Better Idea: Principal Reduction/Balloon Payment
Gretchen Morgenson discusses “refinancing all the nonprime, performing loans held in privately issued mortgage pools (except for Fannie’s and Freddie’s) at a lower rate” in today’s Sunday Times.
She notes it was originally proposed in 2008:
“$1.1 trillion are current on interest and principal payments . . . [Patrick and Taylor] propose refinancing all $1.1 trillion of the loans in securitization pools that are still performing but that may soon face punishing interest rate resets. Homeowners whose loans are in these pools would receive newly issued loans with fixed interest rates, currently 6.14 percent, and 30-year terms. Under this plan, Fannie Mae and Freddie Mac would issue debt to pay off the outstanding principal on the loans and then guarantee the new ones.”
There are some issues with this idea that need to be resolved — but my initial reaction is there are 3 problems with it:
1) This proposal addresses the cost of financing — but not the issue of the cost of the houses purchased.
2) Thus, the proposal ignores the underlying problem: People paid too much, and banks lent too much, for homes at the top of an credit/asset bubble. For both banks and homeowners, carrying an over-priced asset at a lower interest rate does not resolve this.
3) For Fannie & Freddie to pay 100% for this simply seems wrong to me. (Think Goldman & AIG). There are typically provisions that would allow FNM/FRE to recoup some losses when loans go bad from whoever they purchased them from.
Will Investors who bought and sold risky assets be made 100% whole? Is Fannie & Freddie taking risk off of the speculators in alt-A and subprime — with no hair cut? Should these specs get to keep all of the gains?
I am not clear about the rules in point #3 of the Patrick and Taylor proposal. More to the point, let’s address points number 1 and 2:
We know that many home buyers paid too much for circa 2004-07 houses. And a big swath of these homes with mortgages — about 24% — are now worth less than their outstanding mortgages. We also know that the banks lent too much against these homes, and that they are defaulting in huge numbers.
We can address both of these issues through a voluntary combination of principal reduction and balloon payments.
Let’s use round numbers to keep this simple:
Someone paid $500k for house with a $400k mortgage. But the house is now worth $300k. This is a house that very well might be a walkaway, or go into foreclosure.
Solution: The bank refinances the home for its appraised value — $300k. It takes the $100k balance of the mortgage, and puts it into a zero interest, 10 year balloon loan. After year 10, if the mortgagee has stayed current on all of his payments, the $100k balloon payment gets reduced by 50%. The bank takes a hit on half of the “overlending.” The homeowner takes a hit on their downpayment. The $50k then gets added into the duration of the mortgage (20 years) at the same rates as the original $300k.
Prices come down the 10% they are overvalued, but not in a wrenching fashion. In theory, the homeowner will be earning more money by then, RE values will have stabilized (or even gone up). The bank doesn’t take a full hit — its a smaller write-down a decade later. And homeowners get to stay in a house at a price they can afford.
There is only a little congressional action required: The interest free loan should be tax exempt (it would otherwise be taxable). The banks should be permitted to put these loans into a special “held to maturity” vehicle, so they don’t have to take the accounting write down today. The entire process is voluntary, but it is obviously in the banks interest to delay the writedown, and in a fashion that reduces foreclosures.
This is a variation of our original 30/20/10 proposal, and these refinements reflect what we have learned over the ensuing two years.
Thoughts, ideas, comments ?
>
Previously:
Fixing Housing & Finance: 30/20/10 Proposal (September 22nd, 2008)
Stopping Counter-Productive Mortgage Mods and Foreclosure Abatements (January 5th, 2010)
Source:
Housing Doesn’t Need a Crash. It Needs Bold Ideas.
Gretchen Morgenson
NYT, September 11, 2010
http://www.nytimes.com/2010/09/12/business/12gret.html
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September 12th, 2010 at 9:39 am
Thoughts, ideas, comments ? Please share your opinions
September 12th, 2010 at 9:55 am
Deal killer: ” There is only a little congressional action required”
September 12th, 2010 at 10:19 am
If I were a bank CEO, I’d be lobbying for this plan. Everyone knows that housing prices were a scam from 2001-2008. The appraisers and the banks were in bed together and millions of people bought homes at fraudulent prices. I’d consider any profit I get above the legitimately assessed value of the home as gravy.
However, the banks are taking it the other way, Barry. They sense that the GOP is poised to make gains in this election cycle, and that’s their opportunity to turn home loans into student loans–ie, debt that you can never walk away from. They added an amendment to the FHA Reform Bill in the House of Reps to ban anyone who strategically defaults from ever receiving another FHA loan. The bill hasn’t been considered by the Senate yet, so we’ll see what happens.
http://blogs.wsj.com/developments/2010/06/10/congress-may-bar-strategic-defaulters-from-fha-loans/
September 12th, 2010 at 10:21 am
Things may work out just fine the way it is going.
The government will own all the houses with the upside down loans.
They can just turn them all into Section 8 housing!
Problem solved!
September 12th, 2010 at 10:29 am
my only comment would be with regard to your number 2 above: you are right, of course, a lower interest rate doesn’t change the fact that you’re carrying an overpriced asset, but not everyone thinks purely economically/rationally in terms of housing (if they did, everyone would walk away right now, right?)
what I mean, is, even though I may be underwater on my house, as long as I can afford the payments (which I might be able to do with an interest rate re-fi) I may not walk away. Interest rate re-fi’s for SOME people could provide all the help they need, right? That doesn’t solve the problem of Fannie/Freddie eating the losses though – that’s a bigger issue that I think people tend to ignore. “re-finance” is like a magic word, but people forget that it requires re-lending you the money!
