Isn’t ending anytime soon, and the NY Times is noticing:
A continuing steep drop in home prices combined with rising unemployment is powering a new wave of foreclosures. Unfortunately, there’s little evidence, so far, that the Obama administration’s anti-foreclosure plan will be able to stop it.
The plan offers up to $75 billion in incentives to lenders to reduce loan payments for troubled borrowers. Since it went into effect in March, some 100,000 homeowners have been offered a modification, according to the Treasury Department, though a tally is not yet available on how many offers have been accepted.
That’s a slow start given the administration’s goal of preventing up to four million foreclosures. It is even more worrisome when one considers the size of the problem and the speed at which it is spreading. The Mortgage Bankers Association reported last week that in the first three months of the year, about 5.4 million mortgages were delinquent or in some stage of foreclosure.
Not all of those families will lose their homes. Some will find the money to catch up on their payments. Others will qualify for loan modifications that allow them to hang on. But as borrowers become more hard pressed, lenders — whose participation in the Obama plan is largely voluntary — may not be able or willing to keep up with the spiraling demand for relief.
One of the biggest problems is that the plan focuses almost entirely on lowering monthly payments. But overly onerous payments are only part of the problem. For 15.4 million “underwater” borrowers — those who owe more on their mortgages than their homes are worth — a lack of home equity puts them at risk of default, even if their monthly payments have been reduced. They have no cushion to fall back on in the event of a setback, like job loss or illness.
You gotta wonder if the banking industry did to themselves by defeating cramdowns what they did to themselves when they passed the new bankruptcy bill. Poetic justice, I guess.
Scruffy McSnufflepuss
This is good news for McCain!
Punchy
Gotta say that this blog just fucking NAILED this last year. TOS and Zif and the like exactly predicted the Alt-A disaster looming.
A great GOS diary yesterday (I know, I had to shower after clicking on it) full of graphs and pics highlighted this. Methinks this Wall St. “reversal” is a short-term headfake that cannot be sustained, as the housing market continues to dive.
Zifnab
If Congress had passed cramdown, the banks couldn’t maximize their profits. They’d be forced to take whatever number the judge gave them.
I mean, sure, it might be better for the market as a whole and help stabilize the system collectively, but when do I get mine? Amirite?
BenA
The ton deafness, the lack of long term vision, and complete lack of empathy from the financial sector as a whole has been stunning… from the behavoir of the GM and Chrysler bondholders to their blocking off cramdowns and serious credit card reforms… it’s just amazing.
The only thing more staggering is that fact that our elected Congress constantly capitulates to them. At least the Obama Administration seems to realize they have them over a barrel to some extent, not enough…
You’d think that after just after one of the greatest financial meltdowns in this nations history we might be able to get some serious reforms and some slight sense of remorse from the jackasses that caused this mess.
NonyNony
Pretty much. In fact, IIRC people were predicting that if the banks forced the cramdown provisions out of the bill something like this would happen. Cramdown would have in the long run helped all of the banks, while removing the provision will help a few of the banks and probably cause a lot more of them to fail. But the stupid banksters are still playing the game instead of asking for a lifeboat. Idiots.
BenA
@Zifnab:
It’s just completely illustrates the insanity of the sector as a whole. They’re completely unwilling to get 10% less over the course of the mortgage so they can take an 80% loss now. I think a lot of these assholes still think that the homeowner in foreclosure is just holding out on them and just doesn’t want to pay their bills.
Robin G.
My mother-in-law told me about this guy who is running a small business focused on taking over mortgage negotiations for people who are in foreclosure. He wrote this simple program that determines how much a mortgage (and monthly payments) can be reduced while still making more money for the bank than a foreclosure would get them. Banks, after all, would (theoretically) rather not foreclose — they’ll do it at a huge loss, not to mention the fuss of owning and trying to move a property. So, with this program, the bank takes the minimal loss possible, the homeowners keep their homes, and if everyone doesn’t win, at least they don’t lose as badly.
