Monday, December 7, 2009

Making Home Affordable Program… Treasury Finally Admits IT’S A DUD!

From Mandelman Matters

Posted: 06 Dec 2009 05:27 AM PST

Here’s what The New York Times said today about Treasury’s response to the news about the Making Home Affordable Program:

“AFTER months of playing pretend, the Treasury Department conceded last week that the Home Affordable Modification Program, its plan to aid troubled homeowners by changing the terms of their mortgages, was a dud. The 10-month-old program is going nowhere, the Treasury said, because big institutions charged with implementing it are dragging their feet.”

Gee, now there’s some breaking news for you… these guys at the Times, they’re true investigative news hounds, aren’t they? Next week I’m hoping to learn who won the Presidential Election in 2008.

Oh, and by the way, Treasury is nowhere near finished “playing pretend,” as the Times put it. Geithner is the best pretend player in the pretend business. He’s got all the banks pretending they’re solvent and profitable. He’s got them pretending they haven’t lost a dime on commercial property and that the homes they’ve foreclosed on but haven’t sold are still worth what they were when they were purchased or last refinanced.

The only problem is that all this pretending makes the banks look like they’re having a fabulous year, and so the $91 billion the banks have set aside to pay out in bonuses in just a few weeks is not being paid in pretend dollars. I wonder if I can pretend to pay my taxes next year.

The Times story then continued:

“After the government spent hundreds of billions of dollars bailing out banks, the Obama administration rolled out the $75 billion loan modification plan to show its support for beleaguered homeowners. But if the proof of the pudding is in the eating, homeowners are going hungry.”

Is that why Obama rolled out the Making Home Affordable plan? To show his support for the beleaguered homeowners? That’s fascinating. And here I had thought he rolled it out because if he didn’t all the banks would implode as prices continued to fall until everyone just started walking away, leaving the country in a depression and turning his presidency into something that would make G.W. Bush’s presidency look like FDR, Reagan, Kennedy and Clinton all rolled into one. I thought he might have done it because the people that put up the money to bail out the banks that caused this crisis are the same ones watching their homes dive off a cliff in terms of their value. No? Okay then, never mind.

The Times story then went on to point out the obvious:

“A stalled loan modification plan might not be worrisome if the foreclosure crisis were abating. Yet at the end of September, a record 14.4 percent of borrowers were either in foreclosure or delinquent on their mortgages, the Mortgage Bankers Association reported.”

Yes, I suppose that is true. If foreclosures weren’t the biggest problem in the country right now, a stalled loan modification program might be less worrisome. Thank you New York Times for pointing that out. I don’t know what I would have done with out you.

And they went on to say:

“It’s time for the government to acknowledge the flaws in its program and create one that might actually succeed. Only then will the supply of homes for sale, and the pressure on prices associated with that overhang, be reduced.”

Ya’ think? Oh what the heck, we’ve spent the last several years listening to the government not acknowledge much of anything in the way of “flaws,” so what the heck, I suppose it is time.

Personally, since my home has dropped in value by 45% over the last two years, from $900,000 to $500,000, I would have voted yes on the whole “create one that might actually succeed,” thing a tad sooner. Like maybe last year would have been nice. No problem, though… I understand that Obama’s been busy ending the Iraq War, closing Guantanamo Bay, creating millions of jobs, fixing health care, and ending the Don’t Ask, Don’t Tell policy in the military… oh yeah, and bringing home the Olympics for Chicago, don’t want to forget that major victory.

Okay, I don’t want to just sit here being sarcastic about what a monumental mess this whole rescue housing thing has been. Well, I’m not saying that it’s not fun, it is. But, I’d much prefer the government to get something right as related to housing. Just one thing would be nice.

The article talked about re-default rates being too high, which is no surprise when you consider the deflationary collapse we’ve been in for the last couple of years. But the article also pointed out another possible cause of the higher re-default rates:

“The terms of loan modifications also make them especially failure-prone because the government calculates “affordability” (how much mortgage debt a borrower can actually manage) in a highly unusual way — raising serious questions for the housing market over all and for the program’s effectiveness for borrowers.

For example, in devising what it considers an affordable mortgage payment, the program doesn’t account for all of a borrower’s debts — the first mortgage, second lien, credit card debt and automobile payments. Instead, it calculates affordability using only the borrower’s first mortgage payment, insurance and property taxes.

As a result, what may look like an affordable mortgage payment under the Treasury plan quickly becomes onerous when other debt is added. While the government may ignore a borrower’s second lien and revolving credit obligations, you can be sure the creditors that extended those loans will not. Re-defaults seem a likely result.”

