Many analysts have noted that lenders are often better off doing a loan modification with principal reduction than going through the foreclosure process. Despite this fact, lenders would rather foreclose and lose more money than do any kind of principal reduction. Why is that?
Asking Price: $692,800
Address: 33 Canopy, Irvine, CA 92603
{book5}
Clocks — Coldplay
Confusion never stops
Closing walls and ticking clocks
Gonna come back and take you home
Cursed missed opportunities
Am I a part of the cure?
Or am I part of the disease?
Forgiveness is the supreme act of kindness. The beneficiary of forgiveness is not the person being forgiven, but the person doing the forgiving. Carrying anger is both spiritually and physically harmful. That being said, don’t expect forgiveness from lenders any time soon.
There has been much discussion about whether or not banks should modify loans, including giving principal reductions, or if they should simply foreclose and move on. There are compelling financial arguments that favor loan modification and principal reduction; it is not going to happen.
Banks are fully aware of the moral hazard of principal reduction. Once they go down that road, it changes the behavior of borrowers everywhere. l last wrote about this in Crisis or Cure? In that post,I noted the following:
At the conclusion of Mr. Mortgage’s most recent post, he stated, “Bottom Line — after seeing these latest figures I am
more convinced than ever that the next step is wide-spread principal
balance reductions that will reduce the massive negative equity burden
in America and be a first-step to solving the mortgage and housing
crisis once and for all.” Widespread principal balance reductions are
occurring in a process known as foreclosure. Once a property goes
through foreclosure and is resold, the new buyer has a much lower
principal balance than the old one. That is what needs to happen.
Does Mr. Mortgage believe this is going to happen through voluntary
“gifts” of principal reductions to existing borrowers from the lenders?
That is what his statement implies. I rather doubt it. There is no way
to make this “gift” equitable, and the moral hazard would be extreme,
and the lenders will resist this to the bitter end. Look at their
opposition to allowing bankruptcy judges to reduce principal balances;
they would rather take the home back in foreclosure than allow
principal reductions even in the case of borrower insolvency and
bankruptcy. Further, they have managed to kill that measure in the
Senate—a Senate completely controlled by an antagonistic Democratic
majority. Don’t expect to see either a voluntary or a politically
mandated effort at principal reduction any time soon.
At the bottom of the astute observations, there was this gem from grabasnorkel:
IR you and others
have mentioned the choice the banks face -> either mod the loan to X
amount or foreclose and get the same X amount.
Seems like equivalent options, but they are not. The threat of
foreclosure has to be backed up with real foreclosures, if that threat
is watered down, it becomes less of a stick they can use with other
loans. We see some of that in the marketplace right now because many
people are expecting a loan mod and have therefore stopped paying on
their mortgage.
It’s like a loan shark. When loans aren’t repaid, they have to break
bones, even if the borrower is broke. Even once in a while the borrower
is found dead – this has the purpose of keeping the threat real.
If you f#%k a mafioso over hard, and skip town, he’s still going to
come after you to kill you even if he can’t get his money back. Why is
that?
Or a credit card company. They don’t HAVE to ding your credit if you
default on a card, but they will. If they don’t then they won’t be
taken seriously and that leads to more defaults.
Two years ago a guy at work told me the banks would be reluctant to
foreclose because they wouldn’t net anymore than they would by working
with the borrower.. He was wrong then, and is wrong now. Think about it
for a moment.
I have been thinking about this comment for a couple of weeks, and I have come to the conclusion that grabasnorkel is right. The political behavior of lenders lends evidence to this same conclusion. Besides the lobbying for watered down legislation I mentioned above, consider the Bankruptcy Abuse Prevention and Consumer Protection Act passed in 2005. The main purpose of this major legisltation was to make it more difficult to obtain debt forgiveness. When you really think about it, lenders will do just about anything to avoid debt forgiveness even if the short-term costs are higher. Hence, we have loan mods that do not forgive debt (but do create lifelong homedebtors) and we have foreclosures.
The result of bank lobbying and practices is going to be a huge wave of foreclosures. It is clear that Americans have too much debt and need significant debt reductions. We will modify those few on the fringe, and we will foreclose on the rest. That is just the way of things.
