Here are the basics of the latest mortgage bailout initiative from Fannie Mae and Freddie Mac that was announced today by the Federal Housing Finance Agency.
To qualify, borrowers must:
- Have a loan owned or guaranteed by Fannie or Freddie.
- Owe 90% or more than the home is worth.
- Be 90 days or more behind on payments.
- Demonstrate financial hardship.
- Not have filed bankruptcy.
- Presently occupy the home.
Possible remedies under the plan include:
- Interest rate reduction.
- Loan term extended from 30 to 40 years.
- Deferred principal.
Note that principal reduction is not among the possible remedies (nor should it be, in my opinion). What this means is that this plan is really only useful for individuals that really want to keep living where they are now for an extended period of time (10+ years). If you owe $400,000 on a house that’s only worth $300,000 and you want to sell a year or two down the road, reworking your loan in this manner will be of little help.
The plan goes into effect December 15th.
I’d also like to briefly address a quote from FHFA Director James B. Lockhart that appears in the press release:
Foreclosures hurt families, their neighbors, whole communities and the overall housing market. We need to stop this downward spiral.
Note that when a family goes through foreclosure, it’s not as if they end up on the street. They simply have to go back to renting, which is often financially where they probably should have stayed in the first place. And somehow I don’t seem to recall ever hearing high-ranking housing officials saying the converse of the above statement during the inflation of this ridiculous bubble:
Skyrocketing home prices hurt families, neighborhoods, whole communities, and the overall housing market. We need to stop this upward spiral.
But now we have to do anything and everything to (attempt to) keep home prices at ridiculously high levels that prevent financially responsible families from becoming homeowners? Nonsense.
This is like Japan’s 100 years mortgage.
Ratchet that scenario down by 20%! For 99% of borrowers, they can’t owe more than $417k, as that was the conforming limit for most of the boom. Only those that have borrowed in high priced markets in the last 7 months (Since March 2008) could possibly have qualifying loans larger than that.
Oh, good point DJO. I’ll modify the post to include more realistic numbers for the scenario.
Seattle hasn’t seen a large number of foreclosures hitting the market compared to other cities so I don’t see this progrram having much of an impact on Seattle home prices.
The people who bought these ridiculously overpriced homes with little or no money down obviously aren’t financially literate so I can see them modifying their loans so they can stay in the home longer whether it makes any sense or not. Inevitably I see them defaulting on the loan and the home being foreclosed. Maybe this program stalls the number of foreclosed homes hitting the market at once.
I agree with Tim’s comment that these people should be renting and they should have never been allowed to buy a home. There’s certainly nothing wrong with renting! It’s probably a more affordable alternative for people who can’t afford a mortgage!
i like the proposal from the standpoint that it takes away the argument of the people who are handing in their keys “because they didn’t know/understand the payment would go that high”. Now they can only admit that they are walking away because they made a bad decision to buy an overpriced home.
That leads me to my second point. Non-recourse rules are dumb. People should *not* be allowed to walk away so that they can go find another home that will probably appreciate more… not on *my* (tax/bailout) dime anyway. The banks/lenders should be allowed to go after assets and (like in Australia for example) bind the borrower to paying back those funds no matter what, no matter how long it takes. That will make people think twice about buying a $500K “investment” with zero down.
Not sure how that might work contractually though. Although it would be very annoying if on one hand those folks said they were ‘tricked’ into the loan… and then on the other hand, rely on the non-recourse loophole to get out of it.
One last point, from an incentives point of view. When people are not held accountable for their decisions there is no downside to them for taking a risk. ie. if they buy a house (and they knew they didn’t have enough income and that they likely wouldn’t be able to buy a house any other time anyways) then why the heck wouldn’t they go ahead and try? On the upside, they may get the value appreciation… on the downside they walk away and end up where they were in the first place. Again, non-recourse rules need to be changed (atleast from this point forward).
