“The choice we appear to be making is trying to modify our way out of this, which has the effect of lengthening the crisis. We have simply slowed the foreclosure pipeline, with people staying in houses they are ultimately not going to be able to afford anyway.”

-Kevin Katari, managing member of Watershed Asset Management, a San Francisco-based hedge fund


I have some good news and some bad news for you:

The bad news is the $75 billion HAMP program to protect homeowners from foreclosure has been widely pronounced a disappointment. The good news is that more than a few mainstream economists — and even some policy makers — are slowly being recognizing that it has only delayed the inevitable. We may end up with something more functional as a result.

Some of this is discussed in a front page NYT article. It echos what I have been writing for 2 years now — that the mortgage modifications and foreclosure abatements programs are counter-productive.

The $75 billion program Making Home Affordable:

“has lowered mortgage payments on a trial basis for hundreds of thousands of people but has largely failed to provide permanent relief. Critics increasingly argue that the program has raised false hopes among people who simply cannot afford their homes.

As a result, desperate homeowners have sent payments to banks in often-futile efforts to keep their homes, which some see as wasting dollars they could have saved in preparation for moving to cheaper rental residences. Some borrowers have seen their credit tarnished while falsely assuming that loan modifications involved no negative reports to credit agencies.

Some experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.

Mr. Katari contends that banks have been using temporary loan modifications under the Obama plan as justification to avoid an honest accounting of the mortgage losses still on their books. Only after banks are forced to acknowledge losses and the real estate market absorbs a now pent-up surge of foreclosed properties will housing prices drop to levels at which enough Americans can afford to buy, he argues.” (emphasis added)

That sums up the situation perfectly. I am a “rip-off-the-band-aid-quickly” kinda guy, and what we are doing instead is peeling it off as slowly as possible, lengthening the pain, while only delaying the inevitable.

As we have long argued, national home prices remain too elevated for a healthy real estate market; The cheaper properties — primarily distressed units, foreclosures and short sales — are what is driving the bulk of real estate transactions today.

Why so few get this is simply astounding.

Prices should be allow to normalize through ordinary foreclosure processes. Banks should be compelled to write down bad mortgages. Underwater borrowers should be given the option of a cram-down or a foreclosure.  I favor sharing the write-down between the borrower and lender, with a zero interest, 10 year balloon payment for a chunk of the write down (A modified version of our 30/20/10 proposal).

For more details, I have to go to chapter 21 of Bailout Nation, titled The Virtues of Foreclosure:

“It’s not that people are unwilling to buy real estate in the United States; it’s that buyers are now unwilling to over pay.

And therein lies the heart of the problem with most rescue plans. They are designed to prevent the continued downward spiral of the housing market, which unfortunately is precisely what is needed. The artificial demand of the ultralow rates and lax lending standards sent prices to unsustainable levels, and put millions of people into homes they could not afford. The markets are correcting these excesses as people trade out of those homes. It is a classic unwind of a bubble.

In much of the country, home prices remain too high, and the over priced homes are not moving. That’s reflected in the huge inventory overhang of unsold homes. (See Figure 21.4.) And the inventory data of homes for sale does not include the shadow inventory—all of the homes purchased as investments, by flippers, as second homes, or as rental units. These owners are waiting in the shadows for the opportunity to get rid of their properties. Any improvement in the real estate market is likely to bring forth this additional supply.

Until prices revert back toward historical nor ms, the excess inventory will not be removed, the foreclosures will not stop, and the total sales will remain depressed. The sooner Washington, D.C., figures this out, the better off the economy and U.S. homeowners will be.”

The healthiest thing we could do would be to:

1. Allow foreclosures to proceed normally;

2. stop subsidizing purchases at elevated prices;

3. force banks to take writedowns of bad loans;

4. do a “shared pain” cramdown where both the borrower and lender split the loss  of an underwater mortgage, replacing the old original loan with something more sustainable.

We could also bring rates to more reasonable levels — say 2% from 0% — to further stop the subsidy and normalize prices. I am less confident this is likely anytime soon.


Fixing Housing & Finance: 30/20/10 Proposal (September 22nd, 2008)

$15,000 Home Buyers Credit Costs $292,000/home (October 22nd, 2009)

U.S. Loan Effort Is Seen as Adding to Housing Woes
NYT, January 1, 2010

Category: Bailout Nation, 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.

43 Responses to “Stopping Counter-Productive Mortgage Mods and Foreclosure Abatements”

  1. DeDude says:

    I agree with you in general about what must happen, including that the irresponsible lenders and borrowers have to share the pain. Part of the problem now is that the irresponsible lenders are refusing to take their fair half of the losses. Because they are allowed to use fuzzy accounting to hide their loses (as long as they don’t realize them) it is better for them to hold out on the borrower and hope that either he/she or the government will make them a better deal. We need the courts to have the power to do cram downs for owners who cannot afford their houses.

    But I disagree with the “ip-off-the-band-aid-quickly” approach. The total damage from “rip-off-the-band-aid-quickly” is a lot worse than from a “slow-but steady” correction to the normal. If I had no savings and a debt of say $12,000 and was told I had to pay it in 2 days, I would go bankrupt with all the associated costs and losses. If I was told I could pay it over a year I could do it (and all the pain and loss associated with bankruptcy would be avoided). We have to get to the point where the median family income and median home price have a reasonable fit, but delaying that process has some substantial benefits for society and individuals. The only people who will lose anything from a slower process are the vultures who feed on other peoples pain and losses.