One final ramification of lender policy is going to be the long-term exclusion of the foreclosed from the housing market. Previously, I had believed that we would see a resurgence of subprime to serve the needs of those with good jobs and healthy downpayments. Now, I don’t think this is going to happen. If current debtors believe they will be given a home loan in 18-24 months after a foreclosure, many more people will default. Lenders are going to exclude this group from home ownership for years just to serve as a deterrent to others. Current GSE policy is a five-year waiting period before they will buy or insure a loan from a borrower who has gone into foreclosure. Despite political pressure likely to mount in the future, don’t expect this to change.
In short, overextended borrowers are in deep trouble, and lenders intend to keep it that way.
I have joked about the Banker’s Prayer. Do you think they will forgive us our debts? or are overextended borrowers in as much trouble as I say they are?
Asking Price: $692,800
Income Requirement: $173,200
Downpayment Needed: $138,560
Monthly Equity Burn: $5,773
Purchase Price: $870,000
Purchase Date: 12/6/2006
Address: 33 Canopy, Irvine, CA 92603
| Beds: | 3 |
| Baths: | 3 |
| Sq. Ft.: | 2,000 |
| $/Sq. Ft.: | $346 |
| Lot Size: | – |
| Property Type: | Condominium |
| Style: | Other |
| Stories: | 2 |
| Floor: | 1 |
| Year Built: | 2003 |
| Community: | Quail Hill |
| County: | Orange |
| MLS#: | U9002330 |
| Source: | SoCalMLS |
| Status: | Active |
| On Redfin: | 9 days |
stainless steel appliances, ceiling fans, travertine flooring &
berber carpet. Fabulous master bath with spa tub and marble accents.
This property was purchased on 12/6/26 for $870,000. The owner used a $696,000 first mortgage, a $87,000 HELOC and an $87,000 downpayment. That is all gone as the property went back to the lender on 2/11/2009 for $590,750.
If this property sells for its current asking price, and if a 6% commission is paid, the total loss will be $218,768.
IR, I think that grabasnorkel is exactly right. It seems clear, at least anecdotally, that overleveraged people will happily stop paying on a mortgage if they think it probable that the lender will reduce the principal value of their note, and hence their debt regardless of income or ability to repay. If that starts to occur on a widespread basis, nobody would see the need to pay their mortgage. I could foresee individuals taking mortgages and then immediately defaulting to negotiate a lower principal using non-payment as a club. What then would become of responsible borrowers? They would be seen as saps and would disappear, as would mortgage lending.
I’ve always know that the only way out of this mess is lower mortgage balances. The scheme of cheaper interest rates being orchestrated by the federal reserve is a temporary and unsustainable fix.
The only way the banks will broadly reduce balances on mortgages is if they’re forced by the gov’t, or there’s a large incentive with an economic backstop provided by the gov’t. This isn’t gonna happen because it creates incentive for every homeowner with a mortgage to default.
Foreclosure is the best and most efficient method of resolving this mess. Besides, I know that when these home-debtors get back on their feet 2-3 years after they lose their homes, the lenders are gonna evaluate them with an asterisk when it’s time to buy again. I’m not saying the lenders will completely overlook these prior foreclosures, but I am saying they will underwrite them differently than anytime before.
“Besides, I know that when these home-debtors get back on their feet 2-3 years after they lose their homes, the lenders are gonna evaluate them with an asterisk when it’s time to buy again.”
I no longer believe this is the case. Unless the GSEs change their policies–and there will be lobbying pressure for them to do so–this will not happen. If borrowers believe they are excluded from the housing market for 5 years, they are less likely to default than if they believe they will be able to buy again in 2 years.
I just don’t see America with a bunch of 30 to 55 year old long-term renters (5+ years). Most of them have families. A lot of these people will be able to meet the standards of down payment and income to re-qualify. JMO, there’s gonna be a program(s) designed just for them.
I am one of them–renting since 05′ –have owned three homes in the past–
I agree. Foreclosures are the solution not the problem. Most people have it backwards. If loan mods were a better deal, banks would dump the foreclosure idea themselves, they wouldn’t need the government to “force them”.
I knew GM would end up in bankruptcy several years ago, however, it took a really severe recession to bring them down. Same thing will happen to the US. It might take 1 or 10 years, but I’m sure the US government is getting closer and closer to bankruptcy or a similar bad thing (like hyper inflation). The irony will be that when that happens, the banks will probably be able to survive, as they will have had a chance to clean up their mess, thanks to the US government.