“And somehow I don’t seem to recall ever hearing high-ranking housing officials saying the converse…”
Hmm… I’m not sure that’s true. Plenty of elected officials were concerned about the increase in housing prices during the bubble. Municipalities were obsessed with finding ways of creating more affordable housing and more workforce housing. On the federal level, the desire to make houses more affordable is precisely what led Fannie and Freddie to start making loans to unqualified buyers (following in the footsteps of private banks who’d been making unsound loans for years by then).
Or is that something different altogether?
Welcome to America Johnny. If you pay taxes you’re not doing enough business.
Are you employing enough people? Are you buying enough equipment? Are you improving your properties?
Go back to where you came from comrade, because if you are living within your means you’re a communist.
This is the United States of America. We buy more, spend more, and make more money than any place on earth. If we have enough income not off set by expenses we are paying taxes and paying taxes is down right unAmerican.
You see comrade when you pay taxes it’s for government welfare. If my government isn’t strealing your tax dollars for thier welfare then they should give it to a bigger business. That business can then supply the corporate welfare you are probably more comfortable with.
Non recourse? Get a life.
Home ownership, durable goods, secured credit, service jobs, family, and more taxes. When they are done the next one buys it and starts the process all over again.
David,
While i rarely get through the first 2 sentences of your posts… I had to continue this time since you replied directly to me.
Do you understand what “non-recourse” is? Right now lenders have no recourse to go after borrowers that decide not to pay back their loan. Guess who is now paying for those loans that are going unpaid? You and I… through taxes… ie. The Bail Out.
Do you not believe that borrowers should be on the hook for what they borrow?
Tim, is there an ‘ignore’ button in the works yet?
Question to anyone who has heard the answer -
What happens to “homeowners” who had a significant change in income? Loss of job, loss of commissions, etc? 38% of nothing is nothing, surely the government isn’t going to let people stay in $500,000 for zero.
Mariner, I’ve heard that the home owner has to have sufficient income to repay the loan. You won’t get to keep the house if you can’t afford it.
davidb –
If they had sufficient income to repay the loan, the “homeowner” wouldn’t be 3 months behind and need a modification, no?
I’ve been fixated on this topic for a half an hour, checking google & news articles but don’t see an answer. I would think that would be the first question asked at the news conference today. I would think there would be a debt to income ratio to tell some people to get lost and not waste FRE/FNM’s time, but I haven’t found one.
At first glance, this program seems the bonaza of the century – all you have to do is not pay your mortgage for 3 months and your mortgage payment will be cut to 38% of your income – who cares if you never pay off your house – you can rent your dreamhouse that previously you could never afford.
The recourse is the asset.
The lender knew that when they made the loan. The federal government approved an acceleration clause to the contract secured by the deed of trust.
Everything was everything as long as prices of Real Estate were going up.
So everybody knew that if the borrower defaulted the lender could step in and secure the asset for resale with very little fuss.
What bothers me are people whining about tax dollars. If you have a problem with the system change your position in it.
A house is a way to generate tax deductions. Business is a way to generate tax deductions. Spending money is a way to generate tax deductions.
So let me ask you again, do you employ enough people, are you buying enough equipment, and are you making enough improvements to your properties?
Are you paying tax dollars or generating income?
The purpose of owning property is to own it free and clear.
Stretching out the payments increases the return for the lender.
The borrower makes money by paying off the loan as quick as they can.
[...] Seattle Bubble: To qualify, borrowers [...]
So much for those widely advertised $1660/mo $600k Option-ARM’s hiding out in the “good neighborhoods”.
Looks like they didn’t care for flippers much either with the “debtor occupied” provision.
I highly doubt they’ll have much sympathy for specuvestor landlords where the rent doesn’t come close to covering the mortgage.
Then there are the liars loans with the egregiously overstated incomes.
Yeah…sure…everything will be peachy.
Johnny is a little out of touch IMHO.
