Mortgage modification

by on March 5, 2009 at 8:47 am in Economics | Permalink

Yves Smith offers a very good critique of the mortgage modification plan.  Excerpt:

So effectively, the borrower gets a teaser that over time adjusts to a fixed rate mortgage at current (low) interest rates.

Let's
think this through a second. The borrower is still under water (of
course, Bernanke & Co. regard this as temporary misvaluation
resulting from irrational pessimism, but the more data driven crowd
sees housing prices as having moves way out of line with incomes. And
the outlook for incomes isn't exactly rosy either). The borrower
therefore has no reason to invest in the house, including routine
maintenance (assuming he can somehow scare up the dough). If the boiler
goes, the roof leaks, he has no incentive to fix it. Similarly, if he
were to sell the house (let's say he got a good job elsewhere), he's
still faced with either negotiating a short sale or walking and leaving
the bank with the property. Thus for the bank all this does is kick the
can down the road, unless we assume a recovery from these levels.

But there is much more, read the whole thing.  In my view the plan is bad news and will not work.  It is a waste of taxpayer money and even progressives should be highly critical of this weak initiative.

I am reluctant to embrace write-downs of mortgage principal, but if you wish to consider a major plan that is the direction you must look.  John Geanakoplos and Susan Koniak had an interesting piece in the NYT today:

For these non-prime mortgages, there is room to make generous principal
reductions, without hurting bondholders and without spending a dime of
taxpayer money, because the bond markets expect so little out of
foreclosures. Typically, a homeowner fights off eviction for 18 months,
making no mortgage or tax payments and no repairs. Abandoned homes are
often stripped and vandalized. Foreclosure and reselling expenses are
so high the subprime bond market trades now as if it expects only 25
percent back on a loan when there is a foreclosure.

Again, read the whole thing and consider also the diagram.  This is a critical passage from the piece:

It shows that monthly default rates for subprime mortgages and
other non-prime mortgages are stunningly sensitive to whether a
homeowner has an ownership stake in his home. Every month, another 8
percent of the subprime homeowners whose mortgages (first plus any
others) are 160 percent of the estimated value of their houses become
seriously delinquent. On the other hand, subprime homeowners whose
loans are worth 60 percent of the current value of their house become
delinquent at a rate of only 1 percent per month.

Despite all
the job losses and economic uncertainty, almost all owners with real
equity in their homes, are finding a way to pay off their loans. It is
those “underwater” on their mortgages – with homes worth less than
their loans – who are defaulting, but who, given equity in their homes,
will find a way to pay. They are not evil or irresponsible; they are
defaulting because – for anyone with an already compromised credit
rating – it is the economically prudent thing to do.

Is that what "the ownership society" has come to?

Slocum March 5, 2009 at 9:06 am

Foreclosure and reselling expenses are so high the subprime bond market trades now as if it expects only 25 percent back on a loan when there is a foreclosure.

But if that is true now, wouldn’t that be an argument in favor for kicking the can down the road with the mortgage modification plan? Even if many of the borrowers ultimately do default, if those defaults are delayed until more normal times and are spread out over time, then the amount recovered from defaults would presumably rise substantially from a ridiculously low 25%, no?

MH March 5, 2009 at 9:49 am

In the article, Geanakoplos and Koniak don’t seem allow for ‘responsible’ homeowners to be anything but responsible. They describe how sub-prime borrowers who are underwater will respond to incentives, but they don’t discuss how somebody ‘responsible’ might respond to the new set of incentives. If you can get a big of write-down by convincing the bank you won’t/can’t pay, somebody figure out how to game that. I’m trying to stay away from the ‘going Galt’ meme, but, for example, there are plenty of two-earner households that would be just as happy to become single-earner households if the return was greater. And, given how easy it was to get an assessment showing an over-valued home, how hard could it be to find an assessor who will give you a low valuation?

rj March 5, 2009 at 10:06 am

“Of course the owner has an incentive to fix a boiler/leaky roofif its his/her residence.”

I have known people for whom those incentives are insufficient to induce them to make major home repairs.