September 12th, 2010 at 10:47 am
The banks benefit the most because under-water mortgages represent a potential exposure on their balance sheet and an actual one when they default. The banks represent the first and biggest beneficiary of this agenda.
After that there’s a salient point that does not get enough attention. The holders of the mortgages are pension funds and insurance companies that have obligations. Refinancing premium coupon mortgages has many negatives. There’s the income effect for people funding retirement, and to the extent that insurance company investment returns are subsidizing policies the policy rates will have to rise to compensate for the lost income.
How about we leave things alone and stop picking winners and losers?
September 12th, 2010 at 10:48 am
As long as it’s cheaper for banks to lobby to transfer the cost of their bad loans to US agencies that will be the preferred course, any benefits to borrowers are secondary and the costs, in the final analysis, will be borne by taxpayers. The timing is critical because the Republicans need to be able to blame the Obama/Democrat socialists for the trillion+ cost of the next round of bankster bailouts.
I think this is all headed for another major crisis if RE prices resume their drop and walkaways increase and the unaccounted for bad mortgages and shadow inventories become too big to ignore for the big banks.
The banks will never take principal writedowns as long as there’s a chance they can dump the costs on taxpayers but the situation will have to deteriorate to another crisis point before they get their way. Option ARM expirations and walkaways should bring us to that point.
September 12th, 2010 at 10:51 am
BR,
I’m not sure that this: “…Homeowners whose loans are in these pools would receive newly issued loans with fixed interest rates, currently 6.14 percent, and 30-year terms. Under this plan, Fannie Mae and Freddie Mac would issue debt to pay off the outstanding principal on the loans and then guarantee the new ones.””
doesn’t answer your ‘Point 3.’ ..
but, in these questions: “Will Investors who bought and sold risky assets be made 100% whole? Is Fannie & Freddie taking risk off of the speculators in alt-A and subprime — with no hair cut? Should these specs get to keep all of the gains?”, I suspect you are using a rhetorical device..
and, surmise that you believe, and from here, rightly so, that the ‘Answers’, to those Q:s, are “Affirmative”.
this: (Think Goldman & AIG), by itself, is pointer, enough, for anyone capable of ‘catching a s’nap’..
LSS: ’tis ‘nother Cold Cash for Dead Paper schema, hopefully– from the ‘Bankers”/”Bag Holders” perspective– financed by ol’ Uncle Sucker & his Band of Tax/Debt Serfs..
~~
“If They don’t like the Crumbs, Boil them in Fiat..”
September 12th, 2010 at 11:09 am
BR suggested:
Solution: The bank refinances the home for its appraised value — $300k. It takes the $100k balance of the mortgage, and puts it into a zero interest, 10 year balloon loan. After year 10, if the mortgagee has stayed current on all of his payments, the $100k balloon payment gets reduced by 50%. The bank takes a hit on half of the “overlending.” The homeowner takes a hit on their downpayment. The $50k then gets added into the duration of the mortgage (20 years) at the same rates as the original $300k.
reply:
————
Too complicated, it takes too long, how do you handle home sales before end of term?, who exactly is ‘the bank’?, what if it appreciates before end of term?, just to start.
Nothing is going to happen. The US is going to go Japanese. I paid off my house and acted with common sense. I’m sorry for the greedy people who thought they were getting something for nothing but time to take the medicine and stop with the pouty faces and whines. They’re only losing money, not their health or their lives or their children. I’m responsible and am offended by more bailouts for anyone.
The govt and Fed should stop borrowing and stop printing money, allow values to fall to incomes, and then watch the economy pick up. Booms only happen with bubbles and allowing values to reset to appropriate levels will create conditions for a new bubble over something else. The govt is already subsidizing housing by supporting bank failures, and bank financed FDIC funds are paying for the rest.
Stop with the new bailouts, already.
September 12th, 2010 at 11:11 am
Do you think the mortgage holder would agree with this plan if the homeowner’s downpayment was less than 20% as in your example? I would love to see the distribution of underwater homeowners by downpayment percentage. I would imagine that a small number of homeowners invested 20% down in their home as a downpayment. My assumption is that the distribution would be heavily in the 5-10% downpayment range.
I can’t imagine the mortgage holder would be willing to agree with this plan for those mortgages where the homeowner only has 5-10% down.
~~~
BR: Excellent point
September 12th, 2010 at 11:17 am
Let’s revisit: Too Big To Fail
Who (whom) ever is getting a “break” here, either in whole or in part, is part of a class that is “too big to fail.”
Who (whom) ever has gotten a “bail out” for any reason in the past few years, either in whole or in part, is part of a class that is “too big to fail”
Who (whom) ever never got a “break” in the past few years, who is not in a class big enough to participate – they are the big losers – as they are (where) part of the contributors to the fund – that bailed out the rest.