I’ve commented in favor of loan mods before but am not really in favor of them anymore. It’s not because of moral hazard, as Lehman killed moral hazard for big firms. It is the peak of hypocrisy for firms benefitting from govt bailouts to even whisper moral hazard.
I thought loan mods were a way to rectify problem loans where the borrower got swept up in the bubble. First, it’s hard to determine someone genuinely caught by circumstance apart from someone banking on appreciation as savings. Second, I tried to think of types of people who would be petitioning for a loan mod:
Speculators/flippers – definitely NO
people who used option-arm’d to ‘afford’ – prob no, they knew they were gambling
people who stretched to the limit with a fixed-30 >35% DTI – prob no again, as they should have understood the risk.
Finally, someone who could afford their mortgage, but have lost their job. There should be ways for banks to work with these borrowers, but what they would really be looking for is a forbearance, or a reduced payment until their income got back up to previous levels.
Foreclosures are disruptive, but they push the situation closer to reality – not falsely propping up home prices. The bubble inflating was disruptive too. Many people rightly held off buying, or didn’t move to an area with insane prices.
If one has lost their job – is it really in their interest to make a govt program designed* to tie down to a house in a particular location, thus limiting the scope of their new job opportunities?
*and designed also, of course, to funnel taxpayer money to banks yet again
And there’s nothing that says that their next job will be at the same or higher pay as their last one. Especially when they are restricted to the job market within commuting distance of their home, and there is a recession/depression – whatever you want to call it, there is high unemployment rates – with lots of competition for any jobs out there holding down salaries.
One problem of the banks lobbying efforts to prevent principal reductions during bankruptcy and their efforts to pass risk through credit default swaps is the belief this created among lenders that they no longer had risk. Once lenders and investors alike believed they no longer had risk, they experienced their own moral hazard problems and began lending irresponsibly. That is why lenders were willing to provide the air to inflate a housing bubble.
It reminds me of a personal story. When I was 17, I delivered pizza for commission. The faster you drove, the more money you made. I bought a radar detector, and the day I installed it, I no longer believed I had risk of getting a ticket if I drove very fast. That night I was driving 74 miles an hour in a 40 mile per hour zone when a policeman turned on his radar. My radar detector went crazy, but it was too late. I was probably fortunate to get a ticket before I hurt myself or someone else. I experienced first-hand the moral hazard of believing my behavior entailed no risk.
Irresponsible lending is not cast as the major culprit enough, no matter their “reason(s) for doing so. It’s not associated in the media with pure and simple greed enough – i.e., the lenders are not “the bad guys” and we have to go along with bailing them out. It’s hard to fully wrap my bran around that notion – like I am missing something. Why are we bailing out the greedy banks? Oh, b/c if we don’t, we all go down the tubes. Yet the people behind the greed seem unscathed, more or less (few notable casualties to date).
I guess that I just don’t “get it” if I continue to stare in unbelief at what is happening before my eyes. And all of the green shoots of good news, like 500K job loss numbers week after week are “better than expected,” etc. which translates to “good news.” I don’t know, but when i hear that “good news,” I am reminded of the Black Knight’s “it’s just a flesh wound.”
Thanks for that image, IR. I’m having a good time picturing your fiscally conservative, cold-as-steel rational, 17-year-old self flying down a 2-lane road at 74 MPH. I’ve gone ahead and embellished the image to include your ’84 red ford mustang.
AZDavid, can you make me a picture of that?
That’s a tall order.
http://www.crackthecode.us/images/pizzalaunch.jpg
That’s awesome, man 🙂
Thanks!
Excellent post again IR and grabasnorkel. This is what I keep coming back here for. Thanks.
See http://www.bos.frb.org/economic/ppdp/2009/ppdp0902.htm for a very good analysis on this. The conclusion is that the cost of figuring out whether you are dealing with a ruthless defaulter who could otherwise pay swamps any savings by avoiding foreclosure unless the cramdown is very small.