The guy took his program to some lenders, figuring he could show it to them and maybe it would be better than what they’re currently using (and therefore be interested in purchasing it). He was stunned to discover that no one he talked to had anything like this. They had no method for figuring out how to keep people in their homes while saving themselves as much money as possible. They weren’t even trying to figure it out. They were just taking crippling losses without even considering the alternatives.
I think of this when people say the government needs to stay out of businesses because the professionals should be in charge. The professionals got us into this by not, well, thinking, even to benefit themselves. The government can hardly do worse. (Maybe Obama can require the lenders to use this sort of program?)
JGabriel
BenA:
Not really. Greedy jackasses who hoarded wealth when there was plenty will certainly be more motivated to hoard it when wealth is scarce.
.
ichabod
I have to agree, however the doomsday talk has been going on for so long people and the media are painting over the real picture, not that I blame them.
But this steamroller that collapsed the major financial institutions and industry last year hasn’t come to a full stop, and until it does we are going to be in trouble.
I believe Obama ill equipped to deal with this yet there is no alternative available.
RedRaiderJ
right on! http://www.youtube.com/watch?v=5B23TjfKRCA
Dork
Not so sure about this. The banks were losing, natch, but then taking it in by the handfuls from the gov’t.
What’s their incentive to even attempt to mitigate losses if the feds will always step in and flush them with green every 6 months, no matter how much they’ve lost?
Robin G.
:sigh: Recounting this story reminded me to call my mother-in-law about it on behalf of a friend, and said that 1) it was actually a small bank that did this, though they did try to sell the software to the larger banks who were indeed not doing anything of the kind, and 2) she didn’t know the guy, he was on NPR. So probably other people have heard this too.
This is what I get for only half-listening to my mother-in-law on long car trips…
Napoleon
@Robin G.:
3 or 4 weeks ago some radio show like This American Life actually ran a story which included one loan servicer that actually runs a program like that, but they were the only one (or one of the only ones). I guess the only reason they were set up with it to begin with is their specialty, even back in the bubble years, were troubled loans.
The Grand Panjandrum
@Robin G.: It could be worse. Your mother-in-law could be quoting Limbaugh and Hannity to you while you were trapped in a car with her. THAT might have caused you to do something rash.
comrade scott's agenda of rage
Fixed.
Dianne Reihm had 3 bank spinmeisters on about 2 months ago. 50 minutes into the show, even her patience gave out and she sounded downright pissed off when she said:
You. Just. Don’t. Get. It.
They never will.
Robin G.
@Dork: True enough.
Lupin
Atrios and Calculated Risk (among others) have been on this for a while. If I recall correctly the chart of the resets peaks in 2011, so we’re still facing shitstorms of unforeseen magnitude ahead.
Obama, like Gorbachev, can’t think outside the box to save a system that basically can’t be saved, and even if he could, our nomenklatura (aka Versailles) would fight him tooth and nail. As for the Republicans, to put it succinctly, they’re insane.
I hope for the best, but the next few years are going to be rough ones.
BenA
@Robin G. & @Napoleon:
There was another story like this about a couple of guys in Jersey who were doing this. They were a little less scientific about it. They would go look at the property in question, they would go look at the upkeep of the property before they did anything… they’d go after houses where people obviously cared enough to keep the place up… they had a few solutions they would try, they would negotiate a mortgage with the current home owners or they would offer to rent them the property if the home owner wasn’t interested, or they would offer them cash to help them move out. While I’m sure they weren’t in it to be selfless they sounded at least like they liked the fact that they were able to help people out. And I’m sitting here thinking wtf aren’t banks doing this?
Robin G.