We tend to help people who were not “together enough” to protect themselves – let’s earmark the individuals – and reduce their Social Security benefits by 10 to 15% when they receive them (and of any kind of pensions, they may receive) and replenish the pot. As for corporate beneficiaries – we should put a “stand in front” debt instrument – ahead of all other liability holders – to be paid off first in any kind of dissolution – Then highlight the Stanza “…and liberty and justice for all!”
PS. There are still at least 5000 people on Wall St, 10,000 people in Washington – who have not been jailed – or penalized – forget the Jail – confiscate their wealth and let them live under bridges…
Finally, outlaw lobbying. They provide both big money and information to our legislators – both tainted by self interest. Have Congress take annual tests (like school children take) if they fail the test, their term expires within 90 days of the low score. Have Major CPA firms administer the tests and score them – the test identity would be by code # – not by name. Finally, again, Separation of Church and State – removing tax exempt status of violators.
None of these suggestions are either right wing or left wing – or even controversial – they put justice back in the system.
Goldman Sachs – is just plain evil and deserves full punishment on all of the suggestions – everyone is afraid to even point a finger at them.
September 12th, 2010 at 11:20 am
This idea potentially represents a huge wealth transfer from Tax-payer to bank(as if we haven’t had enough of that already). If we’re talking about a 100k write-down on a troubled 400k to 300k(25% severity), this is far more generous than any recovery if the loan went to foreclosure, and then again the tax-payer is on the hook for the new loan. And don’t forget the recidivism rate for troubled loans is very high.
September 12th, 2010 at 11:24 am
All these new proposals are wacko. Too much hand-wringing over this. The solution has already been underway for a long time. The homeowners just stop payment whether they need to or not. By the time the sheriff comes, the free rent over that time would have made up for whatever losses have ever been incurred. As for the mortgage holders, the lesson in economics is priceless! A win – win situation all-around! So you see, everything works out for the best in the best of all possible worlds!
September 12th, 2010 at 11:30 am
Dead Hobo said – Stop with the new bailouts, already.
Sechel said – How about we leave things alone and stop picking winners and losers?
I say – The market knows best. Leave it alone to do it’s own correcting.
September 12th, 2010 at 11:31 am
PS, it’s no crime to be poor, even if you once had money. Sorry if you lost it all because you borrowed way to much and didn’t consider ideas such as ‘loan payments’. Sure, there’s always someone to trot out who has real hardship and an experienced story teller can make their situation sound like the saddest and most horrible thing ever. Too frickin’ bad.
I may be fortunate now financially and positively do have the ability to improve my situation. But that’s because I thought ahead, didn’t spend every dime I made for necessities or what I rationalized were really necessities, or was dumb enough to think prices would rise forever to the point I did something I couldn’t exit fast. What’s happening today is what’s called ‘consequences’.
I lost about 10% of my invested funds in the recent fall that has not been recovered. Over the decade I made well over 10x the amount I lost so big deal. The markets paid for my house. I planned and don’t feel like subsidizing the losses of those who probably thought I was stupid because I didn’t chase yield in the dot com bubble (I couldn’t understand why companies with no revenue or profit were worth so much so I didn’t bite.) or because I never pissed away a fortune on a two week vacation to somewhere pretty. PS, my childhood was squalid poor. Being poor is not a disease. It’s an incentive.
But, whiners vote and Uncle Stupid will pay their bills for them. The Fed will print trillions to help out. The economy will continue to decay as a result.
September 12th, 2010 at 11:42 am
I think this is a poor idea for a variety of reasons BR. The 10 yr loan doesn’t make any sense and when have banks agreed to take a haircut on ANYTHING? I wrote a long response but erased it. The best thing is to let prices fall and put NEW buyers into homes, en masse, at much lower prices. It is the BEST way to clear this hurdle. Any and all attempts to affect pricing will fail and most of them will possibly make things worse. Humans are not very good at just letting things correct naturally. We want to do it NOW and OURSELVES. Politicians are especially bad at it (yeah – I don’t include them in the human category lol). But that is precisely what we should do imo. Ben’s attempts to keep the system flooded with cheap, unsecured credit will fail and when it does it will be an EPIC fail for the ages.
September 12th, 2010 at 11:47 am
Left out that to the extent these policies work in the short run, they make the home purchase more expensive for the new home buyer.
September 12th, 2010 at 12:01 pm
Relax. Let the free markets adjust?
It seems that in the US everything has to happen IMMEDIATELY, and that’s just not realistic.
So, SPEND AGAIN? Yawn………….
September 12th, 2010 at 12:18 pm
Sounds like the best idea proposed to date, and certainly merits at least a trial run. If it works, I suspect that it would cut the length of the depression by 5 years, maybe more.
Which, of course, means that the chances of this being attempted are are pretty much zero.
September 12th, 2010 at 12:33 pm
Oh yeah – and another thing BR – banks are still insolvent. Until they make themselves solvent, they will be EXTREMELY fearful of keeping ANY loans on the books that aren’t ROCK SOLID. So…since refi’s often fail due to joblessness and other issues, what’s the point? The majority of refi’s fail anyways so the banks are gonna want to take as much cash upfront as is possible. They don’t want to lower their cashflow in the HOPE that people keep paying. They want as much NOW as is possible.
September 12th, 2010 at 12:39 pm
I appreciate all the “let the inept suffer” sentiments from the above commenters.
