Gillam, a widow, said she has owned hair salons and baby supply stores for decades. When her baby store hit a rough patch, she borrowed $412,500 in 2005 and then refinanced with Fremont Investment & Loan for $556,000 in 2006. Before those two loans, her home had been paid for, she said.

The $556,000 is gone and so is her business, Gillam said.

“I am broke,” she said.

Gillam has no one to turn to for help, she said.

“I have no family,” she said. “All mine are dead.”

Mortgage Insider’s Matthew Padilla says he’s seeing evidence that more new foreclosures involve people who cashed out the equity from their homes, as Gillam did, and not from people who bought homes at the height of the boom.

The lender in this case, Fremont, was a major subprime firm that went out of business last year, done in by the subprime market meltdown. Fremont was the target of several state investigations into predatory lending, accused of selling high-rate loans to borrowers who couldn’t afford them.

Gillam isn’t alone in her inability to save her house. The New York Times reported that the Obama administration’s housing rescue plan hasn’t rescued all that many homeowners so far. It highlighted the case of Eileen Ulery, who called her lender, Countrywide (now Bank of America), to alter her loan after she lost her job. Countrywide tried to sell her another loan with a higher interest rate.

Ulery is 63 and lives alone in a modest, two-bedroom condo in suburban Mesa, Ariz. She used equity from her home during the boom to buy a car, a Hyundai, and fix her roof. She used to bring home $1,000 every two weeks from her job as an executive assistant at Arizona State University. But she lost the job in a round of budget cuts. She’s not late on her mortgage yet — but she’s headed there.

Ulery should be eligible for a loan modification under the Obama administration’s plan. But a Bank of America spokesman told the Times she was offered refinancing instead because the bank doesn’t yet have a system in place to offer loan modifications to borrowers who aren’t seriously delinquent.

As you go about your day today — maybe buying coffee, going for a run, rushing off to work — it’s unlikely you’ll have on your mind the nation’s housing crisis and the people who represent the statistics behind all those foreclosures.

But sometime today an 85-year-old widow in California will lose her home of 50 years in an auction at a civic center, and a 63-year-old woman in Arizona will prepare to lose hers, with nowhere to turn for help.

The issue of second mortgages has been dogging policymakers ever since the onset of the foreclosure crisis. A large share of troubled borrowers also have a second mortgage on their home, which is typically owned by a different investor than the first mortgage. Such borrowers may not be able to afford their monthly payments if only the first mortgage is modified.

The administration’s effort on second mortgages is also aimed at soothing the concerns of investors, who have been crying foul over the Obama housing plan’s incentives for servicers. They argue the first mortgage shouldn’t be modified if the second one is left untouched. They also contend the banks that dominate mortgage servicing are conflicted because they own more than $400 billion of second mortgages. Such banks stand to gain from modifying the first mortgage because the second mortgage is more likely to be repaid once the homeowner is saved from foreclosure.

Whether servicers will go for this — under the new plan, they will get $500 upfront and $250 a year for the following three years for successfully modifying a second mortgage — remains to be seen.  But whatever happens, I think it’s time to give the Obama administration some credit here. First, officials came up with a housing rescue plan in a very short amount of time, and now they are quickly stepping in to correct a weakness in it. At the same time, the plan attempts to address the dual problem of helping homeowners behind on their loans, while offering lenders and servicers some way to benefit from loan modifications as well. And the Obama administration accomplished all of this by expending political capital in the face of strong public sentiment against helping troubled borrowers. That’s far beyond anything the Bush administration ever did to address the housing crisis.

We saw foreclosure sales drop in the second half of 2008 as banks employed all manners of accounting tricks to avoid actually reporting delinquencies. We’ve previously mentioned that the voluntary foreclosure abatements were merely kicking the can down the road. So to, were the bank gimmicks like extending the date of delinquencies from 60 to 120 to 180 days. As they run out of tricks, foreclosure-related filings increased in February 2009 almost 30% from February 2008, according to RealtyTrac.

And the backlog of “seriously delinquent loans” keeps growing . . .

It’s true that foreclosure freezes probably only delayed the inevitable for many homeowners. But I’m not so sure the idea wasn’t worth trying. Part of the motivation was to buy some time to see whether loans for troubled borrowers could be modified to keep them in their homes.

One of the problems was that not all lenders, or borrowers, were genuinely interested in loan modifications. The stays became mere publicity tools for some banks, as well as short-term solutions for borrowers who knew they could never afford their homes, regardless of how their loans were modified. Eventually reality catches up to both of them, and that seems to be exactly what is happening now.

From The Times:

“You give $25 billion to a bank, at least they should help people stay in their homes,” Mr. Moussa said. “But once you get to big loans, nobody’s doing anything about it.”

I’m guessing there’s a reason for that.

But let’s let Mr. Moussa go on:

For Mr. Moussa, the road toward foreclosure has been precipitous. He bought his home in 2005 for $2.24 million, with a down payment of more than $500,000, and monthly payments of $4,000 for the first year. But as California real estate prices plummeted, his house’s value fell to about $1.1 million, he said. Then his income dropped by half.

After he defaulted on his mortgage five months ago, Mr. Moussa said he asked his lender, Countrywide Financial, to change the term of his loan to 40 years and to lower the interest to 4 percent until the car business revived.

“Two days ago I got the answer that at this point they can’t do anything,” he said.

