Housing prices remain elevated, inventory overhang is huge, cancellations are still rampant, credit is tight, and foreclosures are still rising. It is in this environment that several new plans to modify loans are starting to be enacted:

• Fannie Mae and Freddie Mac are expected to announce plans today to speed up the modification of hundreds of thousands of loans held by the housing finance giants.

• The GSEs will reduce principal or interest rates on some loans and extend the terms of others. The program is an extension of the Hope Now alliance.

• The effort will target certain loans that are past due and will aim to bring the ratio of household debt to income for these borrowers down to 38%

• Citigroup is contacting 500,000 homeowners with $20 billion in mortgages during the next six months. About 130,000 mortgage customers are expected to qualify.

• JPMorgan Chase (and their Washington Mutual acquisition) announced plans last week to cut monthly payments by lowering interest rates and temporarily reducing loan balances for as many as 400,000 homeowners.

Let’s play mark-to-modified market, the home version:How can we determine the total decrease in housing prices based on these mods?

These are not home sales that are going to show up in the data of Case-Shiller, OFHEO, the NAR, or the Commerce Department.

How are we going to capture these price decreases?

I have been saying that home prices are way too elevated to eliminate much of the supply problem. This is going to be a giant deflationary shift in one swift stroke of the pen.

How can this be measured?


Fixing Housing & Finance: 30/20/10 Proposal (September 2008)


Fannie, Freddie Work on Mass Loan Modification Plan
Details to Be Unveiled by GSEs, Officials at 2 p.m. ET
WSJ, NOVEMBER 11, 2008, 10:24 A.M. ET


Citi, Fannie, Freddie to Halt Some Foreclosures
Rebecca Christie and Elizabeth Hester
Bloomberg, Nov. 11 2008


See also:
A Town Drowns in Debt as Home Values Plunge
NYT, November 10, 2008


Financial Turmoil Hurts Toll Brothers
WSJ, November 11, 2008


Citigroup Offers to Ease Mortgage Terms
NYT, November 10, 2008


Beazer Homes says home closings fell in 4Q


Fannie Mae Loses $29 Billion on Write-Downs
NYT, November 10, 2008


Category: Bailouts, Credit, Data Analysis, Economy, Markets, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

35 Responses to “Mark-to-Modified Market (the Home Game Version)”

  1. jmborchers says:

    Best thing to do right now is to not modify it so people can see it.

    People are so out of touch with reality right now.

  2. Myr says:

    I would be more comfortable with these moves to modify mortgages if house prices had reached a sustainable level. We are a long ways from there so this is just wasted money for those institutions and the nation since it’s our tax payer dollars that are sustaining these companies. I’m only getting more depressed as we throw money down a hole.

    How can we even be discussing injecting more capital into GM without demanding a restructuring? They are drowning in debt and our response is to lend them more money? Look at AIG. They should be selling off assets, but now they have 5 years to do it? Suddenly, all that money we have thrown at them is at much more risk. I’m all for the govt intervening in the market to facilitate the functioning of the market, but that’s not we are doing.

    I am losing what little confidence I had. When the govt’s money is gone, what will we have to show for it? We are going to be stuck with the same problems yet our own coffers will be strained even further. Barry, thanks for telling us to watch that PBS special last night!

  3. jmborchers says:

    I haven’t moved my earlier buys. I’ll go down with the ship if I have to. The market looking like it could take 600 points off in minutes at any time indicates it’s good to play the opposite side.

    Red Book sales down only 1% from last year is a good sign for the holidays.

  4. sellthekids says:

    interesting WSJ interactive graphic on the housing inventories:


  5. Archiphage says:

    I guess it depends on how granular the writedown data is on the financial statements. As someone who can’t be bothered to read a financial statement, I don’t really know where to look, but I would think you’d be able to arrive at a guess by looking at the difference in residential mortgage assets pre and post modification and averaging across banks and/or regions. Then again… I am incorrectly assuming that the bankers know what the ‘right’ values are. How are they even going to come up with the payment schemes? That stuff has always been means tested… and those means are themselves very uncertain these days. Is it just pay what you can when you can? Nightmarish.

  6. david says:

    How about a better question….how can we get on the bandwagon? I want MY mortgage to be written down another 15%

  7. jmborchers says:

    Very hard squeeze coming.