That’s not the correct question. The question is not whether they can pay; the question is whether or not the they WILL pay. That is, lots of people who could afford to pay the mortgage but are heavily upside down will walk away if their loan is not modified, even though they could pay it without trouble. Some of those people, however, will continue to pay if the loan is not modified. There’s basically no way to tell the difference between these two groups, although you can tell them apart from the group that can’t afford to pay at all without a modification. You probably just have to say that, on average, x% of people who ask for a modification but can afford to pay will walk away and 100-x% will continue to pay (using past results for a guesstimate of x), and then determine if giving them a modification based on those percentages is the best plan to maximize revenue for the bank.
Geotpf – You nailed it. I have several friends who are in hard-core denial about their situation. They are heavily underwater, but they will continue to pay even if their loan isn’t modified. They feel like its their obligation to continue to pay despite the fact that the math says it is not in their best interest to do so.
This actually makes sense to me: no math was used on the way into the transaction, so why should math matter now?
People are making choices based on emotion. The lenders should extract as much money as possible from people this situation… Heck, they’re *obligated* to do so.
The people who took the money signed a contract to pay that money back. These people are being responsible even though they are underwater. I’m not so sure if you should have any negative feelings towards them.
They borrowed the money and now they have to pay it back. What’s there to understand? May be they want to teach their children responsibility for ones actions.
I agree with zubs. They gave their word that they would pay x dollars a month. They should honor that commitment (if they can), even if they could save money by walking away. You can save money by committing fraud or swiping somebody’s wallet too.
Very well put. When they (including flippers) signed the contract they should have had thought of worst-case scenarios too, like their home losing its value, the interest rates going higher (with option ARMs), them losing jobs etc. If they didn’t consider these situations because of their naiveness, over confidence or stupidity why should the govt or the banks help them out now?
But, the problem is there are plenty of such of people and if most of them walked away without repaying, it’s the economy that’s going to suffer. Sending them behind bars under fraud charges would not fill the hole in our nation’s pocket.
I work with attorneys who do loan modifications and many in OC are defaulting on purpose to try to get their loan balances written down. Most of these people CAN pay, they have paid so far, but they just don’t want to pay anymore.
So far, most banks have only been doing principal reductions if there is loan litigation involved, i.e. they violated TILA disclosure laws, etc. If banks start writing down principal balances for OTHERS, even more people would stop paying their mortgages.
The mods so far for those without litigation (no violations of the law by the banks, only financial problems of the borrower) consist mostly of temporary payment reductions and temporary interest rate reductions. Most of the time the borrower has to document income, employment, ability to pay, etc.. It is a long process, a time consuming process with financial records reviewed by the bank personnel, etc.. Seems more onerous in many respects than the process for GETTING a loan.
Anyway, all the friends, relatives, and church members of these people are watching and waiting to see if loan principal balance reductions really happen; if it does, ALL OF THEM will stop making payments and get in line for it as well.
Knowing who is and will be paying for these people’s mortgage manipulations, we should all be very frightened. If banks start doing principal reductions large scale, we’re all dead.
Thanks for the enlightening view from the trenches. It’s very helpful to know how the real world is functioning one mortgage at a time.
I would think that lenders are less likely to go that route because you are dealing with a person who has already defaulted once. It seems that the redefault rates on mods are fairly substantial, why would a lender want to continue to stay in business with a person who is constantly in default, when you can foreclose and sell the property at the same level?
The only question is, can you sell the property at the same level? In areas with extreme drops (IE, the IE), they might be LUCKY to get half of what is owed on the mortgage if the house sold as an REO-in many cases, less. Sometimes much less. Add in real estate commissions, repairs, inspections, gardening and cleaning crews, utilty bills, unpaid taxes, etc., and the net to the bank might be 30% of what was owed-maybe less. If the bank can, say, negotiate a principal reduction to 70% of what is owed, it’s certainly in their best interest to try. If the owner redefaults, it still can be sold as an REO later.
It will never happen, because that will give incentive for people, who would not otherwise, to default in order to get a reduction and then return to paying the mortgage.
And as IR already stated, if people are not held responsible for a contract that they signed, then the whole system comes into question and lenders would be taken for saps.
This is true, but there’s already the incentive for the borrower to just walk away. There’s moral hazard all over the place here.
How fair is this:
Lets say I paid $400,000 for a townhouse and I make $175,000 a year and can comfortably make my mortgage payments.
