So much money, so many foreclosures
Maybe it’s just me, but I suspect not. But how is it that every other day we have some federal agency or state governor announcing a new foreclosure plan, and the number of people losing their homes just keeps soaring?
What gives?
The federal government’s latest rescue plan aims at modifying mortgages held by Fannie Mae and Freddie Mac. Sounds great. All these plans do when they are announced. But here’s to Sheila Bair, the FDIC’s chairwoman, who crashed this party. She pointed out a little problem. The initiative, she argued, is simply too narrowly targeted and would help too few in a crisis that threatens to push millions out of their homes.
Bair, though, is just one of a growing number of critics of the current state of the nation’s increasingly wobbly foreclosure rescue effort, the Globe’s Jenifer B. McKim reports. She cites some grim figures from Moody’sEconomy.com: 4.3 million homeowners expected to lose their homes over the next two years.
Our state and federal leaders aren’t shy when it comes to committing big sums to combat the problem – at least on paper. There’s been a veritable stampede. A number of state governments, including Massachusetts, have rolled out funds in the hundreds of millions. And just last month, Congress passed a $300 billion Hope for Homeowners.
But the devil in this case is in the fine print. Some of the early state efforts carried all sorts of restrictions. You had to prove you were the victim of fraud or not have fallen behind on your mortgage payments. Now that makes a lot of sense.
Nothing says it like the slow start of the Hope for Homeowners. The initiative, passed this summer, was aimed at helping 400,000 struggling homeowners trade in their toxic mortgages for traditional 30-year fixed-rate loans. But in the programs first two weeks, there were only 42 applications.
Here’s the catch. To take part, homeowners have to persuade their lenders to take part. That in turn, can mean a big haircut, with the bank having to write off as much as 10 percent of the loan.
Still, the number of banks signing on is growing, with 180 on board now. And the feds are now considering changes that would reduce the losses lenders who participate would have to swallow.
We’ll see.
Comment
Permalink
Email
You'll note that several of us on here found those programs laughable as proposed - they clearly weren't going to achieve anything.
What will? Tough to say. The Federal Govt actually doesn't have the money to prop up the housing market. The housing market is much to big, and what govt can bring to bear is much too small.
The best that can be hoped is to get people to make bad decisions - ie to stay in houses they'd be better off financially leaving for the greater good, as that will bring some stability to house prices.
But it has to be done on the backs of the underwater borrowers, ironically enough.
"What gives" is that no one wants to face the truth. It's convenient to pretend that the foreclosure crisis can be stopped with a little handholding and a few basis points shaved off the interest rate. It can't.
Sheila Bair discovered this when she quit haranguing lenders about dragging their feet on modifications and tried to run her own modification program through FDIC. She found that few homeowners could afford the payments even after modifications. The loan balances were far too high and income far too low.
The truth is, in many parts of the country, houses remain too expensive to be affordable for the people who "own" them. Government and the financial industry want to avoid facing this reality, because it would reveal that most financial institutions in the US are insolvent.
The hope for homeowners lenders are mostly brokers or people who warehouse the loans and then sell them, my company is on that list but we can't originate any of those loans because no one will buy them, you won't see the big name banks or investors on the list. FHA doesn't buy loans they only insure them, this program is a joke, Congress gives 300 Billion to these banks and says will you pretty please participate in the program? What have the banks done with the money? They have gone out to purchase other banks. Senator Durbin is writing a bill now that will require those bailout banks to participate in the program. We'll see.
None of these plans get off the ground because none of them can work. They all use one or a combination of three mechanisms, each of which is fundamentally doomed to failure.
1. Reduce mortgage principal. This is too expensive. To bring all mortgages down to the level of their homes would cost trillions of dollars.
2. Cut interest rates. People will still default, as long as their mortgages are worth more than their houses. Not only do studies show this, common sense says if people own their homes for an average of six years, they have to start thinking of an exit strategy early on.
3. Make it harder for people to walk away. It would be politically impossible to impose wage garnishment on a massive scale, and not many who are under water would voluntarily agree, despite any incentives.
What's happening right now is that the problem is bigger than any possible fix could be. Congress right now is trying to figure out how to help out certain classifications of borrowers but not others because some people are in too deep. The issue is - which borrowers can you rescue and which are beyond help?
There have been all these suggestions thrown out there that require borrowers to be at least X number of months behind on payments to qualify for help. The problem there is that if you're going to say someone has to be, say, 6 months behind on their payments to qualify, then you're talking about a huge nut already owed on top of the outstanding principal. What I'd like to see is proposals to save people who aren't that far behind the 8 ball yet. The problem though is that you'd have people manipulating the system to get help when they don't really need it.
The whole thing is such a huge mess and I'd be tempted to just say - screw em all - let everyone sink or swim on their own merits - but the consequences to that could be an absolute disaster - market collapse and a confidence blow to investors that we may never dig ourselves out of.
I have to say though that the people who got us into this mess are unbelievably irresponsible - that includes borrowers AND lenders. Unreal.
Let the chips fall where they may, NO bailouts for the homeowners or banks. Ensure proper regulation in the entire industry and SLOWLY (yup, years) get back to common sense lending and homeownership to those who are able to afford it. Sound mean? Maybe. Sound responsible for future generations? Absolutely. No free lunch, kiddoes. The party's over.
The biggest problem with the bailout is the government itself. Every day there is a different version of a new plan designed to do something drastically different then the plan that was released the day or morning before. All of this, and an out of control spin based media, leads to a drop in consumer confidence which means the people with good credit that can by a home under the old norms of 20% down and a traditional 15 or 30 year mortgages are being scarred away from buying real estate. The banks are out there making loans, especially community banks. The difference is that they are willing to make loans under the rules as they were prior to the 2001-2005 insanity. You actually have to qualify and have an income stream that can support more than your mortgage payment. The FHA has some great programs designed for first time buyers, which are classified as anyone who has not owned a home in the last three years, which call for as little as 3% down. Now that property values have come down to a more reasonable level it is a great time to buy. If we can attract qualified buyers back to the market instead of scarring them away with government indecisiveness, with mortgage programs at low interest rates, the real estate market will stabilize itself and values will begin to rise again but at a sustainable level.
As for how to handle the foreclosure situation, banks should be encouraged to act in a manner similar to Citigroup by refinancing existing mortgages with longer payment plans, say 40yrs instead of 30, for people that have the ability to make the payments. If owners can not afford their mortgages even at the lower monthly cost then foreclosure or short sales are a necessary evil. If owners can not afford to pay the mortgage they will not have money to maintain the property which will just lead to a downward spiral in the local housing stock which would have a negative effect on communities as a whole. There is nothing wrong with property owners reverting back to renters if they can no longer afford to own. We must look at what is good for the community.
Marcus is correct.
Many homeowners behind on their mortgage payments are still not going to be able to make the necessary payments even after a loan modification.
That doesn't mean the federal government and lenders shouldn't help, but programs need to be sensible. Wait, did I just use the word sensible in the same sentence as federal government.
Forgive me.
This blogger might want to review your comment before posting it.
Recent Posts
browse this blog
by categoryINside Boston.com