in a two class society where renters are expected to bail out homeowners through a transfer of tax wealth.
sdbri | February 17th, 2009 at 5:15 pmWhen you modify a loan by lowering the interest rate, extending the term or capitalizing past payments where the borrower is very underwater on the property (i.e. owes 250k on a 150K house), the recidivism rate skyrockets to above 80%.
In many cases a borrower is willing to pay more than a new buyer would. Add in the additional cost (eviction, taxes, commissions, etc…) and the comparison becomes even more lopsided in favor of leaving the borrower in the house. Because a borrower is willing to pay more, modifying a loan to about 110 to 125% of the current BPO does not dramatically increase the recidivism rate. However, as you go above 125% of the BPO value, the recidivism rate goes up.
There are many servicers that still do not get this. They are only willing to capitalize the arrearage and amortize out a new payment. This sets up the borrower to fail. Principal modification needs to be considered when the borrower is underwater.
Securitization Expert | February 17th, 2009 at 5:50 pmThanks Sec. Expert, I appreciate your insight.
Feel free to lay more on us!
For instance, what do you figure the cost is for:
2) foreclosure then REO then liquidation.
Jim the Realtor | February 17th, 2009 at 5:57 pmOh cool, I just read the stimulus bill rolls back the welfare reform of 1994. How does this tie into the a housing bailout? We are now guaranteed a consequence free life by big brother!Party on!
No-go | February 17th, 2009 at 6:12 pmSecuritization Expert is right–As I wrote yesterday–The banks can do what they want!!! It is thier loan, they can modify it as they deem fit, even reducing the principal if they decide. The response that someone wrote about the banks being required to somehow record this modification (principal reduction) as a new “sale” for the modified loan amount is far out of whack–who would the buyer and seller be???
Local Boy | February 17th, 2009 at 7:11 pmIf the transaction is entirely one of the bank deciding to make a gift of part of the borrower’s indebtedness to the borrower, I would say none. But if it’s done under one of the proposed plans in which the modification involves the government or another party acquiring a share in the equity of the home, that should be the same as any other transaction in which a share of a property is being tranferred from one owner to another; the value of what’s being transferred is a matter of public record.
GeneK | February 17th, 2009 at 7:51 pm“As I wrote yesterday–The banks can do what they want!!! ”
Not exactly. Part of the problem is that many of the loans are tied up in instruments that are owned by many parties. To modify the terms of the loan short of pay-off, you may need the approval of all these owners of the security.
Former RB Resident | February 17th, 2009 at 7:56 pmAgreed–In the shared equity scenario, definitely–it needs to be recorded to secure the bank’s vested interest as well!
Local Boy | February 17th, 2009 at 7:58 pmIt seems I/We are a great candidate for a loan modification. Now I’m waiting to see what the new gov’t guidelines will be to see if that can help. The other questions, is finding an loan modification outfit who is not ‘fly by night’.
Paradox, my three friends do NOT have lots of money, but enough saved up to obtain ‘basic’ surgery. And yes, cancer surgery is pretty much routing for those who suffer from the more popular kinds (so to speak). If you need to go to Tijuana for a root canal somebody better have a garage sale to off those designer shoes, t-shirs and ripped jeans. India for a hip replacement? Well that dosen’t pass the smell test. If I spend much less on health care, I expect basic services and not a space on a waiting list. What good is living longer if I can’t get a ‘nail out of my head’ or if I have a bum knee? I’ll catch up on the links, but I have direct sources on health care in Canada and they would rather live here that up there? Don’t fall into the trap. Go to Canada, get sick and find out.
Sorry Jim, the weather is still bad =P
3clicks from da Beach | February 17th, 2009 at 8:10 pm‘nail out of my head’
man, I’m glad it’s supposed to be 70 degrees and sunny tomorrow
Jim the Realtor | February 17th, 2009 at 8:46 pmJim,
Trying is not doing. Holding the State Legislature hostage till they give in will work until the next initiative.
Forcing renters and actual home owners to pay for wannabe home owners will only work for a while.
A simple revolution would be for everyone claim one additional state payroll deduction. It only makes sense to get to a zero tax return since your “refund” might be an IOU.
oc bear | February 17th, 2009 at 9:23 pmLove it – civil disobedience!
Jim the Realtor | February 17th, 2009 at 9:29 pmIndia for a hip replacement? Well that dosen’t pass the smell test.
It’s called medical tourism, for a bit more background.
http://en.wikipedia.org/wiki/Medical_tourism
Secondly, putting people in front of a bankruptcy judge is far different than massive principal cramdowns. Bankruptcy judges are very good and judging debt loads and have a well-tuned BS detector to weed out the frauds. Banks seem to have no problems loaning money to people for cars and credit cards even though a bankruptcy judge can modify those debts.
