Lenders, Loan Modifications and Coming 'Cram-Downs' 24 comments
an article to
-
Font Size:
-
Print
- TweetThis
The debate over how to stop foreclosures rages on. The FDIC’s Sheila Bair is at the forefront of the crusade to modify mortgage loans to help stem foreclosures. There have even been reports that the regulator will be forced out of office because she has been fighting with other government entities to have loan modifications implemented more aggressively.
Bair doesn’t focus on the lenders, she just wants loans modified and says the government programs in place have not been effective. She’s been trying to push forward the FDIC model of dealing with failed IndyMac Bank’s loan portfolio as a prototype for all government efforts.
Tom Brown has been critical of Bair’s efforts to have loans modified and says the market must return to equilibrium without her economy-defeating ideas. He says loan modifications will only delay the inevitable cleaning out of the market. Besides, regulators reported recently that the majority of loans that have been modified often default anyway.
Lenders have been considered the bad guys, showing a lack of effort to modify loans. Bloomberg reports that many of the piggyback loans that were popular during the housing boom have been stymieing mortgage modification efforts—meaning that in many cases the lender simply couldn’t change such a complicated mortgage scheme. Or that when one part of a mortgage is modified, the other part of it may kill the whole thing anyway. Homebuilder Lennar shows on its Q408 conference call that it is often a simple matter of communication.
Traditional sellers, that is, homeowners and homebuilders, are not able to sell homes unless they offer even greater discounts and keep up with liquidation values. The movement to keep people in their homes and to rework defaulted loans is frankly frustrated, by the inability of banks and servicers to actually communicate with their borrowers, and reworked loans are defaulting at an alarming reported 50% to 60% rate in the first three to six months.
Offering lenders the option of modification, but not forcing them, is just one of the reasons numerous well-meaning government programs to stop defaults have failed. Efforts to force lenders to modify loans were stopped short when the $700 billion bailout bill passed in October. Now the movement to allow judges to modify loans is gaining ground again. This “cram-down” concept may yet take hold and then lenders will have no choice.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
On Dec 31 05:28 PM Can'tSpotABubble? wrote:
> This scenario is part of the problem. When will people understand
> that a contract is a contract. The lender and borrower have specific
> remedies to all contingencies stated in the contract. They may not
> be pleasant remedies, but they are spelled out in the contract at
> the time of inception nonetheless.
>
> If America chooses to go against over 230 years of contract law precedent,
> the long term ramifications are very detrimental to the future of
> this country.
>
I understand your position, but the banks should not rely upon the government to be their collection enforcer nor savior. In most states if the mortgage in question is the first mortgage, it is a non-recourse loan therefore the banks only remedy is to seize the property. The borrowers credit record will get dinged but that is the end of it. However, if you constantly went to the housing ATM to live beyond your means you should be hounded until you pay those debts. There is culpability on both sides of the transaction. The people who SHOULD NOT be paying for this fiasco is the U.S. taxpayer.
BTW a good read on the bankruptcy "reform" that was passed and other topics that are very relevant today can be found at www.conservativenannys.../
Many desperate, over-extended mortgagees will grasp at any straw in an attempt to avoid foreclosure. They do not have the basic financial skills to assess prudent action or they would not have mortgaged over their head to begin with. More than a few $75,000 income mortgagees will jump at a modification that brings their monthly mortgage payment, initially $3500, down to $3100. Many will not stop to determine whether their budget will balance.
Why do the lenders make ineffective modifications? I'll give a list (probably far from complete):
1. They will gain some decrease in foreclosures, although based on what has happened so far, it will probably be below 40% of the modifies.
2. They expect that the number of payments will be increased before foreclosure, giving them a marginally improved return.
3. They expect the average time to foreclosure will increase and lessen the holding time of those foreclosed properties (until housing sales volumes start improving).
4. Improve the lender's public image: We're good guys, we try to help.
Mortgage modification is a solution for only some mortgagees. It will have a reasonable success rate only when the resulting housing costs are reduced to a manageable percentage of income (38% max guideline) and the current market value of the home is not substantially below the new mortgage principle.