  2. JustinTheSkeptic says:

    I like your “shared pain” cramdown idea, but even then how does one know that they have paid anywhere near the equilibrium price?

  3. johnborchers says:

    We can’t rip off the band aid because the banks are broke. They need Citi and Bank Of America (for example) to be able to continue to sell stock and bonds to cover the losses over time and to try to continue to operate for the sake of the rest of the economy.

    The data is very clear, but I’m unsure why people don’t see it yet. Take a look at BAC’s price to book versus P/E ratio. You could use trailing or forward P/E it really doesn’t matter too much. A typical price to book for a bank has been around 1.5 recently. A typical P/E for a bank has been around 10. So then ask yourself why does BAC and many other banks have such a huge disparity between the price to book and earnings coming out of the bank. It could only mean that one of the statistics is wrong and I think we all know which one that is. If we use Barry’s method of ripping off the bandaid quickly we could come to a logical conclusion that losses were taken aggressively and the banks books are straight and earnings could go up largely next year. But, that’s not what we are doing. We are taking the long slow road. Then what does that mean for the major banks like BAC and C next year? Of course, you could only come to the conclusion that it means more losses and analyst projections for BAC at 0.84 EPS for Dec 10 could only be a complete fairy tale. I have BAC puts for May 10 at $10 strike. I expect BAC to be below $10 by then. Actually all of the banks projections for estimates of 2010 earnings I expect are around 50% too high.

  4. CTX says:

    now why did they wait till now to print that story? they didnt feel like going against obama then but now they print it?

    Changing the subject – do you agree that Tobins Q shows that stocks are 40% overvalued and do you subscribe to that view?


    BR: Tobin’s Q is no a timing tool — its early by as much as 2 years

  5. franklin411 says:

    The only reason to “rip the band aid off quickly” is if a person is looking to the housing market to drive a recovery. That’s a ridiculous notion, imo. The recovery is being driven by a return to rational levels of investment and consumption, by consumers, businesses, and the government after decades of disinvestment. A return to prosperity requires a re-jiggering of the economy away from the disastrous policies of the past, which created the 70% consumption economy we have today, and towards production and manufacturing once again. Housing is never going to be anything more than a tiny portion of that. And if we made stabilizing housing quickly the sole focus of our economic policy, we’d lose our final opportunity to reverse what everyone agrees has been a disastrous course for the United States: the scrapping of our manufacturing economy in favor of a Ponzi-scheme economy based on minimum-wage Wal-Mart workers buying and sellingn Chinese-made goods to each other based on credit.

    Alexander Hamilton said it best in 1791:

    “Not only the wealth, but the independence and security of a Country, appear to be materially connected with the prosperity of manufactures. Every nation, with a view to those great objects, ought to endeavour to possess within itself all the essentials of national supply.”

    A nation that consumes rather than produces is, by definition, a slave nation.

  6. LLouis says:

    Barry, does Obama, Geitner or other government leaders have talked about your 30/20/10 proposal or other proposals, is there anything that came out in the media about a leader or an official rejecting alternate proposals like yours ?
    It seems to me, in this time of unprecedented financial crisis, they should try to think out of their own box, and use the vast brain power available to them in the U.S.. The people that make sense are on the sidelines watching and commenting the chosen insiders wrong strategies.

  7. zzzzmd says:

    “Not only the wealth, but the independence and security of a Country, appear to be materially connected with the prosperity of manufactures. Every nation, with a view to those great objects, ought to endeavour to possess within itself all the essentials of national supply.”

    A nation that consumes rather than produces is, by definition, a slave nation.

    No truer words spoken
    We sent a man to the moon and back on vacuum tube computers the size of refrigerators (in 10 years), which was the forerunner of our present missile, satellite communication technology.
    Why we create money, instead of creating new more efficient ways to use energy in the next 10 years, just to prop up bloated banks, a housing market that is overinflated, and so forth, just defies my understanding of both the republican and democratic leadership of the country. We are doomed if the only innovators are of financial instruments of one kind or another.
    The world has always been led by those countries with a real tangible item/food source/weapon/energy use/technology superior to rest. (see industrial revolution, technology emergence/ etc over the course of history)
    Gold/money ownership does not convey real power
    See history of Britain/Spain etc.

  8. Greg0658 says:

    I’m gonna post my gut response and then re-scan ..

    I can hardly wait* for the orderly system repos to take place for the bookpushers .. the insurance pump-up .. to have that industry say “can’t handle the fires .. no dice / this is a war-zone”

    * wait ? .. not – I’m wondering while waiting “whats a castle owner supposed to do?”

