IMB – More than 50% of Workouts are Delinquent Again

http://www.marketwatch.com/news/story/CORRECT-Modified-mortgages-often-default/story.aspx?guid=%7BD8172601%2DFCE0%2D4F1B%2DA67E%2D1F5820FE5721%7D

Lender Processing Services told analysts at Keefe, Bruyette & Woods that the results of such modification are often uninspiring.
“Industry evidence indicates that in a majority of instances loan modifications simply delay the timeline from default to foreclosure but don’t prevent them from taking place,” Nathaniel Otis and William Clark, analysts at KBW, wrote in a note to investors on Tuesday.
For the industry in general, after mortgages are modified roughly 25% go delinquent again after just one post-modification payment and more than half end up delinquent after several post-modification payments, Lender Processing Services told the analysts.

You can play with the numbers, for example, doing a $375k and a $50k balloon. The bottom line is both parties have to have an incentive to take some o the hit, and prevent an even worse outcome.”

NO. What this does is penalize those homeowners that aren’t behind in payments, that didn’t buy too much house for their income!

If you want to reduce the original loan amount to current market value for the laggards, then you should reduce the amount owed by a similar amount for ALL mortgage holders. If someone still owes 200k on their house and the neighborhood average reduction is 100k, then they would now owe only 100k.

Also, any apartment owners who get a reduction in their loan amounts, should have to reduce their rents by 1/3.

I’m sure that based on fairness, the banks, security holders and landlords would be more than happy to agree to this solution. [chuckle]

>> Clearly, you can trick great masses of people into *believing* that you can multiply actual wealth by multiplying the number of claims on that same wealth, but that doesn’t mean you can actually *do* it.

I think you can, to a small extent.

>> If you can make people prosperous by tricking them into real production with false credit, why hasn’t eternal prosperity already emerged?

I’m not trying to suggest it’s that “powerful” a tool to wink eternal prosperity into existence.

>> If it’s really as simple as inflating a little, but not too much, what explains these continual ‘panics’?

A changing mix of often poor policies on an unstable system, plus variance? ;-) Okay, eliminate central banks, fractional reserve banking, government interference in housing markets, and more. But, I don’t know how to get there from here, either politically or in practical terms.

>> Could the FOMC just be replaced with a computer model?

We will all be replaced in 30 years by computers. I hope I’m around to see it. It’s a moment to both fear and look forward to, as it will be an incredible moment of crisis and opportunity. Talk about living in interesting times! :-)

Where I come from, a person who gets nothing for something still got screwed, regardless of how they *feel* about it. At the end of the day, claims on value must be exchangeable for actual value. Anything other than that is plain theft, no matter how sophisticated. Clearly, you can trick great masses of people into *believing* that you can multiply actual wealth by multiplying the number of claims on that same wealth, but that doesn’t mean you can actually *do* it. If you can make people prosperous by tricking them into real production with false credit, why hasn’t eternal prosperity already emerged? It’s not like it’s a new idea. If it’s really as simple as inflating a little, but not too much, what explains these continual ‘panics’? Could the FOMC just be replaced with a computer model?

A year later the victims were hopelessly behind on their payments and they went back to the same predatory lender explaining that they just could not afford the payments. The predatory lender (having waited patiently for a year to get another big juicy bite) explained that since the house had increased 20% in value, all they had to do was to refinance and take extra money out to cover the slack – and the lenders juicy fees – and the investors juicy prepayment penalty fees. If the victims protested that the monthly payments were about the same as what they had not been able to handle the first time around, then the predatory lender would convince them that this time they could do it (you have learned; a salary raise is coming; interest rates are going down so we can refinance you later; etc. etc.). If that did not work there was always the “you have no other choice” argument with dour talk about destroyed credit rating and living on the street because nobody would loan or rent to you. And so the circle continued year after year with the victims handing over a huge chunk of their salaries and all of the appreciation of their homes to predatory lenders and investors.

When finally the scam collapsed because even with all the self-reinforcing mechanisms, the 20% per year appreciation in house values could not continue, it turned out that it was mostly the predatory investors (with their never ending demand for higher yields regardless of how much, or who’s, sweet and tears it was sucked from) were left holding the bag.

In the best of worlds the scammers would all be punished and the victims compensated – however, this is not the best of worlds. First of all, although the scams were very bad and hurt a lot of people, they were not illegal (there is nothing like having enough money to “purchase” the lawmakers). So many of the scammers were only “punished” with the disapperence of their scam and its income. The predatory investors were punished both with a loss of their scam-income and with a severe loss in their investment. Some would say that the victims were also punished (with the loss of their homes), although some would view it as that they got out of an enslaving trap.

I say we do nothing except for helping the victims get into a home they actually can afford. Lets set up an entity (we could call it F&F) that will provide people with home loans according to conservative old-fashioned standards of income to loan payments. F&F would own direct costumer offices (lets call them failed S&Ls) in every town. F&F should, off course, be government owned non-for-profit to ensure that it never got trapped in the sins of trying to suck profit out of people who just want to own a home. Since the victims cannot afford a downpayment we would, at this time, allow a loan of 100% of the purchase cost (including closing cost). However, we would demand that the monthly payment came as automatic direct deposit from their employers. This would only be reasonable since the victims had shown some lacking ability in handling their personal finances. With that program in place prices would quickly fall to where they should be, and some of the victims may even end up able to purchase their naboers house.

http://www.nsf.gov/discoveries/disc_summ.jsp?cntn_id=100660&org=NSF