By the way, the 38% includes not only mortgage payments, but also property taxes and insurance.
Lenders may evaluate principal reduction as a modification option, if they feel the modification has a high probablity of succeeding and their experience indicates a much greater loss potential via foreclosure. A 20% principal write-down, which is quick, may be preferable to a 50% final recovery through foreclosure, which may take a long time.
Variations of the principal write-down can involve such things as a contract to share future appreciation, upon sale, if there is any.
All of these voluntary actions have a better chance of avoiding economic dislocations than cram downs.
John, I appreciate your comments on why modifications often fail, which are well thought-out, but quite frankly they've really stuck in my craw. When you say "only the monastic will avoid default" and "They do not have the basic financial skills to assess prudent action..." my immediate response is So What? Perhaps the lenders should give them a pamphlet to help them learn their chants. At minimum, any judicially-enforced cram-down should come with an automatic wage garnishment for the amount of the new payment (whether it's 50% or 40% or 36% of income), enforced until all loans against the underlying collateral are paid in full. It's remarkable how resourceful people can be when they have to be, and how profligate they can be when permitted.
Let's put some numbers to this. Joe makes $80k a year. He lives in a house for which he paid $500k; he owes $445k at 6.5% and the property could be sold today for $320k. He's paying $3450 a month (52% of his gross income), of which about $2300 is tax-deductible interest and another $450 is federally-deductible property tax (he lives in California and pays 1.1%). His monthly take-home pay is approximately $5750. After making his onerous mortgage payment, Joe has $2300 left. Note that we're assuming Joe is single and has no dependents; if this is not the case, he probably pays almost no taxes at all and his take-home pay will be higher still.
My question to my fellow readers is this: what is it that's so all-fired important to Joe's monastic lifestyle that he needs $2300 a month for it? Robes, rosaries, and bibles aren't very expensive. Let's keep going with this and make up an example budget for Joe.
Housing: $3450
Savings/retirement: $500
Groceries: $500 (Joe eats meat every day and has a thing for lobster)
Utilities: $350 (Joe lives in the desert and air conditioning is expensive)
Car note: $500 (Only poor, smelly people ride the bus)
Car expenses and fuel: $200
Laundry and miscellaneous household costs: $100
Clothing and other durables: $150
Total: $5750
Monastic? Try decadent. Joe is living like a king on a pretty ordinary paycheck despite being in debt up to his eyeballs. He's even putting away money! He'll be in trouble if he loses his job, to be sure. But the reality is that even if we cut his pay by 30% he could continue making his mortgage payments if he decided to forgo the lobster, ride the bus or trade in his Acura for a 9-year-old Toyota, turn his thermostat up a bit in the summer, and save a little less. He now takes home $4350 a month. His new budget looks like this:
Housing: $3450
Savings/retirement: $100
Groceries: $250 (Joe has meat four days a week, lots of rice and beans)
Utilities: $250 (Joe likes to set his thermostat at 82 in summer)
Car expenses and fuel: $225
Laundry and miscellaneous household costs: $75
Total: $4350
We're starting to approach monastic here. But notice that Joe's housing payments are now a whopping 74% of his gross pay!
So, sorry, I'm just not seeing it. The reason Joe doesn't make his mortgage payment isn't that he can't, it's that he doesn't want to (and probably doesn't even know what his income and expenses even are, so trying to set out a reasonable budget isn't even possible). Under circumstances like these, lenders should be able to obtain garnishment orders for delinquent loans if the collateral is under water and the borrower's remaining income would be sufficient to sustain life and health. In truth, even with a supposedly inconceivable 74% mortgage burden, Joe is living a lot better than 80% of the people alive today. He could cut another $400 or so from his new spartan budget without threatening his life or health (and he'd still be living better than nearly anyone in Africa or Asia). More to the point, he'd still be making his mortgage payment every month.