  9. ruetheday says:

    I’ve said from the very beginning that any rescue plan has to be based on a triage-like approach that categorizes borrowers into roughly two groups. The first group has had some sort of misfortune – job loss, medical problem, business failure, etc. that has temporarily impaired their cash flow. A mortgage mod will have a relatively high chance of success here. The second category consists of people who bought way more house than they could ever hope to afford, using a variety of financial tricks (Option-ARMs, negative amortization mortgages, I/O mortgages, subprime ARM with a teaser rate, etc.) . These tricks depended upon 1) being able to constantly refi from one not-fully-amortized mortgage at a below-market rate to another not-fully-amortized mortgage at a below-market rate and 2) constantly increasing home prices. Both dependencies are no longer present. You can try deferring payments, principal cramdowns, and all sorts of other mortgage mods, and most of these people simply do not have and will not have the cash flow required to service even the modded mortgages. They’re going to lose their houses eventually. There are also border cases that show characteristics of both categories, that need to be handled in a discretionary manner, but most borrowers fall into one of the two basic categories.

  10. It is a cultural blind spot that has led us here. The “American Dream” of owning your own home has been exploited by special interest groups to get subsidies and remove regulations designed to protect people buying homes. I have seen no recognition of the blind spot by politicians and only extreme efforts to support housing. We will have this enormous albatross around our neck until we realize that only safe sustainable ownership without any subsisdies should be our goal. That certainly won’t happen in my lifetime, if ever.

  11. diegonomics says:

    Franklin411 makes an excellent point- manufacturing creates alot of primary and secondary jobs, and keeps our money more in country. I suppose we have a good stock of commercial and residential real estate for the moment, but if prices go down sufficiently, it’ll get absorbed fairly quickly, and new construction will pick up.

    Thats why I like quick band-aid removal. The sooner we get prices back into whack, the sooner the real estate market starts popping again. We’ve seen low balling prices work all last year, jjust in real estate it can’t be so drastic.

    What I think is that people are mistaking the band aid metaphor. The purpose is to reduce the pain in a process that is going to take place one way or another, and the question is when. I think for sure the time is now. What distresses me is all the people that got demolished buying into the top of the market on a legit basis. But then, by the top, was the RE market in any way legit?

    I have to agree with BR, lets just do this, and get the market going again. If we stay sluggish, we’re just going to stay in the trough until we finally get the nerve to pull the trigger. And yes, I do think Real Estate sluggishness, as well as uncertainty over it, is whats dragging down financial instruments and credit availability. So I say lets do this, for fortune favors the bold.

  12. RW says:

    A couple points:

    1. Commercial and residential RE were not only overpriced they were overbuilt: Not enough building needed in either category to lead to manufacturing or general employment recovery; what we need is a major infrastructure project or two, probably on a scale comparable to the interstate highway system.

    2. The US has not lost manufacturing capacity as a percentage of GDP — it’s stayed relatively steady for decades (e.g., http://tinyurl.com/yhln3zn ) — what has been lost are manufacturing jobs and the wage levels associated with them: A major public works project could change that for a decade or two perhaps but the dynamic needs to change more fundamentally or sluggish domestic consumption and the hollowing out of the middle class will continue; e.g., http://tinyurl.com/5f9jhv (Elizabeth Warren talk – starts about 4 min in video).

    3. Sticking (pun intended) with BR’s metaphor: The band aid may be covering a deep, serious wound and taking it off quickly could not only remove what little scab has formed, starting the bleeding anew, it could open the door to more serious trauma still. This I think was the conundrum Paulson and Bernanke faced when the crisis hit: Barring the accuracy of conspiracy theory, the unknowns were too great to risk.

  13. Doc at the Radar Station says:

    “We can’t rip off the band aid because the banks are broke. They need Citi and Bank Of America (for example) to be able to continue to sell stock and bonds to cover the losses over time and to try to continue to operate for the sake of the rest of the economy.”

    There is plenty of rationale for this thinking, but it is predicated for the most part (IMO) on the idea that the time frame is relatively short (a few quarters at most), and that the cast or the crutches or whatnot can be removed and the patient can walk again on their own. I don’t have many quibbles with increases in public spending to offset the loss of private spending, but I am increasingly doubtful about the practical utility of keeping the banks zombified. I believe they need to be allowed to fail and their debt and equity holders wiped out and the only responsibility the government should have is to make whole the depositors through the FDIC. If the deposit insurance fund runs low then we can print up the money-in this environment what difference would it make? What good are zombie banks that take advantage of the taxpayers and zero interest rates and turn around and charge 30% on credit cards to people who pay off their balance every month? They are a net DRAIN on the economy by allowing them to survive.

  14. b_thunder555@yahoo.com says:

    Not too long Mr. Barry Ritholtz wrote in this blog a definition that I think should be 1) acknowledged as a mortgage industry definition law #1, b) be printed in 36pt font on top of each mortgage application, and, c) be tattooed in 36pt font on every loan officer’s hand that they use to authorize the loan. And the definition is (i paraphrase):
    If you buy a house with no or very little money down and/or if you have interest only or negative-amortization loan – you are NOT a home owner, you are a RENTER.
    Until all those “owners” become renters – the market will have hard time achieving equilibrium or self- sustained (perhaps very slow) growth.
    Too bad another “Barry”, “Barry” O., doesn’t get it…
    When someone in the neighborhood cannot afford $1600+ $600/month in mortgage and taxes on a $300K house – maybe he can afford to rent it for half or 60% of that? Let’s establish a fair, real market price, say $150-175k, and someone will buy the property! I’d buy, and i’d even promise not to evict the guy and not to raise the rent for 24 months, as long as he’s current on his payments.

