Mortgages: More Support for Principal Reduction

The Saturday NY Times had an OP-ED piece titled, “Why Own When You Can Lease?” It was written by Daniel Alpert, who is described as a ‘managing partner in an investment bank’. Mr. Alpert admits to having an axe to grind in this. His thoughts should be read by lenders, borrowers and D.C. Mr. Alpert is another voice out there that is promoting the idea of broad based debt relief.

In brief, the proposal is to create a sale and lease-back opportunity for underwater borrowers. The sale would be a deed in lieu of the mortgage. The lease would be based on fair market rentals. The borrower would walk on the old mortgage with little or no impact on their credit. They would continue to live in the home but at a much lower monthly cost. Sweet deal for a lot of troubled borrowers.This idea is going to be part of the solution. How big a part remains to be seen.

What is becoming increasingly clear is that various forms of principal reduction are going to have to be part of the solution to the mortgage mess. As Mr. Alpert and others have pointed out, “If the government made it work that way with GM, why not me?”

What might this mean? There is no data, so a range of estimates. At this point the number of underwater borrowers is greater than 10%. I think it is equal to as much as 30%. Assume the number is 20%. That would imply a number between $2.5-3 trillion of mortgages that are affected.

The next question is, “By how much are these mortgage underwater?" Another assumption, 30%. If this is in the ball-park then that would imply a mark to market on all of this of $1 trillion. Approximately 55% of all mortgages outstanding are held or guaranteed by Washington. Therefore the cost would be born equally by the public and private sector.

As crazy as this might sound, $1 trillion would be a very cheap price to pay to get this behind us. As far as economic stimulus goes, this one would send the economy and the market to much better levels.

My concern is that little or no action will be taken to provide true debt relief for underwater borrowers. We will continue to modify loans with better terms but no principal reduction. The results of this are already clear. More than 50% of modified loans re-default in less than six months. Over time that number will go toward 100%. We need to end the cycle of default. The current modification approaches are not achieving that.

The risk that we face is that the cycle continues and deepens. If my estimate of 20%/30% for underwater total/embedded losses moves to 40%/40% the cost jumps to more than $2 trillion. It is unlikely that the private sector could afford this large a write down without another TARP bailout. It is equally unsure that the public sector balance sheet could absorb another $1 trillion hit.

This problem is better addressed sooner versus later. Japan tried the ’bury your head in the sand approach'. Twenty years later and they are still paying for it.

Comments

[Kacey:]

I like it !

Aug 02 08:59 AM

[SoCalGal:]

Me, too!

Aug 02 11:58 AM

[Gtarras:]

i should have bought a house i could not afford!!! damn!!

Aug 02 12:44 PM

[Tim Plaehn:]

Bad math. If a trillion in mortgages is 20% underwater that is $200 billion upside down. Still a pretty big number and the banks are holding $800 billion in real estate (today's value???). Easier to give across the board principal cuts on all fannie & freddie backed mortgages originated in 2004 thru 2006. Reduce all government backed mortgages by 20% and the bond pools take the same haircut. Instant equity for a huge number of homeowners and less chance they will walk away. Also, lower payments and a chance to refi the mortgage at current rates.

Aug 02 12:47 PM

[Loan Survivor:]

Over 25% of financed homes in this country are upside down a this time. First American published a study last October that almost 25% of financed homes had less than 5% equity in them. Well, housing prices have fallen more than 5% since than, so we can conclude that over 25% are now upside down.

Also, reagarding your comment about over 50% of loan mods redefaulting within 6 months shows you've fallen for the banks' propaganda. That "stat" came out of a Federal Reserve Bank of Boston study taht skewed the number by only using loan mods done in 2008. That same study showed that only 26% of the loan mods included in the study actually LOWERED payments. for more on the TRUTH about that study read: drewsmortgagenews.blog....

Aug 02 03:15 PM

[John Lounsbury:]

Bruce - - -

I expect you will get some flack for this article, but you have raised some good discussion points. A big problem is that there are so many different individual scenarios among the underwater mortgagees that no one (or even a few) canned plan(s) will likley work. If a canned plan that works for one doesn't work for 19 others, even a minor misapplication (say to 2% of mortgages when it only works for 1%) produces a 50% failure rate. Implementation of such actions as you propose does require significant effort and capital write-downs. If 50% fail, is it worth the effort?

