rssFinally, a Bailout for Homeowners?
Friday, October 31, 2008 at 11:30 am
- 28 Comments
Foreclosure sign in the Southern California desert (Flickr: jeroen020)
As foreclosures continue at a record pace, homeowners in trouble have watched the government devise a $700-billion rescue plan for Wall Street, buy shares in nine major banks and extend credit to insurance companies like AIG. What they haven’t seen is much of anything coming their way.
Now the Treasury Dept. and the Federal Deposit Insurance Corp. are putting together a plan to offer as many as 3 million homeowners lower loan payments for at least five years. Lenders will be covered for some of their losses should the restructured mortgages go bad. Some details of the $40 to $50 billion plan leaked out this week — and it seems that homeowners at the center of the crisis may finally get their turn at a helping hand from the government.
Illustration by: Matt Mahurin
But, in the end, can they get the help they really need?
The Bush administration isn’t entirely on board with the plan, The Washington Post reported. The White House — which aggressively led the way in pushing for a bailout of the financial system — quickly went on record to say it hadn’t made decisions on any proposals for homeowners.
In contrast to the urgency with which the administration pushed the bailout package, whatever might be aimed at homeowners apparently will take a while to become a reality.
Even if the plan gets approved, loan modifications haven’t shown themselves yet to be a fully effective curb on foreclosures. To critics, they have been oversold as a way to keep people in their homes, with policy-makers continuing to push them despite any evidence that they really work.
Redoing a loan for someone who still can’t pay it only leaves the borrower worse off than where he started, said Joshua Rosner, managing director of the investment firm Graham Fisher, and a longtime critic of loan modifications. Early in the downturn, failed subprime lender New Century Financial had loan modification default rates of 50 percent, he said.
Adding to the problem: Restructurings don’t work all that well even in the best of times. Redoing loans while housing prices fall means the homeowner could once again find himself underwater, even with his restructured loan, and in a position to default once again.
Before the government launches mass loan modifications, it should be gathering and analyzing redefault rates, to see if the whole thing is worth it, Rosner said. To him, Congress supports loan modifications as a way to let regulators eke out a patchwork of solutions.
Then it can avoid making a bold but controversial move, like creating something similar to the Home Owners’ Loan Corp., which purchased and refinanced delinquent home mortgages during the Great Depression.
“They’re just trying to declare victory and do nothing,” Rosner said. “We really should be having a public discussion, with facts and figures on loan modifications and redefault rates. Modifying loans in this environment is very risky.”
Others also don’t think the Treasury and FDIC are going far enough. The modification plan simply means they are offering another carrot to entice lenders to restructure loans — but that’s all. It’s a far cry from the unprecedented, sweeping action taken to rescue banks.
The government could direct Fannie Mae and Freddie Mac to undertake mass restructurings, since it controls the two agencies. Housing advocates say both continue to foreclose and to refuse to do restructurings on a large scale.
The government could also issue waivers giving securitizers authority to make decisions on restructuring loans, allowing them to bypass the problem of putting back together again mortgage-backed securities that have been sliced into pieces and scattered around the world.
No one’s sure the new government plan will be able to navigate around this roadblock, which has held up many loan modifications. It could mean that only a small percentage of homeowners will get help.
The government could also take an entirely new turn, and back proposals gaining steam lately that would encourage lenders to allow former homeowners to rent their properties, either for the short- or long-term. Supporting rental policies would keep a property occupied and a homeowner in a home, or would help people who can no longer afford to own their homes find alternatives.
Even with foreclosures jumping by 71 percent in the third quarter, the government’s latest response to homeowners has fallen far short of any decisive intervention — and that’s a different posture from its moves to prop up the credit markets.
“Clearly, banks are the priority,” said the economist Dean Baker, co-director of the Center for Economic and Policy Research.
In the meantime, it’s been an uphill battle for agencies trying to kickstart loan modifications.
After taking over the failed subprime lender IndyMac in July, the FDIC decided to try a mass modification of its mortgages, with the goal to setting an industry standard. FDIC Chairwoman Sheila Bair has been an outspoken advocate of mass loan restructurings, and has pushed for more lenders to try them.
