Pushing down mortgage principals

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Kevin Huffman
Saturday, January 9, 2010
About one-quarter of Americans who have mortgages are underwater, meaning 11 million to 15 million people owe more money than their homes are worth. Let me introduce you to one of them: me.

When the housing crisis started to break in 2007, I felt pretty safe. I was newly separated and had refinanced my home in the Denver suburbs with a run-of-the-mill, 30-year fixed-rate mortgage. I lived in a nice cul-de-sac where adults took pride in their homes and kids and dogs ran in the streets.

Then the bottom started to fall out of the market — and in Denver, it fell particularly fast. Some houses in my neighborhood went into foreclosure when their adjustable-rate mortgages reset at usurious rates. One couple vandalized their home on the way out. Another family gave its keys to the bank and its beautifully landscaped property fell into ruin.

As banks offloaded the properties at deep discounts, all the neighborhood home values started to drop — first 10 percent, then 20 to 30 percent from peak value. In a remarkably short time, I owed more money than the house was worth.

When the Obama administration inherited the housing mess, it had a difficult choice: give banks incentives to make voluntary loan modifications or bail out underwater homeowners. Treasury Secretary Tim Geithner testified last month about the administration’s approach, saying: “This is a conscious choice we made, not to start with principal reduction. We thought it would be dramatically more expensive for the American taxpayer, harder to justify, create much greater risk of unfairness.”

I can’t fault this logic. As distasteful as corporate bailouts are, homeowner bailouts reek of unfairness. I bought at the top of the market, putting down 15 percent and hoping for the best. Let’s say my neighbor saved for a 30 percent down payment, putting off vacations and other indulgences. Anything the government did to reduce my principal would be fundamentally unfair to my neighbor.

So the administration instead set aside $75 billion to get banks to voluntarily modify loans. I’m sure that in the computer models, the banks and consumers responded efficiently to the incentives. In the real world, however, only about 31,000 permanent loan modifications have been done through the government’s foreclosure relief program. While more than 750,000 temporary loan modifications have been done, as of December only about 4 percent of the homeowners who signed up have qualified for permanent federal relief.

It’s bad enough that more than half of the homeowners in the first round of modified loans wound up defaulting again, finding their situations so dire that the adjustments to their monthly payments were insufficient. But a growing number of people are looking at what they owe and their home values and finding the option of walking away more attractive.

In other words, the administration’s program has been a Band-Aid on a gaping wound. Some 2.4 million Americans are likely to lose their homes this year, Moody’s Economy.com estimates — up from 2 million in 2009 and 1.7 million in 2008.

Meanwhile, millions of homeowners are underwater. Experts such as Laurie Goodman of Amherst Securities Group have told Congress that negative equity is the best predictor of future foreclosures — bigger even than unemployment.

Brent White, a professor at the University of Arizona who has written on the legal and moral obligations of mortgage contracts, tells me that every job loss, divorce and medical emergency in an underwater home is a recipe for disaster. “The government has to address negative equity or people will continue to default,” he said. Moreover, in White’s view, more homeowners should consider walking away if their homes have negative equity. It’s wrong to suggest there is a moral obligation to pay, he argues. “The option to default is part of the mortgage contract.”

If more people default — out of desperation or through calculated strategy — this crisis could go on for years, dragging down the chance of real economic recovery. The administration has taken some steps, but they are insufficient.

We need a way, through the courts or government agencies, to force banks to write down mortgage principal balances. The government and banks could share the burden of ensuring that that banks have every incentive to negotiate independently, but the process must be designed to reduce homeowners’ negative equity.

Geithner’s assessment of the options was right: Bailing out underwater mortgages could be unpopular and unfair. But the administration ultimately faces a choice: Maintain the policy of fairness and failure, or embrace a policy that, while unfair, could help end the crisis.

The writer won The Post’s America’s Next Great Pundit contest.

Posted in Pushing down mortgage principals

The second half of 2010 will be a time of stabilization or a “renewed leg down” in housing, and it all depends on how aggressively the industry can rein in the swell of foreclosures, according to a new study from the research team at Credit Suisse. “We estimate that roughly 3.2 million foreclosures must be prevented in 2010 for home prices to stabilize or potentially tick up,” the institution’s analysts wrote in their report. The researchers called the feat an “uphill challenge,” with a very narrow path for success carved out by government programs.

The administration has promised that its federal modification program will help three to four million homeowners avoid foreclosure, but those projections cover a four-year span – from 2009 to 2012. And as it stands now, the program is way behind schedule. As of the end of November, only 31,382 at-risk homeowners had been given permanent loan restructurings. Credit Suisse called the performance statistics of the administration’s Home Affordable Modification Program (HAMP) “quite disappointing” but noted that increased government focus on raising conversion rates could lead to an improvement in short-term results.