A buyer who walked away has had their FICO probably go to 500s. Which puts them out to rent. And not just rent but rent at 10% higher then market if he goes to any landlord worth his salt. They are likewise out of buying anything for reasonable rates at least a year and a half.
Two years ago yes, someone with a low FICO could buy. Not anymore. Banks want to see the real number at 730+.
This doc though is not as good as CITI’s program which is interesting, and from what I have heard they have record volumes.
If this slows down foreclosures by even 15-20% it will slow down this slide which has already trickled everywhere possible.
David,
First time have seen you make a good point and right on without the extras.
People who complain about their tax dollars are in the low income brackets in 95% of the time and pay the least, and complain the most. Most likely do not own a business nor have an accountant to figure out how much they really pay, or should pay or “deduct” :) :)….
Supposedly these (all?) loan mods turn non-recourse loans into recourse loans. It’s better to just walk away if you have a non-recourse loan right now. The interest you aren’t paying now due to the mod gets tacked onto the back end of of the loan so you end up having to pay lots more for a much longer time and if you fail, you get your wages garnished. If these loan mods do turn non-recourse loans into recourse loans (I need to find a citation) then it’s a lose-lose situation for anyone that gets one.
Thank you,
Let me be clear about the rambling.
It’s intentional.
While I agree with the sentiment, mukoh has the right of it:
Over the past 5 years, people who were not able to rent due to credit issues were able to get 100% LTV loans. These debtors now have worse credit and typically worse debts. Many have raided 401ks and IRAs to attempt to pay their debts (even though those were their only protected accounts).With the coming depression, we will see expect more “couch surfing”, living with relatives, and genuine homelessness.
Rather than bailouts, the government should be investing now in safety-nets. When (not if) those brand new condos are unable to sell or rent, the Government should step in and offer market value for the property, then turn it into a public shelter. If a house is foreclosed by a publicly owned bank, then the Government should get dibs on it to turn it into a public resource, instead of it becoming a public eyesore.
We all know what’s coming. Let’s start preparing for it publicly.
Thanks for putting up this blog. I’m usually just a reader, but thought today’s announcement for loan modifications was worth a comment. I used to work as a bill collector. I’ve run a repo desk. I understand how collections departments operate and have a general understanding of the foreclosure process, short sales, etc. I can’t find a link to the story but I’ve read that while the IndyMac model of stopping foreclosures sounds good, actually executing on it is very difficult. Lets assume you have 5000 delinquent mortgages in your portfolio. I know from experience that when you are trying to contact 5000 delinquent borrowers, very few will actually respond to any letters or phone calls. More often than not, the borrowers feel like there is no hope and will ignore your attempts to work with them. Assuming the borrowers respond, there is a mountain of paperwork and income verification that needs to happen. The loan modification program sounds good, but the sheer volume of loans that need to be modified (in a rather short period of time — these people are on the brink of foreclosure after all) makes me wonder if its administratively possible.
I’m sure loans terms are different for every institution and borrower and the “non recourse” clause written into mortgages might seem like a dumb idea. After working in collections for years, I can tell you that if someone loses their home to foreclosure, your chances of recouping any of the loss (say by filing a lien on their next home or garnishing their wages) are slim to none. Lets assume the bank forecloses and the debtor owes $50,000. The debtor has either moved to a rental (no assets to attach) or they’ve moved into another home. At best, you can put a lien on the 2nd home and hope that you eventually get paid but with home prices continuing to slump, the 2nd home probably doesn’t have any equity in it either.
We can attempt to slow down the foreclosures but with the whole economy slowing down, more people will lose their jobs, default on their loans, and cause the financial institution’s balance sheet to deteriorate further. Modifying the loan terms to 40 years is simply going to prolong the inevitable. In 2-3 years, after scrambling to save their home, a lot of debtors will find themselves unable to pay the recently modified loan payment and the bank will eventually end up foreclosing and the process starts all over again.