But a look at the FDIC numbers that Bair reported last week shows how hard this task is. Of IndyMac’s 60,000 borrowers, 40,000 who were more than 60 days late on their loans were deemed eligible for restructurings.
The FDIC sent out 15,000 letters in the first round of its modification attempt. Of that total, some 3,500 borrowers accepted modification offers, and more are being processed. But it’s still not clear yet how many of them actually will qualify for new loans, spokesman David Barr said.
To financial blogger Tanta at Calculated Risk, the totals prove what she suspected all along: the FDIC wasn’t going to be any better at loan modifications than the private sector:
Certainly 3,500 modifications successfully completed in two months is better than nothing. Then again, I don’t think IndyMac’s modification rate prior to the FDIC takeover was exactly “nothing,” either. Bair doesn’t address that, so we still don’t know if the FDIC’s “expedited” approach has really been measurably better than what IndyMac was already doing. At best, it’s probably only marginally better, which wouldn’t be so much of a problem if Bair hadn’t spent so much time earlier in the year scoring cheap rhetorical points about uncooperative servicers not doing enough to help. In any event, the Bair Plan doesn’t seem likely to bring the mortgage crisis to a screeching halt by year-end.
Not everyone agrees, with some advocates praising the FDIC approach as the best way to tackle loan modifications, because one-on-one negotiations are just too lengthy and arbitrary. All loan modifications usually involve lowering the interest rate, reducing the amount of money owed on the loan or stretching out repayments. Borrowers also have to prove they can afford to stay in the home, with the modification.
Under the FDIC approach, borrowers in arrears sign a standard modification agreement that lowers their loan amount. Then they mail in a check for the new payment, along with verifying their incomes.
Barr declined to draw a conclusion from the agency’s progress so far. He said “it’s too early for optimism,” and that the agency’s early results may reflect the easiest and most cooperative borrowers to work with.
To Alan White, a Valparaiso University professor who studies subprime loan modifications, a loan workout is just what it seems — a work in progress. Counselors, agencies and lenders are all getting better at doing them, as they get more experience and as servicers increasingly sign on.
That wasn’t the case at the beginning of the economic crisis. In a sample of a pool of subprime loan modifications begun in 2007, White found not a single loan showing a reduced loan amount, and many loans with higher monthly payments.
Since then, however, some subprime loan modifications have improved, White said. The $700-billion bailout included legal protections for servicers regarding loan modifications, which has helped.
The biggest problem remains that some servicers will restructure loans — and others won’t even try.
Countrywide, for example, does its loan modifications all the same way — by rolling in late payments to the balance and reconfiguring the monthly payment, which usually ends up higher. That’s not a real modification.
“Servicers have been all over the place,” White said. “But what we’re having is a process where things are getting marginally better.”
But that marginal progress is matched by the foreclosure machine’s rapid pace. That means something to stop foreclosures has to be happening at the same time loan modifications are underway, White said. States like Massachusetts, that require some mediation before foreclosure, have had some success in slowing down the process, at least temporarily, he said.
Because servicers don’t make money doing workouts — but do collect fees for foreclosing — a better avenue for Treasury might have been paying servicers $1,500 or so for every loan workout, giving them a financial incentive, White noted. Like Rosner, he also believes modifications have to evaluated for their effectiveness, and targets should be set for new modifications.
Nonetheless, the new approach by Treasury and the FDIC is a step forward, he believes — with a caveat. This is a very positive proposal,” he said. “My concern is that there is such resistance to doing sufficiently aggressive loan restructuring, on the grounds of moral hazard and fairness, that they will produce needlessly stringent guidelines.”
In White’s view, “moral hazard has gotten thrown out the window with the banks” and shouldn’t impede loan restructurings.
Still, unless the government writes some restrictions into its plan, it could create a different kind of moral hazard, said Rosner, the financial analyst. Servicers might rewrite anybody’s loan, whether it would work or not, because they’ll be bailed out by the government in any case. “They could stick it to the homeowner, and to the taxpayer,” Rosner said.