  8. Renting in Mass says:

    Here’s what I think should happen when I finally buy my first house. I should be able to pick any house I want. Then I’ll go to the bank, have them figure out what I can afford to pay, and they give me a loan based on that amount. The taxpayer picks up the tab for the difference between the sale price and my “affordable” price. Everybody wins! Well, except the taxpayer, but they’re doomed anyway. I realize I’m one of those taxpayers, but at least I’ll be in a sweet house!

  9. Mike in Nola says:

    Probably no statistically valid way to do it. Does it have to be measured directly? It seems that any measures that effectively change housing prices will change the selling prices that get reported.

    BTW, everyone (but Karen) enjoying all those ads for the hooker show tonight being pushed by the CNBC babes? Sweeps week? Certainly gives them a serious, businesslike look. I guess that’s one of the downsides of getting a job because you’re a babe.

  10. DL says:

    The Fed has granted two trillion dollars in loans to banks based on questionable collateral. When is the Fed going to apply the “mark to market” principal to the collateral that it’s received from the banks?

  11. DL says:

    BR @ 10:45

    “The GSEs will reduce principal or interest rates on some loans…”

    They should offer that deal to everyone, or no one.

  12. Aristotle says:

    Barry, I think you’re looking at this wrong, rewriting the mortgage doesn’t really change the house value. The house is worth what it’s worth regardless of the mortgage balance. Now admittedly when you’re underwater it increases the chance of walking away but I still think the house value is determined soley on
    selling prices. As another way of looking at it, when I have a negative amort loan and the balance increases
    does my house become worth more? No, if I pay all cash is it worth more or less than if I have 50% or 10% down? Nope. The net effect here might be to stop some of the decline as inventory floods the market but in the end it comes back to price vs income, i.e affordability and supply.

    Interested in your response if I’m off base,

  13. ogardatadude says:

    This goes along somewhat with a question I have asked Calculated Risk and The Phoenix Real Estate Guy. That is, Isn’t the current housing sale pricing mechanism (comparable sales) now antiquated not only by the ever falling prices but also these loan modifications. Shouldn’t these somehow be figured in? Neither have ever answered that question, maybe it isn’t valid, not sure.

  14. Steve Barry says:

    There are no shorts to squeeze…I say 840 on S&P breaks.

  15. Winston Munn says:

    Rest assured, none of this is being done for the good of the homeowners or the taxpayers. The reason is to stem the bleeding.

    It seems a little systemic panic has set in at the idea that houses may have much further to fall in value before prices stabalize. How much more ficticious capital is still hiding based on present valuations?
    What would happen if tomorrow all homes were suddenly priced at historic levels? How much ficticious capital would be wiped out?

    How much of the financial system is only vapor?

  16. Winston Munn says:

    Aristotle Says:

    November 11th, 2008 at 12:34 pm
    Barry, I think you’re looking at this wrong, rewriting the mortgage doesn’t really change the house value.

    @Aristotle – my thinking, as well. It seems the only change that would occur with these modifications would be in loan loss, i.e., the modifications create a loss that must be recognized.

  17. jrhyno says:

    So, of course, those of us who have played by the rules (buying the amount of house that we can afford), get screwed here. Somehow I’m not surprised, but quite unpleased nonetheless.

    In the piece, Barry posted “I have been saying that home prices are way too elevated to eliminate much of the supply problem. This is going to be a giant deflationary shift in one swift stroke of the pen.”

    Sorry to be terribly naive, but how will this be deflationary?


  18. rkinzer says:

    Citi is looking to 500,000 homeowners of which 130,000 will qualify? Wow– 26% of the 500,000 will be qualified. And what IS Citi’s total portfolio? There is a good chance that less than 1% of their portfolio will be effected/modified. This is just a media play to make the larger banks look appealing to the public. Fat and happy American’s will rest assured that their $700 balance checking account is with Citi Bank becuase Citi is helping the American public.

    As for house values– American’s would run up prices tommorow again if the loan products were to return. There is no value in homeownership anymore. People turn and burn properties in 2 years or let them foreclose as they have no repercussions other than a slap on the credit report. The media screams preditory lending, but has anyone ever thought about preditory buying. Yes, the homeowner has the financial stress of a foreclosure, but the banking institution still takes the losses. We are quick to forget that the BANK lent money to the borrower, and the borrower signed a promissary note to pay it back to the bank.