You do realize that when that happens, the banks are likely to need more support — and surely you harbor no beliefs that the goobermint that they own will not spend even more to bail them out? And in the end, those “clever folks” who have avoided trouble and have any remaining assets, those will be the ones who are taxed to keep the goobermint going?
This seems to me to be a huge case of cutting off one’s nose to spite one’s face — if that old saying has any resonance for y’all. It my well be that the moral thing to do would be to let those who deserve it (including the banksters, please) get their just desserts, and relieve the moral hazard a bit. But in a society, we are all, to some degree, interconnected, and the consequences of your neighbor’s stoopidity tend to splatter on you as well. So if you force them to suffer the consequences of their stoopidity, the price of their mental adjustment might well be a below-market valuation of your home, and reduced employment possibilities for yourself (in a depression, job opportunities shrink for everyone) as well. Is their suffering really worth that to you?
Sometimes when people make mistakes that by all rights should get them killed, but by some miracle they survive, the close brush with the Grim Reaper tends to make them wake up and change the way they live. I doubt that very many of those who are currently facing certain foreclosure, and can see it coming and cannot escape from it, are likely to return to buying outsized homes or return to house-flipping using insane mortgages, if they manage to somehow escape their certain doom.
Sure, there are always going to be those who are determined to self-destruct, and will do so again if given the opportunity. So why not give them the opportunity, if it means allowing millions of others to wise up and change for the better?
Just a thought, while I’m feeling beneficent …
September 12th, 2010 at 12:49 pm
Yes, anthing that makes sense is better than the typical “lipstick on a pig” action. When are they going to realize that it serves the nation to actually do something that makes sense? Can you seriously make the case that what BR proposes can actually do more harm than good?
September 12th, 2010 at 12:50 pm
Sounds just a tad bit complicated, bureaucratic, and flawed.
It’ll happen.
September 12th, 2010 at 1:19 pm
“Can you seriously make the case that what BR proposes can actually do more harm than good?”
Yes, I can Louis.
1. The banks are insolvent so ANY cuts they take get passed on to the economy in the form of TIGHTER lending restrictions. Right there you have a net LOSS of credit creation.
2. The banks need to make themselves solvent BEFORE they can lend in any significant way.
3. The 10 year loan concept is silly imo because that too would be a loss of at least 3% causing further credit restrictions.
4. Were rates to rise, the banks would have made a terrible move since the price of homes would fall quickly in the face of higher rates meaning the smart move (looking back) would have been to increase foreclosures and get whatever $$$ they could at the time. IOW – what seems like a terrible price now for an FHA home will look like a GREAT price if rates rise. If rates fall, prices MAY stabilize however but potentially this could backfire in a huge way.
5. Banks would be stuck with lower cashflow at a time when they need to raise $$$! This is counterintuitive although it’s better to have a lower-performing loan than a non-performing one! Still – all evidence points to refi’s as failures. NONE of this can work until joblessness abates and the banks can safely refi knowing the borrower can make those payments. And millions of jobs are gonna come from where? The banks know 50%+ of the people that refi STILL default and so they grab as much $$$ as they can and then try and paper over the loss or kick the can.
Get rid of mark-to-myth and you’ll see the whole system collapse in a NY minute.
September 12th, 2010 at 1:32 pm
To the point about the banks being insolvent.
Agree, but bail-outs only further encourage their taking of asymmetric risk/reward trade-offs and
there is an answer, raise equity or convert bond holders to equity holders. This last suggestion is probably to late, but it merits being raised because the stock holders are the ultimate owners and if they don’t believe they bear the risk and the reward, the system doesn’t work.
September 12th, 2010 at 1:42 pm
I keep hearing speculation that the banks don’t want to take the write downs of foreclosures because they are insolvent. Putting off the inevitable (balloon payments) doesn’t fix their balance sheets.
If the banks are so unhealthy as to be on the edge of failure, than they should go full throttle Swedish. There is no point in continuing to prop up a failed economic model.
I keep thinking underwater houses need to be foreclosed on, so prices can come down. BUt there’s the issue of social stability.
Building on the idea of a strong social safety net, those who lose their homes could have some sort of option to stay and rent the home at a rate below the previous mortgage with some sort of contractual right of first refusal to repurchase the same property at a later date. Seems to me most proposals keep promoting destabilizing society which leads to a dark place.
But then reality kicks in and I recognize that some sort of program like the above would only work with nationalized banks. The program would need to rest on the shoulders of a nation wide land use plan that protected farmland, encouraged open blocks of land, discouraged housing too far off the transit grid, and addressed mass transit. Coupled with federal programs for jobs and industrial development to create much needed income in hard hit areas (Detroit for instance – great location for industry, access to water, shipping and rail transit vs Phoenix – which never should have been allowed to expand to the size it is today as there is no water).
So not gonna happen.
But hey, a girl can dream.
September 12th, 2010 at 1:55 pm
The plan is for those that have remained current. Seems to me these are the ones worth helping, since they’ve kept paying through the crisis and likely don’t want to lose their homes.
Let FNM/FRE refinance them. Once they’re out of the private pools, then the bondholders are stuck with the dreck, as they should be. Next step haircuts for bondholders.
September 12th, 2010 at 2:09 pm
Dow- They put off the inevitable because they believe they can reflate the bubble and get more for their physical assets in the future. I believe they are foolish for doing so but they probably have no choice. If they sold everything at market value, they’d be put into receivership in an instant. So they kick the can and slowly try to regain solvency over time at the expense of a reduction in credit being injected into the economy. That’s where ZIRP comes in.
