One of the most disappointing policy initiatives of the Administration to date has been the expensive and ineffective attempts to fight foreclosures at all costs.

The net impact of this is to artificially prop up home prices and reduce the number of real estate transactions. In the high foreclosures regions (California, South Florida, Arizona, Las Vegas), the foreclosure process have driven prices down to the point where buyers have materialized and sales numbers are improving significantly. The uptick in real estate transactions benefits durable good sales, increases mortgage volume, and positively impacts other real estate related activities.

As wrenching and unpleasant a process as foreclosures may be, the net impact of artificially high real estate prices is even more problematic. It punishes savers and first time home buyers (think Newlyweds).

This is what makes the latest proposal out of Treasury — found here: Supplemental Directive: Foreclosure & Bankruptcy Changes — so disappointing. It seeks to mandate Foreclosure Abatements and Mortgage mods. These (and other related) policies that have shown themselves to be ineffective, and ultimately, counter-productive.

Some of the highlights of the proposal:

• Mandate a 30 day freeze on foreclosures until a delinquent borrower is evaluated and found ineligible for HAMP;
• Once a borrower is in a mortgage mod program, “servicers must stop all foreclosure action” during the trial period;
• Banks must produce “written certification that a borrower is not HAMP eligible” prior to proceeding to foreclosure;
• Requires servicers to consider borrowers in bankruptcy for HAMP’ (!?!)
• Removes other bankruptcy barriers for mortgage mods;

In this proposal, all 60+ delinquent borrowers (who meet eligibility) must be solicited for HAMP. Even newly bankrupt mortgagees should be considered for mortgage mods.

The problem we have in housing is that over the past decade, 5-10 million people bought homes they cannot afford. Many of these homes are now worth less than their underlying mortgages.

The best options in these cases are: 1) A negotiated capital cost reduction (i.e,, “cramdown”) with their lenders; 2) A short sale; 3) Walkaways.

The Treasury Department proposal accomplishes nothing more than keeping people in homes they cannot afford with payments that are onerous. The mortgage mods are failing in huge numbers because lowering the interest rate and or/extending the terms does not address the basic issue . . .

>

Previously:
Coming Soon: 5 Million More Foreclosures (February 16th, 2010)
http://www.ritholtz.com/blog/2010/02/coming-soon-more-foreclosures/

Stopping Counter-Productive Mortgage Mods and Foreclosure Abatements (January 5th, 2010)
http://www.ritholtz.com/blog/2010/01/stop-counter-productive-mods-abatements/

All prior foreclosure posts can be found here

Category: Credit, Legal, Politics, Really, really bad calls

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

35 Responses to “Treasury Looks to Mandate Foreclosure Abatements, Mortgage Mods”

  1. torrie-amos says:

    just like the terminator, they will stop at nothing, saving home prices saves the banks and state and muni taxes………………

    laws, ehhhhhhh, we change em as we see fit is the new america

  2. Marcus Aurelius says:

    A link from naked capitalism — germane to this topic. It’s lengthy, but worth reading (quickly). If it doesn’t make your blood boil, you should see a doctor.

    http://www.mcsweeneys.net/links/panoramaexcerpts/Ali.html

  3. jjay says:

    TPTB know that if the real estate market finds it’s own level, parties over, Hooverville Time!
    I expect them to fight to the last dich to prevent it from happening.
    It makes no economic sense, but only political sense.
    Commercial real estate is on deck!
    Batter up!

  4. b_thunder says:

    this policy only keeps relatively a small number of deadbeats (aka prospective voters) in their homes (that they cannot afford) while screwing over the vast majority of the country by artificially extending real estate recession. the recession will not end until housing finds the *real* bottom, without any gov’t help.

  5. wunsacon says:

    Screwing renters. Ensuring big bank bonuses. Rewarding deadbeats.

  6. torrie-amos says:

    as i’ve mentioned my sis is in the middle of this thing at one of the big ones, the problem, as if we couldn’t guess, finding the file and all documents, she estimates 80% are incomplete, and finding the people, it’s amazing folks will not answer phone calls…………f’n joke

  7. cortezj29 says:

    Many homeowners facing forclosure have at least one person who lost their job. In this jobless
    (non)Recovery, most of these people still will not qualify for HAMP without adequate income. The Feds can only slow down the rate of forclosures, not the inevitability of most of these forclosures.

