Mortgage Writers Getting Huge Loophole
A reliable source heard today on WDEL that with in the bailout bill mortgage companies will be “encouraged” to rewrite mortgages. A key ingredient missing is that mortgage companies should be REQUIRED to rewrite mortgage terms.
So take a guess if corporations are encouraged as opposed to required what do you think they will do?
Section 109 – Foreclosure Mitigation Efforts – Secretary to encourage the servicers of the underlying mortgages, considering net present value to the taxpayer, to take advantage of the HOPE for homeowners Program to minimize foreclosure.
There’s more – Federal Govt will “attempt to identify opportunities” to improve loan modifications.
Fed will “encourage implementation” by the loan servicers.
I don’t know of a bank willing to write off $200k on a mortgage – they would rather lose the whole thing to a foreclosure than save it on the front end.
Little sis here has identified the exact language that makes this toothless — unless the Secretary actually chooses to force this activity.
Requiring mortgage lenders to re-write mortgages to those who can no longer pay their current mortgages or can’t afford an ARM adjustment or have suffered from a reduction in home equity due to housing bubble price adjustment penalizes those of us who have played by the rules, paid on-time, and also suffered a reduction in home equity value.
It essentially provides a discount of tens of thousands of dollars to some homeowners and penalizes those who have paid on-time. It also artificially inflates home prices and extends the housing bubble even more.
Prosecute predatory lenders and mortgage frauds but don’t penalize those of us who have followed the rules. If you’re going to let people refinance their mortgage with government assistance, let everybody do it.
It penalizes stockholders who thought they could make a killing in sub-primes on the backs of the stupid and the poor.
With a mortgage rewrite, they would be forced to make just a regular profit instead of an obscene profit.
anonone
“It essentially provides a discount of tens of thousands of dollars to some homeowners and penalizes those who have paid on-time. It also artificially inflates home prices and extends the housing bubble even more.”
I don’t understand!!! Regardless the terms of the mortgage fixed or ARM the principle amount of the home stays the same. The interest paid doesn’t impact the value of the home. Keeping more home off the foreclosures help stabilize home values.
The best thing this government can do is end the ARM and require all lenders to offer fixed rates only! Fixed rates will force lenders to complete with each other not poor stupid suckers buying homes. Credit card, if consumers are making late payments charge them late fee but after 3 or 4 late payment the lender should be required to suspend account until paid in full! Don’t let those that can’t pay on the balance as it is to charge more.
It essentially provides a discount of tens of thousands of dollars to some homeowners and penalizes those who have paid on-time. It also artificially inflates home prices and extends the housing bubble even more.
I don’t think that this is true. The rewritten mortgages (as I understand it) would be rewritten on today’s (deflated) price, would be on more “conforming” (but more expensive) terms, rewritten for primary residences only and for parts of the country that have been really cannibalized by foreclosures, would stabilize developments that are rapidly becoming suburban or even exurban slums.
Not everyone who is in trouble with their mortgage could even qualify for a rewrite, but if you can identify those folks who can stay in their houses with more stable terms there are benefts. Putting the brakes on the decline in housing values is one. And most of our houses are declining in value the longer this goes on. Ameliorating the problems with the mortgage backed securities is another. If those loan syndicates are made healthier, a good deal of the current risk in the system goes away.
The person who gets the rewrite certainly is not made whole – they still have wrecked credit, will pay an interest rate higher than usual, will have taken an equity hit on the house. The bank has to write down the difference between the selling price and the current value. And all of those 750K developments are now worth alot less. That is not feeding the bubble.
And rewriting what bad loans you can (not all of them can) is alot cheaper (and provides a greater hit to the banks) than $700 billion dollars.
I agree with Kilroy that the govt needs to “require” lenders to do something. As it stands now, they are going to give the banks the money, and suggest that they give it to the homeowners. I’m not comfortable with trusting the banks to do the right thing.
Hi Kilroy and Cassandra,
Here is why this penalizes good behavior:
Two homeowners (Jim and Jane) buy identical homes for $300k in 2005. As housing prices re-adjust, their market values decrease to $250k in 2008.
Jim used an ARM and can no longer afford the payment. He has paid 2% interest on the first 3 years of the loan. He gets to renegotiate to a 5% interest rate on a new $250k 30 yr mortgage.