From a longer perspective, one can argue a case of diminishing returns, meaning that borrowers who could qualify would have already done so, the bank said. “We anticipate multiple rounds of government attempts to achieve foreclosure prevention for those who fall through trial mods by lowering the bar or directing them towards alternative foreclosure prevention programs” such as the administration’s short sale and deed-in-lieu initiatives, the researchers said. Improving home prices and a narrowing demand/supply gap are pointing towards early signs of stabilization in the housing market, according to the report, with recovery supported by a decline in foreclosure sales, record high affordability levels, and the homebuyer tax credit. While delinquencies continue to rise, foreclosures have slowed due to the government’s foreclosure prevention initiatives.

At this point, the housing market has achieved a very tentative sense of balance that could swing to either a modest upside or a significant downside, the report noted. “Success in preventing a sizable proportion of delinquent properties from foreclosure will be key for a housing recovery in 2010,” the report emphasized. Credit Suisse estimates that roughly 4.2 million homes will reach the brink of foreclosure next year. All but 1 million of these must be averted to stabilize the residential sector, the bank concluded. Other risks to the housing market, according to Credit Suisse analysts, include a blowout in mortgage rates and an abrupt decline in purchase activity when the homebuyer tax credit expires in April 2010. The government, though, holds these risks in its hands, the researchers said, and can alleviate any downside by prolonging the Federal Reserve’s mortgage-backed securities (MBS) purchase plan – which has succeeded in bringing mortgage rates down to record-lows and is scheduled to wind down by next March – or by extending the federal tax break for home purchases. Credit Suisse also laid out a plan for reforming Fannie Mae and Freddie Mac in its report. It is proposing a “good bank/bad bank” split of the GSEs, with the good side retaining healthy guarantees and portfolio assets, and the bad side holding the enterprises’ existing credit book and portfolio of problem loans and securities.

When it comes to bankruptcy reform, the only type that the politicians and bankers like is changes which make it more difficult, more time consuming, and less efficient for borrowers and homeowners. The point is to push foreclosure victims into a difficult bankruptcy, while the banks themselves get bailed out by these same taxpayers to avoid the same fate.

Over the past year of the housing crisis, with foreclosure rates remaining at historic highs, one of the proposals to fix the problem was allowing bankruptcy judges to reduce the amount that homeowners owed on a first mortgage. This would have made it easier for the borrowers to pay back part of the loan in the event the property value had fallen.

Of course, the fact that this solution makes some sense and is perfectly acceptable in the case of second homes and other types of debt and other types of bankruptcies (Chapter 11, for instance) did not change the banking industry’s opposition to it. Although giant corporate-government bank Citigroup supported the bill, the Senate defeated legislation that would have allowed it.

Homeowners facing foreclosure, according to the politicians, should not be able to enter into a government bankruptcy court and have their mortgage balance reduced. Instead, they should be forced to enter into a government foreclosure relief program to have their mortgage balance reduced. The key difference is how much control the banks have over the reduction.

In most of the government programs to help homeowners qualify for mortgage modifications, the lenders participation in the plan is voluntary. And in practice, the lenders’ participation has been lukewarm at best or nonexistent at worst. Take, for example, the FHA Hope for Homeowners program, which has been given $320,000,000,000 in taxpayer money and has helped one single homeowner.

Thus, the government modification programs have been a disaster because they allow banks to work as hard as they want to help borrowers. The banks, in turn, give homeowners bad deals or fail to negotiate in good faith with borrowers. Instead, they rely on their bailouts and other free money programs to prevent them from having any motivation to assist borrowers in stopping foreclosure.

The banks know that, if homeowners could file bankruptcy and get their mortgages modified, there would be fewer reasons to go to the government for free handouts. Borrowers would be able to file a Chapter 13, have the mortgage balance reduced to the market value of the home, and be able to make payments to the lenders again. This would be a tragedy for the lobbyists and mortgage companies!

One of the objections to the legislation was that it would make mortgages more expensive. But during the real estate boom, mortgages were as expensive as they ever have been. Although this was not in terms of interest rates, once the bubble inflated to astronomical levels, the amount of a loan a borrower needed to take out just to qualify for a mortgage was extraordinarily high.

The Federal Reserve had lowered interest rates to historic lows. Banks reduced lending standards knowing they could get bailed out by the government if anything went wrong. Loans were given to people who could never afford to pay them back, inflating the demand and rising prices even further. Some of these loans reset at high interest rates after a few years on extremely overvalued properties. None of this was a good deal.

And now, the main objection to allowing bankruptcy judges to reduce mortgage balances is that it would make it more expensive to take out a mortgage? How could it be any more expensive than taking out a loan for 250% of its actual value at a teaser rate that would reset to 12% interest in a couple of years? The banks could not make the mortgage market any more expensive if they tried.

