Mark Hanson of Hanson Advisors (via Barron’s) on why Loan mods are not the answer.

As the tables below show, loan mods seem to lead to subsequent default with distressing regularity.

They illustrate the fundamental flaw in the notion, widely embraced, not least by the Obama administration, that loan modification is salvation for troubled homeowners, beleaguered builders and lenders. Bull, says Mark:

“Loan mods are designed to keep the unpaid principal balances of the lender’s loans intact while re-levering the borrower. Mortgage modifications turn homeowners into underwater, overlevered renters for life, unable to sell, re-buy, refi, shop or save. They turn homeowners into economic zombies.”

Consider the tables below: On the left we see the re-default rates of homeowners who were current on their loans when they first defaulted (sounds odd, I know, but these tend to be people who can afford their homes but who subsequently ran into economic problems).  The data tells us how many of them have defaulted again 10 months after their loans were modified.

The adjacent table (at right) shows the same thing, only this time with homeowers who were seriously delinquent prior to loan mods. As you would imagine, their re-default rates 10 months  after their loans were modified are considerably higher. These are often the people who could barely afford their home (or not at all).

>

Loan Mods Default Rates

loan_-mods-20090710

>

Source:
What Has Sergey Wrought?
ALAN ABELSON
Barron’s, July 13, 2009

http://online.barrons.com/article/SB124726746692125697.html

Category: Bailouts, Credit, 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.

66 Responses to “How Often Do Loan Mods Fail ?”

  1. franklin411 says:

    Cram-downs are the only answer. It’s really quite ridiculous: Basically, a guy on a street corner (the banks) was running the old Three Card Monty scam (inflated housing appraisals). They spot a rube (borrowers) who is easily taken advantage of because he’s not terribly bright and somewhat greedy as well. The game is finally stopped, not when the police (SEC, FDIC, etc) finally expose the scam, but when the hucksters are unable to police themselves and start trying to kill each other (the 2008 bank panic). The hucksters are arrested and go to county jail, but they’re not doing any hard time (bankruptcy). When they’re released, they track down the rube and say “hey, you still owe us the money from all those games you lost. Pay up or we’ll have you arrested for default!” (foreclosures on inflated mortgages). The rube calls the police (government) expecting to have the hucksters arrested. Instead, he’s told that the huckster is right and if he doesn’t pay what he “owes” the scammer, he will be arrested!

    The moral is that the rube deserves to suffer some loss. He failed to protect himself against an obvious scam, both out of stupidity and out of greed. But the scammer knew what was going on. He consciously cheated the rube out of his money. Why should that result be legally enforceable?

    I think it shouldn’t, but as we’ve seen, cramdown will never get through the Senate. All of the Republicans and a good 40% of the Democrats are bought and paid for by the banks–Dianne Feinstein and Ben Nelson come to mind. IMO the President is trying to deal with the reality of the situation, which is that the Senate is the barrier to real change in America.

  2. uno says:

    More in today’s NYT on the mortgage situation, this from the perspective of the effects of the new (too tight) rules: Tight Mortgage Rules Exclude Even Good Risks

    Quotables:

    “No one is advocating a return to the lax lending standards of 2006, when buyers with no income or documentation could get loans. But many people say they believe lenders and the government, in correcting the excesses of that era, have gone too far in the other direction.”

    “The credit pendulum is stuck at ‘stupid,’” said Lou S. Barnes, an owner of Boulder West Financial Services, a Colorado mortgage bank.

    “Without further action, we’re not going to stabilize,” said Steve Murray of Real Trends, a Denver research group. “The real estate recovery will take 10 or 12 years.”

  3. Tracy says:

    I work for seven consumer bankruptcy attorneys around the country. I have prepared just under 500 bankruptcy petitions in the last year. The vast majority of debtors are underwater in their homes. I looked at the table provided in your blog post and was stunned to see the dollar amount of loan mods. Granted I am only seeing a small number of in-trouble homeowners, but I am seeing them in four areas of the country: Virginia/Maryland/DC, NY/CT, WI and CA (SD).

    Example: Countrywide has done $388 million in loan mods. That is a big number till you consider the portfolio size of Countrywide. Then, no so big. But there is another way to consider the number – divide the amount by the median prices of homes FOUR years ago (or 3, or even 2) Using 250,000 as a average loan amount, Countrywide did about 1600 loan mods. Taking the whole table (right side) and the number is around 27,400 loan mods or about 1.4% of the number of foreclosures (which I am estimating at 2 million). My opinion is that by the end of the 2007-2011 period we will see 10m foreclosures.

    Finally, that table totals about 6.847 billion in dollar value. How much value has residential real estate lost in the last 2 years, one to two trillion? 6.8 billion even if it represented a full forgiveness of the loan represents .68% of the one trillion loss. As suggested, those loan mods probably had little to do with principle balance reductions.

    I and many others argued for bankruptcy managed loan modifications as the best way to address the issue. Honest evaluations of a debtors financial condition and verified appraisals (yea, right – but at least there would be something contended) would probably get the best results IF modification was the goal. Credit card companies punish your credit score if you pay off balances – is there any reason to believe that mortgage lenders look at the same situation differently??