  15. Mannwich says:

    I agree with that, f411. The biggest con ever perpetrated (and there were many) by the so-called “smarties” in our country is this thing erroneously called “global free trade”. It’s basically ruined this country. One massive con game heaped on the Sheeple. The question now is – where to go from here and how to fix it? It’s not going to happen overnight and probably won’t happen at all without drastic changes, which the elite political and corporate class seem to be resisting at every turn.

  16. diegonomics says:

    Doc @Radar:

    Over on HuffPo they’re talking about a movement to punish the mega banks for hoarding TARP funds and keeping credit tight by people moving accounts from to smaller, more engaged local banks.

    As long as the accounts FDIC insured, smaller banks do seem to be a way to go- they are more responsive to individuals with middle class means.

    But back to the RE question, it seems to me that we’ve had over a year to regroup, and taking off the band aid will be alot less traumatic.

    Perhaps the mega banks are lying in wait for an inflationary period to minimize their exposure to bad paper. As for their obscene credit card rates, isn’t that an underhanded way of forcing individuals to deleveracge, and continue keeping credit tight?

    Do we need an end around mega banks as well as a process to bring fresh price points to RE? I understand that bankers have alot of bad paper in their portfolios. They need a fresh dressing for that festering sore, but I don’t think we can hunker down and wait for an inflationary period to restore overall health to our economy. Alternatively, if we can get get the credit and RE markets reordered, some inflation will only serve to drive back some value and appreciation to RE. I was taught that RE appreciates faster than the rate of inflatioin in an inflationary environment.

    I’m also dead set against inflation, but hey, everybody has to give a little. So what I’m thinking is its a process of sequence. What I dig about this thread is that RE is just waiting to be addressed. RE has given up alot of value in the past two years, its stable in SoCal (residential) but the ARMs and commercial gluts are still said to be issues for 2010. BRs argument that mortgage relief is a counter-productive panacea at this point in time is, in my view, irrefutable. Last year I could understand it, as finger in the dike. Today, wouldn’t the money be better put to work encouraging first time buyers, at least? Even then, why do more intervention if we don’t have a stable price floor?

    Finally, our problems are all associated with whats known in economics as disordered markets. Thats a general, vague term- think of it as a tangled mess. We’re on our way to untangling the mess, lets make some good determinations and get a fast start in the 1Q. I think its a good strategy to hash this stuff out and go, one way or another.

  17. Pete from CA says:

    I would love nothing more than a quick reset of housing prices to reasonable levels because I am currently renting. Having said that, I think I understand now why the current approach may be preferable from the “big picture perspective.”

    Everyone is familiar with the pricing strategy where you gradually decrease the prices to reach a broader and broader buyer base, right? You don’t want to sell the iPhone for $299 if a lot of people will pay $499 for it… I think that’s what’s happening with housing right now. Everybody’s talking about futile modifications of unaffordable mortgages and people buying with 0% down but the truth is a lot of people have been buying in the past 12-18 months with 20-30% down or even on a cash only basis. These people are voluntarily bailing out the banks with their own money. If I were a bank, I wouldn’t want to deprive them of this “opportunity” by decreasing prices too hastily.

  18. H4H Lender says:

    It was just a year ago that congress passed the Hope for Homeowners program which was given $300 million and only 100 actual new loans were done under the program which was designed for lenders to write down principle and have the Gov’t insure the new loans with a new FHA loan. Shaun Donovan the head of Hud admitted the program was a failure. Essentially banks would exchange debt for equity and split any appreciation with the homeowner over the next 5+ years.

    I agree with most of the author of this posting except the amortization of negative equity. That idea works for people that are $25,000 or less in negative equity , however as we all know the negative equity position for more and more homeowners is growing and there is a direct coralation between the amount of negative equity you have and the number of strategic defaults that are happening at an alarming rate, the author has not really addressed the new norm, homeowners who are walking away that can afford their payments. When your $50k-100k underwater on your Mortgage your better off walking away and starting over, $50k buys a lot of credit repair.

    Tax payers were given nothing in the bailout, at a minimum the Gov’t should have put some strings on those banks that received Tarp money. Someone on this post said people are in homes they can’t afford, I can assure most people would find the money if they didn’t feel there was a way out and a home with upside, (excluding the unemployed) the coming commercial paper crisis has already had the powers at be demanding that creditors rewrite paper to avoid defaults. This includes principle reduction.

    Lastly lets not forget the elephant in the room, the looming dollar crash and the ongoing debt crisis that will only get worse. Under this scenario the housing scenario will only get worse.

  19. TakBak04 says:


    Wouldn’t it be AMAZING…if any of our Cables for the Masses would put that “Interactive Chart” out there?

    What worries me is that the “Middles” who don’t do Political or Financial Blogs/FaceBook/Twitter, etc., or, who are as “Aware” as many of us are out here these days of what we are going through Politically, Financially, Spiritually and Fundamentally in our American Culture these days are left out of seeing interactives like these.

    I long for when our TEE VEE’s will be able to capture this and we no longer will be captives of whatever local Cable Conglomerate has us captive as to what we watch and cannot watch. Where we can BE FREE to WATCH WHAT WE WANT…from our Computers put out there on our TEE VEE screens so that we don’t have to sit on our butts watching this damned BOX!