September 12th, 2010 at 3:54 pm
dead hobo said:
…”I paid off my house and acted with common sense. I’m sorry for the greedy people who thought they were getting something for nothing but time to take the medicine and stop with the pouty faces and whines. They’re only losing money, not their health or their lives or their children. I’m responsible and am offended by more bailouts for anyone.”
Agree wholeheartedly. Proposals like this one are simply and ultimately self-serving attempts by people to indirectly preserve the value of their own house.
constantnormal said:
…”So if you force them to suffer the consequences of their stoopidity (sic), the price of their mental adjustment might well be a below-market valuation of your home, and reduced employment possibilities for yourself (in a depression, job opportunities shrink for everyone) as well. Is their suffering really worth that to you?”
Umm.. that’s assuming the rest of us were: a) dumb enough to buy a house in the past 7+ yrs or so when it was clear to we were in a bubble, b) took out MEW, and c) didn’t save enough to support themselves for potential reduced-/un- employment.
September 12th, 2010 at 6:06 pm
Mayor Quimby were talking about loans that are current and made in a certain time frame. If we keep it focused on that I think BR makes alot of sense.
“the whole system collapse in a NY minute” that sounds very Paulson like but now on the other end of the bailout for the citizens and not Wall Street.
“I’m sorry for the greedy people who thought they were getting something for nothing” You guy’s really believe that everyone that bought property between 2004-07 falls in this camp?
September 12th, 2010 at 6:19 pm
Barry, are you assuming that the banks now want to do something besides pretending that this is all a bad dream?
You’d think that after all this time the banks would have gotten together with each other and the government to come up with some sort of rational solution. Instead, we’re going along the economic route that the Russians pioneered decades ago, where the workers said “We pretend to work and they pretend to pay us.”
I’m beginning to think that, as a group, bank CEOs are the most incompetent CEOs in America, which is sad considering they were arguably the most highly paid ones.
September 12th, 2010 at 6:27 pm
Even if taxpayers took 50% of housing write downs and banks the remaining 50%, I would consider that significant moral hazard reduction. Because the alternative is probably that taxpayers pay 100% of write downs. Therefore, it would be in the long-term interests of taxpayers to sacrifice with the banks but to a level where the banks learn a significant lesson. As an incentive, the government could cover 50% now and allow the banks a three year period to write down the remaining 50%. There should also be a six month deadline for banks to sign loans into this “joint write-down” container thereby putting pressure on banks to turn out their garbage quickly.
September 12th, 2010 at 7:05 pm
lets just legalize clawbacks from the sellers between 2003-2008. those bastards made out like bandits!
September 12th, 2010 at 7:28 pm
As long as the homes are worth more than original cost in 30 years there can be a way out.
Redo the loan at present value of the home.
Make the difference between the new loan and the home cost an equity kicker for the lender or an investor.
Package into 30 year instruments. The investor is only betting that the home will be worth more in 30 years. A good bet across the board.
The current homeowner/borrower gives up some or all the upside of the home but has place to stay for 30 years or… could be structures as well for the life of the homeowner just like Reverse Mortgage.
Give the investor preferable Cap Gains treatment …. say 15% and void all taxes for any loan forgiveness that may be implied.
You could have many variations that the lender and investr could choose from
Equity split
Length of loan for life of lendee or loan
Interest rate above market to alter any conditions above.
etc.
It could be tailor made to the lendee making it preferable to stay in the house rather than foreclose whereupon the lender and lendee both lose as the lendee will probably have to pay rent and pay a higher rent 10 years from now … the lender will have to add another property to the overburned housing market with little chance of ever recouping losses.
September 12th, 2010 at 7:50 pm
A plan that may work in a Central Bank induced recession, but now we have a Debt-Deflation outside the Central Banks control hence the intervention of Gov’t. Average household = Max Income Inequality, Lots of Debt, High Unemployment and likely to go higher, because Gov’t bailed out banks instead of the Country.
A viewpoint of where we stand:
“Class interests and the future of inflation”
http://resourceinsights.blogspot.com/2010/09/class-interests-and-future-of-inflation.html
“Of course, central bankers are right to worry about systemic financial collapse. But they always seem to think that the response to such a threat should be to guarantee the investments of the rich using the public’s money. Central bankers and financial regulators often come from investment houses and banks which are, of course, controlled by the rich, and so are infected with an idea that infects so many of those who are rich or who cavort with the rich, namely, that what is good for the wealthy is more or less identical with the public interest.”
September 12th, 2010 at 8:12 pm
I agree with many here on the major points of causation of the mortgage crisis. I also believe that Principal Reduction is key. Where I take issue is that every plan I have read out there, but one, is focused on the concept of lowering the original mortgage to only the property’s value. There is a lack of understanding in that if you did that, regardless of the remaining assumptions and strategy, you will still have a mortgage, even if it re performs, will still have to be carried as an impaired loan on the books of the Lender/Servicer etc. That means that every loan that these types of Principal Reduction strategies will fail in that the lender cannot create the liquidity necessary to get the loans off the book including re securitizing, Re REMIC etc the pool of restructured loans. You must lower the balance to at least 80% or you must obtain costly credit enhancement like MI, Wraps or default ins.