    I have been reading The Big Picture for at least 2 years. Always enjoy the information and insights.

  4. cvienne says:

    This is kind of OT, but not really as it deals with potentially the next version of the same thing.

    I’m going to post a link here:

    http://www.msnbc.msn.com/id/31862098/ns/business-small_business/
    Obama mulls opening bailout to small business

    Looking over this proposal to help small business owners, at first glance I’d be inclined to SUPPORT it. (does that surprise all of you out there who think I’m an Obama hater)?

    Let me preface this. I HATED the way the TARP got used to bail out Wall St. I feel the Banks simply hoarded the cash (and some houses – like Goldman Sachs are even trading and frontrunning with with).

    Small Business is a different story. I know Small Business owners who recently have received accelerated payback demands from their loans with the SBA (from the same banks like JPM & BAC that the government was bailing out with taxpayer money). It is crushing their business & adding to unemployment. Many will go out of business completely & end up having to default on their business loans. A TOTAL WRITEOFF (which eventually hurts revenue flow into the US Treasury), as well as swells the ranks of entitlement seekers.

    Therefore, I would be IN FAVOR of the President & his staff studying a plan that could use the Federal balance sheet to either guarantee or re-negotiate Small Business loans at favorable interest rate terms. (Maybe even ZERO INTEREST RATE) for a short period while the cash flow situation remains perilous (perhaps 18-24 months out).

    If it were myself in that predicament (as a SB owner), I would be willing to forego any and all tax breaks (and even go the opposite way), meaning, if I needed assistance to any onerous degree from the public trough, I would be assessed a REVERSE tax break, meaning I’d have to pay at a higher rate for a period until my debt was resolved.

    This is a “paper napkin” approach, and I’m normally one in the ‘SCREW EM’ camp, but the Small Business target seems very sensible, I would applaud the Presidents efforts if he could successfully move something in this direction.

  5. Bruce in Tn says:

    Franklin:

    Unless you want to further abrogate contract law….but why bother replying..Franklin fatigue..

  6. Winston Munn says:

    Franklin,

    Nice analogy but I think it misses out in one important factor of the psychological reasoning that allowed this scam to proliferate: the illusion of paper profit as actual wealth creation.

    In your analogy, the three-card monte scam artists sold the I.O.U.s to Wall Street, who then repackaged them as a bond-like MBS, had the junk rated AAA by their partners, and then sold these “investments” around the world.

    And everybody in the entire daisy chain took a slice of the fictional profits along the way.

    But the truth is without the FIRE economic model with its illusory vapor of paper profits as real wealth creation none would have been so quick to believe in the scam. If you had to “pay to play”, far fewer would have been bilked by the gamesters.

    Likewise, if the bill for borrowed government moneys had to be settled each fiscal year, the reality of debt as profit would have been apparent in crushing taxes. But when the United States can feign solvency and profitability by borrowing, it is difficult for the citizenry to realize that the money in its checking account has already been spent and is not truly available to service additional debt. The U.S.A. is now the greatest debtor nation in history – insolvent for all practical purposes – but TBTF in the worldwide globalization of economies.

    Truth is, we are all guilty to some degree for allowing this to occur.

  7. bergsten says:

    I would want to understand the terms of the loan mods, and the degree to which the loans were in default before passing judgement. It could well be that the mods are too little too late, “designed to fail” if you get my gist.

    Secondly, the “balance modified” numbers seem quite low to me. MSM would suggest that there are trillions of toxic loans out there — if so why are the aggregates so small? If WaMu’s loans were all in CA, its numbers could suggest less than 1,000 loans total, certainly less than 10,000.

    Finally, is “What Has Sergey Wrought” citing the wrong article? It seems to be something about Tina Fey’s SNL character, or somebody else I don’t know and couldn’t care less about.

  8. Bruce in Tn says:

    http://www.nytimes.com/2009/07/11/business/11nocera.html?ref=business

    From Treasury to Banks, an Ultimatum on Mortgage Relief

    “The subject of the meeting is going to be loan modifications. Specifically, the government is going to be asking — in none-too-friendly fashion — why the nation’s big servicers aren’t doing more to modify loans for homeowners who are in danger of defaulting on their mortgages. Back in the spring, after all, they all signed onto the administration’s new Making Home Affordable program, which uses a series of incentives — not the least of which is $1,000 to the servicers for every mortgage they modify — to help keep people in their homes and prevent foreclosures.”

  9. Bruce in Tn says:

    I like the idea of cram downs…

    Since our idiot car companies need help too, why not tell the parts suppliers they need to cut prices to the new car companies and Ford in half for the next 12 months? Just re-do the present contracts.

    Since California is bankrupt, just tell the state suppliers we’ll take the supplies and promise to pay you later….oh, wait..nevermind that one..