Sorry to be so doom and gloom but we’re only beginning to see the ripple effects as the giant consumer credit bubble deflates. The harsh reality is that a lot of people are living in houses with lifestyles that they couldn’t afford. The banks will be left holding the bag as these people readjust to a more modest standard of living.
Lenders deliberately drove up the price of real estate. My contention is that lenders have been buying up huge chunks of property just like Monopoly. The lenders have the advantage of time. Lenders have tons of cash that is now secured by assets. Real Estate pricing is a function of time. Investments are a return on investment.
You gave these lenders the money to lend, they made more money, and now they don’t need you. Your IRAs, 401Ks, pension plans, benefits, and stock purchases, through ETrade, no doubt are now all money lenders have invested in long term Real Estate. The difference is that now it’s the lenders money, not yours.
They are making money while writing down the asset only to keep it for years, and years to come. The lenders are rich and you are looking for a government safety net.
Ah yes, the government turned around and gave these long term investors anothe $700 billion cash infusion to tide them over. Now they have more cash to invest and you gave it to them.
Wake up! You need to start working the system or the systemis going to work you.
And Realtors (R) happily took 6% off every transaction. They know how to work the system.
Australia (along with most of the rest of the world) has recourse loans and does not have 30 year fixed rate loans. The only loan products available are ARMs.
This didn’t prevent their RE from going bubbly. It does make foreclosures far more painful, though, so prices should fall much more slowly because people will be trapped by their poor decisions for decades. This means lower worker mobility, leading to lower productivity.
For the economy as a whole, we’re better off with the system we had – almost exclusively 30 yr fixed non-recourse loans, with at least 10% cash money down, and the lender permanently holding the risk of default (to insure real underwriting).
Sorry, that is a delusional statement. which lenders have tons of cash? Have you noticed 3 of the 5 investment banks disappear? Have you noticed we only have 4 major banks left in this country?
I usually ignore the babble – but that one pushed me over the edge.
David is increasingly being delusional. He is RAL without the name calling and his desperate posts mean he is in denial.
Back to the subject of the post. The most informative one was by radix who points out the core issue. There are simply too many foreclosures. Sure, this program might “help” some people, but only to delay the inevitable.
Look at the earnings reports this week and look out for reports after what I predict will be a “Red Friday” for many many retailers this thanksgiving. I predict this will be the worst holiday season in at least 10 maybe as much as 20 years. The stock market is preparing for this in advance. Dow 7000 by xmas?
It’s the further consolidation of lenders/banks, especially commerical ones, that should be of equal concern. Some of these banks are hoarding the funds, some are using them to further consolidate the industry.
Once I examined the preliminary details of this (nice summary The Tim), I seems that this is a superfical measure to keep the bubble inflated, but it’s a finger in the dike.
People need to wake up to the fact that we CAN survive without these huge so-called investment banks. 70 percent of the REAL, everyday economy is consumer spending, NOT investment activity. Their role as been widely overstated to keep the game going for decades for as long as possible, and to keep those not already in the inner circles hopeful they can become just like them.
What we need to understand is that consumers can no longer spend money they don’t have. These investment bankers and others never needed the bailout, and the mortgage bailout won’t keep the assets from declining, as some have pointed out. It will not do much to stop forclosures, but may benefit the short sellers in the long run (a contradiction, but with some truth to it). We are in uncharted territory, and tradtional (in the past 30+ years), responses don’t apply.
More of the same will not change anything. Things like a transaction tax on trades will force the responsiblity for self-funding any bailouts on the people who made 3 bucks for every one they lost.
My two (if I had a choice right now, Austrailan) cents…
explorer @ 28,
What? That’s crazy talk.
You said To qualify, borrowers must: Owe 90% or more than the home is worth.
I did not read that in the Federal Housing Finance Agency file. If that qualification is required then the program is all about protecting Fanny / Freddy and not the home owner. If the owner only owes 50% of the value, foreclosing would be great for the lender but if the owner owes 90% the modification might keep the lender from being stuck with a home valued under the delinquent amount.