My neighbor paid $425,000 and makes $65,000 and got into the house using a teaser-rate.
If the bank forces his principle down to $350,000 so that he can afford the monthly payments, what should I think? He gets a $75,000 relief on his house and I get to take an additional shot when he sells for $360,000, nets $10,000 and drives down the comps in the neighborhood.
Not only will banks never go for this, but the general populous would not let this happen.
I think the big problem is that lenders are seeing that current attempts at restructuring. Something like 50% of homes that go through the federal process (extending the loan, lowering the interest rate) end up back in foreclosure within 6 months. If these people are still defaulting, it’s going to take principle reductions of 30-40%, maybe higher, in order to keep them from defaulting anyway. What incentive is there for the banks to reduce principle when its becoming more and more obvious that outrageous mortgages are merely a symptom, not the disease?
My thoughts were ambling in this direction as well. I don’t think of lenders as especially good at judging risk, but that’s due to their behavior over the past 6 years. Risk analysis is, however, still something they have experience at, and I would assume that the employees most capable at this have not all quit in disgust. Two things should be apparent at this point:
a) Most overextended borrowers are bad at managing debt, and will not be saved by principal reduction.
b) These same borrowers, because they are bad at managing debt, will also be poorer risks in the future.
If we assume that mortgage lending returns to more sane risk models, then these people will not be getting loans on good terms anytime soon.
“b) These same borrowers, because they are bad at managing debt, will also be poorer risks in the future.”
I could point out that they might learn from experience and so be better risks in the future … but I don’t believe it. Now flying pigs, that’s another matter.
when you say principal reductions, how much reduction we talking about here? 10%, 25%, 50%??
http://www.nytimes.com/2009/06/03/business/03mortgage.html?_r=1
I honestly don’t think lenders care at all who is paying the mortgage because being indebted to the system is what they want. When you buy a home you are spending double/triple the acutual cost in loans over 30 years. And the hope you take out a second and spend more is a very happy lender. What they want is the bill to be paid and they would rather extend your debt any way it’s possible before they reduce debt.
I am very suspecious of these short sells when banks finally give in to lowering the debt on the home. One in Portola went down to $900k and was gone in one day. Did the homeowner buy it back at the lower price? Did the bank do a deal with them keeping them tied to a mortgage? Where did this house really go?
These great deals on new homes seem to disappear so it makes me wonder who is actually buying these homes?
Should I be making friends with a bank/lender?
The system reeks with fraud one huge reason I will stay out.
This topic and your comment prompted me to add my inflation adjusted 2 cents. i am a renter with no prior experience of applying for a mortgage. There seems to be a huge disconnect between the expected and actual refinance process. A significant number of my friends (6-8 families in Irvine) were upside down on their mortgage. Over the last 2 months all of them have been able to refinance with great mortgage rates. Most of them purchased homes during the boom period (2000-2005) and had good to great credit history. miraculusly all the houses were appraised to have no negative equity, yet it is obvious that none of those houses would sell for the appraised value…i am sure this is not limited to the ‘hot’ market in Irvine.
My post sounds bitter but the fact of the matter is that appraisers make money, mortgage brokers and lenders have a vested interest to make the loans and while we talk about rewarding the responsible the reality is that rules and policies are such that the risk takers are the ones who benefit the most.
The 6-8 families may have refinanced into another adjustable rate loan.
They undoubtedly paid significant fees (regardless of loan type) which go right to the bottom line of the financing bank.
They may have paid the difference in cash between the loan amount and the appraisal (I doubt that).
Would be interesting to know which comps the appraisers used. The 6-8 families would have that info since they paid for the appraisals.
Nevertheless, just doesn’t seem to make sense.
me neither, i do know that 2 had 80/10 loans. one had taken a heloc (for a house purchased in 2000-01) the rest could be 30yrs fixed. I have no idea about the appraisal process, or the comps used. I feel that banks seem to be ok with refinancing people will good credit and 10-30k underwater. They make more money via fees, borrower locks in a lower rate, home doesnt get excessively updside down and all is well in Irvine 🙂
Which goes back to my point as long as the bill is getting paid it does not matter what the house is actually worth because in the end you will be paying double/triple it’s value through interest rates.
