Paying homeowners to walk away

Bugs · March 8, 2010

I guess this is American politics, but it affects us all ... it's another plan to make everything OK by passing money around that ends up making things easier for the banks. See what you think ...

In an effort to end the foreclosure crisis, the Obama administration has been trying to keep defaulting owners in their homes. Now it will take a new approach: paying some of them to leave.
This latest program, which will allow owners to sell for less than they owe and will give them a little cash to speed them on their way, is one of the administration’s most aggressive attempts to grapple with a problem that has defied solutions.

Just so you know, the whole article is at: '>http://www.nytimes.com/2010/03/08/business/08short.html?src=sch&pagewanted=all

There's five million mortgages that ultimately face foreclosure. Obama's team has already put up $75 billion, paying the down payment on low-interest mortgages. [For the life of me, it sounds like NINJA mortgages are still in vogue. (NINJA = No Income, No Job ...)] Now, they acknowledge that this plan has hardly put a dent in the problem.

And, of course, all of this could, it is feared, risk the fragile recovery. (Ahhh, what recovery are they talking about? The jobless recovery? Maybe they just don't want to shake people too much before November and the elections? The point is -- there can be no recovery until huge amounts of exactly this debt is 'liquidated'.

... [T]he program could encourage hundreds of thousands of delinquent borrowers who have not been rescued by the loan modification program to shed their houses through a process known as a short sale, in which property is sold for less than the balance of the mortgage. Lenders will be compelled to accept that arrangement, forgiving the difference between the market price of the property and what they are owed. [....]
The problem is highlighted by a routine case ... a real estate agent, has a house he is trying to sell on behalf of its owner, who owes $150,000. [The agent} has an offer for $48,000, but the bank holding the mortgage says it wants at least $90,000. The frustrated owner is now contemplating foreclosure.

The article doesn't say this, but another facet of this problem is that the banks can't afford to take the losses that liquidation will force on them. There is, after all, a long-used, well worked out bit of law to cover these situations. It's called foreclosure, and bankruptcy -- and that's exactly what the financiers and bankers fear more than anything ... deflation!

Instead, the government hopes to let the home-owner off the hook with the bank, by giving all the parties a pittance. In the example given, for instance, the two mortgage holders would each get $1,000 from the government to forgive the underwater portion of the debt, so the house can be sold. But if the bank does that, it loses an asset worth $150,000 on the books, and replace it with $48,000 cash. It's capital base goes down by $102,000. How many times will the bank do that if each time, it takes the bank closer to its own closure by FDIC?

The article lists 'advantages' to the plan, but they come down to spreading the burn around so the banks can be saved. Because this plan makes no sense, whatever, if there isn't a wink and a nudge going on ... that, in fact, the banks won't have to be closed after all ... for some reason or another which they haven't figured out yet.

It's just the way the Obama White House operates.

But there are problems.

Short sales are “tailor-made for fraud,” said Mr. Lawler, a former executive at the mortgage finance company Fannie Mae. [....]
Under the new federal program, a lender will use real estate agents to determine the value of a home and thus the minimum to accept. This figure will not be shared with the owner, but if an offer comes in that is equal to or higher than this amount, the lender must take it.

A lot of properties have two, three, four or more mortgages on them. All of these claims would be automatically wiped out by a foreclosure. If the first lender can only get a fraction of his money, then certainly the rest will be screwed. How long do you think it will be before bank managers are working with outside buys on tricky little deals that end up with his friends getting good properties cheap?

Major lenders seem to be taking a cautious approach to the new initiative. In many cases, big banks do not actually own the mortgages; they simply administer them and collect payments. J. K. Huey, a Wells Fargo vice president, said a short sale, like a loan modification, would have to meet the requirements of the investor who owns the loan.

See what I mean?

This is just another way to appear to be doing something. The problem is the banks, and they are in a regulatory situation that gives them zero good choices. They ought to be compelled to 'mark to market' at some point in the future. That means, they have to evaluate their asset, the loan, at its current market value ... lots lower, in most cases.