  8. Marcus Aurelius says:

    OT, from the Onion:

    “Geithner Refuses To Come Down Off Capitol Dome”

    http://www.theonion.com/content/news_briefs/geithner_refuses_to_come

  9. cortezj29 says:

    @ torrie-amos:

    Troubled homeowners are following the 5 D’s of Dodgeball: Dodge, Duck, Dive, Dip, and Dodge. Most probably believe they will not quality for HAMP but use to process to forstall losing their homes.

  10. torrie-amos says:

    man, that is a long read Marcus, sad, funny and totally true

  11. Marcus Aurelius says:

    torrie-amos:

    I know it’s long (much can be skimmed), but it further highlights just how much leverage the consumer/taxpayer/citizen has lost due to the new Corporatist, lawless government we are ruled by. This kind of crap is what the “conservatives” want more of (I’m not trying to pick on “conservatives,” but it’s “conservative policies that brought us to the brink. In the end — and we are at the end — tax and spend is preferable to borrow and spend, if only because it’s the lesser of two evils). Why do they hate America?

  12. ashpelham2 says:

    It is amazing to me that mortgage writedowns are still considered by most, and many of us reading here, as a last resort. Why shouldn’t the banks and the borrowers who bought the homes go ahead and take a hit right now, to lower the price of these properties, lower the note that is in repayment, and get on with it? We are totally comfortable doing the opposite to a gradual writedown of the note, which is a HELOC, or construction loan. In my ideal world, certain borrowers who vastly overpaid, and in markets where prices are falling the hardest and fastest, would basically be in a situation where they cannot walk away, but rather, would continue to pay a variable mortgage note that is decreasing as the property is re-assessed yearly by market data, not by the taxing authority. If I bought a home for $500k, and now it’s worth 250K, my mortgage note should reflect that, and the lender should be eating the writedown. The borrower should basically be unable to borrow or refinance during that time, while a final total for the writedown is settled. At some point, the bottom is reached, the writedown is done, and a final mortgage note is settled. In extreme cases, there would be a balloon payment due after some time, and during that time, once all writedown is achieved, refinancing is once again possible.

    I don’t know. Seems like we are just putting off the inevitable, and dumping tons of inventory into a market that doesn’t need it, punishing everyone else, socializing poor decision making and risk taking.

  13. cognos says:

    BR:

    The problem is NOT — “we have 5 million homeowners who have bought homes they cannot afford”.

    This is NOT the problem. NOT really any different from any other 5 year period. NOT significant.

    The problem IS — we have house prices down >20% nationwide and >40% in the worst areas. This has many ramifications and really is the results of a self-reinforcing downward cycle that works for NO ONE. It doesnt work for banks. It doesnt work for the overleveraged homeowner. And it doesnt work for citizens. More foreclosures cause more price declines and more underwater homes (even yours!). The problems include:

    - no one who bought a home in 2006 (with 20% down) can simply MOVE (for a job, family, etc) without either coughing up another 20%… or walking away from debt.

    - no one can downsize their home (a natural part of life)

    - no one can cope with the loss of jobs and incomes (do we have any of that these days?)

    We could use a govt mandate to correct some of these imbalances because there is no single decision maker empowered to re-write the contracts. But AS WRITTEN… EVERYONE LOSES. The homeowner is best off becoming a deadbeat and ceasing all payments (they will lose everything anyway). The bank will foreclose… but only get 10-20 cents on the dollar (why not accept 50 cents from the current homeowner?). Neighbors and the general citizenry lose… and their home are also marked down.

    This is just a self-reinforcing cycle. Its too bad no one (banks or Obama) was willing to assist this in a simple way… as everyone would’ve been better off. But I guess this is kinda a 1-yr old issue. The problem is basically solved… the hard way.

  14. torrie-amos says:

    marcus,

    i’m well aware of what is going on, me repeats often, all to save banks and home prices and 85 oil kills all

    how bout them confidence numbers, here comes stimulus two too a state near you

    cognos,

    the problem is a small busines owner you will decline to invest when your government is f’n insane, and writes and rewrites laws as it pleases, period end of story, a small bizz owner could give two shytes who loses or wins, they have to make a profit, and by god they will and keep it, there are enough sales, and cheap labor to keep the doors open and the beat goes on

  15. tude says:

    ashpelham2 says “If I bought a home for $500k, and now it’s worth 250K, my mortgage note should reflect that, and the lender should be eating the writedown.”

    So do we do this with every single house in the US? Or only those who were bought by idiots that could not afford them?

