Sep 25th, 2008 at 2:02 pm
How to Fix Mortgages
I posted early on why I think revising the underlying bad mortgages is essential to any successful bailout proposal. How you actually get that done turns out to be complicated and technical and I can’t really explain the mechanism. But it is possible. And Andrew Jakabovics can explain it better than I can.
67 Responses to “How to Fix Mortgages”
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September 25th, 2008 at 2:18 pm
You forgot the quote at the beginning of the a href bit, so the link appears with an unwanted ” at the end, breaking it. The article is here.
September 25th, 2008 at 2:19 pm
Per my comments yesterday, CAP’s suggestions just don’t cut it.
Firstly, this idea that judges are going to step in and start rewriting mortgages is dangerous. Just what are the guidelines to such an action? How can you claim that this is going to be in the interests of “fairness” when it’s impossible to come up with a one size fits all guideline? Secondarily, and most importantly…we have a credit crisis here…just what institution is going to extend credit when you allow judges to come in and change the rules of the game?
With respect to limiting purchases to mortgages…just how does one do that when many of those mortgages have been split apart into a million pieces? Perhaps I have this wrong here, but per my comments yesterday…trying to put these things back together is a task that only the Almighty himself could accomplish in a reasonable period of time. If they are not whole, then you’re not going to be able to limit your purchases…I may have misread this, would be interested in comments.
I agree, there is a lot of risk in this plan…but what it is trying to do is not only provide a floor…but buy us time to grow out of this situation. That is ultimately the best remedy for these mortgages…restore economic growth and rescue the housing market.
September 25th, 2008 at 2:27 pm
, this idea that judges are going to step in and start rewriting mortgages is dangerous. Just what are the guidelines to such an action? How can you claim that this is going to be in the interests of “fairness” when it’s impossible to come up with a one size fits all guideline? Secondarily, and most importantly…we have a credit crisis here…just what institution is going to extend credit when you allow judges to come in and change the rules of the game?
You evidently are unfamiliar with bankrupcy proceedings. There’s nothing novel about rewriting mortgages–it’s been done before.
September 25th, 2008 at 2:29 pm
just how does one do that when many of those mortgages have been split apart into a million pieces?
I’m no economist, but my understanding is that the actual mortgages still exist as discrete entities. The problem is with the financial instruments based on those mortgages, many of which are apparently complex and poorly documented.
Disclaimer/Informational Link: Much of my understanding came from reading the below-linked article:
http://scienceblogs.com/goodmath/2008/09/economic_disasters_and_stupid.php
September 25th, 2008 at 2:51 pm
Rea,
Indeed, I am. Thankfully, I’ve never had to have gone through one.
Perhaps I should stick with my second point…because there’s a lot more people with mortgages on a primary residence than on investment properties. In that case, we’re talking about bilking the industry out of billions more. I would again point out…we are in a credit crisis…why would you want to discourage the industry from extending credit?
Also, if these folks are going to declare bankruptcy, just what is the penalty? Are we going to have millions of people that won’t be able to be extended credit because we decided to concentrate on their mortgages rather than the overall system?
September 25th, 2008 at 2:54 pm
You guys need to go read calculated risk. They have gone into depth as to why this is not a trivial process and requires a lot of grunt work and requires time. And about how banks are quite willing to go through this process with homeowners as long as they are following the guidelines that prevent them from being cheated out of perfectly reasonable mortgage loans. Of course they will also talk about how the executive office loves to cut the budget of branch offices that do that actual loan work of the bank and instead focus on bonuses for the people generating the financial magic tricks that got us into such a mess.
September 25th, 2008 at 3:10 pm
Ed Smithe waives a red herring.
The Bankruptcy Code provides that “a plan may – … (5) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence.” 11 U.S.C. § 1129(b).
There is a virtually identical provision in Chapter 13.
The Bankruptcy Courts approve or disapprove the modification of loans every day, only there is currently an exception barring modification of mortgages secured by one’s residence. Every other loan can be modified. The mortgage on rental property or a vacation home can be and often does get modified. The only thing that need change is the exception for debtor’s residences.
The guidelines have been in place for ages. There is absolutely nothing new there. Two typical examples of modification would be:
1) Interest rate reduced to prime +2%
2) secured debt reduced to fair market value of the collateral, with the difference (the amount the bank would lose in a foreclosure) being treated as unsecured debt.
There should be a provision in Chapter 13 allowing the term of years to be stretched to make payments smaller, but there isn’t.
September 25th, 2008 at 3:19 pm
How about a bailout on a micro-scale?
Every homeowner could choose to have the gov’t buy a portion of their home for cash that they could apply against their outstanding principal and re-finance the resulting balance. If I own a home with a mortgage based on a $500,000 valuation that is now worth $350,000, I apply to the gov’t for a $150,000 grant. Actually, I apply for a grant to cover the $150,000, but the mortgage owner would have to take some discount. I get a mortgage on the outstanding balance.
When I sell, I owe the government for every dollar between $350,000 and $500,000. Plus, the government takes some portion of everything over $500,000.
There are some details to work out, but it de-toxifies the mortgage on that home and allows the owner to stay in the home. If there’s an upside, the government gets to recover it’s investment and possibly make some money.
As I’ve written it, there’s not enough disincentive for folks who are not underwater. That would need to be worked out so that there’s a limit on the upside that would discourage people who don’t need help. It would also have to discourage flippers. You need to stay in the home for another five years or so.
Anyway, it’s basically a more direct bailout.
September 25th, 2008 at 4:09 pm
This is all becoming pretty moot, because it looks like the legislation is a done deal, unless House Republicans have more members willing to rebel than I think.