The underwater worry is really insane because the price of a asset is only realized once it’s sold. Who is to say in so many years these homes will not be way up? The entire principle of housing has been lost if we drop down the price paid–we might as well do it for every stock I ever bought as well.
Refinancing the loan is really the only sane way to allow correction which is what Ben and company wanted with the lower mortgage rates. And why the credit crunch because the banks didn’t want to give up their cash.
Allowing the markets to be free rates would go sky high because of the higher default rates. Keep a lid on rates has been what the fed has been forcing upon the markets.
Your friends in Irvine were given a reprive if housing continues to correct.
A friend just bought a house he paid 730k for, and the appraisal came in at 780k. I was surprised. I bit my tongue but I wanted to tell my friend “yeah right, sell the house to your appraiser for an immediate $50k profit, then go and buy one of the other three very similar properties that are selling for less than yours!”
During the Great Depression, banks would foreclose and then just rent the homes back to former homeowners.
In Arizona now, similar things are happening (ex. investor buys a home at auction, then rents it back to the former homeowner who is still living in it).
In both cases, people still have a roof over their heads. It’s just that the ownership is different.
Why is that a bad solution?
You know the answer to that–is it a bad solution?
It prevents real price finding/correction artifically keeping prices up and not allowing the market to find the correct bottom through foreclosures.
But… if an investor is purchasing the property through foreclosure, they’re only willing to spend so much on their investment. How is that not still inevitably going to push to the market bottom?
what you are refering to is size and amount of foreclosures–the satuation effect and so far this appears not to have hit Irvine compared to other areas like Inland Empire.
One foreclosure in a neighborhood can always be overlooked–(example)
I agree that principal reductions won’t happen, for all the reasons you name.
I would agree that it should not happen, if not for one fact: taxpayers have given, or loaned if you are optimistic, over 1 TRILLION dollars to banks. Is that enough forgiveness for ya? I think some of that forgiveness should get spread around a bit.
Despite a fair amount of reading, I’ve yet to see stats on the actual number of loans still in the hands of the originating banks vs. the originating bank simply servicing the loan. I suspect a sizable number are simply servicing loans and have to obtain approval from the note holder – which is probably impossible due to bundling in CMOs – in order to deal with the homeowner.
As an aside, there seems to be an upswing in the last week in the number of “new listing” short sales and REOs in Talega (San Clemente) starting in the mid $200s per square foot. This is down from the 300s very recently.
I’m not trying to get too political here, but as a frustrated renter waiting to get into the game I have become very skeptical of the current administration. It seems that the fine print associated with accepting any bailout money implies that the President is the new CEO and decides what direction the company (country) will go. Somehow, (I am baffled at how he pulls it off) the President has convinced America that he is an expert on the auto industry, the financial markets, real estate and the credit industry. All of the posts discussed on this forum describing why the lenders won’t modify loans are well reasoned, logical and make sense….. but remember that we are in desperate times that appear to be getting more desperate. Political decisions seem to be running the economy, not business decisions. The only way that this could ever take place is if America is run by a king with rock star status who is beyond challenge from the business community. My point isn’t to rail on the current administration, rather to point out that we are Alice and our logic might not run things here in Wonderland.
It’s pretty simple. Here’s free money. If you take the free money, I get to tell you how to run your company.
That is, Obama has no control over Ford, because they didn’t need to take the TARP money.
Well, looking at where the business experts and leaders in the auto, financial, real estate and credit industries have gotten us, it seems a bit of a stretch to wonder why the ones bailing them out should just say “here, take whatever you need and do whatever you think is best”. Business decisions are what got us to this situation.
I totally agree that the knuckleheads who got us here should not be trusted or paid to lead us to safety, but common sense tells me that the government as CEO isn’t the answer either. This is the federal government that we’re talking about here. What if GM decides that they need new couches for their lobby waiting room… do they have to get the administration’s permission first? If the government green lights the couches, do they say to buy from the couch store in a congressman’s district in Alabama or from the cheaper store 5 minutes away for less? This example is kind of a joke but at the same time think about the inefficiencies that will come into play. The point of my original post is that we need to anticipate fiscal decisions using the government side of our brain, not the Econ 101 side of our brain. Let’s continue to opine using logic and educated analysis but not be surprised when political policies come into play in this WTF environment.