Too many people have insane ideas about what the essentials really are. If you've lost a lot of money on your house and money is tight, you don't get to just stop paying. You cancel the cable TV subscription, quit eating out, and rein in your spending. No doubt there are people who truly are at rock bottom already; as a lender I would be happy to work with such a borrower even if it means a principal reduction simply because I can see that he or she really is doing everything possible to pay, and is therefore likely to continue to do so if we can come up with some reasonable terms. But in our example above, Joe isn't even trying. He's not a very sympathetic figure; as little love as I have for banks (hint: none at all), they're in the right here almost every time. Suck it up and pay your debts, and learn a tough lesson your good-for-nothing parents should have taught you.
Meanwhile the banks get many from the government. I think Joe is just looking for his share. The gov could have let this thing take it course, but, when they stepped in, this is what the rest of the US will want, tax papers want their share, if they are paying for it anyway.
.Lenders take too long to act for processing or approving loan modification,.
.Lender's staff does not know or not prepared to do loan modiication
.Lenders did not have direct contact, tel no. fax no or email address.
.Lenders staff had a collusion with outside foreclosed lawyer.
.Lenders had a group of investors already that will buy the foreclosed properties os that they refused to approve the loan modificaiton such as Wells Fargo. No wonder why Wells mostly deny the loan modification...
.Lneders is the one participating in the auction for the subject foreclosed properties.
;Lenders staff had no knowledge of dealing with loan modificaiton
;Lenders asked large upfront mony payment and charging expenses for the Homeowners.
.Some lenders like HSBC would let the loan modify for 6 months only.
.The government should enforced that the only on th e8th missed payment the lenders should initiate the foreclosure.
.The government should also enforced that the lenders should accpet partial payment. Normalyy if you pay partial payment especially on the 3rd missed payment they will refused.
.The government should suspend the rating and foreclosue for a while.
.The government should not give bailout to the banks but instead buy the foreclosed property and have it modified by the government itself.
.The FBI should investigate the collusion of lenders staff and the foreclosed lawyer.
.Lenders should pay the 3rd party loan modification companies at least $1000 per file whereas the government is the one paying $1000 for the mortgage servicers.
;Lenders and government should treat the 3rd party loan modification companies equally as like the non-for pofrit agency organization..
.Some of the lenders staff are working for a commission and sometimes they discourage the homeowners not to used the 3rd party modification and instead deal directily to lenders staff with a extra fee.
Oh, I hear you. And you're right, some of them probably are thinking that way and I can't blame them for it. In fact, I too am looking for my share of the handouts. There are 3 different approaches that can be taken here by angry taxpayers:
1. Joe's way: act outside the rules in ways that perpetuate both the transient problem and the deeper underlying problems with the government and the economic system.
2. Voting in a new government. The Obama team is not new; it's the same people you've had all along. Try Ron Paul next time; you'll learn what kind of change in government is really possible, and the handouts to crooks and fools will stop overnight.
3. Get your share by playing within the rules. The system may be corrupt, but it still offers ways to profit from its own insanity. Here you profit by making extremely cynical trades: long banks and gold, short Treasuries (and with the latter at bubble prices you really can't go wrong). Be sure to keep the gold in hand so that no one can take it from you; you're making this trade because you know they'll take anything they can find and want them to take it from someone dumber than you.
Note that (2) and (3) are honest ways to fight. (1) is not; it steals from people who may themselves be honest, provides relatively limited upside, and does nothing to punish those responsible for the current situation (which, I must add, includes YOU if you bought an absurdly overpriced house and took on a loan you knew or should have known you can't afford). Worst of all, in the absence of other meaningful action, it encourages the powers that be to do even more of the things making you so angry today. And I hope you have an escape route planned because the ultimate result of these policies isn't pretty, and they're not going to stop!
Your discussion of the ability to pay problem is better than mine. You have re-emphasized my feeling that lender loan modifications are preferable to cram downs.
You assume that lenders will always do what's in their own best interest. In reality they are not prepared for this crisis and subsequently have employees with no experience in these matters making decisions.
