Economics

Loan Mods Beaten Up By Loan Rockers

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E. Dolphus Unum.

With the real estate market back in freefall, yesterday's House Oversight Committee hearing on the failure of the Home Affordable Modification Program gives some hints about why the pain is going to go on and on.

In testimony, Edward J. Pinto, who has done yeoman work on figuring out how the loan-guarantee giants Fannie Mae and Freddie Mac managed to sneak loans of abysmal quality into their portfolios, gave a pretty full accounting of the program's failings. Some highlight:

* Despite its promise to help "as many as 3 to 4 million financially struggling homeowners" avoid foreclosure, HAMP is on track to spare only about 250,000 defaults.

* Though various ignoramuses continue to claim that unemployment is driving foreclosures, job loss (as noted here many times) is at best a secondary contributor to mortgage default. (That's not free-market cant: It comes from Federal Housing Finance Agency, hardcore real estate interventionist Laurie Goodman, and others.)

* Pinto's estimate of inevitable redefaults on modified loans is an eye-popping 40 percent—and that's actually lower than consensus opinion that has redefault rates at 50 percent. (The performance-so-far figures in the must-read Mortgage Metrics Reports from the Office of Thrift Supervision support the higher figure.)

* Despite conventional wisdom that HAMP would curb redefault rates by increasing the number of principal-reduction modifications (i.e., the bank reduces the actual size of your loan and the taxpayers make the bank whole for its loss — the rarest and most radical type of loan mod), HAMP actually reduced the number of successful permanent modifications. These peaked in the first quarter of 2009, before the stimulus went into effect.

* The modifications being made by and large are based on even worse credit evaluation than the lax lending standards that caused the crisis in the first place. Example: "[B]orrowers obtaining a permanent modification through May 2010 had a median total debt to income ratio of 64%. A total debt-to-income ratio of 40% would be considered high on a loan not at risk."

* A vast amount of trouble has been caused by the administration's need to window dress its efforts and show fake progress. The most damning part of Pinto's report comes in a footnote:

The clogged pipeline problem dates back to a desire by Treasury to post big numbers early on. To achieve this, the entirely new concept of a trial modification was introduced. Borrowers were allowed to enter a trial without qualifying on the basis of income. No doc loans were replaced with no doc modifications. This wasn't fair to those borrowers who had no chance of qualifying. They were left in a no man's land and many will be worse off than if they had been given a quick no and encouraged to find alternative housing. This design flaw caused the HAMP pipeline to become hopelessly clogged, leading to a series of blame and shame attacks on servicers.

As the rest of yesterday's hearings showed, the blame-and-shame attacks have not stopped. "I just wonder how hard you are really trying," Rep. Dennis Kucinich (D-Ohio) told JPMorgan Chase's head of home lending. "Why are you denying loan modifications to my constituents?"

Rep. Edolphus Towns (D-New York) joined in the show trial, stating, "This is not just about HAMP… I think the mortgage banking industry has got to recognize that HAMP cannot be the only solution to the mortgage foreclosure crisis."

Their comments indicate neither Kucinich nor Towns has been paying much attention to what's actually happening in the world of mortgage default. Far from being too quick to foreclose, banks have in fact been doing everything they can to avoid adding more REO property to their balance sheets. Lenders have essentially tolerated defaults on houses with plummeting values, and borrowers in many cases have been getting free rides of a year or more. It's only since the first quarter of this year that the necessary work of foreclosure has begun in earnest—in many cases after repeated cycles of default, modification, redefault and remodification. Without the false hope of being able to bail out on the public, banks and bad borrowers would have taken their medicine long ago, rather than dragging out the agony through this elaborate tango. So this is, in fact, just about HAMP—specifically about HAMP's massive failure to do what it promised, and about how it has distorted the market in ways that will take years to sort out.

NEXT: Now We Know What Honest Services Fraud Is (Sort Of)

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  1. Speaking of ignoramuses, we interrupt this thread for a breaking news announcement. Dave Weigel has resigned from his WAPO gig.

    http://www.mediabistro.com/fis…..165850.asp

    1. Don’t fuck with Matt Drudge, apparently.

      1. And all this time, Weigel thought hubris only applied to the terms “Bush” and
        “Iraq.”

    2. From the comments:

      Its ok, Petraeus has agreed to step in.

      I like that, pretty funny.

    3. David Weigel|6.14.10 @ 5:01PM|#

      Well, I really enjoyed the two and a half years I spent here, and I’m constantly confused as to why mentions of my name lead to a lot of schoolyard insults. I really can’t figure out why they do it — lack of fulfillment seems like a good enough theory. After all, I’m here, and they’re where I left them in 2008.

      Now if you’ll excuse me, I have to return to my rewarding job and large circle of friends. I don’t know how my ego will ever recover…

      1. His mom will prepare a TV dinner for him t cry into.

    4. Nice. There’s even a comment from 24AheadDotCom.

  2. Let’s not defile a Cavanaugh thread with Shilly biz. Even I don’t hate the D that much.

    1. When did H&R commentators become libertarian’s version of The View?

      1. Well, that was not what I expected.

        1. Ya, a little heads up on ye ole NSFW next time would be appreciated sir.

          1. But I’m juss talkin’ ’bout pie.

            1. Oh, I like pie too, just not sure I want to sully that image with the thought of the women who represent the View.

              Joy Behar should not allowed to be naked ever.

              1. No one expects The Spanish Inquisition

  3. various ignoramuses continue to claim that unemployment is driving foreclosures

    Remember the ObamaCare debate, when “skyrocketing” medical costs were driving the foreclosures?