    However….WHO WILL PAY for this NEW MEDIA? Same folks as Before? New conglomerates emerge and we pay and they end up like the ones we have now …once they get BIG ENOUGH?

    How will this evolve? Is there a big enough audience for those who want “real news” and “hard science” and the rest to exist without “Celebrity Fluff?” All hard stuff and no “fluff” indeed makes “Jack a dull boy.” (old English Nursery Rhyme) with much truth.

    How does this sort out for those of us who are total Internet Addicts for News and Entertainment as opposed to those who love their “American Idol” and the features like you talk about “Curves” and PBS and HBO and whatever stuff Fox and Networks have that folks glue their eyes to.

    Interesting times we live in. But, what IF the CABLE NEWS would do that Interactive Graphic…would it change minds? Wake more folks up? Who knows.

  20. TakBak04 says:

    @TakBak……Previous Post was supposed to be for your: “Job Disappearance by County” post and not the one my reply has shown up on. Sorry…glitch with me. Whatever…it’s your “Job’s Post” this reply is in reference to.

    This post of yours quoting your conclusions from your book (which I bought and read) is also worth a reply:


    Thanks BR for your work. It’s much appreciated out here… And a Good New Year to You and Yours! A PINT TO YA’ !!!

  21. rootless_cosmopolitan says:

    The problem with the NYT article is that it basically presents only opinion, according to which the HAMP program does more harm than good. It doesn’t present any thoroughly checked diagnosis derived from empirical data. The opinion is being backed up with referring to some anonymous “experts” who say the same, as if one wouldn’t find some “expert” for any opinion. Quoting some hedge fund manager’s opinion doesn’t make it more than an opinion either. People who share the opinion will read the NYT article as confirmation to have been right with their opinion, like Barry does, but it’s still just an opinion.

    Barry says:

    “I am a “rip-off-the-band-aid-quickly” kinda guy, and what we are doing instead is peeling it off as slowly as possible, lengthening the pain, while only delaying the inevitable.”

    Somehow, it appears to me this metaphor isn’t quite appropriate. One rips of a band aid, once the wound has sufficiently healed, and the band aid isn’t really needed anymore. Ripping off will cause a short pain, but not do any damage again.

    I think the more appropriate metaphor in this case would be, to be in favor of letting the critically damaged patient just quickly die with the promise, everything will go much better afterward.


  22. Mike in Nola says:

    It’s not that we can’t rip the bandaid off; it’s that the Administration will not allow it. Where would the bankers get their bonuses and the Congress its campaign contributions if the banks were forced to recognize the true value of the collateral they hold.

  23. voguetouch1 says:

    The problem with the NYT article is that it basically presents only opinion, according to which the HAMP program does more harm than good. It doesn’t present any thoroughly checked diagnosis derived from empirical data. The opinion is being backed up with referring to some anonymous “experts” who say the same, as if one wouldn’t find some “expert” for any opinion. Quoting some hedge fund manager’s opinion doesn’t make it more than an opinion either. People who share the opinion will read the NYT article as confirmation to have been right with their opinion, like Barry does, but it’s still just an opinion.

    Barry says:

    “I am a “rip-off-the-band-aid-quickly” kinda guy, and what we are doing instead is peeling it off as slowly as possible, lengthening the pain, while only delaying the inevitable.”

    Somehow, it appears to me this metaphor isn’t quite appropriate. One rips of a band aid, once the wound has sufficiently healed, and the band aid isn’t really needed anymore. Ripping off will cause a short pain, but not do any damage again.

    I think the more appropriate metaphor in this case would be, to be in favor of letting the critically damaged patient just quickly die with the promise, everything will go much better afterward.

  24. rootless_cosmopolitan says:

    There is a repeat under the name “voguetouch1″ of my first comment. I don’t have any idea why this is there. It didn’t come from me. Editor?


  25. [...] modification programs have made things worse.  (Business Insider, Big Picture, naked [...]

  26. AllStreets says:

    Barry, my comments relate to your prescription for housing and economic heatlh:

    “The healthiest thing we could do would be to:

    1. Allow foreclosures to proceed normally;

    2. stop subsidizing purchases at elevated prices;

    3. force banks to take writedowns of bad loans;

    4. do a “shared pain” cramdown where both the borrower and lender split the loss of an underwater mortgage, replacing the old original loan with something more sustainable.”

    Barry, the nation is on course to follow your recommendations numbers one through three, but not number four, and that menu entails a slide into economic depression. Elements of your recommendation number four are the critical ingredient that could create an quicker endpoint for the crisis with much less pain and permanent damage, if properly structured; the outcome matters a lot on what the “something sustainable” would be. Ideally the something else does not require a write off, but a conversion of negative equity to a less onerous form of debt, i.e. non-mortgage debt to the federal government equally shared by lender and borrower with lower debt service payments. Your 30/20/10 plan is one possible item 4, and my AllStreets Bailout Plan is another. With the AllStreets Bailout, home equity losses aren’t realized, they are converted to non-mortgage low-interest long-term debt to the federal government who would fund the loans, and borrowers and lenders equally share the loans; no deficit spending is involved, just direct lending to replace losses with much more easily serviced debt not secured by the properties so most properties could once again be refinanced or sold without a loss.

