Mortgage modification

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.

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?


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