    Shame on me for buying a 1000sf cottage in a working class (at best) neighborhood with my 6 figure salary because that is what I could afford (with simple math I learned in grade school). Shame on me for not spending hundreds of thousands of HELOC money putting in a pool, doing a kitchen remodel and buying a boat…or going on that month long vacation…

    I should have bought that 800k+ remodeled house in the “good school district” up on the hill with the fabulous views that all the mortgage brokers said I could “afford” back in 2005. Maybe I could now qualify for a few hundred thousand in a nice write down since in any real terms there’s no way I could really “afford” it.

    God this shit makes me ill….Grab what you can while the getting is good, then let everyone else pay for your mistakes.

    If you can’t afford the house you bought at the time you bought it, get the hell out and move into a damn apartment so maybe some of us that did buy what we could afford can move up someday? Hey that’s a thought. Bring on the inventory at rock bottom prices – some of us have jobs still, and have actually been saving through all this.

  16. [...] what the Treasury Department’s answer to the abject failure of the HAMP program is in “Treasury Looks to Mandate Foreclosure Abatements, Mortgage Mods.”  Here is a little preview: • Mandate a 30 day freeze on foreclosures until a delinquent [...]

  17. mcrcr4 says:

    “…even newly bankrupt mortgagees should be considered…” Black’s defines mortgagee as: ” One to whom property is mortgaged; the mortgage creditor…” Unless I miss your context, I believe you meant mortgagor, “One who mortgages property; the mortgage debtor…”

    Picky on my part, I will stipulate, but, having been scolded too many times by Socratic parties, it is hard to leave alone.

    Best retgards,
    RF

  18. Concerned American says:

    Amen Tude.

  19. Renting in Mass says:

    I’m with you tude.

  20. cognos says:

    torrie — Everyone involved (banks, investors, home owners) WANTS to re-write these contracts! Its just that they’re too small, too cumbersome and no single party is responsible. the idea that the “govt re-writing contract” is a problem is dumb.

    For example, we see only a small fraction of this problem in commercial mortgages. Becuase the 3 or 4 stakeholder just renegotiate the $250M mortgage. Modifications are happening in a BIG way in commercial space. The problem is… we cannot have 3 lawyers involved in renegotiating a $300,ooo mortgage… down to $200k. So instead it forecloses and recovers $75k. Dumb, dumb, dumb. No one wins.

    This is EXACTLY the role of govt… to step into broad situations to make the outcome better for 95% of all parties.

  21. Joseph Martinez says:

    The Government has a trillion or so invested in the real-estate market … Everything is out of whack … Japan seems to be coming out of their lost decade. Maybe ten years from from we will be able to come out of the great recession. But then again 10 years from now the 50% of the baby-boomers should be on social security and medicare.

  22. Kelja says:

    The more I understand the problem, the more I’m convinced this will all end badly. Violently.

  23. The Curmudgeon says:

    First…the government owns or insures the vast majority of residential real estate mortgages–over $5 trillion. Just check the balance sheets of Fannie, Freddie, Ginnie Mae and, of course, the Fed. Much of the debt is actually owned overseas, but is insured, effectively, by the full faith and credit of the US government

    Second…renegotiation of contracts by government fiat would be an impossibly bad idea, and is arguably unconstitutional. It would dry up the foreign investment upon which the residential real estate mortgage depends, and would set the precedent that nothing agreed upon by two private parties will enjoy the enforcement powers of the government. The sanctity of contract is a bedrock principle upon which the creation of wealth depends. Besides, it is just stupid to believe that if renegotiation were in the parties’ best interest, they would somehow fail to do it. Transactions costs are not prohibitive if there is money to be made or saved, just as transactions costs weren’t so prohibitive in the first place that money from Norwegian pension funds couldn’t find their way into the Inland Empire residential real estate market.

    There is also a moral principle. At some point, the folks in this country that work hard to provide for their families; the folks that don’t want more than they need, instead holding a little back for a rainy day; in short, the people that don’t buy into the cultural nonsense that happiness means getting something bigger, newer, etc.–these folks are eventually going to say enough is enough. Even though my home is paid for, it wouldn’t bother me a bit if my overextended neighbors lose theirs and the value of my home thereby decreases. My taxes would be lower, my money would be worth more, and the residential mortgage market might cease being a gamblers paradise, giving neighborhoods the chance to become a place to raise a family, instead of a place to make a leveraged bet on residential real estate values.

  24. Mysticdog says:

    The probablem is not that people bought houses they could not afford. The problem was that people with way too much money to be useful drove up home prices through speculation, so that when people went to buy homes, they could only afford them through bad mortgage vehicles. Normal buyers did not drive up home costs. Normal buyers did not invent insane mortgage vehicles, nor leverage those vehicles by factors of 30 or 40. Normal buyers just did what they could to get decent houses, houses that were half the price just 3 or 4 or 5 years previous.