Look, if I’m the only one who’s thinking what I’m about to say, would someone please email me so I can have someone put myself out of my misery? Just wait until I’m looking the other way, and smash me in the back of my head with a shovel. If you cared about me at all, you’d do it.

So, the government calculates affordability by not considering anything but the house payment, insurance and property taxes? And the Times finds this to be “highly unusual”? “Highly unusual”? And I suppose I’d be out of line here to suggest that a better phrase might be “incredibly stupid”? I’m sure. I know what you guys think… Mandelman Matters… he’s so sarcastic… he’s funny… I got such a laugh… well… check yourself, because that’s not funny and the fact that you’re not in a tearful rage and gassing up to stand in front of the White House and scream is monumentally sad. Highly unusual, my Aunt Fannie.

The Times story also discussed negative equity as being a leading cause of foreclosures. This is a view that is gaining momentum of late, and I find that both interesting and terribly important. From the very first article that I wrote on this topic, almost two years ago, I used the phrase “foreclosures breed foreclosures,” as a way to try to convey that once the dominoes start falling in the wrong direction, they feed on each other until one foreclosure becomes the proximate cause of the next.

The government, however, began by seeing the foreclosures as being caused by irresponsible sub-prime borrowers taking on too much debt as a result of lax, or even nonexistent lending standards. After a while, the word causing foreclosures was unemployment. Now… finally… our government is recognizing that it may just be negative equity that is driving the volume of foreclosures that much higher. It may have something to do with a recent study conducted at the Kellog School of Management that showed 17% of borrowers will walk away from their mortgages when they’re 45%+ underwater.

Whether negative equity or unemployment is the primary driver of today’s increasing number of foreclosures isn’t important, at least not to me. What is important is that we all come to understand that none of us is immune from being seriously harmed by the ongoing crisis in the housing market, and to the extent that it is allowed to continue to spread, there will be precious few among us that won’t look back and wish we had done more sooner.

As a nation, we don’t want to modify mortgages for the benefit of those in foreclosure, we need to modify mortgages for the benefit of those not yet in foreclosure. Or in other words, don’t modify my neighbor’s mortgage to help my neighbor, modify it to help me.

It helps to consider that mortgage modifications often are not in the best interest of the borrower, especially when the property in question is underwater by a lot. It’s easy to see that when you look at a guy with a $500,000 on a house worth $250,000. Lowering that guy’s interest rate a couple of points for five years and extending the loan out to 40 years… is not for his benefit from a financial perspective.

If you wanted to do something to benefit that borrower, tell him to stop making his payments, live in the house rent-free for as long as possible, and then hand the bank the keys and go rent a beautiful home for a couple of years, at half the amount owed now. That’s what would be in the best interests of the homeowner, not a modification in many instances.

Then there’s the issue of second mortgages and HELOCs. But, the Times story points out:

“Unfortunately, there is a $442 billion reason that wiping out second liens is not high on the government’s agenda: that is the amount of second mortgages and home equity lines of credit on the balance sheets of Bank of America, Wells Fargo, JPMorgan Chase and Citigroup.”

There are messy conflicts between banks or investors when one holds the first and another the second. But the Times story quotes the head of mortgage strategy at Amherst Securities Group, Laurie Goodman, and what she had to say on the topic of principal reductions.

“AN interesting data point: when banks do own all the mortgages on a property they seem to see the merit in principal reduction modifications. Studying second-quarter government data, the most recent available, Ms. Goodman found that when banks owned the loans, 30.5 percent of modifications reduced principal balances. When they service someone else’s loan or hold a second lien on the property, they rarely allow principal reductions.”

Good to know Ms. Goodman, I appreciate that and will look for it from now on.

Perhaps predictably, the Times story does wrap up with a brief paragraph on the perceived “moral hazard,” asking the question, “Why should someone who borrowed too much be given a reduction the amount owed, while someone else who did not act irresponsibly isn’t granted a modification?” To give you an idea of how things have changed, here’s how the story in the Times responded to the “moral hazard” point of view.

“But doing nothing also has hazards, the most obvious being continuing foreclosures, which nobody wants, and further declines in real estate prices that will hurt homeowners as well as investors.”

And, I would like to echo… CAUSE EVEN MORE FORECLOSURES, which ultimately will bankrupt the banks completely, to the point that there won’t be enough money on the planet to paper over the problem.

So, maybe the New York Times has been a tad slow catching on, but now that they’ve started the ball rolling in this regard, perhaps we’re that much closer to solving the problem.

Personally, I think it’s past time for Mr. Geithner to realize that he can’t pretend us into a recovery, and if he doesn’t soon show an understanding of that, then it’s time for the country to stop pretending and put someone into the job of Treasury Secretary that’s a realist… and will really fix what the investment bankers have destroyed.

Oh, and one more thing… sooner would be better than later.