    1. The Democrats were prescient enough to construct this crisis with interchangable causes. When pushing Stalinization of our health care industry, medical costs were driving the fiasco; when thumping the tub for stimulus plunder, it was the lack of market liquidity; when putting the boot on the neck of the financial industry, it was greedy bankers/credit card companies/Wall Streeters; etc.

      They’re not letting this crisis go to waste.

      1. They are the crisis.

  4. Its worse than you think. We’re bound to get a whole new wave of this shit unexpectedly because the lions share of purchases over the last year have been on FHA 3% down, which when combined with a $8k tax credit is damn near no money down throughout vast swathes of the country… and since the mods and the banks own lack of willingness to foreclose on the deadbeats the second they defaulted have delayed the decline in RE estate, once all these REOs get back onto market, we’ll have an entirely new population of underwater “homeowners” ready to default again. Lather, rinse, repeat, fml.

  5. As long as unqualified homeowners are allowed to stay in their houses, and banks are allowed to mark-to-myth, the real estate market will not reset. Reinstate FASB(157, 166 and 167), and you will see foreclosures. Otherwise we are headed for a Minsky Melt-up.

  6. What are you guys worried about? It’s not like the government is lying about the value of those loans.

  7. nothing ever goes as planned.

  8. All they have to do is push inflation high enough and the value of the homes will exceed the face amount of the loan.

    Problem solved. Right?

    1. Psst! Ixnay on the anplay!

    2. Inflation is an excellent way to tax the savings of those who would have been able to make a substantial down payment on a home they could afford.

      1. Politicians love inflation for exactly that reason.

  9. Nothing demolishes the libertarian utopian fantasy of rational free market agents like the banks’ behavior since (and before, of course) the collapse of the housing market. Knocking down the principle on these loans is imminently sensible in many (but not all) cases, yet the bureaucracy within the banks makes them entirely incapable of rational reaction. They’re severely understaffed and the staff they do have are ignorant and mostly powerless to effect any real mitigation. Calling any big bank’s foreclosure mitigation department will make a person wistful for the smooth efficiency of the local DMV.

    1. There is no “fantasy of rational free market agents”.

      That markets can, and do, act irrationally, is well known.

      What the libertarian position is is that the consequences of failing to act rationally lie with the agents who did not.

      IOW, no bailouts for banks. No bailouts for borrowers. In this case, the paralysis you refer to has been created by the expectation that they will be bailed out.

      1. While I agree that bailouts may have made banks somewhat more complacent than they would have otherwise been, this has had only a marginal effect on the “paralysis.” These big banks could not negotiate principal write downs in any significant number if their existence depended on it. Again, they are understaffed, undertrained, and rife with self imposed red tape.

        I wouldn’t mind so much if they suffered the consequences of their stupidity, if only it wouldn’t bring down the entire economy with them. Although I understand certain libertarians pine for apocalyptic anarchy, I’d prefer sensible regulation to cut down their size (so they could go ahead and fail without fucking the rest of us). A socialist can dream can’t he?

  10. TIMMAH IS BACK!!

    I missed you Tim.

    It will be interesting to see home prices next Q. Starters are still moving here fairly rapidly, but the price wars over them are over. (had a short spurt of major interest that has died off)

    Commercial here is still dead, it seems people are buying to some degree, but nothing is going into the property. I assume people are just taking a financial hit to get in at the ground floor hoping for future profitability out of the property.

    1. What market are you in hmm?

  11. Knocking down the principle on these loans is imminently sensible in many (but not all) cases, yet the bureaucracy within the banks makes them entirely incapable of rational reaction.

    Writing down the value of those assets has serious consequences, in the world of GAAP and bank regulation; why do you think Timmay and Bennay have been trying so hard to keep it from happening?

    1. Just delaying the inevitable reckoning. I’m sure they all sleep better with their bullshit accounting, and it certainly keeps their bonuses coming in, but reality is going to come knocking eventually. Better for them to take honest steps to correct these crap loans then stick their heads in the sand.

  12. Why would you think a career politician can correct the Real Estate and Finance Industry? Only the Real Estate and finance industry can correct it. Best thing to do now that things are even worse now is, Have homeowners make a loe interest only payment but not prevent them from being able to pay principal when they have it and stop foreclosing. Foreclosures are forcing prices down on the market as a whole which is causing the banks not only to lose interest but now principal!!!
    This is a recipe for the country’s demise.

    1. First lesson in credit loss reporting:

      Recognize your losses and account for them. Don’t pretend that they will go away.

    2. Foreclosures are forcing prices down on the market as a whole which is causing the banks not only to lose interest but now principal!!!

      Good for me!!!!. There, I put 4 exclamations points to your feeble 3.

  13. With the real estate market back in free-fall,

    Mmmm yeah no. According to King County, the assessed value of my house has gone up every year except a small dip in 2009. That followed a $58,000 increase in 2008, and was followed by another significant increase in value for 2010.

  14. “as many as 3 to 4 million financially struggling homeowners” avoid foreclosure, HAMP is on track to spare only about 250,000 defaults.

    That was “create or save” 3 to 4 million financially struggling homeowners.

  15. Paul Krugman’s “New Silverite” movement will fix this.

  16. Mortgage Loan Modification is the only solution to save your home and stop foreclosure. Some 650,000 troubled borrowers have been put into trial loan modifications under the president’s foreclosure rescue plan, the Treasury Department said Tuesday. That number represents only 20% of eligible homeowners. Mortgage Home Modification Program is the solution to save your house and stop foreclosure process Use this free tool to see if you qualify for loan modification http://bit.ly/b8C0iS

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