Mr. Moussa now has monthly mortgage payments of $8,700 and a home that may never recover its equity. The stress has eroded his marriage, and his wife and daughter are now with her family in Beirut.

His frustration was evident in his voice. “I can make $5,000 payments per month. Why not do that for me for a couple years? Why take it away, sell it” for a huge loss, he asked. “In my area, half the houses are in foreclosure or short sales. And some of them have been stripped down, everything torn out.”

I may be venturing into Rick Santelli territory here when I say I’m having a hard time shedding a tear for Mr. Moussa. If he still can make mortgage payments of $5,000 per month, then he’s better off than most people in danger of losing their homes.

Excuse me, Mr. Moussa, but it’s time for you to move to  a smaller house, not to plead to the government for help.

I’m as sympathetic as anyone when it comes to helping homeowners, who have been left to fend for themselves as banks and insurance companies received repeated government bailouts. I’m with those who worry that while President Obama’s plan is a good start, it would be more effective if servicers had protection from liability for doing modifications and lenders had to write down loan balances, not just reduce interest rates.

But people who live in multi-million dollar mansions, and who still can afford to pay $5,000 a month mortgages, don’t need help from the government, in whatever form it comes. They might benefit from the “Get Out of Jail Free” idea I’ve been pushing, in which borrowers in default get their credit records clear after they give their house back to the bank.

I’d hand that to Moussa, but that’s all. What he needs most is a simple fix — one that doesn’t require him to qualify for a loan modification: he needs to give up his mansion. He can start over in a smaller dwelling. He can begin to understand, as we all have, that homes aren’t entitlements, especially McMansions in Dublin, Calif. Soon enough it will dawn on him, and others in his position, that loan modifications aren’t about government acting as your indulgent parent, fixing your every mistake and making everything better again.

The initiative, first announced on Feb. 18, would require applicants for loan modifications to fully document their income with pay stubs and tax returns, and sign an affidavit attesting to “financial hardship,” according to documents released by the U.S. Treasury in Washington today. The second, larger part of the plan relies on government-run Fannie Mae and Freddie Mac to refinance loans.

There are no surprises here. The details announced today were outlined by President Obama when he announced the rescue effort last month, as The New York Times noted.

A mortgage lender or mortgage-servicing company would first receive cash incentives to modify a borrowers’ loan so that the monthly housing payment declines to no more than 38 percent of the family’s gross monthly income. At that point, the government would match, dollar for dollar, the lender’s cost in reducing the payments as low as 31 percent of monthly income.

The reduced payments could come in the form of a lower interest rate, longer mortgage term or a reduction in the principal outstanding loan amount. The lender would have to make a calculation on whether its cost from reducing the monthly payments, after accounting for the government’s cost-sharing, would be less than the costs it would incur from foreclosing on the house.

The guidelines indicate that a lender would have to make the loan concessions if the subsidized cost of doing so would be lower than the cost of foreclosure. The decision would become voluntary if the estimated costs of the concessions appeared to be higher than the cost of foreclosure.

However, this is new: Bloomberg reports more than 8.3 million Americans were underwater on their mortgages in the fourth quarter of last year — meaning they owed more on their loans than their homes were worth.

That news alone demonstrates why this plan is necessary.

From Thornberg, a California real estate economist:

How about a national tax break for buying not just any home, but only a foreclosed property? How about generating a new group of potential buyers by simply not allowing current defaults to be recorded on people’s credit reports? How about streamlining the foreclosure process, making it quicker and easier for banks to clear properties and find a new buyers, thus reducing their losses?

I’ve previously talked about the possibility of wiping defaults away to let delinquent homeowners start over, calling it a Get out of Jail Free card for people too far underwater on their mortgages to keep their homes. That way, with clean credit credit, they can either find a decent rental or buy again someday, as Thornberg notes. I’m assuming they’ll buy a less expensive home the next time.

The Atlantic’s Megan McArdle also has had similar thoughts:

My lunatic proposal for the day: why not make it easier to move homeowners out of homes they can’t afford? Set up a streamlined foreclosure proceeding where a current or mildly delinquent homeowner can simply give the house to the bank and walk away. Do this with two legal provisos:

1. No tax on the forgiven loan

2. No black mark on the credit record. The bank marks the loan as fully satisfied.

The homeowner gets a fresh start, and the bank gets the house without the huge administrative costs that are normally associated with foreclosure. Everyone loses something, but no one loses a crippling amount, and there is no net transfer between two parties who are both in financial trouble.

These aren’t perfect fixes. I’d be rightly suspicious of trusting that banks and credit bureaus will be diligent in keeping their side of the bargain. Still, I’d rather explore ideas like these, instead of leaving the fallout to the former subprime wolves, who still seem to be at the door.

]]> http://washingtonindependent.com/32328/a-get-out-of-jail-free-card-for-troubled-homeowners-and-other-mortgage-rescue-ideas/feed 0 http://washingtonindependent.com/30207/bad-housing-ideas-part-i-paying-banks-to-lower-mortgage-rates http://washingtonindependent.com/30207/bad-housing-ideas-part-i-paying-banks-to-lower-mortgage-rates#comments Fri, 13 Feb 2009 12:18:00 +0000 Mary Kane http://washingtonindependent.com/?p=30207 The administration’s rescue plan for housing is taking shape. But as Calculated Risk notes, one thing it apparently won’t include is a proposal – once under serious consideration – to pay mortgage companies to lower interest rates.

Instead, as we discussed Thursday, Obama officials are looking at ways More...