Jane took out a 30 year fixed at 6% and has never missed a payment. Compared to Jim she loses:
– The difference between 6% and 2% for the first 3 years
– $50k in home equity that the government or bank eats for Jim
– The difference between 6% and 5% mortgage over the life of the loan
So Jane loses $tens or hundreds of thousands compared to Jim. And by allowing Jim to re-finance at a lower cost basis, it keeps his house from going on the market, reducing housing supply, and keeping house prices artificially high. So new homebuyer Jill can’t buy Jim’s house because the government has subsidized it and kept it off the market. If Jane sells to Jill, Jane loses $50k in equity. Plus, Jane has subsidized Jim through her tax dollars.
You can see the rewrites as penalizing good behavior or you can see the rewrites as a way to fix the current problem without throwing money at banks.
There aren’t any good options that don’t cause somebody some grief or pain along the way.
Besides, the only thing that Jane loses — really — is that someone eats the loss of equity on the house. The only way that selling Jim’s house keeps prices high is if he can sell it for what he bought it for or better. If he can only sell it for the current low value price, he is contributing to the downward curve.
anon wrote:
Sorry, but no. If the mortgage holders — who may or may not be the original lenders — are required to rewrite mortgage principle down to current assessed value, then the homebuyers get a break, but the people who sold them the house at the higher value have already received their money! The mortgage company which currently holds the loan will either have to lose that amount of money, immediately, as an asset upon rewrite — meaning that such legislation would kill the private mortgage companies — or the government will have to make up the difference.
It will be the latter which happens, because the last thing the gum’mint wants to do is force mortgage bankers out of business. That means that it will be you and I who subsidize the McMansions.
One wonders here: if it was so awful that people bought homes at inflated prices, why is it the mortgage companies, which enabled them to buy a home in the first place, the villians, while the builders — and y’all are in a big Toll Brothers McMansions area — who already have their money, are not?
but the people who sold them the house at the higher value have already received their money!
That has already happened – it is a done deal.
What the bailout protects is the stockholders of banks that are invested in mortgage-backed derivatives. Th0se are the people who took on an unknown risk in search of huge profits, and they lost their bet. They need to reformulate their risk analysis and recapitalize themselves.
Cassandra,
I don’t know how I could spell it out more clearly:
Compared to Jim she loses:
– The difference between 6% and 2% for the first 3 years (thousands in real dollars already spent)
– $50k in home equity that the government or bank eats for Jim
– The difference between 6% and 5% mortgage over the life of the loan ($10s of thousands over the life of the loan)
Those are really BIG losses compared to Jim – perhaps over $100,000! And she has to pay taxes to subsidize Jim. If Jim sells his house for $250k, he loses nothing. Jane loses $50k. Maybe that is not a lot of money to you, but is is a fortune to Jane.
Prices are based on supply and demand. Lower supply=higher prices. You are proposing that the government help homeowners keep their houses off the market, via a government subsidy, when they might otherwise be inclined to sell. That keeps prices higher and extends the bubble.
There was never a guarantee that home prices would always go up. The banks and homeowners that assumed that risk are the ones that should own it.
Don’t penalize taxpayers and other homeowners because they gambled and lost. That is like asking all hotel guests to subsidize people who played and lost money in their casino.
anonone
“If Jane sells to Jill, Jane loses $50k in equity. Plus, Jane has subsidized Jim through her tax dollars.”
I see your point! And for many of us Our home isn’t just a place to live as it is an investment as many retires tend to downsize and use the some of the equity for other uses.
Also, this financial nightmare goes beyond the value of homes as it dragged down investments and 401-K’s. For one not having an employee pension just a weak 401K I managed to live within my means and it “sucks” to lose $$$$$ in market investment that was for my retirement. I keep “combined” credit card debts below $1000.00. I’ve been drive the same car for 13 years. Was force to trade wife’s car in after 11 years? I hate car payments. Basic cable! Reduced trips and dinner out! Just had a review at work , “your doing an outstanding job and are a value employee sorry we can’t afford to give you a raise.” So the unethical leading practices screwed me big time. Retirement went from a dream to a fantasy!
We need to end the ARM and have lenders compete with each other not for idiots!
Lil Sis:
“The govt needs to “require” lenders to do something…”
Really? Think about this:
Honest Mortgage Company (HMC) has 10 loans of $300k for identical homes. They are all 30 year fixed at 6%. HMC paid $3million in real cash to the SELLERS when made these loans to the BUYERS.