There is a methodology out there right now, based upon a major Patent, that can not only solve the above problems but add tremendous liquidity allowing even a GSE loan to be restructured. It takes 5 minutes to go through 18 slides. http://www.slideshare.net/equidebt/h-option
September 12th, 2010 at 8:42 pm
Does the plan get us anywhere different than no plan? Would the orchestrated losses be ultimately greater or lesser than unorchestrated losses? If not lesser , have you sold the voters and taxpayers who will not be able to participate in the plan, (renters and doing too well) yet one more bailout and a local one at that to resent? Defaults of reworked loans? Brand new mortgages held by 60 year olds? Sales of properties with reworked loans? If it can be sold, it sounds doable. What are the unplanned social, political, and economic costs
September 12th, 2010 at 10:35 pm
Yur points would be valid if this were being proposed as a mortgage reliref program. But it is just anither way to funnel mo9ney to the banska dn mortgage lenders.
This is a STEALTH BANK BAILOUT PROGRAM. Another one.
September 12th, 2010 at 10:52 pm
I would like to see *all* policy response focus on getting back to a larger number of banks. I can’t find a current chart but this one http://www.fdic.gov/bank/analytical/fyi/2004/070904fyi.html shows a pretty steady market of 14k banks for over 60 years and then the sharp decline/consolidation period. Tbtf policy is only countered by a robust and growing number of new market entrants. At a recent conference I was told new bank startups are facing all kinds of red tape. No amount of engineering can or should save the current banks. Let’s focus on helping entrepreneurs create the next generation.
September 13th, 2010 at 7:20 am
1. No plan will have truly widespread success. The mortgage situation is not monolithic. People in distress are in that state because of a thousand reasons and degrees of severity including loss of income (often a spouse’s secondary income), illness (coupled with poor or lack of insurance), divorce (ever more prevalant), added childcare expenses (not considered in any underwriting), etc. So, a plan such as this might be wonderful – for 5 or 10% of those in trouble who want to stay in their homes and safeguard their credit. Maybe not a pancea but well worth doing for those 1,000s of families.
One cannot condemn it just because it fails the impossible test of addressing every need.
2. I love those who want to stick it to the banks. Has anyone noticed that deposit rates are rather low and fees rather high? Duh! Who the heck is paying for those write-offs? Look in a mirror lately?
3. I do not understand why, instead of an outright write-off, the lender does not take a silent second. So, let’s say that the principal balance on which the homeowner is paying needs to be reduced by $50,000. So the lender MODIFIES (not a new loan) the existing loan and secures it with the original mortgage and a $50,000 junior lien. The junior lien is excluded from the payment calculation and does not accrue interest but sits out there to be dealt with if the homeowner ever sells the property. Of course, if that sale occurs in the next 5 to 10 years there might be no actual equity to satisfy the silent second and it will have to be released but at least the lender can delude themselves that they might be repaid the $50,000 some time in the future.
This too will relieve the nonsense of trying to peg this to a new current appraisal. Who cares what the property might appraise for right now? What is important is what the property is worth if/when it is next sold.
4. Your proposal requires rewriting the loan. Bad move because then the loan is subordinate to any existing second lien (HELOC, piggyback, etc.) You have to modify instead.
September 13th, 2010 at 8:44 am
OK, let me be honest up front. I did not vote for our President, nor would I would vote for his re-election based on his performance…..so far. Could that change? YES. If he continues to point out that the current crisis was handed to him, or he inherited a mess…..my view will never change. In my opinion he has had numerous opportunities for “change” and has passed on every one of them. The fact that he re-nominated Ben Bernanke and has not asked for the resignation of Tim Geithner (whom he should never have appointed) means he now owns the mess we are in. And for all you out there that still want to blame George W. Bush for the mess, here’s a clue…….the events that led up to the current crisis we are in, were put in place long before he took office. Simply put, we are all at fault for the current mess.
OK…..enough of that. The economy is in shambles, despite what the government manipulated statistics tell you. I really can’t fault the government for massaging the numbers; part of turning the Economy around is inciting positive feelings. There are numerous things that need to be addressed and each of those things has numerous ways of addressing it……all of which we seem to be ignoring. I am going to focus on one, which I perceive to be is the biggest factor, HOUSING. Some things we need to understand that we don’t find in the main stream media is; the HOUSING CRISIS IS UNDERSTATED. That is, the number of homes in or at foreclosure is not being reported correctly and we have a shadow inventory of homes that is going ignored and is GROWING. These are the homes that banks should have already foreclosed on, but have chosen not to. I have read about countless instances (and know of a few personally) where the home owners have not paid a mortgage payment in nine, twelve, even eighteen months. Banks used to send out the NOD (notice of default) after 30 days of non-payment. This has changed to 90 days, so they do not have to be marked in their quarterly reports. But the banks do not want these homes, as they would be required to maintain them and pay the taxes on these homes. Instead, they are choosing to ignore the foreclosures or they are making phone calls telling the home owners, if you send a check, as little as $1,000 we can begin the time all over again. Some people send the money, others say, “not interested”.