@The Grand Panjandrum: That is unbelievably true. She’s quite liberal, though often not all that informed and I have to say, “Uh, actually, that stuff about Sotomayor? Total BS.”
someguy
That’s because the “banks” don’t actually own the mortgages, or at least the banks that are in trouble don’t own the mortgages. They write the loan agreement, take a fee, draw a couple month’s payments off the the mortgage (advance interest payments, if you’ve ever looked at your amortization schedule) then 6 months or a year down the road they sell the mortgage in a big block of mortgages to somebody else, for the sale cost of the house +/- X percentage. The bank takes a servicing fee of a hundred bucks a month or something for the trouble of dealing with all us assholes, but the revenue stream goes to somebody else – an investment brokerage or mutual fund or pension plan that actually owns the mortgages. If any given mortgage goes tits up, the bank has insurance (AIG, for instance) to cover the losses and the resale. They don’t do anything like this because the banks, the ones that wholesale their mortgages (most of the big ones) have no incentive to do it. It’s a pain in the ass but they don’t really lose that much money. The places where the risk is pooled – investment banks, the California Pension Plan, places that hold big tranches of securitized mortgages – take it in the shorts but they are in no position to do mortgage workouts.
Smaller banks and credit unions that issue their own mortgages and do their own collections and foreclosures are much better positioned to do this kind of thing. Those banks probably don’t need a program to tell them how much they stand to lose or make on a foreclosure or workout, because they only need to open the ledger book in the back room.
Brick Oven Bill
This is posted from real estate meltdown town. There is some good news in that the excess inventory is shrinking. In this place of say, ‘100’ houses, there were ‘9’ on the market not that long ago, all foreclosures. Today there are ‘2’.
Over cocktails with someone selling these homes, the typical buyer is an owner-occupier as the prices to buy are down to rent-an-apartment levels. Prices have stabilized here. Part of this is rumored to be because for every house the bank has on the market, it is holding 2 in reserve as to not further an excess of supply. But there are now multiple offers on houses.
The bad news is that prices are down over 50% and the US taxpayer is picking up the tab in large part due to this letter from Peter Orszag, telling Congress that the taxpayer can assume all of Fannie-Freddie’s financial risk for probably no money, or perhaps $25 billion. In practice, there were $10 trillion in mortgages, and after administrative costs, the loss will probably be over $3 trillion, the majority borne by Fannie-Freddie. Thanks Pete, enjoy your promotion to OMB.
Steeplejack
@BenA:
No individual snowflake feels responsible for the avalanche.
“Hey, I was just out there hustlin’ to make a buck. It was those other morans who screwed everything up.”
jcricket
Yes, the “wave” chart is pretty scary, but remember, that’s just based on the resetting/recasting of the interest rates or payments – it doesn’t factor in the impact of increased unemployment for another year (or longer).
I’m not a doomsday type, and I don’t think this recession means a permanent decline in Americans’ standard of living (or whatever). But I think being overly rosy and proclaiming the “worst is over” does no one any favors.
We need to realize that the path of the past 30 years, where the laws and tax structure have been designed to protect, defend and support only a select few – are broken. What we need now is a complete tilt to the left.
Frankly, if we tilted policies and taxes so that the “bottom 95%” had a bunch more money, faced fewer bankruptcies due to healthcare costs, etc. I’m 100000000% positive that money would trickle up. Because when the average person has more money, they spend it. And they spend it on stuff sold by companies owned by the top 5%, so the revenues and profits of those companies go up. And I bet those profits (and hence share prices) would go up more than enough to offset whatever tax increase we needed to pass to get the ball rolling in my scenario.
And frankly, even if the top 5% saw their standard of living decline by 5, 10 or 20%, that would not be the worst outcome if for the other 95% standard of living improved.
But it all comes back to – do we think this crisis was a simple result of speculation gone mad? Or a fundamental expression of how broken our entire economic policies are?
inthewoods
@someguy:
The other issue is that with the suspension of mark-to-mark accounting rules, I believe the banks no longer have to provide accurate information on the value of the toxic assets – so they have, in my opinion, even less incentive to work out a mortgage. Instead, I think they will hold them and hope they go up, and still be able to say they are solvent.
David Atkins
so far as I can tell, they didn’t really do anything to themselves. With the bailouts, most of these guys have managed to be blithely free of the consequences for their actions.