    It makes a lot more sense to write the principles down on those mortgages and let people keep their houses than to forclose those houses, ruins good peoples’ credits, and then sell those houses for the same amount or less than the cramdown value. It doesn’t make any sense at all to punish a million families for doing their best in a shitty system they had little control over, and leave the assholes who made that system to hold onto their profits.

  25. ZackAttack says:

    I honestly think these various loan modification/forebearance programs have as a *part* (not the primary, of course) of their intent to make sure there aren’t 12 vacant houses on a block of 60, that everyone can see and know what happened, then really think their situation through.

    They count a lot on the populace being silo-ized. When that turns into a bitch is when they want the silos to go away for some unified action.

  26. [...] – “Expensive and ineffective attempts to fight foreclosures at all costs” has been one of the Obama administration’s most disappointing policy initiatives, Barry Ritholtz notes. [...]

  27. patient renter says:

    The mortgage mods are failing in huge numbers because lowering the interest rate and or/extending the terms does not address the basic issue…

    True, but why are we still pretending that the administration doesn’t know this and get on with discussing the real motivation for their actions.

  28. contrarian says:

    I experienced the boom and I’m experiencing ground zero…right here in sunny Southwest Florida.

    Amidst abandoned, mold-ridden & overgrown houses (some starter homes; some mansions), it’s the same story…different names.

    @MysticDog, you’re right! It’s happening now, though principal reductions et al will not make the nightly news…for obvious reasons.

    @The Curmudgeon. Including the word “morality” in this discussion seems anachronistic, to me at least. John Courson, president and C.E.O. of the Mortgage Bankers Association, irrefutably debunked morality obligation. Walk away…what’s good for BUSINESS should be prescribed and encouraged for mortgage borrowers as well. Morality…now that’s funny. LOL And you probably are serious, weren’t you?

    @Tude. Your argument is sooooooooo 2007. You say, “So do we do this with every single house in the US? Or only those who were bought by idiots that could not afford them?” Obviously, you, your brother, sister, father/mother, best friend and others important to you STILL have jobs. GREAT! Many of the “idiots” you elegantly depict caught one of those pink slips raining from the sky in the last 3 years. Damn them. They’re idiots for getting FIRED…oops I mean “downsized.” Still, it’s their fault they can’t pay their mortgage. The damn idiots bought a house on 28/36% ratios with 6 months expenses put away for that rainy day–just like good ole Dave Ramsey taught them–but then Corporate cut them loose. And now they can’t find a pot to piss in. Yep, I’m with you, TUDE. No body should have bought a house b/t 2001 and 2007. Everybody should have seen this nuclear explosion coming. Oops, Tude, are you talking only about the sub-prime “idiots?” Oh yeah, the sub-primes, the “idiots” who got this party started. Finger pointing always helps, doesn’t it?

    @cortezj29. LOL You’d better believe troubled homeowners are following the 5 D’s of Dodgeball: Dodge, Duck, Dive, Dip, and Dodge. I’m doing my small part along with a BIG group of Florida attorneys to clog judicial foreclosures with YEARS of affirmative motions. “Show me the NOTE!” Mr. Debt Owner. And if you want to cop an attitude (ala OneWest), judges are poised for cramdowns! BTW, get set for round for more defaults …including corporate defaults. We’re not through the forest. WE have many more “idiots” to castrate before we get through this epic storm. Of course, Tude’s family, friends & significant others are insulated and NEVER will lose their jobs…or source of income. They’ll NEVER be among the throngs unable to pay their mortgage.

    @wunsacon. You say “…screwing renters.” I deal with MORE renters squatting in houses in foreclosure, preventing sellers from kicking their sorry asses out to even attempt a short sale. More renters in my small neck of the world are squatters, using the beleaguered Florida courts (that is) to force properties into foreclosure. Some renters getting screwed? YES. Some borrowers (distressed property owners) getting screwed by squatters? YES. Media don’t give ya that side of the story, do they?

    I follow BR’s posts but rarely drop in to comment. Daily, I work the trenches. I sit at the dining room table with the kind of people TUDE describes as “idiots.” Here’s the irony, these people could be YOU, ME and people close to you. Does the name-calling change or cease when it’s you, me & people about whom you care? Ahem. No bleeding heart here. Just a realist who logs in as contrarian.

    Good chatting with ya.