Aug 02 03:24 PM

[Market Sniper:]

What is NOT addressed is what happens as the market continues to slide, and slide it will. We are not even close to market clearing prices as yet. As the sub-prime meltdown moves to a prime mortgage meltdown. We have at least two more HUGE waves of foreclosures coming. So you do principle reductions for those under water now. They should be further under water later. What? Another round of principle reductions? The little bounce we have supposedly seen is for the absolute bottom rung of properties. How many 2 bedroom 1 bath cracker boxes are there? There is absolutely NO move up market as the higher end properties continue to crash. Also, what does pricipal reductions due to the leverage on the lenders' balance sheets? Could trigger even more and larger bailouts, bank failures, etc. We should all agree, there are NO easy solutions to this and it should get worse, much worse shortly.

Aug 02 03:46 PM

[Sober Realist:]

Nourial Rubin and a few other economists proposed an across-the-board mortgage reduction many months ago. Blaming the average Joe for buying a house in the bubble period is more of a scape goat for poor leadership in this country. Government and Fed policies as well as the actions of the unregulated financial oligarchy are at the root of the bubble. The average Joe is not a trained economist and didn't know what a " housing bubble" was. But now he certainly does.

Aug 02 04:28 PM

[john69er:]

I have put over 300k in my home and it is upside down by 250k they have made a wonderful mod payment that is going to last 5 years then it goes to 5.5 percent guess what im still walking. Want to know why because i will not have paid a dime down on the principal and have no way to pay back a home that is so upside down. Bottom line is these mods are bull shit. A stall tactic by the banks and gov. It is not helping us at all other than to get through the next five years. What about my future i have none to look forward to as the property is not done falling in value. If the bank would have gave me a principal reduction and a higher payment I would have preferred that better than a low payment in which I am basically renting a house that will never be payable. The cause of the market problem now is upside down mortgages not people who can't pay. Who the hell wants to pay for a house worth nothing. Tough shit for anyone that thinks we signed too. Because I signed on for a house that was worth half a million not 250k it works both ways you appraised it you told us what it was worth we had to pay taxes and insurance based on those values and you left our streets full of foreclosures crashing our values you short sold homes further causing our homes to lose value and ruining our savings and equity in our homes and you will reap the whirlwind baby oh yes you will this thing isn't near over. None wants a home that ain't worth shit. Keep your houses I'll go rent want to negotiate then reduce it to fair market value but principal def. is not an option that intelligent homeowners want.I want my money the 200k in equity that I had before you destroyed my home with empty homes all over my neighborhood. Prediction 2015 will see another housing crash as all those mortgages that they modified reach maturity and basically it is like an arm where it will go right back to the payment it was the housing values will not be what they were if you average 5% a year starting from now and we are still not at the bottom anyways so you are just going to be short selling homes later while they are renting them out basically for now to figure what more to do. Write em down and get it over with dumb asses. You will be doing it anyways and I will not buy another home ever and get stuck in this crap again. And if I do I will have a lawyer write provisions in the mortgage on my behalf in regards to value loss caused by foreclosures or I won't buy. I recommend no one buy homes and let these banks fail and the government until they do what is right by the people. They caused it let them pay for it why should we pay for it. Don't except mods that have increases in five years or you will end up in the same situation all over again and five years of your life will be gone think about it then there will be a ballon payment at the end of thirty years anyways even if you got a 40 yr mod its a trick it amortized over 40 but you will owe the balance and any principal after 30 plus the balance of principal that was forbearance it is not a true principal reduction. This will leave you in much the exact same situation in five years promise you. Especially since anyone picking up a short sale in you neighborhood will be able to sell under you for some time to come that will prevent you from selling for some time. Think about it joe blow buys a short sale = to your home for half the price he can selll it when the market improves to someone for a profit they can buy it sell it and so on for many years until these homes rebound then the market crashes again because of maturing mods and you are right back to square one thanks but no thanks either short sale the homes to the property owners or forget you mods that' s what you should tell the banks I did. Have fun debating it I spent five years trying to sell my home and will not go through the stress of wanting to end my life because of a house and greedy banks that ruined the market. A speedy write off would have fixed this the first year it happened instead it will be 2020 until it gets fixed because it will take another five years after the mods collapse before
these morons running the show realize they have no choice.
But to reduce the principal on upside down homes.

Aug 31 12:58 PM