Bob Montgomery March 5, 2009 at 11:31 am

What I don’t understand is this: how is lowering interest rates going to help that much? Interest rates have been very low for almost ten years now:
http://mortgage-x.com/general/historical_rates.asp

Initial ARM rates haven’t been above 6% since 2001. 30-yr fixed rates haven’t been above 6.5% since 2002.

There just doesn’t seem to be much room to lower rates.

What am I missing here; am I wrong?

babar March 5, 2009 at 12:01 pm

I’m not sure that Yves is right about the “tranche” issue, and in any case it doesn’t apply to mortgages that have not been securitized. (These are loans that are directly held on banks’ balance sheets. There is no concept of ‘AAA’ or anything here — these are either ‘performing’ (meaning that the borrower is paying you back) or ‘non-performing’ (meaning that the borrower is not paying you back)). If mortgages are being held by banks they are at liberty to write them down. And even in the securitized case I believe it can vary from contract to contract.

That being said, I don’t see how this plan gets us closer to having a well-structured pool of mortgage debt.

At the very least they could have suspended income tax on ‘income’ from short sales.

Bob Montgomery March 5, 2009 at 12:20 pm

oops, badly edited post. Yves is right about the tranche issue, but only for securitized mortgages.

But isn’t the whole point of the mortgage plan the securitized mortgages, since they are the ones that are difficult to modify?

dierk story March 5, 2009 at 12:29 pm

Raivo Pommer
raimo1@hot.ee

EZB krise

“Zu spät, zu zögerlich”

Der DGB ging die EZB dagegen scharf an. “Sie reagiert zu spät und zu zögerlich auf die historische Wirtschaftskrise”, sagte der Chefvolkswirt der Deutschen Gewerkschaftsbundes (DGB), Dierk Hirschel.

“Sie hätte sich ein Beispiel an den angelsächsischen Banken nehmen und die Zinsen schnell und drastisch senken sollen.” In den USA liegt der Leitzins nahe null Prozent.

Vor der EZB hatte am Mittag bereits die Bank von England ihren Leitzins auf das historische Tief von 0,5 Prozent gekappt und den Ankauf von Staatsanleihen angekündigt um zusätzlich Milliarden in die Wirtschaft zu pumpen.

babar March 5, 2009 at 1:11 pm

here’s a good article with data from someone who believes this kind of plan will not work: http://zerohedge.blogspot.com/2009/02/mortgage-subsidies-arguably-useless-but.html

Jim Gallen March 5, 2009 at 5:43 pm

Let us just hope the “final solution” offered by the government will not involve judges making evaluation decisions. Look at the mess made by judges here in California.

raivo pommer March 5, 2009 at 6:19 pm

Drei Jahre Arbeitslosigkeit senken den Rentenanspruch demnach deutlich stärker als drei Jahre Erziehungszeit. Vor allem Frauen drohe Altersarmut, warnt der am Donnerstag in Brüssel vorgestellte Bericht.

Ein einziges Jahr Babypause vergrößert die Rentenansprüche zwar in Deutschland und vier anderen EU-Staaten. In Österreich können Eltern in diesem Fall sogar mit über zwei Prozent Rentenzuwachs rechnen. Aber das zweite und dritte Jahr Erziehungsurlaub drückt das Altersgeld in fast allen Ländern spürbar: In Deutschland beläuft sich das Minus dann auf mehr als zwei Prozent.
x
In 16 Mitgliedstaaten sind die Regelungen für die Kindererziehung aber vorteilhafter als für Arbeitslose, wobei Frauen und Geringverdiener besonders betroffen sind. Drei Jahre Arbeitslosigkeit senken die Rentenbezüge laut EU-Bericht in Deutschland um 3,5 Prozent. In Rumänien, der Slowakei und Finnland müssen Erwerbslose nach drei Jahren Zwangspause sogar mit Rentenverlusten von sechs und mehr Prozent rechnen. Am geringsten sind die Einbußen in diesem Fall in Frankreich und Tschechien.

mulp March 5, 2009 at 7:10 pm

Did anyone notice Geanakoplos et al is calling for the government to select a community bank to do cram downs? Isn’t that ripe for political deal making?