Loan modifications have never been particularly popular with the lending industry. Some believe even government guarantees won’t change that.
Christopher Whalen, an investment banker and research analyst who follows the financial services industry, and who once worked for Bear Stearns, said lenders and servicers aren’t enamored with either workouts or with the idea of becoming rental property managers. If the numbers don’t show someone can afford a house, it’s time to get the foreclosure over with and get that property back on the market, as a first step toward stemming falling home values.
“Lenders are ill-equipped to hold hands with people,” Whalen said. “They don’t want to become a social-services organization. Their goal is to get all this resolved as quickly as possible.”
For people on the brink of losing their homes, the policy debates offer little of anything that’s useful.
Iris Pulliam, 51, who lives in Prince Georges County, Md., thought her loan was restructured in July, through the Neighborhood Assistance Corp. of America, a housing advocacy group. But even that group, which attempts mass loan restructurings, hasn’t been able to get her servicer to sign on. She struggles each month to keep up with her payments. “This is very stressful,” she said. “I feel like I’m losing my patience.”
Just like many homeowners, who see everyone else’s hand out for a government bailout, with only theirs coming up empty.
28 Comments
Comment posted October 31, 2008 @ 3:14 pm
For the prudent and responsnible .. my advice is to STOP PAYING YOUR MORTGAGE NOW … the only hope for survial in the usa is to “game the system” just like all these overextended and irresponsible “homeowners” did and will now get YOUR tax dollars to live in their mcmansion. If you can't beat them then join them!!
After you have been foreclosed upon, your house (and lots like it if your friends and neighbors do likewise) will drop dramatically in price. Presto! In a year or two you will be able to buy it back at half what you paid for it in 2004 or 2005. Now that's a bargain.
So give the government and the banks back what they're trying to give to you – a royal screw job.
After all, they intend to give your neighbor who behaved imprudently a bailout, and if you were prudent, unless you suddenly become imprudent, you're going to get screwed in the form of being taxed to buy his home for him:
“The program, which might help several million homeowners refinance into affordable loans, would require lenders to restructure mortgages based on a borrower's ability to repay. Under one option, the industry would keep lower monthly payments for five years before raising interest rates, the people said. “
Got that?
If your next door neighbor lied about their income to get their house, or took out an exotic “Option ARM” mortgage and can't afford their payments, they will get a big fat bailout.
You will, in fact, get his mortgage bill.
Unless you intentionally default, in which case you will still get to pay taxes, but you won't pay your mortgage, and thus, you won't pay twice.
Comment posted October 31, 2008 @ 7:24 pm
This mortgage bailout is going to come with a corresponding tax credit for renters, right?
Comment posted January 4, 2009 @ 10:18 pm
I don't know much about how economics or anything like that works, but I do know that I am 4 mos. behind in my house pmt.( I bought the house when things were going good for me, now everythings been going really bad for the past 2 yrs.), I would think that instead of the government giving away money to huge corporations, just to make it not hurt so much WHEN they foreclose, wouldn't it be better to pay someones mortgage payments to get them up to date, then the homeowner keeps their house, and the lender gets their money? Maybe the government could pay half due and give lender the other half in tax credits?
I understand that alot of people have fallen on hard times, but if everyone looses their homes, then what? Isn't rent usually more than a mortgage? how many are going to be homeless?(then who pays?).
I know im getting sick of no heat in my house(couldn't pay gas bill), and sick of electric shut-off notices every few weeks.
Comment posted January 6, 2009 @ 2:03 pm
“Christopher Whalen, an investment banker and research analyst …it’s time to get the foreclosure over with and get that property back on the market, as a first step toward stemming falling home values.”
How, exactly, is this the best course of action? The house will then be on the market appraised for the same reduced value as could have been offered to the homeowner if a modification had been pursued.
I.e. say my circumstances are such that I can't afford a loan for $300K but the current appraised value is $200K which I can afford. If the Mr. Potter's of the world skip to the chase and foreclose, the lender would then be trying to sell the house in an already flooded market for the same $200K.