    If you really want to see house prices fall, crush all the banks and make people get hard money loans to 65% Loan to Value at 11%– all of a sudden that 5/1 arm that ‘jumped’ to 6.25% from 4.25% doesn’t look so bad.

  19. Winston Munn says:

    DL Says: “The Fed has granted two trillion dollars in loans to banks based on questionable collateral. When is the Fed going to apply the “mark to market” principal to the collateral that it’s received from the banks?”

    The Fed won’t even tell us what collateral it has accepted. Bloomberg is suing under Freedom of Information Act to force the Fed to specify.


    It seems to remain the land of the free and the home of the brave, our rulers feel we are required also to be the nation of the opaque, and the home of the uninformed.

  20. Bob_in_MA says:

    Myr Says: I would be more comfortable with these moves to modify mortgages if house prices had reached a sustainable level

    Exactly. You have people refinancing into guaranteed into FHA loans and their homes may lose another 20% over the next couple years.

    Am I missing something, or does Barry no longer attribute his quotes?

  21. AGG says:

    Sam Mathid in his essay at 321Gold.com says it best when he notes that “Nowhere is there reference to prior criminality and stupidity on such a grand scale. There is no historical precedent.”

  22. JT says:

    This is what frustrates fly-over America. We see these bailout and mortgage re-writes happening on the East & West Coast and other “hot” spots in the country. We wonder why and how it happens. Most people in this country try to live within their means. In fly-over America, this means a $16.00/hr job does NOT qualify you for a $400,000 mortgage. I suspect some one will post that I do not get it. People on the coasts have to pay more for housing. I suggest that people move to fly-over America. You can still buy a 3 bedroom, 2 bath house for less than $100,000 and it is not in a crappy part of town. We don’t reach the highest highs but we typically avoid the lowest lows.

  23. dead hobo says:

    This process will build a floor for falling home prices, or at least it should assist in slowing the decline. An excess of supply over demand is causing prices to fall. If fewer distressed properties are placed on the market, this should improve price stability.

    I suppose you can measure it’s effectiveness by seeing if prices appear to stabilize in a few months, or if inventories of newly placed ‘used’ homes on the market decrease. Or if foreclosures diminish relative to the number of people who go into the program.

    Of course, gas prices will be under $2 a gallon in a couple of weeks, well under $2 in low tax states. This will probably have a similar positive effect.

  24. Big E says:

    I don’t think this is going to “help” anyone – just prolong the bottom.

    Housing prices are still going to be falling, perhaps a little slower. But people are still going to end up underwater, and as unemployment increases and things get tougher, these people are STILL going to end up defaulting – except those defaulted houses are going to come back on the market at the lower “recovery” price, driving down housing prices further.

    Too many people are focused on the short-term and not focused on the “big picture”. What’s the trend? Housing is going down, and needs to continue going down until they become affordable. This whole mess started (and will end) with housing. Everything in between is just noise. The more the government tries to arrest this trend, the longer it’s going to take to reach the bottom.

  25. dafox says:

    Aristotle -

    The problem with not changing the price of the home is that the home price is only what you can sell it for – but how is that determined? Comps! So if the entire neighborhood bought at $600k 2yrs ago, but everyone had their mortgages modded to $400k, a new buyer (me!) cant get the same deal that everyone else got since comps for the neighborhood will show each home is worth $600k.
    Modding mortgages keeps prices inflated.

    My take on this:
    1. Each mod attempt comes with mandatory fraud investigation. If you are found to have inflated your income on your original loan, you’re prosecuted to the fullest extent (want to create jobs? here you go!)
    2. If you do get a successful loan mod, it shows as a sale on the MLS. This will help new buyers get the same deal as those who gambled and got bailed out. It will also help maintain the proper market correction speed. Without it, we’re kicking the market correction can down the street further and just making things hurt for longer.

  26. tenaciousd says:

    Renting in Mass, you’re my new hero. I rent out here in NC and I’d love to get myself in over my head on my first house with an automatic taxpayer bailout built-in to cover my shortfall. It’s so crazy it just might work! That’s change you can take to the bank, which is the only kind of change I can believe in. NC is a swing state now, so I bet we can get all sorts of sweet deals if we play our cards right.

  27. dead hobo says:

    Steve Barry Says:
    November 11th, 2008 at 12:36 pm

    There are no shorts to squeeze…I say 840 on S&P breaks.