    Since AIG is too big to fail, we’ll take taxpayer money and bail them out…don’t see the analogy? “We” as your elected representitives in a representative democracy will cram down new taxes because we have decided to bail out these idiots…and with mortgage cram downs it is not even the government’s money (I know taxpayers who the money belongs to….) it is the company’s money…and the contract doesn’t exist between the government and the mortgage holder, it exists between the company and the homeowner…

    Since fewer people can afford college, I think they should cram down the salaries at state supported institutions of higher learning. A good use for the cram down…..

  10. uno says:

    Sales-tax receipts continue to go down. A form of taxpayer-on-government cram down?

  11. bergsten says:

    @uno
    CA solved that one — they upped the sales tax.

  12. uno says:

    Those inventive Californians…so solution oriented.

  13. Winston Munn says:

    Kalifornia seems to believe that issuing I.O.U.s will allow them to balance their budget without sacrificing any of the services the government now provides.

    The home state of Snow White believes in fairy tales – now there’s a shock.

  14. call me ahab says:

    Bruce-

    imo college is over-rated and the middle class think of it as a panacea- if only more people have degrees than more people will have better jobs- before long they will limiting janitor positions to a minimum of an undergraduate degree- preferably in sanitation science-

    it is all a big charade- the universities sell it as a dream- imo most of the classwork in the first 2 years could have/should have been learned in high school-

    if a person has a dream to be a dentist- then fine- go to dental school- if someone wants to be an archeologist- then great- get a degree in art history/anthropology then pursue a graduate degree in archeology- however-

    if little miss prissy pants barely got decent grades in HS- has no clue what she wants to pursue- is uninterested in learning-

    then she has no business being in college-

    full disclosure- I have a B.S. Finance- so I have no chip on my shoulder re higher education

  15. Lord says:

    Absolutely. Mods are not in the true interest of either borrower or lender because they attempt to maintain debt unsupported by collateral. They are an expensive means of deferring loss recognition for the lender and keep borrowers in an uneconomic situation that cannot be sustained. Better for both to face reality and write off the losses.

  16. VennData says:

    Let’s just assign everyone their share of the national debt and let them pay it off, return the government to a debt free state, GM-like.

    Then we can cut taxes to the extent of the “interest on the debt payments” we make.

  17. Onlooker from Troy says:

    uno

    The whole industry got lazy and relied either on the credit score industry to judge their borrowers or just let the borrowers themselves do their own underwriting (i.e. NINJA loans, etc.).

    They have completely “forgotten” how to do underwriting. They want some easy, formulaic way to judge borrowers (now that they have to actually have lending standards again; drat!), so they “don’t know how” to deal with unusual circumstances that require old fashioned underwriting practices.

    They are indeed, stuck on stupid.

    With that said, the effect this is having shouldn’t be overstated, IMO. It’s having an effect on the margin but it’s not the answer to the RE market’s problems. And instead of working to fix the problem, the industry is looking to the fed govt to throw some more money their way in the form of more tax incentives, etc. Why am I not surprised?

  18. franklin411 says:

    @Bruce
    I’m no lawyer, but IIRC it’s Contract Law 101 that a contract obtained by fraud is unenforceable.

  19. CNBC Sucks says:

    franklin = liberal
    Winston Munn = progressive
    Wunsacon = progressive
    Douglas Watts = progressive
    VennData = progressive

    Anyone who does not understand the distinction between a “liberal” and a “progressive” only has to read the differences between what franklin writes and what these other gentlemen write.

    The New Left is right. Everything else is wrong. Relative to the rest of the world, America is far right of center. America is a facade of Libertarian “free enterprise” with a massive underbelly of military-industrial, nuclear, oil, and Wall Street subsidies needed to maintain the illusion of wealth in this country but are otherwise largely useless to the rest of the world. America’s competitors combine some free market with some planned economy in the form of smart industrial policy to produce products that provide these nations a place in the world’s economic table other than its largest debtor. The American way of faux laissez faire economics is something akin to bringing a knife to a gunfight in the modern global economy; the national debt and account deficit are mere indicators of the shortcomings. Until Americans fully recognize and completely embrace the proper role of smart government in defining their future, and until they recognize the depth of their own troubles and give respect to what is happening outside their borders, and until they commit to beating their military-industrial swords into economic ploughshares, no amount of loan modifications, bailouts, IOUs, emo or indie, tattoos, booze, pot, or FWB sex will resolve America’s oncoming economic blight. You ain’t seen nothin’ yet.

    The blight will happen anyway, because of The Curmudgeon’s international wage arbitrage, but until all of America makes a sharp turn to the Progressive Left, the hole will just keep getting deeper.

  20. Onlooker from Troy says:

    When borrowers start walking away in sufficient numbers, the banks will come around to modifying principal instead of these modifications that just make debt slaves of people (or renters with all the responsibilities and liability of ownership). In the mean time many are taken through the grinder and faced with the decision over whether they should walk away or “fulfill their obligations.” It’s a very difficult place to be. Glad I’m not there. And I’m not talking about those who were greedy, irresponsible, etc.

    The banks would be much better off by just admitting to the losses and getting on with it, but of course mark to model allows them to pretend it’s all going to be alright soon, with valuations soaring back to bubble land in a year or two. And/or “earn” their way out of the hole, at the expense of everyone else. Like leeches on the economy.