There are a whole lot more stories in the housing debachle other than the subprimes. Between health issues and a new baby my wife hasn't worked in 3 years. We tried to sell just before this whole thing started and we watched our asking price follow the market down…trailing just behind. We went from hoping to come away with a modest down on something much smaller, to hoping we could break even, to being deeply indebted to family for the past year which will shortly run out.
I have similar urges like 'mad and angry' below but intentionally defaulting is a bad decision…like the ones that led people into the subprime web in the first place. I have to believe the system will open to those like me who have tried desperatly to be responsible. I just hope it happens in time.
Comment posted January 20, 2009 @ 12:28 am
Loan modifications have never been particularly popular with the lending industry. Some believe even government guarantees won’t change that. – Yes you are right about that.
Comment posted February 6, 2009 @ 3:55 pm
If lenders and mortgage companies were smart instead of foreclosing on someones house, they should discuss with the homeowner and see what reasonable payment they can make every month. If it's $900.00 or $1,000.00 a month for the next 5 years or 30 years. This is common sense it would be a steady income for the lender. Also, the people that are suppose to be running our states need to make sure that if a big company needs to be bailed out it needs to be researched closely. Companies should not get bailed out for giving their employees a company paid vacation.
Comment posted February 6, 2009 @ 4:08 pm
BR aka Chriatopher Whalen, do u have a life? dude… who cares if ur a investment banker.
ur lame ;D u think all cuz u make a lot of money u can talk down 2 us liltle people… DUDE>.>
u need a life cuz u are probably a middle age dude sitting at the computer playin World of Warcraft of some stupid, immature, pointless game to chat to your nerdy buddies. So there :P . And u know what, u shouldn't even be on this site cuz u prob. some rich, snobby person and your home or house may not even be up for sale, foreclosure SO THERE… AGAIN *_*
Comment posted May 4, 2009 @ 6:01 pm
The new Federal Loan Modification program has been created to helping people navigate the complicated system and offer guidelines for lenders as well.
Not everybody qualifies fir it though. Do your research and ask for professional help if it's needed.
Comment posted May 5, 2009 @ 1:13 am
I am glad that finally there is something that all Counselors, agencies and lenders are all getting better at doing and that loan amount is getting reduced. – There is still a way to go!
Comment posted May 5, 2009 @ 6:53 am
As an English language teacher I can tell that restructurings loans don’t work all that well even in the best of times. If housing prices fall it means the homeowner could once again find himself in trouble. This has happened to me.
Comment posted May 6, 2009 @ 12:24 pm
The policies of the new government are in favor of providing the benefits of loan modification programs to most of the distressed home owners who live in the fear of foreclosure.
This is the right time to get your loan modified and save yourself from foreclosure.
Do your research and ask for professional advice
Comment posted May 30, 2009 @ 11:36 am
I agree with FDIC approach as the best way to tackle loan modifications is the one-on-one negotiations These personal issues need to be handled carefully.
Comment posted June 6, 2009 @ 10:16 am
Loan modification has never come at a better time. As the mortgage market is shrinking people seek new ways to stay in business. Changing terms of a loan is the only way people can keep runing their businesses.
Comment posted June 13, 2009 @ 5:26 am
With all that said apparently it is up to your mortgage company to assist you in this process. Recently I lost my job and went the route of restructuring out loan but after 4 months of waiting on the mortgage company (GMAC) and Freddie Mac to make a decision finally they came back and said that the financial paperwork on there site was revised and we had to fill out another financial report again “so we did”. After not hearing from GMAC & Freddie Mac we called them back and they told us that they need for us to do this for a third time “so what's up with that”? At this point I am starting to believe that this is a stall tactic so they can foreclose on our home and pocket the equity that we built up over the years. I also believe that THE “not our” GOVERNMENT is offering a helping hand but every time we reach for it someone pulls it back.
So if you are getting the same old run around and are at the point were foreclosure is at your front door do this, call up a wrecking company and have them level the part of your house that you have your equity in. This work's best if you start at the foundation.
