Three Problems with the Fannie / Freddie Mortgage Modifications 21 comments
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There are at least three serious issues with the Freddie (FRE) / Fannie (FNM) mortgage modification programs. First, they are fundamentally offensive to anyone who bought a house with a reasonable amount of money down, some contentiousness about the price paid, and the cash flow to support it. Granted, sometimes you have to hold your nose and go along with such things if a credible case that the alternative is worse – i.e., mass defaults – but that doesn’t make it materially less offensive.
Second, unless I missed something, the mortgage mods didn’t actually, you know, modify the most vexing part of the mortgages. Interest can be lower, but principle will be repaid at the end of the loan? What the f**k does that do that’s useful for people who owe more on their mortgages than their houses are worth? Those are most of the people walking away right now. Simply being able to (currently) muster the cash flow to hang in doesn’t make it materially less likely that many people won’t walk away from their home.
Third, the 38% debt to income cap is, in a word, high. Sure, it’s better than being really, really high, as is the case when you made no down payment on a mortgage that has now reset, but that’s sort of beside the point, isn’t it? These are still people highly levered to fixed payments in an environment where their incomes stand a greater chance of declining than increasing over the next twelve months.
Maybe I’m wrong, but I think we’re setting the stage for mass judicial review / rewriting of many U.S. mortgages early in 2009. This plan doesn’t strikes me as if it will stick.
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This article has 21 comments:
The last time prices fell 30% in Southern California, it took 10 yrs to get back to the 'top' or 'break even' point for the mortgage. In other words, IF you bought a $600K house that is NOW worth $400K, even if the government modifies your loan, you are essentially paying 'rent'. In the forward 10 yrs of paying your mortgage, you'll NEVER accumulate ANY equity and will only get you out @ your original $600K. You're essentially servicing a loan like a renter is paying a landlords mortgage! You are 'renting' your own house till the mortgage is paid OR you move and STILL have a balloon payment to pay off...WHY would anyone do this!? Walking away and getting into another situation where there is at least SOME upside Equity potential would be THE only answer for these people! Sorry...
This would serve us better in a number of ways. First, as a taxpayer I wouldn't be as upset at someone who played by the rules to have first crack. Second, it would eliminate moral hazard. Third, we may get someone who better qualifies for the loan and therefore we wouldn't be in jeopardy of this home later falling into foreclosure anyway.
Also, 38% of income? Whose income? Husband and wife, or just husband, or just wife. Many might find it better to "lose" their job to claim hardship and take advantage of this program.
And how about those equity lines? What happens to them in this scheme?
You can take this to the bank - this program is nuts. It is one more knee-jerk attempt to fix the problem.
Moreover, how much do you want to bet that more and more peo0le are now going to stop paying their mortgages hoping for a better deal to come along when this one blows up in their faces.
Here is the root of the problem - these "fixes" are merely window dressing to make it look like something is being done.
Let the bums get foreclosed on, go bankrupt, and lose the houses. The private sector will come in and clean up the mess a lot faster than a bunch of moronic bureaucrats masquerading as saviors.
Does this plan change the guarantees to the bondholders? Or who makes up the difference?
... Flash
Furthermore, your conclusion that they would be better off walking away from the current situation where they are merely "paying rent" and getting into a better housing situation with upside is based on the false assumption that their credit record would allow them to do so.
Lot of people took out 30 year mortgages due in 5 or 7 years on the assumption that they'd only be in the home for less than 5 or 7 years and thus would not face the higher reset rate on the balloon that was due. How is this any different than the refinancing risk on the balloon at the end of your 10-year recovery scenario?
I'm sorry, but your description here wreaks of a prevailing attitude that purchasers of real estate are entitled to capital gains while the downside risk is only to be born by the lender.
On Nov 11 05:32 PM RJMoran wrote:
> I have to agree with PK...
> The last time prices fell 30% in Southern California, it took 10
> yrs to get back to the 'top' or 'break even' point for the mortgage.
> In other words, IF you bought a $600K house that is NOW worth $400K,
> even if the government modifies your loan, you are essentially paying
> 'rent'. In the forward 10 yrs of paying your mortgage, you'll NEVER
> accumulate ANY equity and will only get you out @ your original $600K.
> You're essentially servicing a loan like a renter is paying a landlords
> mortgage! You are 'renting' your own house till the mortgage is
> paid OR you move and STILL have a balloon payment to pay off...WHY
> would anyone do this!? Walking away and getting into another situation
> where there is at least SOME upside Equity potential would be THE
> only answer for these people! Sorry...
Instead, the 80/20 people who lied about their income are the ones getting the first handout and the 20% down people are getting screwed!
You'll never see the government help the 20%ers though... because they're "rich" {or at least used to be}.
Policy-wise, I can understand the need for a "quick-fix" in order to preserve real estate values in nearby areas where borrowers are making monthly payments & are not underwater. But the leaders in Washington need to communicate to these imprudent borrowers there's no such thing as a free lunch. The policy should be "I will help you now, but you will pay me later" in the form of equity. There is absolutely no reason why these borrowers should keep 100% interest in their home after receiving a gift at the taxpayers' expense.
good point. you heard about all these bidding wars in the real estate hot spots. Now the dumbest (highest) of those bidders is now holding the house. Why not give the people who were prudent and said "too rich for my blood" a shot.
cadoggy
{or at least used to be} ... That's funny.