    There is about $12.8 trillion in total residential mortgage debt, with about $1.8 trillion now in default, and possibly 20%, or $2.5 trillion underwater. Probably the homes most underwater are the high end ones in CA, AZ, FL, NV, WA, CT, IL, etc. That could paralyze the lending and housing sectors for many years and lead to huge numbers of foreclosures and bank failures. Letting the market continue with the inevitable huge numbers of foreclosures and short sales, or leaving paying homeowners locked into their upside down properties indefinitely, would not constitute returning the nation’s economy to health in my view, but just letting the patient bleed to death slowly but surely. To eliminate roughly 20% of negative equity, any plan would require about $2.5 trillion in combined writedowns or refinances. But it’s not fair to all citizens to offer a solution that just saves underwater or defaulting homeowners. If the government fairly allocated direct federal loans to all adult citizens to refinance mortgage debt, or for other constructive purposes, it would simultaneously rescue most lenders and borrowers alike and restart the economy due to reduced debt and debt service payments and restored ability of lenders to finance economic expansion. In absence of some type of program like that, rest assured that foreclosures and short sales will continue without significant government hindrance and lenders and borrowers will suffer permanent damage unnecessarily.

    For the vast majority of homeowners in trouble the various official homeowner “bailout” schemes have not worked, including voluntary subprime mods by Hope Now Alliance, Hope for Homeowners or HAMP. They arent’ likely to work because fewer borrowers qualify due to unemployment or have enough income to support their modified loans, and all the mod schemes to date require severe voluntary write downs of lenders’ assets which they don’t want to do, especially not to large numbers of assets suddenly. Lenders don’t want to write off loans until the loans are proven to not perform. Bank lenders are the one’s most in trouble due to worthless second mortgages on top of non-performing first mortgages. If they drag out the process they can offset mortgage losses with reduced private lending and increased arbitrage income by borrowing 0.25% Fed funds and leveraging into 4.5% T-bonds or other Treasury securities which are Tier One assets. That keeps private lending stalled out.

    The process of letting the system purge itself via foreclosures and short sales will not be quick, partly because the problem keeps growing due to increasing unemployment and sustained underemployment or unemployment. Banks don’t want to suddenly write down all suspect assets since they don’t have the capital ratios to survive sudden write downs of under-performing and non-performing or prospectively bad loans. The FDIC could not possibly finance all the bank failures involved. What banks would be left to take over failed Citi, Chase, Wells, BofA, etc.? The surviving banks couldn’t afford paying enough increased FDIC insurance needed to fund the losses; it would become credit default disaster number two on the taxpayers backs.

    In absence of an effective plan to convert the negative equity to a form of debt that is more reasonably serviceable and not secured by the properties, and doesn’t require lender write downs, homeowners will be locked into their homes and loans until they default or short sell, or until the value increases enough to bail them out, or until they earn enough to pay down upside down portions of mortgage debt. In absence of a solution for upside down mortgage debt, chances are the consequence will be continued financial and economic crises evolving into a depression due to the vast numbers of citizens who have ruined credit and insufficient income to support increased spending. It’s hard to imagine what the economy will look like when 20% of homeowners lose their home due to loss of income. Who will rent to them? I see large tent cities on the capital mall and major social unrest with that outcome.

    What’s different about the current recession is the unavailability of credit to 50% of those who might have qualified for some kind of bridge financing during the last several recessions (home equity or credit card debt). In addition, a long recession with high unemployment and scarce credit will have totally different consequences for the economy than a short recession with credit available as has been typical of recent recessions. To make credit available again, the negative equity underlying bad loans must be replaced by non-mortgage debt that is more serviceable.

  27. Mon E. says:

    Sorry Barry,

    But you are sadly mistaken if you think the HAMP, Hurting Any Modification Possiblity, program has failed. It has been a TREMENDOUS success. for lenders!..See what the media only talked about was the $3000 possible money that the lender would make if they did modify, what the media failed to talk about was 1)HAMP, with lenders like OneWest Bank(formerly Indymac Bank), made it easier for them to NOT modify by forcing them to meet with the servicing agreement, which in most cases DID NOT ALLOW modifications, 2)That lender MAKE MONEY on cash for keys. The cash for keys program, under HAMP, rewards both the BORROWER and THE LENDER. The borrower is offered money to leave the home undamaged(by the way the money is the BORROWERS own TAX DOLLARS BEING GIVEN TO THEM. It does NOT come from the lender) and the lender ALSO gets paid from the goverment, UPFRONT, to kick you out of your home. 3)The same works for a a short sale. When a short sale gets done, the lender gets PAID from HAMP DIRECTLY.

    Simply, why would a lender modify a loan to stretch out payments ove 3 years, when they can get the money TODAY. By the way, if you review HAMP, it DOES NOT disclose HOW MUCH MONEY the lenders are receiving from this program.

    HAMP was never done to help homeowners, it was just another way for lenders to receive money besides HAMP that would NOT have to be paid back to the federal government and taxpayers.