Byrk | February 17th, 2009 at 10:12 pmOn the other hand, having a house drop 40-50 percent in value because your neighbors are assholes isn’t really fair either.
But is it “fair” to future buyers (or you, at the time) if housing prices tripled or quadrupled because these same neighbors were fraudsters who borrowed money that they never intended to repay? The “unfairness” happened on the way up, not on the way down. Once prices reach their intrinsic value, they will stabilize — see the massive increase in sales and multiple offers in the areas where prices have largely corrected already.
But, a big part of the plunge is irresponsible lending and borrowing.
Again, the plunge is entirely due to the run-up that was caused by the fraud. The entire reason prices got so high in the first place was because of irresponsible lending and borrowing. Without the fraud and toxic loans, prices would probably have started falling in 2001.
CA renter | February 18th, 2009 at 4:54 amHow about instead of government trying to be everyone’s savior it just takes less taxes dollars from it’s people and hires less government numbnuts to do the kinds of jobs private industry can accomplish for half the price and at a profit!
——————-
1. The development of the internet was a result of government spending:
http://www.davesite.com/webstation/net-history.shtml
2. The government provides most of the funding for the development of new medical technologies through various goverment enterprises (including the NIH, government grants to public and private universities and hospitals, and other medical research laboratories). The private market usually steps in AFTER the basic, **govt-funded** research is done, and they believe the technology can return a profit:
Government is No. 1 financial source
http://www.post-gazette.com/pg/06133/689900-115.stm
3. Most of our agricultural technology (this includes some health tech, like the ability to mass-produce penicillin) is also government-funded:
http://www.ars.usda.gov/AboutUs/AboutUs.htm?modecode=36-20-00-00
4. How about all the technology developments done on the govt’s dime over at NASA?:
http://www.howstuffworks.com/framed.htm?parent=ten-nasa-inventions.htm&url=http://www.sti.nasa.gov/tto/
———————————-
The reason government is usually involved in the development of new technologies (I’d say the vast majority of what we atribute to “American innovation” is due to government funding) is because very few investors will invest in an idea that is not proven and has little obvious commercial viability. Also, they don’t want to invest in something that won’t pay off for many years in the future. The government has a longer-term horizon and can be less picky about what will or will not end up being a viable technology. Many times, researchers have to try a thousand different things before they hit on that ONE truly miraculous discovery that can change life forever. Who wants to fund the 999 times it doesn’t work out?
I could go on (trust me, there are many other points to make), but this isn’t the venue for it.
CA renter | February 18th, 2009 at 5:38 amSecEx@52:”There are many servicers that still do not get this. They are only willing to capitalize the arrearage and amortize out a new payment. This sets up the borrower to fail. Principal modification needs to be considered when the borrower is underwater.”
Do servicers generally have the authority to accept principal modification? With mortgages that have been pooled and tranched and sliced up hither and yon, it sounds a bit dicy.
Johan Larson | February 18th, 2009 at 7:12 am“We live in a two class society where renters are expected to bail out homeowners through a transfer of tax wealth.”
Um, there are many more classes than that. I’d argue we have one for each bracket in the tax tables. Those with more income massively subsidize those with less income. The upper 20% pay what, 100x more tax than the bottom 20%? Maybe 1000x?
Anonymous | February 18th, 2009 at 7:21 am“Without the fraud and toxic loans, prices would probably have started falling in 2001.”
This is exactly what happened where I used to live. Prices peaked in 2000, started falling in 2001 (no big military component to local economy to get a boost from 9/11, mobilizing military to Afghanistan), and continued to fall until the launch of the bubble lending spree. Meanwhile, to this day office buildings in Silicon Valley continue to lay vacant and techies continue to post scarce job woes to tech forums. In a low-growth area where new home developments can take decades to clear local opposition (and in some cases, the Coastal Commission as well), the only thing that was going on in the local economy was the bubble: more and more people using timebomb loans to play musical chairs with a largely unchanged housing inventory.
GeneK | February 18th, 2009 at 7:22 amI’ve talked to to mortgage mod outfits and they have both said that Chase is able to modify the loans it services. Our loan has been with Chase since day one. They simply get ‘permission’ from Chase to talk to the investor who bought the loan. Still researching.
3clicks from da Beach | February 18th, 2009 at 7:22 amBahhh – Obama’s latest loan modification program is geared towards loans originally issued by Fannie and Freddie and conforming (less than $417K). Given that California is a major bubble state and approx 60% of loans during the bubble were non conforming jumbo like yours truly, this is not going to help me or anyone else in my similar position in the Golden State. My company shut down and I want to modify my mortgage before I find another job. If banks are willing to use tax payer money to hedge against their Pechanga losses, then I’m going preemptive =p
Who do I call to get then to expand this program to the ‘forgotten class’?
3clicks from da Beach | February 18th, 2009 at 10:10 pm