  21. cvienne says:

    @Franklin

    I’m no anacronym specialist but IIRC can also mean:

    Interactive Illinois Report Card
    Image and Identity Research Collective
    Impedance Imaging Research Center (Korea)
    International Internet Recruiting Consultants
    International Inter-Society Research Committee (on Nuclear Codes and Standards)
    Internet Information Research Center
    Immunity and Infection Research Centre
    International Interdisciplinary Research Colloquium
    Inactive Item Review Code (US DoD)
    Iraqi Islamic Reconciliation Conference
    Isn’t It Really Cool
    IVF & Infertilty Research Centre (Calcutta, India)

    and MY personal favorite:

    IF I REALLY CARED (although for me it would be IIRFC)…

  22. call me ahab says:

    Lord Says-

    “Better for both to face reality and write off the losses.’

    exactly-

    a mortgage is a non- recourse loan- the best thing for the mortgagor to do is walk away from the home- issue solved- any subsequent loss is borne by the bank

  23. CNBC Sucks says:

    I neglected to include…

    Marcus Aurelius = progressive

    MA is a loner anyway so I guess a separate comment is fitting.

  24. uno says:

    @Onlooker from Troy:

    Be all of that as it may (and it may ‘not’), if qualified buyers can’t buy then we are entering truly interesting times.

    I don’t think you’ll find anyone to take the opposite side of the argument that unqualified buyers shouldn’t be buying.

    The best idea I’ve seen so far is Barry’s earlier argument for enabling balloon mortgages. That’ll still cause cash-flow problems for the banks, but mitigate a full-blown meltdown.

  25. Andy T says:

    VennData Says:
    July 11th, 2009 at 1:09 pm
    Let’s just assign everyone their share of the national debt and let them pay it off, return the government to a debt free state, GM-like.
    Then we can cut taxes to the extent of the “interest on the debt payments” we make.
    ~~~~~~~~~~~~~~~~~~~

    I have a better idea. Let’s just get our house in order next few years….

    1) Reform the health care/tort system in the US
    2) Resign our status as global super police
    3) Create incentives for businesses to come to the US and not leave the US (as is the current trend)
    4) Reform the tax the code for everyone (tax returns should be a 1-2 page deal for businesses and individuals)
    5) Slash energy imports

    Essentially, we need to make reforms that reduce the number of lawyers, accountants, and investment bankers. These groups, while necessary to some degree, act as barnacles on the hull of a ship…slowing the whole thing down. They serve has a huge TAX on all of us.

    If we do these things, then confidence will start to be restored and real economic activity will pick up. Then, we’ll eventually get some inflation which will automatically reduce our real debt levels….

  26. Dan Duncan says:

    To Bruce in TN…”Franklin Fatigue”…what a perfect description.

    To Franklin: If you want to make a stronger case in support of cramdowns, you’ll need to do better than the one dimensional Jack and Jill narrative of: Bank defrauded Borrower, so Bank should pay!”

    The main problem with the mortgage crisis was not active fraud. Yes, there was plenty of active fraud…but the most egregious examples came at the end of the speculative frenzy, like a last blow-out at the end of a long market rally.

    The real problem with the mortgage crisis was passive fraud, ie non-disclosure and NINJA Loans, etc.

    So what difference does it make? Fraud is fraud.

    On that note, you are correct, but meting out justice becomes more problematic when there is no clear, identifiable victim and no clear, identifiable malfeasance. [The operative words being "clear" and "identifiable"...I can't remember if it was Barry or Fleckenstein who coined the term "misfeasance"...which is quite apt.]

    All we know is that there is a large segment of taxpayers who did not try to speculate their way to prosperity, who now shoulder the burdens of this recklessness. Additionally, we know that many of the banks that played these games are out of business. But…believe it or not…it’s also a fair statement to say that many of the surviving banks were not duplicitous, nor did they defraud any borrowers. [Bruce in Tn asks some good questions in his retort to your knee-jerk cramdown solution. I'm curioius as to what your answers are...or does a Jack & Jill worldview preclude any nuance unrelated to the scintillating account of carrying buckets uphill and banks defrauding borrowers?]

    The mortgage industry took one straight from the playbook of the US Military on gays: Don’t Look/Don’t Tell. As a result, a hoard of passively fraudulent actors were spawned. Both Borrwers and Banks alike engaged in a game of non-disclosure with intent to deceive. Only, the one being “deceived” (the banks by accepting Stated Income as Proof of Income) actually encouraged the deceit.

    Whodda thunk it? Self-Induced Fraud…And why open one’s self up to being defrauded when AIG is on your side…just waiting to reimburse you should you ever be a victim. Only, in this Dime Store Mystery, self-induced fraud turned out to be a Murder by Suicide.

    So are cramdowns necessary? I agree, as I don’t see any other solution (although I’m certainly open to others’). But we’re not going to reach any meaningful conclusion until this nation makes a choice as to which innocent group should suffer more: The non-reckless segment of taxpayers or non-reckless segment of banks? We won’t even get to that point, however, with Dr. Seuss soundbites of “Banks defrauded Borrowers, so cram it down!” as the main source of justification.