You are correct ! . Those of us who put 20 % down , 28% ltv fixed mortgages on homes we could afford are getting f**ked without even a kiss!
This is welfare that rewards financial irresponsibility . You are also correct in saying " we used to be rich ".What happens when these losers default again ? You know they will , demanding more handouts ! kp is correct in wondering " what happens to all those equity lines of credit ?"
I think real estate prices in most places should come down. I think in the long run most people have less stressful lives if real estate prices are low. I think Paulson/Bernanke thought, if we have this many problems with real estate going from 100% of peak to 80%, then life as we know it is going to end if real estate goes to 60% of the peak. 60% of the peak is probably a good annual growth rate of 5% from the yr 2000 in most places. So Paulson/Bernanke want real estate prices to stop going down even though the increases in many hot markets would now indicate they have more to fall.
I don't think mortgage resets do that much to keep real estate prices stable or higher. Resets keep foreclosures off the market but that's all. They don't make prices any more attractive for the new marginal buyer, who is the person who determines current market value in the market. They don't change the price for the marginal new buyer and they don't make financing any easier for the marginal new buyer.
I saw comments about rent. Actually we all are paying rent until we get the mortgage paid off. After the mortgage is paid the house can still be taken away in some States using eminent domain laws. I'm sure there will be some morons who will try to use 90 day delinquencies to lower their payments. I'm just as sure that in 180 days there will be a law passed making that illegal and it will be backdated till 11/11/08.
I think adjustable rate mortgages need to be scrapped and balloon payments made illegal. Both of these methods add fuel to the fire. In the 1970's all mortgages (that I knew about) were fixed 15 or 30 year rates.
Folks who have a few thousand to spare might want to go look at the houses for sale at Fannies website. You can find some pretty good bargains. Fannie has 67,000 homes to get off the books so it's sale time.
I actually think that BofA, JPM and Citi are trying to make good moves to rewrite some of the loans, but I would agree with Paul that it is hard or impossible to accomplish. I definitely think FMN and FRE would invite doom by doing that. Without the proper valuation and transparency, any action would still have a huge risk to fail. Not to mention if you revalue one mortgage, you technically need to revalue all the mortgages.
However, since the true pricing of the real estate is the problem of the loans, why should the banks focus only on salvaging the bad loans? Why not just try to revalue the value? It does take some time, but like Richard said, there will be others? Perhaps the banks should then take a writedown of part of the loan as losses should owners choose to move on and downgrade their homes? I must admit, two problems exist for this, time and guts to swallow the bitter pill. I personally will swallow bitter medicine to get well soon, so I hope this idea could fly into something better. It is better than obliteration though.
Taking a variation of a proposal in the WSJ a few weeks ago - refinance the owner occupied house at a low interest rate through Federal borrowing (mortgage at 4 1/2 %) where the obligation to pay remains if one walks away from the house, and the debt does not go away in a bankruptcy (except for extraordinary medical situations).
The current loan balance is not paid in full by the Federal program: The portion of the mortgage that is greater than 85% of the original purchase price - is a 100% loss for the lender. For the portion of the remaining loan balance after the first adjustment, that is greater than current current assessed value of the house there is a 50% loss to the lender.
When the house is sold in the future, the Federal program recovers their loss from the second adjustment at a 50% rate until it is recovered to 150%.
With the lower interest rate, tax deduction (and Obama tax credit for mortgage interest), most people will find staying in their existing home better than walking away.
To enter the program, both the current mortgage holder and homeowner would need to agree to doing so.
Finally, change the tax code so that the interest paid on new non-recourse mortgages are no longer deductible or eligible for the Obama mortgage tax credit.
For those of us who paid our mortgages on time, it's not clear if this is a better deal, they don't have non-recourse loans, we enjoy 100% of home appreciation. At the same time for those in trouble, the offer is good enough to accept.
Second problem cited...underwater...m... clients I work with in lending were buying for 5-7 years...or more....if you bout in 2004, perhaps you worry about things in 2011 or later....if the modification plan is properly structured, the incentive to stay in the home versus renting will be a simple math issue....
The third problem cited....underwriting ratios...is the real culprit....if Mr. Kedrosky thinks 38% is HIGH....what would he think of FNMA's realities of 65%....because F/F were puching through thier best approvals with 60/60....63/65.... FHA today is writing loans with ratios beyond what FNMA is proposing....the 38% guideline proposed is, by recent and current experiences, quite tame and moderate.....
The leveraging of income by the GSE's and others....as well as the treatment of income..defiining just what is stable income...is at the core...along with the generous F/F guidelines....
ANd, the housing problemsw today are the result of declining income, that was over leveraged to begin with...
Not all mortgages in the USA are non-recourse. In fact, only a few states like CA and AZ have that law.
And even in CA if you ever refinanced your primary residence it is no longer non-recourse.