Since these settlements, home property values have dropped to $250k through no fault of HMC.
What you’re saying is that HMC should be FORCED BY THE GOVERNMENT to lose $1/2 million to refinance all those loan.
Tell me…Where are they going to get that money? The taxpayer? You want renters to subsidize homeowners? Or are you going to force good honest companies like HMC to go bankrupt? If they do, where are people going to get mortgages or honest re-financing?
Why should good companies that followed the rules be forced to eat the equity devaluations? Home prices go up AND down – that is part of the risk of home ownership that you make when you agree on a price.
Maybe I’m missing something, but where does it say that we are doing anything with the principle part of the mortgage? Re-negotiating the terms of a mortgage should actually have nothing to do with principle and all to do with interest. But like I said, I may be missing something…
I hear you, Kilroy! And you’re not alone.
Yes. Who would rewrite these mortgages? The company who originally sold the mortgage? Do these companies still exist?
LG,
The principle is the dollars paid to the seller by the mortgage company on behalf of the buyer. If mortgage companies are force to re-write a mortgage at a deflated market value, that becomes the new lower principle and they (or somebody) have to eat the difference between the original principle and the new one.
If Jim renegotiated his loan and wasn’t in trouble, he would still get the savings of paying below market interest for a few years before going to fixed price. Jim is going to renegotiate to a fixed rate that is certainly higher than the current best fixed rate, which seems to be about 6%. But since Jim will NOT get the best rate, he will be paying 7-8% easy. Both Jim and the other are out the equity. The difference is that government took the hit in Jim’s case.
But while the government gets Jim get to stay in his house, Jim is not trying to sell it at fire sale prices just to get out and the bank is not selling at a loss just to get out. Fire sale prices do reduce the value of other homes and if you multiply Jim by just a few in a single neighborhood, you have a real problem. Plus Jim staying in house avoids the vacant house on the block that you really don’t want.
If you live in Delaware, you probably don’t see much of the real issues with the foreclosure problem but this is it. A nationwide drop of home value of 16% (driven by the markets in Vegas, Phoenix, Miami losing almost 30% in a year) helps define the huge market losses that the current crisis is trying to grapple with. If you live in DE, you may not see much drop off in value. But it is the high growth Sunbelt areas that are leading the charge.
The thing is that somebody is going to get a subsidy here. The only question on the table left (unfortunately) is whether you stabilize an entire market (plus the securities that are giving the credit markets such grief) or do you hand over $700 billion to the banks that enabled this crap in the first place?
HMC would not be rewriting any of their loans since they are all still good, presumably.
They would only have to rewrite any bad loans they have on the books (only the ones that they can — not everyone will be eligible) if they decide to sell back to the government any bad mortgage securities or other credit derivatives back to the government as part of the bailout.
If HMC doesn’t need to be bailed out of anything, they don’t need to rewrite any loans they still hold.
Cassandra,
“Fire sales” happen when supply is greater than demand. “Fire sales” are good for buyers. Why do you think the government (taxpayers) should penalize potential buyers in favor of sellers by artificially keeping prices high and houses off the market? Houses won’t sit on the market if they are priced correctly. Supply and demand.
Your assumption that Jim will pay a higher rate then Jane is questionable. Even so, a higher rate on a $250,000 loan is tax deductible whereas a $50,000 equity loss is not. I’d take the renegotiated loan any day.
Cassandra,
Why should my neighbor be allowed to force their mortgage company to rewrite his loan on more favorable terms, but not me? Why should they get to re-purchase their house at a lower cost, but not me?
And why should I be required as a taxpayer to subsidize it?
What about equal justice under law?
Why shouldn’t I just make my loan a “bad” one? See also “moral hazard”
Fire sales happen when you need to get out of a house quickly.
And I know that it is difficult for you to see beyond your own block on this, but this is what we are talking about. I don’t think that anything in DE is happening on this scale, but when a community has reached a metric like 44% of its homesales are actual foreclosures, you have a problem. This is a fire sale. And in Phoenix — the media price of a foreclosure was 220K last year and this year it is $161K. If you are living in these neighborhoods, you’ve taken the equity hit, period.
Your neighbor is not forcing their mortgage company to rewrite anything.
No, under the described scenario, the government is forcing the mortgage companies to re-write it if my neighbor can’t pay his original mortgage and he asks for it.
key fact seems to be left out here..