    Franklin Fatigue….belongs right up there with MisFeasance.

  27. cvienne says:

    @The Great CNBC Sucks

    You need 2 break that down further…

    …ie…cvienne is a libertarian/emo or indie…

  28. Dan Duncan says:

    Speaking of fatigue…

    What a ridiculously long post! Sorry about that. I guess I had to vent..

  29. cvienne says:

    @Andy T (1:32)

    I’m with you on all counts…I’d add a #6 to that, the framework I articulated above…

    http://www.ritholtz.com/blog/2009/07/how-often-do-loan-mods-fail/comment-page-1/#comment-192339

    I just read this new proposal today, and I think it has the makings of a winner…

    I can’t tell you how many Small Business owners would consider this a lifeline…And I think help such as this would be 1,000 times more productive than addressing the home loan modification issue…

    What will happen is this:

    - Some businesses will fail anyway because their business model was stupid to begin with. But we don’t want to put out of business all the good ideas right now that are being crushed by the bad economy…

    The Administration should get behind this…Consumer confidence would pick up DRAMATICALLY…

  30. CNBC Sucks says:

    @ cvienne: I like the flame broiled taste.

    @ Andy T: I always had you down as “finance professional”, but that #2 of yours alone puts you left of even my entire rant. You can get shot for expressing such a radical left-wing idea. You crazy!

  31. hue says:

    as someone who was in the mortgage business, i can tell you that that list is a who’s who’s of subprime lenders. the top ones on the list, Cwide, Wells F, and Wamu of course had A-paper, Fannie and Freddy products, but i would bet that the loan mods were mostly sub prime. Those three had huge subprime businesses. Wamu sort of specialized in all kinds of bad subprime products, up to 100 loan to value.

    the whole pitch of subprime originators during that time is that you (the homeowner or borrower) are currently subprime, so you we these loans for you 3/27 or 2/28, those are the subprime arms. Then before the arm adjusts, you would refi into a better loan, a Fannie Mae, 30-year fixed, as your credit improves. the problem however is that there scores don’t improve because those dings on the credit report are not fixed. some people may have been able to refi down the road (or sell the house) when house values will still on the rise, once that stop, the music is over. those subprime rates during that period where high, higher than the lowest Fannie 30-year fixed. once the arms adjust, those subprime rates probably shot up into the teens.

    No amount of mods will make the payment affordable for those subprime loans. Some people are always subprime, not because they once had gone credit and lost their jobs and they fell behind.

    There are programs of modifying Fannie Mae loans. People who had excellent credit and bought during the boom and now are in trouble, those kinds of mods might have different results. The stats should n be separated to see how many the modifications were subprime. You can’t make a blanket statement, or use those statistics, that most mods are no good, unless you can find out which kind of original loans were modified.

  32. Tom K says:

    The loan mod story is about as shocking as a government study that reports pig poop stinks.

    And I wish some of the comments above would be accompanied by violins – as I read about the poor, stupid, greedy “rubes” who got tricked by the diabolical banks. The same mentality that got these rubes into houses they can’t afford is the same mentality that got people to vote for free/low-cost heathcare, green jobs, more govt. services, etc. This is all from a government that has $12 trillion it debt.

    It’s the same mentality that made the Federal government a majority owner in an automobile manufacturer, or made government believe they can change global temperatures by forcing their citizens to use higher cost energy.

    Each American’s share of the national debt is almost $38,000, and this administration has only begun to spend. Rubes believe government can and should do more, and can do it all without a price.

  33. Onlooker from Troy says:

    bergsten

    The article is the right one. You have to go to the very end of it to see the part referenced here. I too was initially befuddled by the link, but found some entertainment in it, then saw the end part about the loan mods.

    Cheers

  34. cvienne says:

    @The Great CNBC Sucks

    “but that #2 of yours alone puts you left of even my entire rant. You can get shot for expressing such a radical left-wing idea. You crazy!”

    Here’s where it gets murky in the ‘classification’ game…

    I’m on Andy’s side on that one (a notion I wouldn’t have considered even a few years ago)…

    The BULK of the money we could probably save would come from that notion while we put our financial house in order…

    Desperate times call for desperate measures…

  35. hue says:

    sorry for the typos.
    back in the hey day, you could come out of a bankruptcy and immediately get a mortgage with Long Beach, Wamu’s subprime arm. I can’t remember exactly, but you may be able to get 100% financing even with a bk on your record. if not 90%, 10% down, for sure.

  36. DL says:

    The loan modification program makes sense from a political perspective.

    Push problems into the future. That’s what politicians do best.