Somewhere in the last 30 years something changed. Our economy was re-defined and we became a credit based economy. We had been heading that direction for a LONG time, but it was officially changed in that period. The only problem, all the models out there never reflected such a change and many Economists say we never saw this coming. I have to disagree with that, but that is for another time and another discussion. Years ago (after the great depression), when banks provided nothing more than the utility of banking, the idea of home ownership meant something. This was something you saved up for, put 30% down and did not take a mortgage out for 2 times your gross salary. Otherwise, it was considered a risky investment, by both the homeowner AND the bank. When things changed, mortgage bankers began telling people, to gather your wealth and buy a house based on that. Take the value of your 401K, all the stocks you owned, all other properties, your pension…everything. Well guess what???? MONEY IS NOT WEALTH, nor should banks be lending on the perception of wealth. Under this new credit society, we never re-defined money. Money should not be looked at as M0, M1, or M’ (Prime). The new definition of Money is, “The unencumbered assets against which one is both willing and able to borrow.” (Courtesy of Karl Denninger) WE began to believe this and WE began to live as if our perceived wealth was what we could spend. We then borrowed and spent against this perceived wealth. Guess what? That 401K lost value, our underfunded pensions lost value, and the assets we bought have lost value. What are we left with??? DEBT…huge piles of DEBT. Not just at the personal level, but at the town, county, city, state, federal and corporate level. WE ARE A DEBT SOCIETY, not a credit society. There are 2 things we can do with debt. We can pay it or we can default on it. I am not a proponent of openly defaulting on debt, but depending on what state you live it, I believe strategic default is something worth considering. It is a business decision. Companies like Morgan Stanley have opening done this 3 times in the last 6 months. Just recently one of the largest commercial real estate deals, based in NY City just went through the same thing. There is no stigma to default anymore; the banks have chosen that route too.
MY VIEW is a little different. I want to make something clear to this administration. You can take every alphabet plan out there, whether it is TARP or PPIP or anything….NOTHING will address the housing issue the way it should be addressed. HOMES WERE and STILL ARE OVER-VALUED. I hate to say it, but the only way to save housing is to go through principal reduction. I am not saying a hair cut on prices, as we do have contracts….. What I am recommending is the changing of the contracts to suit both the home owner and the banks. What I think we should do is set a target date. I would pick one of two dates. I recommend starting either at January 1, 2001 or January 1, 2005 and clawing back all mortgage payments and directly re-applying them to the principal portion of the mortgage and beginning the mortgage anew as of January 1, 2010. By doing this you would greatly reduce the debt burden on individuals going forward, which would also help jump start the economy as people might be a little more willing to spend again. You would also immediately put a floor in the housing market when it comes to pricing (without such, I believe we have another 20-30% downside risk). This would also make a lot of people who are currently underwater, able to pay, but considering strategic default back in the black on their homes. This would allow many people who think they are being swallowed by a giant debt tsunami the ability to pay down that debt and get on with their lives. THIS WOULD GIVE PEOPLE THE POSITIVE FEELING we need right now. I am even willing to make this optional for the banks and here is how that would work. The banks would choose to enter this program. If they chose not to enter it, this is what they need to do. Go out and foreclose on all properties where delinquencies exceed 60 days. Take the property over, pay all taxes on the property and bring them up to date. Maintain that property with the intent to resell it. They must also MARK EVERY LOAN TO MARKET. That’s right, honest accounting will be forced upon them. If we bankrupted Arthur Anderson for allowing Enron to fudge the numbers, why shouldn’t we force the banks that fudge the numbers too???? For that matter, lets also go after the enablers…the debt ratings agencies (again..another time and another discussion)
Now I fully understand that banks would be against this, but we did bail them out recently and this is owed to the American people. I think it is time WE CALL IN THE FAVOR we are owed. I also NEVER want to hear another Congress Critter or representative of the administration say again, “But the banks re-paid TARP”. THEY have not re-paid it, so get over it. The American tax payer is still on the hook for hundreds of billions of obligations. When these banks were BAILED OUT, they were also told to recapitalize, which they did at OUR expense. They sold FDIC backed bonds, and lots of it. (MANY NON-BANKS also sold FDIC back bonds, which is against the charter of the FDIC. The FDIC was created to protect depositors, not the banks and definitely NOT CORPORATIONS). So if at any point in the future they default on these bonds, we the TAXPAYER, are on the hook for it. So guess what….we still own the banks. Yes, this would also cause all kinds of restatements on earnings going back years, but in all honesty, I don’t believe any of their numbers anyway. Plus, if the banks were doing their duty to their shareholders and actually foreclosing on these mortgages, they would be protecting shareholders from having to fully write down the loss and taking such charges against their earnings.…..Another reason they choose to pretend and extend with the homeowners. So who is kidding who here? They are playing games with the money we gave them. It is time they took a haircut. Taking the haircut, is a lot better than writing a big fat ZERO where a loan used to be before the foreclosure happened. They owe this to their shareholders (both equity and debt).
Being the administration and the congress are beholden to these bankers; I would find it hard to believe that such a plan would be undertaken. But I stand by my view….NO PLAN WILL WORK WITHOUT PRINCIPAL REUDUCTION. This plan reduces principal without changing the amount the home was purchased for. I think it’s fair and it is time President Obama. Change is good…..
September 13th, 2010 at 9:16 am
Since this puts 75% of the loss on the homeowner, why wouldn’t the banks agree?