    I’m not the technician you and others are, but volume seems light. There is no fear in the market. I think the market is falling just because there are no buyers. I’ll come in later in the week if it does fall as you think. But right now it’s too low to sell and too high to buy. Fortunately, I’m not a desperate hedge fund guru who has found alpha.

    I picked up some stuff Friday. I suspected a fall like this at the time, but didn’t care. It’s a good time to accumulate if your time horizon is a few months. Hedge fund selling is keeping the market distressed. Once it goes away, prices will go up a few percent and that will be the new bottom range for a while.

    Once the market breaks, I think it will look like 2004 when there were 4 decent tradeable peaks before the market started rising. I’m not smart enough to know when that will be so I’m just accumulating at the bottom and not worrying about the absolute bottom or the specific time. There will probably be a decent tradeable peak in a few weeks separate from the ones mentioned above, I suspect. I’m about 60% cash now, but will probably bring that to 50% or a little less if things firm up a little.

    It already looks like bottoms are forming in a few areas. Even the Japanese market is looking like it has formed a passable bottom. This is the first time in my life that the Japanese market looks good for anything. Since this market has always been inscrutable, I will not put cash there. But I do think it is an interesting observation.

    Utilities are forming an upward sloping bottom. Does anyone have an opinion of this sector? I have no experience in that sector and am thinking about putting some spare change to work. I would think that they have a captive market, their stocks fell in sympathy rather than because of lack of business, and there is a decent trade potential.

  28. ReturnFreeRisk says:

    What do u think of this argument?
    “price decline will happen anyway but govt intervention will prevent prices from overshooting from their equilibrium values”

    This idea is what is cirulating the halls of policy making agencies such as the ones sighted above. I have big problems with this:

    1) The idea that home prices have overshot on the way down is misplaced.
    2) The idea that govt intervention will prevent prices from overshooting is wishful thinking.
    3) Before the recession began, price/rent or price/income ratios pointed at about 35% over valuation. Is that reasonable? It was. With a nasty recession, rents and incomes are sure to decline, so add something more for that. Let us say 10-15%. It is the equivalent of Dr. Roubini’s argument that S&P earnings will decline so earnings used for valuation should be lower. In the extreme case, the earning power of financial industry in NYC has gone down substantially in the future. So equilibrium prices (in NYC) should be lower. Right?
    4) The world’s stock mkt wealth has been cut into half. So why should the houses be priced as if the S&P is at 1565?

    I think the equilibrium price is now ~ 50% of the peak. But who am I? Let the market decide.

    I think that manipulating market prices in a market as big (40-50 trln in the US) is impossible for the government. And yes, THAT IS what we are talking about. How much money do you need to corner and manipulate this market?

  29. Aristotle says:

    Winston – I agree that the banks have a write-down because the loan principal has dropped.

    dafox – I’m not completely following your point, BR said that the mortgage mods need to be reflected in housing prices, I don’t agree. The house is worth the same regardless of the mortgage amount. If we have the same house and mine is paid for and yours has the mortgage reduced does that make it worth less than mine? No, when we put them up for sale they should both be worth(sell for) the the same.

    You’re right, modding mortgages will probably slow the drop in prices but Barry is saying the values should be lowered to treflect he mortgage reduction.

  30. rex says:

    They aren’t writing down any principal; all they are doing is giving the homeowner a break on the interest rate, or extending the mortgage forever. This doesn’t affect the outstanding loan value, just the monthly payment (for the few who will qualify for this relief).

    What’s crazy is that this brand new plan remains completely voluntary (except for Fannie & Freddie, who have a gun to their heads). I can’t understand why the Treasury isn’t requiring the banks who are getting bailout money to participate in this plan, or even to go further and write down principal on at least some mortgages. I think they could easily identify a few million loans where that would make sense for the lender, borrower and the rest of us.

  31. Mook says:

    I’m with Winston and Aristotle on this one.

    The “giant deflationary shift” isn’t going to happen when these mortgages get written down – it’s BEEN happening all along, as the collateral behind those mortgages continues to fall in value. If my house is worth $100k less than it was two years ago, then it’s worth that $100k less regardless of whether I own it outright or am $100k underwater on a giant option-ARM mortgage.

    @Dafox – “The problem with not changing the price of the home is that the home price is only what you can sell it for – but how is that determined? Comps! … Modding mortgages keeps prices inflated.”