  28. Greg0658 says:

    allstreets@2:50p “But it’s not fair to all citizens to offer a solution that just saves underwater or defaulting homeowners.” .. 2nd That .. those radio ads pumping “we can get you into dime on the dollar resets if you’re $15K or more underwater” makes me furious* when I hear ‘em .. probably airing with subsidized psa dollars

    * furious and despondent that I didn’t do as much for my local community as I could have pre-crisis … you know import those dollars into the community from abroad all for a signature

  29. RogueGnome says:

    First, I’m utterly shocked that neither the blogger, Mr. Ritholtz, nor any contributors have breathed so much as a reference to the FRBNY 23DEC report, ‘the Homeownership Gap’… if nothing else, Andrew Haughwout, has provided hard data and shown a path of logic for residential real estate….

    Second, every time I see a discussion like this with its removed arguments of market prices and bank adjustments or any other totally irrelevant contention of why someone should or should not invest in residential real estate….I want to grab the nearest ‘barf bag’ from my seat on this flight of fancy and hock my guts out over all your inane obtuseness to the subject….

    This is a long line of conspirators who have contributed to this crisis …. Not one single one is to be given quarter from the henchman .. not any! … be it Realtor, builder, building supplies sales, mortgage underwriter/investor, flipper, speculator or even HGTV….all are exclusively and mutually culpable for the peril that has befallen America’s homeowners ….

    America’s homes and homeowners have become the pawns of all the aforementioned conspirators the privateers of dirt who drove this engine of mass destruction at a breakneck speed down the tracks of destruction….to ruin the American Dream…

    This is not an industry problem, its not a finance problem, its not a regulatory problem…. this is a HUMAN problem…one of Herculean dimension…. Because, for the sole purpose of meeting the usual players greed and selfishness…. American homeowners have had their basic right and safety to shelter utterly and totally shattered by a bunch of slick, Gucci-wearing, fast-talking croupiers ….the type that would make snake oil demagogues, carnie barkers and used car salesman pale by comparison….

    Mr. Ritoltz, you claim loan modification has failed….well there is nothing that can succeed if the very co-conspirators that created this mess are given the duty to implement modification…..their sabotage is so overtly obvious even to the point of arrogance when the group majeur appeared before the House Finance Committee…where they were so caviler that thanks to the Congresswoman Waters, she threw them out on their ears for the smoke that they tried to blow up the arses of Congress and for ozone cadets that Chase & BoA sent to represent them…

    So are you the apologist for these ‘scum bags?’….I would hope not…. There is one and only one issue that is at hand….that is “Saving Homes for HomeOWNERS”….oh I don’t mean those so-call investors…the scumbag flippers or landlords that have speculated on the backs of Americans that need basic housing…no, take those bastards to the nearest wall and summarily shoot their dismal profiteering arses, because they are in fact the most heinous of all…. And include that mousey, Hirohito-looking nerd hawking profits from foreclosures on late-night infomercials these days as well!….

    In fact, I’m absolutely astounded why we ‘Villagers’ are not out in the midst of night, torches in hand to chase these monsters to the top of the ramparts and throw them into the gator-filled moats below….

    America’s real estate industry from its footings up is rotten to the core—termites are the least of our worries as Americans when it comes to buying homes…the whole industry is all nothing but snake oil, smoke & mirrors…..AND, we should be infuriated because the basics of shelter are essential to a free society as is food, healthcare, education and opportunity….we have been duped by the bankers, the realtors, the builders, the mortgage investors and we have been compromised by the appraisers, the flippers, investors, speculators, landlords and lawyers…

    America deserves better for it shelter needs…

  30. [...] Ritholtz on the failing mortgage and foreclosure relief policies: "Rip the band-aid off already."  (TBP) [...]

  31. Pat McGroin says:

    “I think the more appropriate metaphor in this case would be, to be in favor of letting the critically damaged patient just quickly die with the promise, everything will go much better afterward.”


    I think this is a faulty analogy. The housing market won’t DIE…there are still plenty of people (like myself) with sufficient capital to purchase a home when/if they return to affordable levels. Personally, I’ve been watching the MLS listings here in San Diego for TWO YEARS….and, imo, most properties are still over-priced (at the current asking prices). For the limited number of listed houses where I have “last sale” data, even a lot of foreclosures and short sales are listed at prices well above where they were when the housing bubble began taking off (using 2000-2002 as the “lift off” time-frame).

    I have the same view as Pete from CA (and not just because I’m living in CA too)…prices are only slowly coming down because people are still buying houses here. In fact, I suspect that the attitude here is that housing prices (at least in this area) will continue to go up (eventually)…and that this housing bust is just a temporary setback in the longer-term upward price-trajectory. Whether that’s true or not, I honestly don’t know…but I’m sure that there are any number of folks who believe it, because I see a constant stream of MLS listings (even in the 500-700K price ranges) that go inactive in short order. Either someone’s buying them…or the sellers are pulling them off the market. I suspect the former, in most cases.

    Even so, I don’t see value in most of these homes (with respect to location, condition, square-footage, etc.), so I continue to rent. But, given enough time for the government to continue (or even increase) their interference in the housing market, I wouldn’t be surprised to see much of the current (and forthcoming) inventory being worked off as prospective home-buyers eventually capitulate in the face of so much governmental interference. At the end of the day, I have to decide whether I want to continue to hand a check over every month to a landlord, or invest in a house that I would own myself. Sure, there are advantages/disadvantages to both…but I’ve owned a home before, and would prefer to do the same in the near future. I suspect many others (with the financial capability) would prefer to own as well.