Regardless, the banks worked hard to lobby politicians to defeat the legislation, and now the mortgage banking industry is celebrating its victory. But what have they won? Nothing more than ability to force homeowners to keep paying for properties that are overvalued, while the banks themselves line up to receive more and more taxpayer money in order to avoid the same fate of a difficult bankruptcy.

MSNBC.com

Whittled-down housing bill leaves loan decisions up to banks, investors
By John W. Schoen
Senior producer
updated 7:36 a.m. PT, Thurs., May 21, 2009
More than two years year after the housing market tanked and the foreclosure rate began rising, the ongoing wave of distressed home sales is weighing on house prices and crimping a long-awaited economic recovery.

On Wednesday, President Obama signed off on the government’s latest response to the crisis, a whittled-down bill aimed at helping millions of struggling borrowers keep their homes. But the latest effort may not be strong enough to reverse the downward spiral that has gripped the housing market and the economy.

After months of debate, the final version of the latest bill eliminated a key provision that would have allowed bankruptcy judges to modify mortgage terms. Faced with heavy pressure from the banking industry, Congress again tabled the highly contentious provision after several attempts to introduce it over the past year. That leaves the decision to refinance a mortgage up to lenders and investors holding securities backed by those loans.

Meanwhile, homeowners stuck with unaffordable payments, or who now owe more than their house is worth, must slog through the red tape of negotiating a new loan with their lender.

Courtney Scott, 60, a retired nurse living in Atlanta, has been trying for over a year to get her loan modified.

“This has just been round and round,” she said. “Every time we do what they say they need us to do, something happens where we need to resubmit it or they say there’s a backlog and it’s going to take more time.”

That backlog is growing as the pace of foreclosures rise. They’re up 32 percent in April from a year ago, according to the real estate data firm RealtyTrac. Some 2.4 million new home foreclosures are expected this year, according to the Center on Responsible Lending. Nearly one in five homeowners is already “underwater” — owing more on their mortgage than their home is worth, according Moody’s. While pace of job losses has begun to slow, unemployment is still headed higher.

“You mix all of that together, and the foreclosure problem is getting worse not better,” said Mark Zandi, chief economist at Moody’s Economy.com. “We’re counting on the president’s loan modification plan to really kick in here. But it hasn’t yet, and we need to see it.”

Meanwhile, the rise in foreclosures is tearing a hole in the household budgets of those that lose their homes and those who live next door. As homes are sold off at distressed prices, the value of neighboring homes also drops.

Though home sales have perked up this spring, in some markets as many as half of those are distressed sales to new home buyers and investors looking for bargains.

“We need the foreclosure supply to start slowing down,” said Susan Wachter, a real estate professor at the Wharton School of Business. “As we get more homes through the foreclosure process, housing prices continue to fall.”

The government’s foreclosure relief effort is beginning to show signs of progress. The Making Home Affordable program, for example, gives cash incentives to lenders who provide foreclosure relief. In the first two months, some 55,000 homeowners were offered more affordable terms, according to the Treasury.

“We’re encouraged but we are not by any stretch convinced,” said John Taylor, president of the National Community Reinvestment Coalition, which has been working with Congress on various foreclosure relief proposals.

Since the foreclosure rate began rising in the middle of 2006, the government has made several attempts to slow the ongoing erosion of homeownership. In October 2007, the Bush administration launched the Hope Now Alliance, a public-private partnership designed to encourage lenders to rewrite loan terms to make payments more affordable.

Though the group says nearly a million mortgages were reworked, many of those “workouts” simply added missed payments to the outstanding principal, raised the monthly payment and made the new loan even less afforadble. As a result, more than half of homeowners who got help defaulted on their new loans in less than a year.

The latest effort centers on providing incentives to loan servicers — the companies who collect payments from homeowners on behalf of investors who jointly own the mortgage — to provide more affordable terms. The Making Home Affordable program, for example, offers incentives to lenders who lower monthly payments by either reducing the interest rate or stretching out the term to 40 years. The program applies to loans issued or sold to investors through Freddie Mac or Fannie Mae and the Treasury estimates it could help as many as five million homeowners.

The latest foreclosure bill expands on that effort and provides further help for lenders who offer troubled homeowners more affordable loans. One key provision protects servicers from lawsuits by investors holding bonds backed by loans that are modified. In many cases, lower mortgage payments bring lower returns for those investors; servicers say that has stymied past efforts to modify loans.

Another provision overhauls the Hope for Homeowners program. Introduced last summer, the program was intended to help some 400,000 borrowers. But high fees and tight credit left all but a handful of homeowners with new loans and lower monthly payments.