Daniel,
The 90% LTV requirement is mentioned in some of the articles I read about the program, such as this MarketWatch piece:
WAS OUR PRESENT ECONOMIC MESS BUSH’S FAULT, CLINTON’S FAULT OR BOTH?
See the June 2008 Washington Post proof in part:
“….Fannie and Freddie finance about 40 percent of all U.S. mortgages, with $5.3 trillion in outstanding debt. Owned by private shareholders but chartered by Congress, they are exempt from state and local taxes and receive an estimated $6.5 billion-a-year federal subsidy because they can borrow money more cheaply than other investors. In return, they are expected to serve “public purposes,” including helping to make home buying more affordable.
HUD officials dispute allegations that the agency encouraged abusive lending and sloppy underwriting standards that became the hallmark of the subprime industry. Spokesman Brian Sullivan said the agency and Congress wanted to increase homeownership among underserved families and could not have predicted that subprime lending would dominate the market so quickly.
“Congress and HUD policy folks were trying to do a good thing,” he said, “and it worked.”
Since HUD became their regulator in 1992, Fannie and Freddie each year are supposed to buy a portion of “affordable” mortgages made to underserved borrowers. Every four years, HUD reviews the goals to adapt to market changes.
In 1995, President Bill Clinton’s HUD agreed to let Fannie and Freddie get affordable-housing credit for buying subprime securities that included loans to low-income borrowers. The idea was that subprime lending benefited many borrowers who did not qualify for conventional loans. HUD expected that Freddie and Fannie would impose their high lending standards on subprime lenders…”
The rest of the URL:
http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626_pf.html
I think losing one’s home is pretty traumatic, and if I recall correctly, lenders are only supposed to have a small percentage of their assets in real estate…they’re supposed to lend on homes, not have physical possession of them. I’m also not sure if preventing or slowing down foreclosures will have the effect of propping up home prices….No, of course there’s nothing wrong with renting, but what effect will forcing all these folks to become renters have on rents?
Please, please, please don’t drag this ridiculous disproven argument to this blog. It will make my head pop off.
Fannie and Freddie financed less than 15% of the subprime lending in the boom. 24 of the top 25 subprime lenders were not subject to CRA. Your article tries to tie Fannie/Freddie share to subprime when the reality is that almost all of their lending was “prime”.
That WaPo article is 5 months old.
Here is what Alan Greenspan had to say on the subject last month:
And if anyone had an incentive to lie about this, he did!
Truth is that all the politicians are to blame but this particular argument is a partisan piece of chocolate (doing tim’s edits for him :^))
“I usually ignore the babble – but that one pushed me over the edge
And if anyone had an incentive to lie about this, he did!”
You are so far out of touch with reality it’s frightening. Wealth can take a paper loss and still hold cash. It’s the paper that generates the cash.
You pay by buying stocks, paying mortgages, having savings, IRAs, insurance policies, 401Ks, pension plans, and buying with credit. You pay.
A corporation or subcorp can bankrupt without recourse because that’s business. No one ever questions that. The assets are moved around and the cash is squirelled away.
What’s so difficult to understand about that?
Loan modifications keep you paying. Taking the property to resell or rent is all just numbers. Real Estate is the ultimate hard asset.
OK, now Peter Schiff (on his weekly radiocast) is now on a rather funny (but really sad) tirade about the bailout program and raises the same question I have been wondering about for the past 24 hours – Why isn’t a cap on the amount of mortgage relief in the program?
Think:
2 income couple, why shouldn’t one spouse “lose” his/her job, and get their mortgage + housing expenses cut to 38% of the working spouse.
or
Single worker scraping by to pay the mortgage – stop working overtime, even quit their job, work at a fast food restaurant, get a new discounted max 38% mortgage of a minimum wage income, then get a new job that pays more.