Often times the lender would be best served by offering a principal reduction but due to mark-to-market rules they can not even entertain that as a possibility.
Lenders certainly didn't have any problem making the loans when the market was running up. Now that it swiftly ran into the tank I feel they have a fiduciary responsibility to suck it up and deal with the reality of pending doom if they refuse to take the hit and allow anyone who wants to modify their loan an opportunity to do so. And I'm not just talking about the 1 out of 5 troubled loans. My bent is the 4 out of 5 homeowners who continue to make their payments and live up to their obligations even though their property values are underwater because of the greedy lenders and the 1 out of 5 homeowners who screwed it up for everyone else.
If the Fed is bailing out the big boys then the big boys should have the common sense and desency to help out their customers and I mean all of them. During the past 2 years close to 40 percent of our wealth has literally vaporized in both real estate and the stock market and it will get even worse when the prime residential borrowers and commercial troubled loans start kicking in in '09.
You can't blame this on Johnny Six-Packer and Linda Lunch-Bucket. Everyone wants to be part of the American Dream. But the lenders are 100 percent the enablers in this scenario. If lending policies hadn't changed so drastically during the past decade do to non-existant and lackadasical regulation in the lending industry these lenders would have never had the opportunity to make these bunk loans in the first place.
As far as I'm concerned anyone who is upside down is a victum and should be made well by the bullies who put them in that position in the first place. I'm for principal and interest loan modifications across the board. The banks can take the write down on the difference. Afterall they're getting a trillion dollar bailout or more when all is said and done.
And please don't try negotiating directly with the lender. That's tantamount to letting the fox guard the hen house. All you'll end up with is a cosmetic modification i.e. knock a little interest off for a few months, stick the arears on to the back side of the note and then start jacking up the payments after a few months to get the loan back to where it was. That's a ruse. What you need is a qualified third party negotiater who's looking out for the homeowner's interest not the lenders.
dnusbaum.com/crisis.ht...
www.thepoint.com/campa...
surferjohn@cox.net
THis is a mistake, Maximondo is a marketing company and affiliated with Law Office Of Anthony Montegna of Illinois.
On Jan 01 11:06 AM maximondo wrote:
> A friend of mine worked with Maximondo Modification Consultant Corp.
> of Chicago, Il 60618 7735888776 and they told me the problems for
> loan modifications that I noted:
>
> .Lenders take too long to act for processing or approving loan modification,.
>
> .Lender's staff does not know or not prepared to do loan modiication
>
> .Lenders did not have direct contact, tel no. fax no or email address.
>
> .Lenders staff had a collusion with outside foreclosed lawyer.<br/>.Len...
> had a group of investors already that will buy the foreclosed properties
> os that they refused to approve the loan modificaiton such as Wells
> Fargo. No wonder why Wells mostly deny the loan modification...<br/...
> is the one participating in the auction for the subject foreclosed
> properties.
> ;Lenders staff had no knowledge of dealing with loan modificaiton
>
> ;Lenders asked large upfront mony payment and charging expenses for
> the Homeowners.
> .Some lenders like HSBC would let the loan modify for 6 months only.
>
> .The government should enforced that the only on th e8th missed payment
> the lenders should initiate the foreclosure.
> .The government should also enforced that the lenders should accpet
> partial payment. Normalyy if you pay partial payment especially on
> the 3rd missed payment they will refused.
> .The government should suspend the rating and foreclosue for a while.
>
> .The government should not give bailout to the banks but instead
> buy the foreclosed property and have it modified by the government
> itself.
> .The FBI should investigate the collusion of lenders staff and the
> foreclosed lawyer.
> .Lenders should pay the 3rd party loan modification companies at
> least $1000 per file whereas the government is the one paying $1000
> for the mortgage servicers.
> ;Lenders and government should treat the 3rd party loan modification
> companies equally as like the non-for pofrit agency organization..
>
> .Some of the lenders staff are working for a commission and sometimes
> they discourage the homeowners not to used the 3rd party modification
> and instead deal directily to lenders staff with a extra fee.