    Somewhat off-topic…I’ve often wondered why the RE markets that experienced the biggest “bubble” were located in sunny, warm climates (Fla, Calif, Arizona, Nevada). If it’s just the warmer climate that resulted in increased demand during the bubble years, there’s really nothing to say that it won’t continue that way in the future.

  32. reactiontm says:

    [I favor sharing the write-down between the borrower and lender, with a zero interest, 10 year balloon payment for a chunk of the write down]

    Balloon payment? Why?

    This is not ripping off the band-aid, it’s just more kicking the can, prolonging the process.

    If you’re going to do a writedown, just do it, get it over with, and quit pretending that housing prices are going to be that much better in 10 years.

  33. [...] government’s $75 billion program to protect homeowners from foreclosure has generated lots of reaction around the Web. Essentially, many have deemed the program a disaster as it’s merely [...]

  34. formerlawyer says:

    Dumb question No. 1 (for this year anyway) – Does a foreclosure result in a deficiency judgment? ie. if a mortgage is underwater or a home realizes a lower result than anticipated – can an American bank/financial institution obtain a judgement for the difference?

  35. Transor Z says:

    @formerlawyer: Yes, in many states foreclosure will result in deficiency judgment. Whether the note holder will pursue or not depends on the deficiency and other considerations, but yes.

    Barry, the loan mod program was set up to fail because it was implemented by entities with no real incentive or competence to do so. Foreclosure is the stick that lenders don’t want diluted in the long term.

    I’m basically with you on the shared-pain cramdown idea. That’s been my feeling all along: adjust both sides of the equation. You’d get more heartfelt participation on the lending side by adding sweetener incentives, i.e., being more thoughtful in setting up a national mod program scheme. And there should be a formula that considers present income, % equity, and generally the affordability of the home based on market price and income. If the homeowner fails the test, the property goes to foreclosure.

    If the homeowner passes the test, the loan is recast with principal calculated on present FMV — not ability to pay because that’s asinine and is in the lenders’ interest and just sucks people dry/prolongs things. The loan mod interest rate is capped and is limited to fixed or another non-exotic form. The sweetener might have to be a federal guarantee of a % of the loans in the event of default. But if you use fairly draconian means testing, you minimize tax payer risk.

    My main concern with the “rip off the bandaid” view, Barry, is I think it’s a recipe for a big overshoot to the downside. That benefits no one and is potentially hugely destabilizing at the macro level. Foreclosure pricing is not an efficient process and impacts surrounding home values. What it is is the way things have been done. We need leadership and we need an innovative loan mod program. And we needed it 18 months ago.

    With “rip off the bandaid” lenders will recover less during the downside overshoot, homeowners will be out on their ass, and municipalities will have another fiscal crisis and have to jack up property taxes as they’re currently doing. Not efficient as the repercussions move through the system.


  36. beaufou says:

    Do you really believe the HAMP program is “protecting” homeowners, or is it just another scam to help lenders?

  37. Marcus Aurelius says:

    Trying to control this correction is like trying to control a 500′ tsunami — for the sole benefit of beach-front property owners. The wave will do its damage, regardless of the pathetic, after-the-fact (or during-the-event) attempts at damage control. The only correct course of action, and the one government has chosen not to take, is to move the general population to safe ground, and abandon the infrastructure to the forces that will consume it. Any other course of action is a waste of time, energy, money, and lives.

    The recent leg up in the markets is the trough between the first and second waves of the tsunami. People have been encouraged to collect the fish flopping around on the dry sea bed. Poor bastards.

  38. Transor Z says:


    Then Conchubar, the subtlest of all men,
    Ranking his Druids round him ten by ten,
    Spake thus: “Cuchulain will dwell there and brood
    For three days more in dreadful quietude,
    And then arise, and raving slay us all.
    Chaunt in his ear delusions magical,
    That he may fight the horses of the sea.”
    The Druids took them to their mystery,
    And chaunted for three days.
    Cuchulain stirred,
    Stared on the horses of the sea, and heard
    The cars of battle and his own name cried;
    And fought with the invulnerable tide.

    [Cuchulain = American people here]

  39. Marcus Aurelius says:


    Cool quote — fits right into our current situation. That’s Irish mythology, isn’t it?

  40. Transor Z says:

    Yes, Yeats.

  41. riley says:

    “Banks should be compelled to write down bad mortgages.”

    Agreed, but banks are carrying these loans at prices well above market. If banks were compelled to write down bad mortgages, either due to foreclosure or a reinstatement of mark to market how many of them would be bankrupt? What politician is going to be willing to admit that all of the stimulus programs were a complete waste of taxpayer money? Remember a politicians remedy for any problem is 1) throw lots of money at it, 2) tell the public “we’re on the job, everything will be ok” and then 3) build in enough time for the problem to solve itself. If the problem does not go away, call it a different problem and start the process again. No matter how beneficial it will be in the long run, no politician that wants to get re-elected will opt for a solution that even suggest that there might be some pain involved.

  42. [...] Stopping Counter-Productive Mortgage Mods and Foreclosure Abatements (January 5th, 2010) [...]