Comment posted June 13, 2009 @ 12:26 pm
With all that said apparently it is up to your mortgage company to assist you in this process. Recently I lost my job and went the route of restructuring out loan but after 4 months of waiting on the mortgage company (GMAC) and Freddie Mac to make a decision finally they came back and said that the financial paperwork on there site was revised and we had to fill out another financial report again “so we did”. After not hearing from GMAC & Freddie Mac we called them back and they told us that they need for us to do this for a third time “so what's up with that”? At this point I am starting to believe that this is a stall tactic so they can foreclose on our home and pocket the equity that we built up over the years. I also believe that THE “not our” GOVERNMENT is offering a helping hand but every time we reach for it someone pulls it back.
So if you are getting the same old run around and are at the point were foreclosure is at your front door do this, call up a wrecking company and have them level the part of your house that you have your equity in. This work's best if you start at the foundation.
Comment posted June 19, 2009 @ 4:56 am
I agree with Amber. Unfortunately banks and lending institutions are too greedy. They want the most money possible from any transaction. Now, because of this chaos they are more willing to “share” their profit in the form of loan modification. This is the right time to modify your loan and stay in your home. Go for it.
Comment posted June 19, 2009 @ 5:14 am
Definitely though times. You have to see first if you qualify for loan modification in order to save your home. Not everybody qualifies, but most people do.
Comment posted June 29, 2009 @ 6:40 am
Modifications are becoming a little easier now for homeowners since Obama's Home Affordability and Stability Plan (HASP). Whether or not it will achieve the goal of helping 8-9 million homeowners remains to be seen…
Comment posted July 10, 2009 @ 7:38 pm
Not everyone who is currently in foreclosure lives in a mcmansion, nor did they over extend, some of us just happened to lose jobs that were supposed to be “stable”. In order for a mom like me to look for a job to pay my mortgage I have to pay for daycare, in order to pay for daycare I need a job, and so it goes round and round. I worked in the mortgage industry for 13 years, didn't look like the end was near until BLAM there goes 98% of my office unemployed. I live in a very modest home in a very modest community, which I am leaving because I am losing my home, where both of my children were born, I have no choice. But I am one of the lucky ones, I have a mom who has a house that can accomodate us at least temporarily. We won't be homeless, but my credit is GONE so it'll be a while before we can have our own home again and live in a neighborhood where my kids will grow up safe, and in order to do that we'll have to save up BIGTIME. So please don't generalize…..
Comment posted July 23, 2009 @ 1:41 pm
These are very sorry things!
I hope so that the things will change into good direction.
It is good quickly.
Pingback posted February 14, 2010 @ 12:38 pm
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Comment posted May 17, 2010 @ 7:46 am
Loan modifications ca are taking place in great numbers due to the rise of foreclosed real estates over the past year. It is advised to seek help from an attorney who has great experise to deal with a variety of issues during the modification process. They have a higher success rate than individual applicants.
Comment posted May 26, 2010 @ 12:34 pm
Bank modification dose not work for people receiving unemployment. It would work if the banks were willing to let families that are still in their homes pay a small amount or set up a rental program for families that are unemployed, giving them time to get a job, than having a empty home decaying as long as families are in their homes they would still up keep the home. The banks would not loss so much, because the families would get jobs at some point and can start paying their mortgage in a more timely manner. President Obama need to look at the number of families helped and the number of not. 5/25/2010 Hamp program did not work, bailout stree families just as he bail out the theives on wall street, and the workforce people that are miss using the funds give to help the unemployed and not their own pockest. It's a shame how the American people are being lied to and funds stolen. Clear all homeowner debit on their homes giving them an even playing field to find work in the worst of times we are facing.
Comment posted July 6, 2010 @ 7:10 am
So if you are getting the same old run around and are at the point were foreclosure is at your front door do this, call up a wrecking company and have them level the part of your house that you have your equity in. This work's best if you start at the foundation.
Comment posted August 4, 2010 @ 5:34 am
price in housing is dropping in US, except Flushing Queens NY, please drop as well, so i can buy! lol…
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