I believe the problem with many of the ideas for manipulating or “fixing” the market that I’ve seen is that ultimately, it can’t be done. Supply and demand simply have to come into alignment again, and that takes time. The good news is the process is already happening. House construction has declined precipitously, and population continues to increase. By my estimate there are already some 3 million more people living in the US than when the RE market peaked two years ago, and every month that number increases by at least a quarter million or so on average.
Another problem I see is that getting the government so involved in the minutiae of loan servicing and collecting means requiring it to engage in an activity for which it is poorly suited. There are millions of under/non performing mortgages. Why not just let the private sector sort it out? There’s plenty of money sitting on the sidelines (so I’m told). If holders of mortgage paper (or the underlying assets) are willing to lower their prices, they’ll find buyers.
We’re told that the reason the government needs to act is that a crippled financial sector will affect the broader economy. Fair enough. If that’s the case we should concentrate on keeping any government plans as narrow in scope, and as tightly targeted, as possible. If the balance sheets of the firms in question can be repaired, we’re off to the races. To do this all the government needs to do is right several hundred checks. This seems to me vastly easier to achieve than getting the government so intimately involved in millions of transactions.
I’m waiting to see the fine print on the legislation, but from what I’ve read I can live with it. In fact, the Democrats seem to have gotten agreement on terms that are frankly tougher than I’d push for, because assisted financial institutions are going to have to pay the government for the help with both equity (all I think is necessary) and in paper.
Again, I’ll hold off on final judgment until I see the language. But this is looking better than I had hoped 48 hours ago.
September 25th, 2008 at 4:09 pm
By my estimate there are already some 3 million more people living in the US than when the RE market peaked two years ago…
Make that 6 million.
September 25th, 2008 at 7:15 pm
If they just struck out those few words in 1329(b) starting with “other than a claim…” we would be able to have our “micro” restructuring, and the Banks would have performing assets valued far higher than the toxic securities they now hold.
The problem is that the pools have been tranched so that no one owns the entire pool, and nobody has the necessary authority to materially alter the underlying mortgages. A lot of these homes are foreclosed under servicing contracts and then remain idle because there is no one entity to take control and possession and do something with them.
If you can figure out how to “desecuritize” these pools you would solve the problem and be a very wealthy individual.
September 25th, 2008 at 7:16 pm
Perhaps I should stick with my second point…because there’s a lot more people with mortgages on a primary residence than on investment properties. In that case, we’re talking about bilking the industry out of billions more. I would again point out…we are in a credit crisis…why would you want to discourage the industry from extending credit?
Extending relief to homeowners in the form of loan modification or principle reduction isn’t bilking the industry. In fact, it’s the bitter medicine that the lenders need but refuse to take because they’d rather just dump their bad loans on taxpayers now that the option exists.
What’s happening now is that homeowners who have no relief are either foreclosing in record numbers — in which case the bank is losing a considerable sum of money — or selling short — in which case the bank is losing a considerable sum of money, unless they attach an unsecured loan to the sellers that follows them.
It costs banks an average of $50,000 just to file the paperwork for foreclosure. Add in carrying costs for the home (yard maintenance, taxes), transaction costs (real estate commissions and sales taxes) and a low eventual sale price due to dramatically declining markets and deferred maintenance, and a bank has lost usually between 60% and 75% of the value of the original outstanding note.
By allowing loan modification, banks as well as homeowners benefit, because:
1) Banks save the foreclosure filing fee, $50,000 off the top
2) Banks have a continued income stream from the mortgage payments on the home, stabilizing their assets and cash flow
3) Banks save on all the taxes, maintenance, and commissions they would otherwise have paid
4) A drop in foreclosures curbs the decline in market values and therefore the values of the outstanding notes
The current bailout plan as it has been discussed does NOTHING to stop the bleeding at the source. Nothing. Because bad loans were packaged and sold as securities the investment and commercial banks are tied to the fortunes of the housing market, which is continuing to pick up speed as it drops because of the continual foreclosures. Unless massive action is taken to reduce foreclosures banks will continue to fail and/or need to be bailed out again down the road.
And the banks would rather get the homeowners off the books without paying for it than keep them on the books and set the precedent of across the board loan modification, despite the fact that it could save them (could impact future profits, don’t you know).
Pragmatism must trump ideology. Ideas about “limited government involvement” need to be cast aside in a situation where massive intervention is needed to keep the economy from locking up, and that is exactly where we’re headed. Complaining about “socialism” is nothing but arguing about nonsense like which is the correct side of the egg to tap open. We don’t have a centrally organized economy, therefore we are not a socialist country. Using government legislative and economic resources to bail out a particular industry to save the entire economy and all of our fortunes doesn’t make us socialist, it just makes us smart.
September 25th, 2008 at 8:40 pm
The misconception that seems to prevail is that the problem is under performing mortgage “pools”. The problem is actually the securitization of mortgage pools, which means that although the mortgage itself survives as a discrete instrument,ownership is divided among several, potentially dozens, of investors/holders, and often divided into “wedding cake” tranches.
Windhorse an PSP have it right above, this is nothing new in the BK courts and it is done every day with virtually every kind of loan, EXCEPT HOME MORTGAGES. The holders are not giving up anything they haven’t already lost, i.e. the portion of their loan which is not supported by their collateral, if they foreclose that is all they could conceivably recover anyway.
These instruments, the MBSs are now selling for 20%, when the underlying mortgages are probably worth 60-70%.
September 25th, 2008 at 8:57 pm
http://emptywheel.firedoglake.com/2008/09/25/why-the-bankruptcy-change-is-important/#more-2758
This is a pretty good description of the process.
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