At minimum, why would any intelligent homeowner who has less than 10% equity in their home with a GSE mortgage not skip 3 payments and get a discount on their mortgage?
“And somehow I don’t seem to recall ever hearing high-ranking housing officials saying the converse…”
Hmm… I’m not sure that’s true. Plenty of elected officials were concerned about the increase in housing prices during the bubble. Municipalities were obsessed with finding ways of creating more affordable housing and more workforce housing.
———————————————–
Municipalities were actually perfectly happy with rising home prices. At the same time they were obligated to create “affordable housing”. These are two separate things. Government would be happy with “regular” housing appreciating to the sky and building low-income units for everyone else. These were policies that were systemically destroying the middle class. You end up with everyone either living in overinflated housing (which provides increased property taxes to the governments) or low-income government subsidized housing. Where’s the middle class in this scenario?
From DJO’s quote in #24, But Mr. Greenspan, who was first appointed by President Ronald Reagan, placed far more blame on the Wall Street companies that bundled subprime mortgages into pools and sold them as mortgage-backed securities. Global demand for the securities was so high, he said, that Wall Street companies pressured lenders to lower their standards and produce more “paper.”
This article gives an interesting glimpse of that phenomenon from the inside. It’s long but definitely worth the read. It does a very good job of explaining that the “Credit Default Swaps” that drove these high-flying investment banks to their knees were basically just…bets. Bets on whether unqualified borrowers would pay back their exorbitant mortgages. Duh. Frankly it’s appalling that anyone with two brain cells to rub together would let any of this crap come to pass, but I guess the incentive to get rich quick on other peoples’ money is too hard to overcome. Lucky for these folks America is a civilized nation or lots of Wall Streeters would be swinging from lampposts in the near future….
For further context on how things worked from the investment end of things, check out This American Life’s episode called The Giant Pool Of Money.
I’ll submit to a vote on that one as to who is more out of touch with reality.
I’ll submit to a vote on that one as to who is more out of touch with reality
I haven’t called you out in a long time.
The fact that you are having a difficult time understanding business surprises me. It’s the same for many commenters here. Wealth is created every day by exploitation.
You can either profit or take the loss.
What concerns me is the Joe six pack media hype. Many people here want to keep the Joe six pack idea alive. If you look beyond that, if you look beyond your work a day life, you should be able to see there are people in the world today who are insanely wealthy.
That wealth is in cash. That cash is everywhere around you. There is a saying in the Real Estate business that bad news is good news for Real Estate.
Real Estate is a hard, tangible, asset.
There is no conspiracy, and it’s not a theory, it’s just business.
Let me ask a better question, more to the point, do you really think that huge multi national corporations all stopped building at once because of some global recession?
Is it at all possible that the supply, as you are so fond of pointing to, just exceeded the demand?
As a Rothbardian Anarcho-Capitalist the idea of confiscating money in the form of taxes from workers to give it to irresponsible people or government sponsored corporatists is nothing short of larceny. Intervening in the free market leads to nothing but more trouble later on. Please don’t preach to me about FDR, etc.. These policies always lead, in the long run. to economic collapse.
No bailouts for anyone including mortgage holders, banks, car companies, airlines or insurance companies. If you bail them out there is no incentive to make the needed improvements to create a successful and stable business. The same principle applies to bailing out an irresponsible mortgage borrower.
We need to pay the piper and take our lumps. Then we can get to work establishing a system that really works.
What I want to know is why the people running the rating companies aren’t being frog marched for all the fraud they committed by creating bogus ratings that made people think these tranches were worth something.
babble filter back on
“In these uncertain and difficult times, banks are inclined to hoard rather than to deploy capital,” charged Sen. Charles Schumer, D-N.Y.
Doing research on loan mods today and stumbled on this post. It would be interesting to see how many people were able to obtain a streamlined loan mod v. the new Obama administration’s loan mod plan.