September 13th, 2010 at 10:17 am
Not buying this. Like others note, its Japanese style non-recognition of losses.
But I am slurring the Japanese. They finally got it mostly right. About 1998. About 6 years late.
To point out the errors—
QUOTE “helping pension funds, banks and other investors in those pools recover paper losses created when prices plummeted”
These aren’t paper losses– they are real losses. Got it?
QUOTE “The banks should be permitted to put these loans into a special “held to maturity” vehicle, so they don’t have to take the (THIRTY PERCENT ) accounting write down today”.
There is no hold to maturity on this crap, or the original crap. Got it?
The sooner everyone accepts this– the sooner securitization can start working again on an honest basis. Rather than continued bogus accounting that will blow up again and stick us and Fannie and Freddie w more losses. Wall st is spending huge dollars and effort, including this bogus trial balloon, to get back to that.
The article is right about the problems, especially short sales frozen, i could not get a purchase done last year.
QUOTE “All those loans have been accounted for at artificially lofty levels, and have thereby provided bogus padding on balance sheets of banks that own them. Banks’ refusal to write down these loans has made it harder for average borrowers to reduce their mortgage obligations, leaving them in financial distress or limbo and dinging their ability to be the reliable consumers everyone wants them to be.”
This is 100% correct and completely contradicts the first quote. They arent paper losses.
September 13th, 2010 at 10:52 am
Why does anybody think housing or any other part of the economy can be managed? Greenspan’s belief that he could manage the economy, create soft landings and avoid the pain necessary to cleanse the system is at the heart of the cause of the financial crisis. Yes it will be very, very painful – the longer you take to face an issue the more painful it is when you ultimately do and we have put off facing these problems for more than 20 years – but in order to move forward we need to accept the pain. Any attempt at a soft landing in housing will only create greater pain at some point in the future. The irresponsible players will still be in the system and capital will be taken from the responsible to prop up the irresponsible.
September 13th, 2010 at 12:21 pm
Let’s use round numbers to keep this simple:
Someone paid $500k for house with a $400k mortgage. But the house is now worth $300k. This is a house that very well might be a walkaway, or go into foreclosure.
Solution: The bank refinances the home for its appraised value — $300k. It takes the $100k balance of the mortgage, and puts it into a zero interest, 10 year balloon loan. After year 10, if the mortgagee has stayed current on all of his payments, the $100k balloon payment gets reduced by 50%. The bank takes a hit on half of the “overlending.” The homeowner takes a hit on their downpayment. The $50k then gets added into the duration of the mortgage (20 years) at the same rates as the original $300k.
Barry, this is great idea, but RE is local and it was noted that it only addresses the financing portion to the mortgagee of said loan. You have been to La Jolla before and some other “desirable” neighborhoods in San Diego. How would this deter the mortgagee (let alone other neighbors) from selling and potentially inflating the prices in the area higher? It seems there would be a mini bubble again.
Would the original modified mortgagee be off the hook for the 10 year balloon loan? Or would this passed on to the new mortgagee?
September 13th, 2010 at 1:17 pm
Instead of restructuring the loan for these mortgages, why not restructure the collateral?
If the lender were to divide the fee on troubled home loans into land and appurtenant structures, then the homeowner could mortgage the structure and lease the land from the bank. The loan for the house part of the transaction could then be arranged to suit the ability of the family’s ability to pay.
The leasehold could be favorably priced (say zero rent for x period of time) with an option to purchase at some future date certain. These leases would be the equivalent of a bond on the bank’s balance sheet, or could even be swapped to the Fed for bonds under some sort of “rescue” program.
Since land value is generally in the neighborhood of 20% of total appraised price, this would allow upside down mortgages to be put right side up and allow families to stay in their homes without undue hardship.
September 13th, 2010 at 1:23 pm
Why should the banks take any hit at all when they know that the Fed and the Treasury (the taxpayers) are gong to make them whole….?
I think that yours is a great idea and one of many ways of skinning a dead cat… However, since your thoughts did not evolve in the bureaucratic, beltway echo chamber, it will promptly be disposed of in the circular file… Sorry….!
Best regards,
Econolicious
September 13th, 2010 at 5:44 pm
dead hobo Says: September 12th, 2010 at 11:09 am
“I paid off my house and acted with common sense.”
Being bailed out by the government is common sense, but you must first be patriotically in debt.
“Banking, the Swedish model”, http://www.csmonitor.com/2009/0622/p06s16-woeu.html, apparently worked for them, but their banks may not have spent a hundred million on lobbying.
September 13th, 2010 at 10:04 pm
There is no good path for this…only less disasterous outcomes.
Your plan is more coherent than most I’ve seen and at least it splits responsibility equally between the parties involved – instead of saddling the rest of us.
But I don’t see it as being workable – if only because of the time periods involved. Ten years is a long time for two scorpions to scheme. One or both parties will find a way to “push” the other – and it will end in a squabbling match for sure.
Folks we’re in the mess because of widespread belief systems which glorify financial conquest. Neither of these parties wants to trade – they want to conquer. So we may actually be better off getting things over with. One contestant must die. Hand em the blades and let them have at it.
Probably > 50% of these conflicts do not originate from need…only from some party wanting a better deal. Attitudes are infectious.
We (rest of us) may also be better off if the borrowing party can never again borrow, and the lending party never again lend. Am serious.