MichaelSchmichael

Lax Underwriting , Foreclosures, and Credit Crunch Stimulate Misery Industries

Good article, but I would like to get your comments on an exchange we had a while back re whether banks were actually taking the haircut and writing down the principal balance preemptively. This article suggests that, no, banks are not willing to write down the balance and work with the borrower, preferring foreclosure. Yet, before, you indicated that banks were taking the writedown or selling the defaulted loans to GSE's.

That prior exchange follows.

I first commented:

The article and comments re modified terms disregard the impact loan recasts and teaser rates are going to have on losses in the Alt-A portfolios. The "payment shock" and related defaults associated with these factors will operate independently of interest rates. Further, because many of the borrowers could not afford the payments on their principal balances if subject to fully amortized payments at market interest rates, loan modification is simply not an option without a principal haircut (which banks don't appear willing to take on a preemptive basis).

You commented:

Uh, speaking as someone on the frontlines? The banks are taking the haircut and writing down the principal, either through short sales or loan mods. It was a good theory though.

I responded:

Uh, Jimmy Lathrop, you think First Fed is going to voluntarily take the 40%-plus haircut required to get the principal balance on this loan (from the WSJ) low enough for Mr. Truong to afford his payment?

"Dien Truong, a 35-year-old, water deliveryman, pulled out $156,000 in cash when FirstFed refinanced the $628,000 mortgage on his Richmond, Calif., home in 2005. Mr. Truong used the money as a down payment on another home and turned the FirstFed home into a rental property. But the $2,500 a month he collects in rent is no longer enough to cover his mortgage payments, which have climbed to roughly $5,100 from $1,618.

FirstFed offered to refinance him into a new loan with payments of roughly $4,250 for the first five years, but Mr. Truong says he can afford only to pay the $2,500 in rental income. Because he has been making the minimum payment, his loan balance has climbed to more than $690,000, which is more than the home is worth.

"I've been a good customer," says Mr. Truong, who hasn't made a loan payment since March. "This time my credit will be screwed up for good." His loan application shows that Mr. Truong and his wife earn $165,000 a year, more than double their actual income, says Katrina Vizinau, a housing counselor with Community Housing Development Corp. of North Richmond. Like Mr. Truong, she says, many borrowers say they didn't read the application until later."

You responded:

MichaelSchmichael - the answer is yes, because they are doing it now, or they are selling the loans to a GSE who will take the loss and let the American taxpayer bail them out until someone dissolves the GSE charters, which will not happen in the near future.

Thoughts?