  37. call me ahab says:

    why cramdown at all?

    to what end- so someone can stay in their house? It is guaranteed that the creditor will report on the credit report that “creditor settled for less than amount due” if cramdown occurs-

    the logical thing for someone to do is a “deed in lieu of foreclosure”, pack up their stuff and rent somewhere-it’s a house that they’ve been in a few years- how attached to the house can they be-

    a mortgage is a “NON-RECOURSE LOAN”- the borrower CAN WALK AWAY- so why not that? There are houses for rent all over the place-

    And when i hear about families being kicked out on the street- or that they are homeless- I laugh my ass off- because that is not reality- people just move into something more affordable- end of story-

    just remember- the homeowner is in control of their own destiny- don’t negotiate with the bank- let them have their over-leveraged asset back- and then push on- it’s not the end of the world

  38. CNBC Sucks says:

    Andy T, who is one of the best “serious”, on-topic posters on this blog, lost all credibility with me with his #2. Despite my left-wing ideas, the registered Republican in me will have to call him “Krazy Kommunist Andy Taboo”. Geez man, expressing THAT idea under your own real name? Even Obama couldn’t even suggest something close to that. Did you see what happened to Kennedy?

    cvienne, if you are with Krazy Kommunist Andy Taboo on #2, then you crazy too!

  39. DL says:

    CNBC sucks @ 1:57

    I could go along with a significant reduction in military spending if it were part of a package to dramatically cut federal spending overall. And that, of course, would have to include big cuts in entitlement spending.

    (My #1 priority is economic growth).

  40. cvienne says:

    @CNBC

    OK then fine…Let’s change the parameters…

    Screw being the POLICE FORCE…Let’s just be IMPERIALISTS and get on with it…

    We’re in Iraq…GREAT, let’s annex the oil fields (and invade all the surrounding countries as well)…

    We’re in Afghanistan…Let’s just take over the opium fields and sell the herion ourselves on the Hong Kong market…

    Oh wait…SURE…Putin would have something to say about that…

    But can’t everyone see that Russia is just playing us out for what we played them out back in the 80′s?

    We made them broke…now they can sit back and watch us go broke…

    He who laughs last laughs best…

  41. One of the problems with mods is once people see others getting mods, they will intentionally default as well. This isn’t a problem with foreclosure. People in that situation lose the house. But once others get the idea that they can keep the house and reduce payments the threat of strategic default rises.

    The NYT article defines the problem well, that these are loans that were never underwritten now being underwritten. Underwriting is a time consuming and labor intensive process. I also suspect that the servicers and investors aren’t liking the answers they get back in regards to cash flow. I’m sure any reasonable Net Present Value test would have the likelihood of redefault factored in. So an investor gets discounted cash flows with some factor of redefault or a lump sum that might be 30 cents on the dollar. The cents is looking awfully attractive at that point.

    In places like Southern California I don’t think you could foreclose too much. Renters are the majority of the population in places like LA County. There is tremendous demand for homes. Foreclosing on the financially weak and replacing them with the stronger borrowers would work here. In places like Michigan and Ohio, with little to no available pool of buyers I would suspect modifications is the answer. The real point is it isn’t the governments job to decide which is the best way for the investor to lose their money. The government is jumping in an redefining contracts between servicers (trying to bribe servicers to lose the investors money and give them legal cover to do so) and investors and borrowers and servicers, it is wrong.

    I thought Lord put it perfectly:
    “Mods are not in the true interest of either borrower or lender because they attempt to maintain debt unsupported by collateral. They are an expensive means of deferring loss recognition for the lender and keep borrowers in an uneconomic situation that cannot be sustained. Better for both to face reality and write off the losses.”

    They should just take off the foreclosure time limit for FHA (possibly add a higher insurance premium) and keep foreclosing on as many borrowers as the investor sees fit. The market would explode with activity. It would be the boom all over again, just at a lower price point. The foreclosed on borrower would essentially get a loan mod, it would just be on a different house with full doc underwriting. It seems like a much better way to go about the whole thing.

  42. CNBC Sucks says:

    Andy T, cvienne, and DL – all crazy. Didn’t you see how even President Eisenhower waited until his last day in office to warn about the military-industrial complex? I mean, I talk about it too, but people don’t take me seriously.

    I better enjoy my summer day before the NSA shuts down this blog. You guys watch yourselves.

    Crazy…

  43. Andy T says:

    CNBC Sucks. Ha! Yeah, that’s why I try to stay anonymous….

    I’m an admitted Ron Paul lover. I disagree with some of his ideas, but resigning our role as global superpolice and abolishing various governmental departments (Homeland Security/Education/etc, etc, etc…) are ideas that I wholeheartedly stand by.

    In terms of “Mortgage Mods”….it’s in the banks interest to keep you in debt. The best thing people can do is just walk on the loan/default. The banks will be forced to reduce/write off the debt one way or another. Some of the best solutions I’ve seen are where 3rd party investors come in to buy the house and then rent the house back to original(defaulted) tenant. Of course, the 3rd parties are only buying the houses on the cheap. So, the banks are going to have eat it.

  44. Andy T says:

    cvienne. Agree with you that something needs to be done with small businesses who need legitimate funding for legitimate business ideas. With the banks enduring a credit crunch and the shadow banking system of securitization collapsed, there are definitely good business ideas out their that need some assistance. That’s one of the issues in a credit collapse–even good businesses get shut out.