Foreclosure relief efforts have also been hampered as servicing companies have been overwhelmed by calls from homeowners seeking help. Originally hired to collect payments and forward them to investors, servicers say they aren’t set up to handle the historic wave of defaults created by the housing market collapse. Cash incentives for loan modifications are designed to help defray those costs. But many servicers remain badly understaffed.

“You talk to a machine, talk to someone in a foreign country,” said Taylor. “More often than not you never get the same person. So you’re constantly starting from scratch. I do think there is an industry infrastructure problem.”

Scott’s attempt to modify her loan typifies the process. When she bought her Atlanta-area home two years ago, she applied for an FHA mortgage through a state-sponsored program. Bank of America approved her application for a $65,000 loan — about half the home’s current value — but the payments are consuming nearly 70 percent of her fixed income, she said.

After contacting the bank in March, 2008, she was told there was nothing the bank could do until she was behind in her payments, she said. So she stopped paying. After she recently began working with a HUD-approved credit counselor, she said the bank told her she had to make up two of those missed payments before they would talk to her. Two months ago, the counselor helped Scott apply for a loan modification, but the bank has not yet assigned someone to her case.

“They lost the paper work and asked that it be resubmitted,” she said. “So then we had to start from scratch, resubmitting all the documents.”

A Bank of America representative said the company does not comment on individual customers’ financial details but that it is reviewing Scott’s case.

Like other lenders who are participating in the government foreclosure relief programs, Bank of American also faces a hurdle when it tries to modify loans that aren’t held in its portfolio or were packaged and sold to investors outside of Fannie Mae and Freddie Mac.

Because those mortgages were pooled and sold off to hundreds of investors — each of which have varying financial interests in the loan pool — modifying those mortgages means getting those investors to sign off on the loan. Loan servicers say they’ve been hampered in their efforts to provide more affordable terms because of the threat of lawsuits from investors who might get a lower return on the new loan.

To help break that logjam, the foreclosure relief bill includes a so-called “safe harbor” provision that would shield lenders and servicers from lawsuits if they follow government guidelines when modifying loans.

© 2009 msnbc.com Reprints
URL: http://www.msnbc.msn.com/id/30854314/ns/business-eye_on_the_economy/

© 2009 MSNBC.com

Government Foreclosures on homes will occur when homeowners default on:
•    Mortgage payments from lending institution
•    Taxes (local, state and federal) and assessments
•    Homeownership fees
•    Utility bills
•    Mechanics Liens (right to payment for contractual services on the house and land, legally executable by law) any

monies available after foreclosure sale will be appropriated according legal priority status.
Different agencies will handle government foreclosure properties. When the homeowners default on payments, the title of

property or deed reverts back to the government under certain conditions.
Fanny Mae and Freddie Mac are government secured insurances that homeowners apply for to reduce their mortgage payments

offered by their original lending institutions. Homeowners can benefit from lower taxes and a lower down payment if they

qualify for these government plans. However should they default on these payment plans, the bank or other lending company

that issued these government backed loans, will then go to the Fanny Mae, and Freddie Mac foundations to retrieve their

money, thus the property now becomes government property, and these divisions will proceed with the government foreclosure

sale.
Government bodies such as the US customs, and the department of internal revenue may directly seize property for nonpayment

of taxes and law violations.
HUD, or the US Department of Housing and Urban Development and the FHA, or Federal Housing Association are also responsible

for government foreclosure sales done through public auctions.
The Department of Veterans Affairs guarantees home ownership loans for military personal. In turn, they will seize property

that was guaranteed by the VA when homeowners default on payment.
Though since 2004, the VA Department sales off the property with a private contractor, Ocwen Federal Bank, OFS.
The US government HUD and VA guaranteed programs are only offered through licensed real estate agents and brokers that have

been approved by these government bodies. Another important thing to note is that you cannot reassign the government

contracts provided by the US Department of Housing and Urban Development (HUD) or the Department of Veterans Affairs (VA).
Similarly, these properties are sold at auction through the licensed authorized real estate agents. These real estate agents

receive a six percent commission for procuring a sale. Unlike other public auctions an investor must go through these

licensed agents to be able to bid. A person will need to provide a letter from their bank to assure that they can cover up

their bid and in turn the six percent real estate agent fee will be added to the bid. The letter from the bank is only valid

for a period of 60 days, so selection and bidding on property must be done quickly.
Before purchasing government foreclosure property, learn about your rights and obligations concerning these sales. The US

Department of Housing and Urban Development (HUD) can provide you with all available information on buying government

foreclosures, and the licensed real estate agents can provide you with the information as well.

Posted in Foreclosure Help, Foreclosure Laws Tagged: Americans, Avoid Foreclosure, Foreclosure, Foreclosure Solutions, Government Foreclosure, Home, Homeownership, House, Mortgage, Real Estate, real estate agents, Stop Foreclosure, USA