THE SHITTY TYPES OF LOAN PRODUCTS OUT THERE THAT ARE SCREWING PEOPLE LIKE CRAZY…
helllllloooooooo
Cassandra,
My home was foreclosed when I was a child. I can see beyond my own block on this.
I am not saying that there isn’t a problem. I am saying that the housing market bubble needs to find its bottom without government intervention. Yes, some people are going to get hurt badly, that is inevitable, but the solutions being proposed don’t stop that from happening. If they did, I’d be all for them. That is what I am trying to point out. All things being equal, I’d rather have the free market distribute the pain than the government via the taxpayers.
And then keep the problem from happening again via new regulations and enforcement.
liberalgeek // Oct 1, 2008 at 11:33 am
“Maybe I’m missing something, but where does it say that we are doing anything with the principle part of the mortgage? Re-negotiating the terms of a mortgage should actually have nothing to do with principle and all to do with interest. But like I said, I may be missing something…”
That was one of my orignal comments however Anonone pointed out though it benifts those over their heads getting refinancesd, thier buying something they couldn’t afford and those selling them a package that they you can, cause the nightmare that drove down home value of repsonsible people.
The losers win and winners lose !
If the government starts rewriting mortgages it happens under these scenarios:
The Government already owns the mortgage or owns the security it is syndicated in.
Banks who participate in the bailout scheme are required (which is not the current language of the House bill) to review the current portfolio and whatever securities they have left for opportunities to rewrite mortgages.
Mortgage companies would not be forced to rewrite a loan since they 1) are not (by definition) eligible for the bailout and 2) they are unlikely to still own the loan (it was already syndicated).
Banks not looking for bailout funds would not need to rewrite any loans since they are not participating in the government program that requires this.
Only banks looking to have the government buy their bad assets will need to rewrite loans if the Secretary chooses to enforce that option.
And it is worth noting — again — that not all of the foreclosure starts are going to qualify under this. There are still folks — maybe most of them — who still couldn’t reasonably afford the rewritten mortgages.
Lenders are “encouraged” to renegotiate loan terms by the simple fact that the last thing they want is to own the house itself. Just picture this letter:
Dear Mr. Morgan Chase, you have been assessed a $250 fine for failing to mow the grass on your property located at 1313 Mockingbird Lane.
Yours Truly, New Castle County
The way my old Finance prof. explained it, even if you’re losing a bundle on a pork bellies future, it’s better than having a ton of pork bellies in your garage. Well, unless you’re Mike Matthews…
All things being equal, I’d rather have the free market distribute the pain than the government via the taxpayers.
This is exactly what Republicans want. After of course absorbing all the profits from the bubble, they now want the taxpayers to socialize the loss, while they themselves pay less of the massive tax burden required to fix things.
So if Dems do take the bailout, then after the election they should pass sufficient tax hikes on the upper 1% and upper 20% (and on the financial sector itself) to make sure they bear the brunt of paying for the bailout.
anoone–good point in #28..enough said…or else..here we go again….
If you’re stupid enough to buy into a shitty type of loan product then you should pay the consequences. Not me. If you are silly enough not read and understand the most important document(s) you will ever sign, you get what you deserve. No one was forced to accept these exotic mortgages. If it was your only option, maybe you should have waited.Time to take your medicine.
All things being equal, I’d rather have the free market distribute the pain than the government via the taxpayers.
Me too, but if you have been watching the news over the past few days, I’m thinking that the government is going to throw money at somebody. I think I’ve been sufficiently convinced in my reading that rewriting mortgages has a better (and way cheaper) outcome than does handing over money to banks.
Cassandra,
Let’s go with your scenario.
Let’s say I have been paying my mortgage faithfully, but my home is worth $100k less than I bought it for.
The government institutes your program.
Tell me why I should keep paying my current mortgage?
I’ll just stop and turn it into a “bad loan”, get the taxpayers to subsidize my equity loss, and I walk away with a $100k loan forgiven. Yeah, my credit is shot for a couple of years, but for $100K and I keep my house, that’s OK. Even better if I had taken out a home equity loan – now I walk away with the cash that I spent and have the $100k loan forgiven. Sweet.
Now multiply that by millions of home owners doing the same thing. You get to $trillions pretty quick.
h. // Oct 1, 2008 at 12:29 pm
“If you’re stupid enough to buy into a shitty type of loan product then you should pay the consequences.”