    Well, yes and no.

    I occasionally buy and sell things on eBay. Usually, before placing a bid on or setting a reserve price on an item, I check the ‘completed listings’ for similar items sold in the past month to see whether my bid or my price is ‘in the ballpark’.

    Let’s say that one day, unbidden, eBay went in and (retroactively) increased the final prices of all of their ‘completed listings’ by 50%. Thus a bunch of people over the past month bought and sold a given model of digital camera for, say, $200 but, when I check, eBay tells me that all those cameras sold for $300.

    Will new listings of those cameras suddenly start selling at $300 based on that one change?

    Maybe a handful of them will. However, a lot more often, the buyers will say, “300 bucks for that thing? Forget it, I’ll hang on to my old Pentax for a while.” And sellers will say, “I can get $300 for this? Sweet! I’m ditching this sucker right now!”

    Listing volumes would spike overnight, but sellers would be perplexed by how few bids come in. Eventually, they’d realize that buyers aren’t willing to pay $300 for that camera, and they’ll start dropping their prices until equilibrium sets in back at right around $200.

    Same thing would happen with houses. A few sellers might get lucky and nab an artificially inflated price for their houses based on those comps, but most of them would sit … and sit … and sit … until they realize that a buyer won’t pay more than $400k, and either drop the price or pull their house off the market. The dynamics of the market won’t (can’t) really change, whether the seller got a loan mod, bought the thing with cash on the barrelhead, or what have you.

  32. dafox says:

    Aristotle, Mook-
    Mook, I see your point – prices will fall back to affordable levels…eventually. Foreclosures are the gas pedal to the price correction – they are NOT the cause of the price correction.
    The problem is that we’re dragging out the price correction by modding mortgages and effectively keeping them a secret (hence my MLS suggestion).
    They’re not fixing the problem by keeping people in their homes and avoiding foreclosure. They’re merely delaying it. I’d rather get it over with.

  33. swartzfr says:

    Not sure these actions can be used to measure any ‘new’ market value. Some will have lower rates, some balloon payments, some balance reductions. Seems like it is meant to lessen the negative impact on the banks.

  34. DaveM says:

    If the reason this entire mess began was because a liability was dressed up as the ultimate user friendly asset, and now the downside risk is being minimized to slow the rush for the exits, the only possible conclusion to the mess is that, for a time at least, residential real estate has to be seen as the polar opposite…a terrible investment. Slowing normal market action will only hasten this emotional reaction. Ok, I am not the first to mention this basic market dynamic but the question demands to be asked : If saving troubled home owners from failure only worsens the perspective that homes are a good investment, doesn’t that mean there will be less and less investors willing to take the other side of the trade (meaning less mortgage origination)? How long till someone shouts in the back of the theater “We can’t possibly afford any more of these bailouts!” Answer: just as soon as the backroom campaign promises are fulfilled.

  35. jeffsket says:

    Ok, Barry, here is a VERY back-of-the envelope analysis, but it does show that this is a HUGE decrease in price.

    Let’s start with the Average median income. The data is at: http://www.ffiec.gov/hmda/censusproducts.htm#MSAincome

    I want to use the Los Angeles area because that is where I am from.

    The avg houshold income in the LA area is $59,800 annually…
    …which translates to a monthly pre-tax income of $4983…
    …which becomes an after-tax income (28% tax bracket) of $3587.76. This is disposal income.

    Now, 38% of this income represents the amount this household is “allowed” to pay per this article. That amount is $1363.35 per month.

    Let’s find out how much “home” this household “should” be able to afford given “traditional” lending standards of 30 yr fixed mortgage at prevailing interest rate (6.1%):

    Per Bankrate.com’s mortgage calculator, this household can afford a mortgage of $225,000. (http://www.bankrate.com/brm/mortgage-calculator.asp)

    If we consider that this home was purchased with no money down, then that is the current “value” of the motrgage/house.

    Per (http://www.housingtracker.net/) the median price for an LA county home is currently $389,000.

    The difference between $225 and $389K is a decrease in home “price” of 42% (!!!). So, with the stroke of a pen, the gov’t just cut house prices by over 40% by doing these adjustments. (At least in LA – other parts of the country will be quite different)

    I am sure there are multiple flaws in this simplistic analysis – for example, this does not take into account the effect of down payments. But I wanted to start somewhere since no one else has. Enjoy.