    Of course, the big problem is the politics of it all. Who gets the help? Will the “underprivileged” urban areas receive the assistance or will bigger local donors get first dibs at the trough. Or will the money go to the best use of capital…The very best business ideas that are going unfunded? Unfortunately, I don’t think the U.S. government would make for the best banker/lender. We might end up with a bunch of lousy businesses getting the money in Barney Frank and Nancy Pelosi’s neighborhood. The good news is there are plenty of unemployed bankers on the street who might be of assistance screening applicants.

  45. Onlooker from Troy says:

    We’ll get to the point that you want to see ahab (folks walking on their underwater homes). It just takes a while for this to sink in and for the mindset to change.

    When people get to fully understand their obligations and options, and deal with it in a rational, objective way, unfettered by emotions and their understandings of moral obligation, they’ll walk in droves. It’s starting as a trickle, but it will ramp up in a big way, soon, IMO.

    And eventually I hope that we’ll all understand that the best way out of this is to recognize the losses, with defaults, bankruptcies, foreclosures, etc. Instead of taking on more debt to push the problem out further, creating zombies everywhere.

    I know that it has taken my a while to reach this point as a person who is not in trouble with my house, has no other debt, etc. The initial reaction is to say, “screw ‘em”, debtors prison for them all, etc. It’s tough to get past those feelings and thoughts for those who’ve watched this develop, waiting for the day when we’d be vindicated for staying out of debt and not succumbing to the siren song of consumerism.

  46. call me ahab says:

    onlooker-

    I’m with you- I owe very little on my house- it’s almost paid for-

    however- what i am trying to get folks to understand is that they have a very simple decision to make- can they afford the house- no? are they substantially underwater- yes? then the decision is quite simple- you have a non-recourse loan secured by an asset- hand the asset back- and find somewhere else to live-

    I just don’t see where the quandary is- as far as debtors- I understand that they took a risk and lost- greedy possibly- naive probably- happens all the time- people get caught up in the hysteria- fortunately- it is the bank left holding the bag- they are the experts and they are the ones who advanced the loan- in many cases @ 100% value for an asset that can just as easily go down in value as go up in value- the banks made a bad decision- and they will have to absorb the losses

  47. bergsten says:

    I’m not advocating anything whatsoever here (so you can file me into any ideological bucket you want).

    So anyway, questions I’ve never seen broached, let alone discussed…

    Circumstances would suggest that the mortgage crisis was precipitated by teaser rates resetting, due to either “interest only” loans starting to collect principal, or “fixed-for-a-short-period-of-time” loans going to (higher) variable rate. If true, this would imply that those holding such loans were in fact able to make payments up to the point of the reset.

    SO (question #1:) WHY WEREN’T THE TEASER TERMS SIMPLY EXTENDED?

    Seems to me that some money coming in is better than this massive disruption to the entire financial sector. Can you tell me that all of these loan returns were running at a loss for three to five years? If so, what morons bankrolled them?

    Everybody puts all of this down to chiseling and idocy. Are we in fact that crooked and stupid?

    SO (question #2:) WHO STOOD TO MAKE OUT BY NUKING THE REAL ESTATE MARKET?

    Inquiring minds (who should be out doing somthing healthy instead) wanna know.

  48. willid3 says:

    i suspect that the home crisis is still to come. once the majority figure out that their homes are worth less than their mortgages they are gone (and some of these aren’t living in them. they rent them. and that means renters aren’t safe either. and they have less of chance to know whats coming until the constable/sheriff shows up). and then the real mayhem will happen as those that wrote the loans have to take the losses, and the owners of those MBS are also in for rude shock when they find out how little they are worth later. but hey houses will be much (lots even) cheaper.

  49. Onlooker from Troy says:

    willid

    Agreed. People already know that they’re upside down. But when they come to the realization/understanding that they can walk on it and be better off in the long run, and that it’s the rational thing to do, the stampede will start.

    And to ahab, most people just don’t have that understanding of the situation. They approach it from the perspective that they want to fulfill their obligations. They were raised to pay their bills, not bolt on them. But they don’t understand the nature of the mortgage loan and the legal niceties, or the legal relationship with the lender. Everything you say is correct, but it’s not widely understood; yet. It just goes against the way people think, for the most part. And therefore it takes time to change that mindset. We’re starting to see this come out in the MSM so it will sink in soon. And of course many more are losing jobs or income and just can’t do it anymore.

  50. Onlooker from Troy says:

    ahab

    I don’t frequent the personal finance blogosphere these days, but maybe I’ll give them a run through soon. IMO, when you see this (that walking on the mortgage is the rational thing, etc.) start to appear there, you’ll know that it’s sinking in. They reflect the conventional wisdom of the day, IMO. And are probably on the leading edge of it. They’re not usually much different from what you’ll see in Money mag, etc., but they are more mainstream, and so reach more of the masses, especially lately, I would imagine.

  51. cvienne says:

    @Andy T

    “We might end up with a bunch of lousy businesses getting the money in Barney Frank and Nancy Pelosi’s neighborhood.”