    God bless

  29. Jim Fickett says:

    Treasury is trying to increase awareness, but awareness is not the issue. Even if ALL eligible mortgages were to result in trial modifications, the results would still be inconsequential. HAMP is likely, at best, to save 2% of seriously delinquent mortgages. Here is the calculation:

    HAMP is aimed mainly at mortgages delinquent 60 or more days. In its latest progress report Treasury estimated that there were 5.6 million mortgages delinquent 60+ days.

    Not everyone qualifies — not all servicers participate; only owner-occupied homes are eligible; jumbo non-conforming are not covered; borrowers must be in financial distress, etc. Treasury estimated that 1.7 million out of the 5.6 million loans were eligible.

    The trial period, which has varied to some extent, is meant to be three months. If we take the number of permanent modifications completed as of the end of January, 117,302, and divide by the cumulative number of trial modifications as of three months earlier, 708,120, we get a completion rate of 17%. This particular three month period was one of Treasury — shall we say — very strongly encouraging the banks, so the completion rate is unlikely to get much better than this.

    If we assume, optimistically, that all 1.7 million of the mortgages eligible in Jan result in trial modifications eventually, and apply the 17% completion rate, this would suggest that there might be eventually 289,000 permanent modifications from this cohort.

    According to the most recent Federal Housing Finance Agency Foreclosure Prevention and Refinance Report, the percentage of loans remaining current 6 months after modification was 44%. So perhaps 44% of the 289,000, or 127,000 loans, might avoid re-default.

    127,000 is 2% of the 5.6 million seriously delinquent loans.

    Jim Fickett
    ClearOnMoney.com

  30. cognos says:

    Thankfully… this problem is mainly solved. While better stronger “modification” programs and incentives would have been advantageous for all parties 1-2 yrs ago. Right now we are >50% through the foreclosures and >90% through the write-downs. Expectations are worse than future reality.

    Ironically… just as we did to banks and credit bonds, these poor policies are likely to create (and have already) a huge yo-yo effect where there are fantastic opportunities for speculators to buy up properties out of foreclosure at great prices… and make 100-500% in just a few years. Just as they did in stocks and bonds in the last 1-yr.

    Its sad when regulators and bad policies are increasing the volatility in the market. There are human costs and frictional costs for value for society. But great opportunities for smart speculators.

  31. [...] Treasury looks to mandate foreclosure abatements, mortgage mods – Barry Ritholtz, the chief writer at the Big Picture and someone that I’m a big fan of, is not wild about the latest Treasury proposal that would lengthen the foreclosure process by at least 30 additional days and attempt to put borrowers through a HAMP modification.  I’m not familiar with the length of the process in other states, but I can state from being involved in foreclosure activity from beginning to end, it is plenty long enough in Pennsylvania.  If a borrower is interested in a HAMP modification, there is no need to add another 30 day waiting period.  Further, it makes no sense to try to inject this stuff in with ongoing bankruptcies.  That said, I’m not as sold as Mr. Ritholtz that foreclosures are as stimulative as he says.  I’ve closed on plenty of houses that deteriorated to the point that they were sold for basically scrap prices. [...]

  32. [...] the government announcing new loan modification plans, expect more of these houses to hang around in limbo for a while. That's not a huge amount given that there are over 100 million homes in the United States, but [...]

  33. CitizenBee says:

    Think about this who would want to buy a house when the local real estate property taxes are around a thousand dollars a month and going up in NJ. And why is there never any mention of this in the news or how salaries have declinded for ten years.
    Yes Sir America has been sold out to the highest bidders or donators which there is no difference. As an average tax payer my one dollar doesn’t buy me much influence in washington nor does my vote.
    Check out this business homeowner who is a sign of things to come in America.
    http://www.businessinsider.com/henry-blodget-man-bulldozes-house-before-it-gets-foreclosed-2010-2

  34. destor23 says:

    But there is one kind of mortgage modification that would not prop up house prices — principal reductions. Reset the total amount owed to the new value of the house. That will, yes, force the lender to eat the loss but that’s okay because the effects of that are mollified by all the other no strings aid the lenders have received. If you reset the mortgages to reflect new and lower home values then underwater owners will be able to sell if they want (and maybe there can be profit sharing with the bank on anything they get over the new value) and first time buyers will have a shot to get in at the new prices. Everybody wins except for bank shareholders and bondholders but as I said, they’ve had enough help.

    The only thing you need to add to this is some sort of one time payment to renters to make up for the fact that they get nothing out of this. Just to be fair, of course.