Moral hazard indeed.
brian griffin
@David Atkins: true.
that’s the point of the insurance on the loans, right? the banks will prefer that the loans fail, so that they can collect from AIG. If they have to accept lower payments from homeowners, they lose out.
It’s no different than Chrysler’s lenders that preferred the company go bankrupt–that gave them the biggest payout.
the banks are fine as long as we keep shoveling money to their insurers.
John S.
I hope someone in government is aware of your totally unhealthy obsession with Peter Orszag, BOB. Especially given recent events and your own affiliation with all things wingnut.
KRK
@Robin G.:
During the farm credit crisis of the 1980s (land value bubble burst; some farmers in default even without missing a payment because their loans were written to trigger default if the lender deemed itself “insecure”), advocacy groups were able to get Congress to enact some loan servicing requirements for the direct loan programs run by USDA (the “lender of last resort”). Among those requirements is exactly the kind of program you mention, which is still used today. Called DALR$ (the Debt and Loan Restructuring System), the program calculates the “net recovery value” of the security on the loan, taking into account the current value of the security property and the lender’s costs of foreclosing on, holding, maintaining, and reselling it. For loans directly made by USDA, if the government would be no worse off restructuring the loan (including writing down principal and/or interest if necessary) compared to foreclosing, and the borrower is eligible for restructuring (among other things, able to cash flow the restructured loan payments), USDA must offer restructuring.
gex
@JGabriel: And the working class folks who blindly supported Wall Streets vision for the American economy are different during each crisis. Besides, I heard that FDR made the Great Depression worse, dontcha know.
joes527
@jcricket:Exactly
The separation of loan origination, servicing and holding is one of the big reasons we got here and why it is so hard to turn around.
Why would a loan originator care whether a loan will be profitable, or even not a huge loss? All the loan originator cares about is whether they can flip the loan for a quick profit. If it was a terrible loan and eventually is a huge loss … it isn’t their problem. That’s how we got here.
Why would a loan servicer care if a loan is heading for default when he servicer can make more money pushing the loan into foreclosure than it can restructuring the loan? Most of the control is in the servicer’s hands and all the downside is for the poor sap holding the loan. That’s why it isn’t getting better any time soon.
Brachiator
Unfortuntately, the solution to this problem is beyond what either the government or the banking industry might want to do even if everyone behaved with the ultimate in empathy.
As the NY Times story implies, it is financially irresponsible to permit workout plans that lower the mortgage payments without ultimately reducing the fair market value of the home. But if you reduce the home’s fair market value, you reduce the amount of equity that the homeowner has.
And still none of this will save a homeowner if their income is stagnant or they lose their jobs because of the declining economy and can no longer make payments.
Congress and both the Bush and Obama Administrations have passed new laws which sometimes allows homeowners to get forgiveness for some of the debt that they owe, and I would not be surprised if this is extended to forgive some credit card debt.
Still, some pain is unavoidable. And it is going to get worse as the economy continues to contract.
Chris Andersen
@BenA:
The financial sector isn’t designed to be empathetic. They are required to maximize profit. As such, the GM and Chrysler bondholders made a completely bloodless calculation that they would do better if GM and Chrysler went into bankruptcy.
Instead of decrying them for doing what they were designed to do, maybe we should change the laws so that this kind of behavior is not longer required.
TimmyB
I was going to write how defeating cramdown actually would hurt mortgage note holders in the long run, but really, I don’t care any more.
I’m tired of our government getting in the way of the banksters’ many attempts at suicide. If these guys keep insisting on killing themselves, then we need to let them die. Stop funnelling them taxpayer money through AIG, TARP, and all the other handouts. Just let them kill themselves.
tc125231
@Zifnab: Are you right?
Yes, I think so.
Wile E. Quixote
There is a blog called Dr. Housing Bubble that examines the California real estate market and its insanity. It’s a good source of information on why things are so completely and totally insane and how long it’s going to take for them to bottom out. There’s also good stuff about the California economy in general.