Thing is they loose something they should of never had but those of us work hard and live within our means pay the real consequence!
Like a drug dealer living high on the hog and yes all good things come to an end. So a few years living the life is better then not! What is the difference between jail and the gehttos? Lie the fools on Deal or No Deal! We came with nothing and what the hell!
A few local data points:
(link)
First, this is not my scenario. This is the scenario currently being contemplated by your government or are you not reading all of the synopses of these bills coming out?
Second, if your mortgage is Alt-A or subprime written in the last 5 years or so you might be eleigible to have the companies rewrite your loan. I have no idea how they treat folks who just stop paying now that they know the paper might be rewritten.
Third, current estimates (as I noted before) is that rewriting what they can of the bad mortgages is approx $300 billion. Compare that to the $700 billion being funneled to banks. And not one dime of the $700 billion to the banks rewrites a mortgage.
Hello Mr. Mortgage Man. My name is Mr. Neverlate Onapayment. Since I have never payed my mortgage late, and since you are allowing other homeowners to renegotiate the terms of their mortgage, I too believe that I am entitled and would like to renegotiate my current mortgage.
What’s that, I can’t hear you. Yea, the laughter in the background is drowning you out.
I’d like to cut my interest rate in half. Yes, that’s right to 2.75%.
But .. but .. I’ve never payed late. I’ve haven’t taken a vacation in years. I’ve never owned a new car. Christ, I’ve only recently purchased a flat screen(and had buyers remorse afterwords). I live within my means.
What do you mean that’s my fault?
“because those were the only types of loans available for high-priced housing, she said.”
That fit the buyer credit profile??
So where does the $700bil go?
How will it be spent?
Can they gaurantee that there will be a profit made by re-selling these shitty mortgages? If so, please explain how these profits will be made, and approx. how long it will take. Because I really can’t see any profit ever being seen.
The $700 billion goes to buy the mortgage backed securities and other derivatives from the banks. This is the stuff that they can’t sell because the underlying mortgages are blowing up. So the banks have all of these assets that are basically worthless and when you have worthless assets who lends you money? Besides Ameriquest. The banks aren’t lending each other money because they can’t be sure they’ll get paid back and the banks aren’t doing much lending to consumers and businesses because the money available is tight. That is the very superficial version.
But not one dime of the $700 billion deals with a mortgage rewrite. And that, to me, seems to be the problem. You have this hole in the bottom of the boat and you are providing money to make sure that the bar above can still serve drinks.
Cassandra,
Sorry, I should have said the scenario you described.
“I have no idea how they treat folks who just stop paying now that they know the paper might be rewritten.”
Exactly. Moral hazard.
In the “you couldn’t make this shit up” department, this item is on page 301 of the Golden Bailout:
SEC. 503. EXEMPTION FROM EXCISE TAX FOR CERTAIN WOODEN ARROWS DESIGNED FOR USE BY CHILDREN.
(a) IN GENERAL.—Paragraph (2) of section 4161(b) is amended by redesignating subparagraph (B) as subparagraph (C) and by inserting after subparagraph (A) the following new subparagraph:
‘‘(B) EXEMPTION FOR CERTAIN WOODEN ARROW SHAFTS.—Subparagraph (A) shall not apply to any shaft consisting of all natural wood with no laminations or artificial means of enhancing the spine of such shaft (whether sold separately or incorporated as part of a finished or unfinished product) of a type used in the manufacture of any arrow which after its assembly—
‘‘(i) measures 5⁄16 of an inch or less in diameter, and
‘‘(ii) is not suitable for use with a bow described in paragraph (1)(A).’’.
anon wrote:
ROTFLMAO! Anon, count on one thing: regardless of whether Senator McCain or Senator Obama wins, this “rescue mission” means that taxes will be going up for all of us.
The 2001 and 2003 tax cuts will simply be allowed to expire, and no subsequent tax cuts will be coming, because the government is about to spend more than the entire Iraq war has cost us. Given the turmoil in the financial industry, no one is going to want to buy T-Bills at anything other than a much higher interest rate, and that means that taxes have to go up, for everybody.
The only remaining question is: will either candidate be honest enough to admit it before the election?
I just checked: Barack Hussein Obama’s website is still promising tax cuts for the middle class, and so is John McCain