Sunday, December 6, 2009

NYT: Why Many of the New Home Loan Modifications Fail

It is so dispiriting to see so much wasted money to support the Ponzi economy and all its subsets such as housing.  Rather than allowing the market to clear, albeit painfully but in much more quick fashion, we are borrowing & printing countless dollars and putting the obligations on future generations.  We already saw earlier versions of mortgage modifications failed at a rate in excess of 50% [Dec 8, 2008: More than Half of Homeowners with Modified Loans are Back in Trouble]  yet as all people know, when you see a policy that has failed the best way to solve it is to.... do it again.

If you are unfamiliar with what is currently happening, along with countless other programs [Mar 5, 2009: WSJ - Mortgage Bailout to Aid 1 in 9 Homeowners]  the government is pressuring (and incentivizing) the banks to do mortgage modifications - effectively paying them off to get these loans changed.  So people who were once in teaser loans with nothing down and 0% or 1% interest rates, before they ballooned - now get to enjoy super low rates again... 2%ish if they "qualify".  While people who played by the rules get no such benefit. 
  • To get the payment down to the 31 percent figure, the bank first cuts the interest rate, to as low as 2 percent, while leaving the other terms of the mortgage unchanged. For the vast majority of mortgages being modified, that is enough. If not, the term of the mortgage is stretched out to as long as 40 years.
  • Finally, if that is not enough, part of the principal can be deferred. That deferred amount is still owed, but no interest accrues and the lump sum is due at the end of the 40 years, or when the house is sold. (as if any sucker will be sitting there in 40 years to make those payments)
The banks are doing 3 month trials (edit: I just found out the trial program has recently been extended from 3 months to 5 months.... more kick the can policy), at which point I suppose the next step is decided (continue or abate the process).  I admit I am not following it closely anymore as I've thrown my hands in the air long ago.  But this story in the New York Times hits you in the gut... so much of our money handed to people who took out poor loans in the first place, and so many of them are not even bothering to make one payment POST modification.  This is why all the economic data, housing data, any data is so impossible to analyze anymore.  So much meddling, so much stimuli, so much morphine in the system to keep together the house of cards.  If you dare look under the headline figures to see how "green shoots" are being created, you cringe in revulsion.  So many of these loans were so awful [March 19, 2008: Alt A Mortgages Beginning to Break Down] [Aug 13, 2008: Option ARMs- Who Thought Up these Time Bombs?] .... and extended to the people who never had a chance as home "owners" in the first place - we have simply thrown billions of good money after bad to pretend we have prosperity again.  Remember, many of these vintage 2004-2007 mortgages were "no doc" in the first place; so do you really think there will be any viable documentation when you try to give these people free money?

But there is no stopping us... we shall continue the same policies.... bigger in each iteration.
  • Why are so few temporary mortgage modifications turning permanentOne reason may be the same one that a lot of bad loans were made in the first place. Borrowers can declare their income, and the banks are willing to grant temporary modifications based on those figures, without any evidence to confirm them. (the fact we are modifying mortgages - even on a temporary basis - WITHOUT income verification is just plain sad... kick the can Uncle Sam)
  • But to make a modification permanent, the banks have to see proof of income, (what an outrageous request) and the borrower has to make three monthly payments of the new lower amount.(wow, 2 egregious requests placed on the borrower... showing proof of income and make 3 payments at the new lowered mortgage amount
Sounds pretty simple huh?  I wonder how this story ends.... nevermind, I already know.
  • In most cases, those requirements are not being met
  • The banks, and the government, are soon going to have to decide what to do about borrowers who are making the modified payments but have not provided the documents after repeated efforts to obtain them. Should the banks just take the money and let the preliminary modification turn permanent? Or should they foreclose?  (you have to be kidding me...there is a question here?)

  • Those decisions will affect just how fair the program is seen to be. If the banks allow those who do not submit documents to get by without doing so, it will appear unfair to those who told the truth about their income, and paid more than they might otherwise have been required to pay. If they do not, the wave of foreclosures could devastate more neighborhoods.  (I think it is pretty clear based on precedent set the past 18 months, where the decision will fall - let the mirage continue)
Now even more wonderful is thus far the government has refused to release data (I know CNBC reported Diana Olick has been trying for months) on how the modifications are doing.  I wonder why? (that was a rhetorical)  However, some of the individual banks have begun releasing the data and thus far, it's ugly.  Keep in mind after this banking disaster of the past few years, we've now concentrated much of the mortgage market into the hands of 3 of our oligarchs - Bank of America (BAC) [now owning the largest morgage originator Countrywide], Walls Fargo (WFC) [now owning what was once the 6th largest bank Wachovia] and JP Morgan Chase (JPM) [now owning the largest savings & loan - Washington Mutual].  Here is what Chase is reporting. .
  • Chase disclosed in November that nearly a quarter of trial modifications had failed because the borrower did not make even a single payment, and that nearly half had failed to make all three payments required before the modification could become permanent.
So let's stop right there.  1 in 4 of your modifications did not make 1 single payment at the lower mortgage amount.  The program should be stopped right there based on that "success" rate - it's a complete sham.  But to take it further, half failed to make all 3 payments necesasry to turn from trial to permanent.  HALF!  Yet the banks are once again (pun intended) laughing to the bank because the US taxpayer is paying them to do the trial modifications.  Who cares if they succeed?  We are once again doing payouts based on transactions rather than potential success which was the nexus of the entire disaster we just went through in the housing market.  As with almost all things in financial oligarch - heads they win, tails they win.   And in this case the US taxpayer loses - again. 
  • Of those who had made all three payments, only about a quarter had submitted all the required documents.
This is the hilarious part...
  • In Washington, there are suspicions that banks simply are not trying, that they do not really want to make modifications. There is talk of shaming them into action. Tempers may run hot when bankers meet with Treasury officials on Monday and then testify before a Congressional committee on Tuesday.
Because if we shame the banks into doing more modifications then of course home owners being modified will begin paying.  By the way, after what has happened the past few years, aren't we clear the banks have no shame? 

Effectively all we are trying to do is stop foreclosures, improve economic data, and sing Kumbaya - by using taxpayer money to throw as many people, as soon as possible into loan modifications - if they can pay or not... if they provide full documents or not.  Ponzi style.

[Nov 25, 2009: America's Stealth Stimulus Plan - Allowing its Homeowners to be Deadbeats]
[Nov 19, 2009: More Homes in the US in Delinquency or Foreclosure, than for Sale]
[Apr 15, 2009: Treasury Saving $10 Billion for Big Banks to Modify Loans]

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