Great post. Nothing irks me more than the idea of principal reductions. Why not just mail every upside down owner a $100k check? I mean it’s the same thing basically. And how about those who are underwater because they liquidated their “equity” to pay for whatever? Mr Mortgage not only jumped the shark when he started promoting this idea, he earned the scorn of a lot of people and deservedly so. It’s not only morally reprehensible, but does nothing to solve any of these problems.
Plus, many of the “owners” paid little or nothing down to begin with, so they would be rewarded again for a one-sided speculation. Writing down principal is like re-pricing stock options for corporate executives to make sure they remain in the money.
If you took the trillion we used to bail out the banks and mailed mortgagees a big check with the stipulation that it went to repay their mortgage holder, it would bail out the banks and the people at the same time. Seems to me a much more efficient way to fix the economy than what we are doing now. but emotion will overrule logic, so that won’t happen.
Why should we bail these people out at all? Let them either pay their mortgage and keep their house or not and go rent like the millions of others in this country. They are in no way entitled to these houses if they aren’t paying for them.
To “save the financial system”. I was against bailing out the banks. they were at least as stupid and irresponsible as any homedebtor you can name. I’m only saying that if we are going to bail people out to “save the financial system”, why not do it from the bottom up, and not the top down?
The answer is that for some reason people don’t get as outraged by their banker and politician overlords taking advantage of them as they do their next door neighbor taking advantage of them.
Let me posit another theory about what’s happening.
From my observations, the lending and banking industry has been hollowed out and effectively demolished by the financiers and MBA’s to the point where there is no core competence left in the system.
Every stage of consolidation and buy-out was accompanied by a destruction of middle management and experienced professionalism. It’s not that they’re deliberately withholding inventory to prop up their balance sheets. They just don’t have the staff to process the paperwork.
I was naive enough to think that the various moritoria might allow time for financial institutions to develop a team to provide for orderly disposition of these assets, but that doesn’t appear to have been very interesting to the remaining merged and consolidated financial institutions.
We have a vast shadow inventory not because of any strategic decision by lenders, but because we don’t really have any lenders anymore.
They replaced loan review with software models and outsourced loan origination to sleazeballs who made hot money by juking the stats.
Now the hot money guys are trying to figure out how to unload whole bundles of mortgages to their cronies at Penny Mac or Pimco, making another fortune in the process. They’ll move their salaries and bonuses seamlessly from one scam to another.
This may be an even more cynical view than Irvine Renter’s, and thus a preferable theory.
I’ll posit the new version of Occam’s razor. Given a choice between two theories about the economy, the more cynical view is always closer to the truth.
That is my view as well.
Thanks.
It’s a theory, with plenty of anecdotal evidence, which doesn’t add up to data, but I’ve watched the hollowing out of American businesses for decades, with some personal insights into the financial industry.
I had a conversation with a new Mod Guy who is trying to open an office in my shopping center in San Jose. He swore that once he has gotten a borrower a int reduction he then goes back and gets a principal reduction a few months later (planned re-default?). I tried to tell him there was no way banks would just write off the principal but he swears he has done it many times (30-50%). He said he would show me the files on these cases which I will confirm here if he comes through.
The sizes of principal reductions he represented were staggering, but I guess I can’t be too certain he is “crazy” as I told him to his face… in this new brave world, no amount of subsidy seems off limits.
I have heard others make this same claim, and I’ve yet to see proof of it. To me, it sounds like a scam.
I understood why the bank wouldn’t modify my loan to where I could afford it, especially since my income was cut in half (divorce). I believe it’s in the best interest of everyone for the foreclosures to go forward and the markets to rest, and the banks to fail if they need to fail.
But that’s also why I decided against trying to short sell, since I knew the bank wouldn’t agree to a purchase price that I could actually get. Why waste everyone’s time for a sliver of hope that my credit wouldn’t be totally trashed?
That’s what I realized personally. There comes a time when you need to stop throwing good money after bad, and deal with the consequences. As long as I’m still willing to work hard, and have my health, I’ll figure it out.
After receiving my auction notice, I got my rear in gear and found an apartment to rent. I was worried about qualifying for it with a pending foreclosure on my record. My credit cards are already closing my accounts and jacking up interest rates, so I know it’s on my credit report.