Wouldn’t bankruty judges being given the authority to do cram downs a far more open, and thus less likely to be corrupted process?

Poppa Bear March 5, 2009 at 7:51 pm

What if the borrower has a second mortgage and would like to apply for a Home Affordable Mortgage Modification?

Under the Home Affordable Mortgage Modification program, junior lien holders will be required to subordinate to the modified loan. However, through the Home Affordable Modification an incentive payment of up to $1,000 is available to pay off junior lien holders. Servicers are eligible to receive an additional $500 incentive payment for efforts made to extinguish second liens on loans modified under this program. The following article has more information on the Mortgage Modification program…..

dwinds March 6, 2009 at 6:02 am

It has become fashionable to point fingers at the victims of Wall Street irresponsibility and greed rather than at the perpetrators of it–especially when Federal funds are involved. If one dime of bail-out money must be used for anyone–itself highly debatable–then better it be for a salvageable, underwater homeowner than for Countrywide/MER/BAC, the decade-long trainwreck that is Citi, Golden West/Wachovia/WFC, the bail-out of GS via AIG, etc.

Suisse March 6, 2009 at 2:49 pm

Raivo Pommer
raimo1@hot.ee

Schwarze geld

Die Schweizer Regierung will am Bankgeheimnis vorerst nicht rütteln. Sie bietet allerdings Gespräche über die anonyme Zinsbesteuerung, wie sie schon mit der EU besteht, und die Amtshilfe an. Nach einer Regierungssitzung sagte Bundespräsident und Finanzminister Hans-Rudolf Merz, die Schweiz habe viele völkerrechtliche Verträge geschlossen, die eine Grundlage für den Informationsaustausch mit anderen Staaten böten. Mit einer Expertengruppe soll diese Zusammenarbeit über „Steuerdelikte“ verstärkt werden, kündigte Merz an. Der Finanzplatz dürfe keine Wettbewerbsnachteile erleiden. Zugleich schloss der Finanzminister nicht aus, dass die Schweiz auf eine „schwarze Liste“ geraten könne.

Die Schweiz leistet Amtshilfe nur bei mutmaßlichem Steuerbetrug, nicht jedoch bei Steuerhinterziehung. Der Begriff „Steuerdelikt“, den Merz jetzt verwendete, lässt den weiteren Weg offen. Merz hatte vor wenigen Tagen gesagt, das Bankgeheimnis solle „weiterentwickelt“ werden. Mit ihrem Gesprächsangebot versucht die Regierung dem wachsenden internationalen Druck zu begegnen. In der Finanz- und Wirtschaftskrise haben die Kritiker vermehrt Gehör gefunden, welche die „Steueroase“ Schweiz austrocknen wollen. So erwägen die wichtigsten Industrie- und Schwellenländer (G-20) unter Führung der Vereinigten Staaten, Großbritanniens, Frankreichs und Deutschlands entsprechende Beschlüsse auf ihrem Weltfinanzgipfel am 2. April in London. Eine Teilnahme der Schweiz wurde abgelehnt.

claus story March 6, 2009 at 6:35 pm

Raivo Pommer
raimo1@hot.ee

LBBW-Bank krisehilfe

Die Landesbank Baden-Württemberg (LBBW) wird fünf Milliarden Euro bekommen, um die Folgen der Finanzkrise abzufedern – in Form einer Kapitalerhöhung. Doch möglicherweise braucht Deutschlands größte Landesbank noch mehr Hilfe. Einem Bericht der Schwäbischen Zeitung zufolge benötigt das Institut zur Absicherung von risikobehafteten Papieren Garantien in Höhe von 16 Milliarden Euro. Die Bank wollte dazu am Freitag keine Stellung nehmen.