    You know Andy, if “votes” is what they’re after why not think outsede the box…

    I mean, Pelosi & Frank probably already have their re-elections locked up…Why not spread the money around to some Republican oriented districts to swing a few votes the other way…

    Even James Carville might like that idea…

    In any case, it’s clear that simply taking care of BIG BUSINESS who funded their last elections isn’t going to help anyone in the long run…

    - The banks have taken the money and either split ot just lined their pockets.
    - Industry responds by firing more workers and taking care of their shareholders.
    - Bailing out homeowners is exacerbating the problems with that market.
    - Bailing out the unions doesn’t help anything but keeping payrolls inflated at the expens of the taxpayer.

    Good ideas for Small Business is what’s going to carry us out of this thing (if there IS GOING TO EVER BE a carrying out)…

  52. Transor Z says:

    Are loan mods defined in the article? What are the new terms? (I’m not a subscriber so sorry if it is included in the Barron’s piece.)

    Also, what’s the default rate for people who can’t afford their mortgage — 100%? Keeping 50% of people in their homes and current on new terms ain’t necessarily bad if you have a baseline default rate to compare it to.

  53. Christopher says:

    Stop all the federal bailouts/”stimulus” crap….make it clear that nobody is TBTF
    Freeze all fed hiring except for military inductees
    Stop any foreign aid that isn’t being used to feed/clothe/basic healthcare
    Close all overseas military bases
    Stop all agricultural subsidies
    Raise SSI age to 70 and eliminate the salary cap on SSI tax
    Raise ciggie/alcohol taxes another dollar or two
    Legalize marijuana and tax accordingly
    Put in term limits for Congress Critters
    Ban all DC corporate lobbying
    Put the Glass-Steagall Act back into place
    Lower top corp tax to 25% and make it clear that offshore banking/tax evasion will put you in prison

    It would be start…

  54. Christopher says:

    Cramdowns punish the folks who did/are doing the right thing. I buy within my means and pay as agreed…and my neighbor gets their mortgage reduced because they can’t make the note.
    So what stops me from defaulting on my mortgage to get a cramdown too?? Where does it end??
    How will that help the market?

  55. Bruce in Tn says:

    Christopher:

    “Where does it end?”….yes, exactly.

  56. Pat G. says:

    Only one word comes to mind when I look at those two charts; FUGLY!

  57. wunsacon says:

    Reading comments in reverse order…. I vote for Christoper @ July 11th, 2009 at 5:11 pm.

  58. alfred e says:

    Christopher gets my vote for everything except raise SSI to 70.

    Somebody’s got to have some money to spend to fuel our consumer economy.

  59. Winston Munn says:

    Is Tom K the ghost of Reagan past?

  60. danm says:

    The moral is that the rube deserves to suffer some loss. He failed to protect himself against an obvious scam, both out of stupidity and out of greed. But the scammer knew what was going on. He consciously cheated the rube out of his money. Why should that result be legally enforceable?

    ————
    I’m conservative. I buy a smaller house than I can afford in a less posh neighborhood where schools are not as good. I still end up paying twice the amount for my house because of the bubble which has propped up all real estate, smaller houses even more percentage wise. I can always make my payments because I was financially responsible.

    But thee goes Joe Wannabee who buys bigger than he can afford. Falls behind and gets a cramdown so gets his Mcmansion for cheap while I’m stuck making my full payments in my dinky house. Plus I have to pay for these cramdowns because the “rubes” don’t end up paying for these losses, the averegage citizen does which each bailout.

    And this does not create some kind of social upheaval how?

    I have a better idea. Why don’t the delinquent in good neighborhoods switch houses with the solvent?

  61. danm says:

    When borrowers start walking away in sufficient numbers, the banks will come around to modifying principal instead of these modifications that just make debt slaves of people (or renters with all the responsibilities and liability of ownership).
    ————–
    And then they’ll be stuck modifying the loans of the solvent also.

  62. Bruce in Tn says:

    danm:

    This is the kind of logical thinking that has evaded the new administration. My point above is this is a contract, between two parties, and government intervention into the contract won’t help.

    ….And people are ACTUALLY WONDERING why new credit seems so hard to originate…why, I just for the life of me can’t see what the problem might be????

  63. danm says:

    IMO, cramdowns won’t work because there will be so many that we can’t realistically expect them to reflect market values.

  64. [...] 7.  How Often Do Loan Mods Fail ?  (look at charts from Barclays Capital) http://www.ritholtz.com/blog/2…..mods-fail/ [...]

  65. DeDude says:

    The critical issue is how you modify the loans. Because most modifications so far have been done by banks to the advantage of the banks I am not surprised that those will go through cycles of re-modifications. The banks will try to squeeze as much as possible out of the unsophisticated consumer. They do the same thing with credit card defaults. Their programs are not guided by a realistic approach to “saving” the consumer – it is guided by sucking as much out of the borrowers, as a group, as they can. I suggest to all that are under water on a mortgage and getting in trouble, to completely stop paying, fight eviction while you save some up money (no monthly payment), and when you finally get kicked out, pay a 3 month deposit and get into a nice rental. If the banks don’t give a sh*t about you ,why would you give a sh*t about them?

  66. [...] From: How Often Do Loan Mods Fail ? | The Big Picture. [...]