I lined up a co-signer (thanks mom!) and went in to apply. They told me 3 things could happen. One, I would fully qualify and could take advantage of their reduced deposit special. Two, I would conditionally qualify, and have to leave a larger deposit, up to a full month’s rent. And three, I wouldn’t qualify on my own and need a co-signer.
To my total surprise, it came back as option one! I even got a copy of the report, and all my foreclosure activity was listed. And this is a sizable company (H.G. Fenton), not a private owner. (And I’m so glad I didn’t need a co-signer!)
To my even bigger surprise, according to my auction notice, my house was sold 2 weeks ago, and I’ve heard nothing from anyone about getting out. I am in the process of moving, just sorting through everything to make all the crap from a 1200 sq ft home with a 2 car garage with a lot of storage into a 700 sq ft apartment with a carport and no storage!
I imagine your case is typical right now. They likely looked past the foreclosure because it is irrelevant to your current debt level: indeed, it’s only a plus, seeing that it’s a lot of debt that you no longer carry. If you had a long history of late CC or auto-loan payments, or were carrying large debts, they might think twice.
From what I have seen, rental companies have been caught off-balance by this economy. Their business model, or their stockholders, may be making it difficult to adjust rents downward as quickly as demand has been shrinking.
I searched company-owned downtown lofts a few weeks ago, and most charts of available floorplans had hand-written downward corrections to the prices, in amounts well above 20%. One super stated flat-out that prices would be even lower in a few months, and that we need not hurry – I doubt her manager would be pleased that she had told us this.
I have the impression that the rental companies are in shock, and are happy to get warm bodies right now.
That’s definitely what I found. I ended up in a much nicer neighborhood than I was in, and looked at 2 complexes my then-husband and I looked at 4-5 years ago, and the rents now are the same or cheaper than they were then. And now they accept pets.
My house issue was the major problem on my report (there’s another minor issue that came up I was unaware of but less than $100), and I’ve had my job for 8 years, and am salaried, so I have steady income.
I’m not sure where everyone’s going…squatting in their foreclosed houses? Moving in with family? Moving away from CA? Not very many of them are renting apartments!
I thought shortsales trash your credit just as much as a foreclosure….
They rent apartments to people with trashed credit? Alert the media!
As far as I know, this is correct (although a lot of people think otherwise). The only difference is the time period that you have to wait before you can get another mortgage (I think two years for a short sale and five for a foreclosure). Can anybody confirm?
I was told by a certified financial planner and also by an attorney (family law though) that short sales were a little less than a foreclosure. As in 30-50 points.
My new point of view is people are stupid until they prove otherwise.
I think banks realize this and also realize that the minute they start reducing principal all the stupid people will stop paying their mortgage so they too can have their principal reduced.
These stupid people will then find out when the NOD’s arrive that they are not entitled to a reduction and at that point will have thier house foreclosed on.
Listen to the radio there are firms advertising left and right for principal reduction. The same stupid people that paid off credit cards with HELO money will try this route too.
I heard an ad on the radio yesterday by a “foreclsure specialist attorney” or something like that. Any way, the ad was peppered with “how would you like to live in your house rent free?” and “you are entitled to principle reductions”.
Sickening.
Actually, paying off a credit card loan with a 20% interest rate using a HELOC loan with a 5% interest rate is pretty smart.
http://real-estate-and-urban.blogspot.com/2009/02/principal-reduction-or-interest.html
See link above to post by Richard K. Green who writes:
“Sunday, February 22, 2009
Principal Reduction or Interest Reduction?
A concern raised with the Obama housing plan is it focuses on payment reduction instead of principal reduction. But a payment reduction based on a cut in interest rates has a de facto impact on principal. While par remains the same, the present value of the remaining payments falls. For anyone who doesn’t need to move, this has the effect of reducing the amount owed (the mortgage) relative to the amount owned (the house).
As for those who do have to move, they are still stuck with the par value of the mortgage. On the other hand, a lower interest rate allows for more rapid amortization. An 8 percent 30-year mortgage with a 100,000 balance amortizes by about $835 in its first year, while a 5 percent mortgage amortizes by $1475. Not a huge difference, but every little bit helps.”
Hi Irvine Renter,
Can you explain how this person applied the 87,000 heloc to the purchase price? Sign me confused.