SPD-Fraktionschef Claus Schmiedel, der Mitglied im LBBW-Verwaltungsrat ist, sagte: “Die Zahl ist aus der Luft gegriffen.” Man müsse sich darauf konzentrieren, nur die stark schwankenden Papiere abzusichern. “Denn jede zusätzliche Abschirmung kostet Geld und belastet die Gewinne.” Den Umfang wollte er nicht nennen.

Wie die Zeitung aus der Bank nahestehenden Kreisen erfuhr, sollen die Papiere aus dem Kreditersatzgeschäft, die großen Schwankungen unterworfen sind, in eine Zweckgesellschaft ausgegliedert werden. Finanzkreisen zufolge soll es sich bei dem Volumen um etliche Milliarden handeln. Dadurch sollen sie die Bilanz der LBBW nicht mehr belasten.

Andrew March 7, 2009 at 6:35 am

Interesting to me on the chart is the wide gap between the different “classes” from Prime to Sub-Prime. I guess Democrats would blame this on the ability to repay and Republicans would blame it on the willingness to repay.

arnold stein March 8, 2009 at 5:39 pm

Raivo Pommer
raimo1@hot.ee

Österreich Krise

Österreichs Ruf als Schuldner steht auf dem Prüfstand. Die Alpenrepublik will in dieser Woche ihre bis 2014 laufende und 2 Milliarden Euro schwere Staatsanleihe um eine halbe Milliarde Euro aufstocken. Dieser Betrag sollte leicht auf dem Anleihemarkt einzusammeln sein. Allerdings ist Österreich ins Gerede gekommen. Das liegt an der tiefen Rezession in weiten Teilen Osteuropas. Dort haben österreichische Banken Forderungen von 280 Milliarden Dollar – eine Zahl, die dem österreichischen Bruttoinlandsprodukts nahekommt. Wegen der wachsenden Schwierigkeiten osteuropäischer Schuldner, ihre Kredite zurückzuzahlen, sind die Bedenken der Anleger mit Blick auf die Kreditwürdigkeit Österreichs und seiner Banken in den vergangenen Tagen gewachsen.

Ein Indiz für die Skepsis ist die Renditedifferenz zwischen österreichischen Staatsanleihen und deutschen Bundesanleihen. Noch nie war sie so groß wie derzeit. Für zehnjährige Laufzeiten zum Beispiel beträgt die Differenz fast 1,4 Prozentpunkte. Bundesanleihen rentieren mit 2,9 Prozent, österreichische mit immerhin 4,3 Prozent. Auf dem zu Übertreibungen neigenden Markt für Kreditausfallversicherungen (CDS) ist die Diskrepanz zwischen Österreich und Deutschland sogar noch größer. Die Aufstockung der österreichischen Staatsanleihe ist daher keinesfalls Routine.

private st March 15, 2009 at 6:45 pm

Raivo Pommer
raimo1@hot.ee

Die privaten Banken

Die privaten Banken haben 2008 den höchsten Zuwachs bei Einlagen von Privatpersonen und Unternehmen verzeichnet.

“Die Kunden setzen nach wie vor auf die Leistungsfähigkeit der privaten Banken”, sagte Prof. Dr. Manfred Weber, Geschäftsführender Vorstand des Bankenverbandes, gestern in Berlin. Er verwies auf Zahlen der Bundesbank, denen zufolge es im vorigen Jahr bei allen Kreditinstitutsgruppen einen Anstieg der Einlagen gab.

Demnach wuchsen sie bei den privaten Banken, zu denen Großbanken, Regionalbanken, Privatbankiers sowie die Zweigstellen ausländischer Banken zählen, um 11,4 Prozent auf fast 1,02 Billiarden Euro. Ihr Anteil an den Einlagen erhöhte sich damit von 31,8 auf 33,1 Prozent. Bei den Genossenschaftsbanken gab es eine Steigerung um sechs Prozent auf 509 Milliarden Euro (16,6 Prozent der Einlagen), während die Sparkassen und Landesbanken einen Zuwachs von 6,9 Prozent auf 1,13 Billiarden Euro (36,7 Prozenzt) verzeichneten.