At the same time, the banks have to maintain a ratio of their own money to the loans outstanding. Marking to market would have quickly reduced the bank's capital to zero if the rules were in effect -- and they would already been out of business.

It's unreasonable to expect the banks to face up to their own bankruptcies, and do the right thing. My conclusion is that Obama and gang are just fooling around ... they are trying anything to avoid facing up the the problem -- liquidating the debt, and most centrally, the mortgage debt --- because the country is being sacrificed to the banks.

Comments?

Topaz · March 8, 2010

On a business program I was watching, said in 2010, the housing market will worsen because of the renewed mortgages that are coming up and they said it will be worse than 2007-8. I really feel for these people, the banks didn't so them any favours if these people couldn't afford the mortgages.

Shady · March 8, 2010

On a business program I was watching, said in 2010, the housing market will worsen because of the renewed mortgages that are coming up and they said it will be worse than 2007-8. I really feel for these people, the banks didn't so them any favours if these people couldn't afford the mortgages.

The government did them an even less favour, by pressuring banks into lending to these people who didn't qualify. Sometimes renting is a good thing. Especially until you can actually afford a down-payment, and proper mortgage.

punked · March 9, 2010

So what FDR did the same thing and made the federal government a huge amount of money.

punked · March 9, 2010

The government did them an even less favour, by pressuring banks into lending to these people who didn't qualify. Sometimes renting is a good thing. Especially until you can actually afford a down-payment, and proper mortgage.

Tell that Bush's home for every American Program Shady. Tell that too your supreme leader.

Shady · March 9, 2010

Tell that Bush's home for every American Program Shady. Tell that too your supreme leader.

You tell that to Carter and Clinton for causing the problems in the first place. Especially Clinton. The problem was already in full-force before Bush was even elected.

punked · March 9, 2010

You tell that to Carter and Clinton for causing the problems in the first place. Especially Clinton. The problem was already in full-force before Bush was even elected.

Yet the house crumbled on his watch Shady. Keep trying too pass the buck, everytime anyone mentions this you put the blame everywhere but in the person it belongs too most.

Shady · March 9, 2010

Yet the house crumbled on his watch

Well, what can you do when your predecessor builds a badly constructed house?

Here, take a look at this SNL video.

http://www.funnyordie.com/videos/f5a57185bd/funny-or-die-s-presidential-reunion

It's common knowledge that Clinton stripped out regulations. They even mention it during the joke reunion video. "It was the 90's, people did a lot of crazy things." :lol:

punked · March 9, 2010

Well, what can you do when your predecessor builds a badly constructed house?

Here, take a look at this SNL video.

http://www.funnyordie.com/videos/f5a57185bd/funny-or-die-s-presidential-reunion

It's common knowledge that Clinton stripped out regulations. They even mention it during the joke reunion video. "It was the 90's, people did a lot of crazy things."

I usually don't take my political learnings from Jim Carry but too each his own right? But I am glade we can agree more regulation is a good thing. Finally Shady on the side of regulation.

Bugs · March 9, 2010

I usually don't take my political learnings from Jim Carry but too each his own right? But I am glade we can agree more regulation is a good thing. Finally Shady on the side of regulation.

Is the only thing to be discussed is this interminable wrange about who to blame? Christ, there's more than enough blame for everybody. What about Greenspan and Bernanke? What's more regulated than banking and mortgage finance? The problem is the regulators -- Fannie Mae in particular -- gamed their own rules. And what about the bankers, major supporters of the Democrat Party?

There is no 'good' and 'bad' here.

Anybody got any ideas about what to do about it? Or what's going to happen?

My point is that the Treasury can compel the banks to do their accounting by strict, mark-to-market rules, any time they want to. It doesn't require Congresss, it's simply a change in a regulation back to what it normally was. And that would start to clear the logjam of foreclosures. Which makes this program probably a farce.