Mark March 25, 2009 at 2:29 pm

Has anyone tried working with Carrot Peel on a mortgage modification? http://www.carrotpeel.com I’ve heard good things about them but wanted to get some other opinions.

beachdude April 2, 2009 at 1:06 am

The most common mortgage modifications are listed below:

lowering the mortgage interest rate
reducing the mortgage principal balance
fixing adjustable interest rates within the mortgage
increasing the loan term throughout the mortgage
forgiveness of payment defaults and fees
or any combination of the above

Check out this public service site: http://mortgagemodificationinfo.org

mspelts April 14, 2009 at 9:53 pm

Hello all-

I work for a company that owns as well as services roughly a $10 billion dollar home lending portfolio. There are many misconceptions in regards to the relief that the Obama administration has provided. The whole package revolves around nothing but Fannie and Freddie loans. Many mortgagors have been left out in the cold due to the fact that their mortgage is a publicly traded security and no adjustments can be made to extend the maturity date without doing a total refinancing, which very few people have the funds available, the credit score, and the equity to do at this point. At this point every servicer has begun some type of a modification program, it’s the only thing that will keep them in business. The main thing is don’t be afraid to talk to your mortgage company and be sure to do your homework going into it. Some conventional loans, depending on the situation and the investor can be written down to as little as 3%. Of course this is clearly a desperation situation on the investors part if they are willing to go that low, but a loan performing at 3% is better than a loan not performing at 10%. Granted the west coast has been the hardest hit as far as property values plummeting, you have to keep in mind this is not your investors or your servicers fault, so that argument is a mute point when attempting to negotiate. Some servicers, like the company I work for, have taken an aggressive approach with the portion of the portfolio they actually funded, and are deferring a portion of the principle to a balloon payment at the end of the loan and modifying the monthly payment based on the lowered principle amount. Initiatives like this, while risky, are more aggressive than anything the White House has offered. Another thing to keep in mind is that while your servicer wants to keep you in your property, after reviewing your financial situation and making any cuts we can possibly advise to you, if you still come up on the negative side of the ledger, the best thing you can do is walk away from the house because you simply can’t afford it. At that point a short sale is your best option for doing the least damage to your credit and the amount of a short sale payoff a company will accept will fall in the 70-90% of unpaid principle balance range. The 25% recovery on forclosed properties figure is a bit misleading. In reality it’s in the 55-60% area, still a large hit, but once a property goes into REO status, a large enough servicing company has the luxury of sitting on that property until the market recovers, if they choose to do so. In all honesty, the loans that are underperforming the most, particularly on the west coast, are the loans that were written off of stated income. During the boom from 2000-2006, if your business was going well you could walk into a mortgage broker and tell them you made $500k a year and you could get yourself into a $2-3 million dollar home on an ARM loan with an affordable (at the time) interest only payment for the first 10 years of the loan and told you could refinance in two years to a low fixed rate. All of a sudden your business is scaled back, your home is losing value, and your rate just adjusted 3 points and raised your payment 25%. Now you are in a position of being upside down in your loan, you don’t have the income to qualify for a modification, and now your not making enough money to support your interest only payment. Trust me, I see this situation several times a day and it sickens me how predatory all of these mortgage brokers were during that period and how many people it is hurting now. In closing, contact your mortgage company and see what they will do for you, and for your own sake don’t contact any of these 3rd party companies that say they can get you a modification because 7 times out of 10 it won’t happen because there is NO ONE who can make the servicer modify your loan. And the 3rd party company will charge you anywhere from $1500 to $4500 to do this modification and when they epicly fail, your out that money, which could have gone to pay on your mortgage.

adamp May 11, 2009 at 12:42 pm

consult a loan modification service to get the best rates and lower your monthly payments

Mortgage Modification August 7, 2009 at 1:50 am

I think Mortgage Modification is the process of modifying your existing loan to make your payments more affordable.

Charlotte Loan Mortgage Modification January 23, 2011 at 11:04 am

This is a great article, loan mortgage modifications do help with hardships

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