In a one-two punch for industry prognosticators, self-styled experts and finger pointers, loan modifications are not performing well. Recently styled as the cure du jour for economic recovery, the news is not promising; however, before these teaspoon deep thinkers run for the next “sure bet” for salvation, it is important to remember that the facts aren’t all in and the data is skewed – we are only talking three months of data. I have no evidence suggesting that modifications ARE, in fact, the answer…just a sober recognition that policy should be long term in scope rather than some “will o’ the wind” reaction to mere weeks of data. (/cough Paulsen and Bernanke.)
In the first real assay of loan mod performance during the first quarter of 2008, over a third of all modified loans were delinquent again within first three months and over half within six months. That is truly bad performance. It means that these borrowers are RE-defaulting on their loans after a work-out has been reached often within weeks of completing the transaction. But does that mean that loan mods are a waste of time? The only real answer is maybe.
When I heard this last nite, I almost choked on the modest yet well-rounded chicken dinner I made for my family. How is this possible? We give Goldman Sachs $10 BILLION in October… they make $2.3 BILLION in profit for the year… yet they only pay a TOTAL of $14 MILLION in taxes – or 1% tax rate. Does anyone else feel like a big sucker?
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Goldman Sachs Group Inc., which got $10 billion and debt guarantees from the U.S. government in October, expects to pay $14 million in taxes worldwide for 2008 compared with $6 billion in 2007.
“The company’s effective income tax rate dropped to 1 percent from 34.1 percent, New York-based Goldman Sachs said today in a statement. The firm reported a $2.3 billion profit for the year after paying $10.9 billion in employee compensation and benefits.
“Goldman Sachs, which today reported its first quarterly loss since going public in 1999, lowered its rate with more tax credits as a percentage of earnings and because of “changes in geographic earnings mix,” the company said.
“The rate decline looks “a little extreme,” said Robert Willens, president and chief executive officer of tax and accounting advisory firm Robert Willens LLC.”
“Dec. 10 (Bloomberg) — GMAC LLC, the auto and home lender, failed to raise enough capital to become a bank holding company and qualify for federal aid, intensifying concern it will seek bankruptcy protection.
“The lender’s $38 billion debt exchange didn’t lure enough bondholders, leaving GMAC shy of the $30 billion in regulatory capital demanded by the Federal Reserve for it to become a bank, GMAC said in a statement today. GMAC last month asked bondholders to tender their securities for as little as 55 cents in cash or a combination of new notes and preferred stock, which would count as regulatory capital.
“GMAC, the primary lender to General Motors Corp. dealers, is trying to skirt a collapse by becoming a bank and gaining access to the Treasury’s $700 billion rescue fund. As a bank, GMAC would also be able to sell bonds backed by the Federal Deposit Insurance Corp., giving the finance company new funding after being shut out of the public market for bonds backed by auto loans for the past six months.”
Ah…they are at it again. The Treasury Department is cooking up a doozy of a plan for those that can capitalize on the devastating loss of their fellow citizens who have lost their home to foreclosure. The notion is that if you lower rates to historical lows (like 4-4.5%) first time homebuyers will snap up the volume of homes in inventory left by foreclosures and this will cause housing values to magically rebound. At a modest price tag of $25b a year for the taxpayer, what are the potential effects of this plan:
THE LOSERS:
1. Current homeowners: It does NOTHING to address the reason so many homes are on the market… foreclosures, their contingent loss to investors, the effect it has on the local market or the families that have lost everything they have. And if you are in a bad loan, one that could be modified with some thoughtful approach, too bad… they will just make it easy for the next guy to buy your American dream on the cheap!
2. The economy: OBJECT LESSON: Nothing can quite destroy an economy like overly cheap credit and pressure on banks to extend it. Wait – that would mean learning from our mistakes, which is too much to ask.
3. Future homeowners: What happens when these first time homebuyers…often at the lower end of the economic scale… are the first to be fired in a constricting employment market? I know this was planned with the notion that FHA (read taxpayer) would be insuring most of these loans… so we get two losers…the future homeowner AND the taxpayer. Now that sounds about wrong.
Did we really hire these guys? Seriously, is it that they wake up in the morning and think some cooky taxpayer funded/borrowed plan to not address the issue will be THE ONE, the NEO of our economic matrix? How about comprehensive strategy… you know what the real business people out here have to do because we know that Congress isn’t our lobbyist’s call away for our bailout? I would rather that we employed a single mom of three kids that knows what a budget means and how to creatively figure out how to get out of a mess…at least we would get something real.
Today leading Congressional Dems join with a growing Rep consensus in questioning the authorization of the second half of the $700b to Paulsen without conditions that he use some or part of the money to shore up against foreclosures. So far the bailout has been a lot of money (with only $20b of the initial $350b uncommitted) with little results. I don’t think anyone was really thinking it would be a magic wand that would ratchet the economy out of a recession – but something – some result would have been dandy. As of today, there has been no relief in credit markets… which are virtually frozen. There has also been no relief in foreclosures…which are at the heart of losses for banks, exacerbated by the effect on property values. It has been officially announced that the economy has been in recession since Dec 07 (quel surprise!). And today we learned that last month our economy shed over half a million jobs…the most in over 30 years.
Hand wringing aside… there is a new cottage industry in the mortgage world. It is called “loan modification.” Whether it is an attorney seeking to find remedy for a client wanting to stay in their home in an increasingly hostile economic environment or a something-for-nothing hope peddler seeking to siphon off the remaining cash from a strapped homeowner, the term “loan modification” has replaced “pay option ARM” as the product du jour.
What is a loan modification?
A loan modification is a permanent change in one or more terms of the loan. (more…)
Titan has remained at the forefront of mortgage banking with our focus on the emergence of small community banks and credit unions. In the post-megabank environment, where banking had the same intimacy and charm of an airport terminal, we see a retrenchment of consumers seeking safety, reliability and personalized service. This article outlines what we have been talking about for a long while…
“As the U.S. economy weakens and the country suffers its worst housing crisis since the Great Depression, big “money center” banks — after years of reckless lending before the housing bubble burst — have cut back drastically on loans.
But lending by credit unions is steadily rising. Credit unions are nonprofit cooperatives owned by their depositors, or “members.” Credit unions are as a rule much smaller than commercial banks, with average assets of $93 million in the United States in 2007 according to the Credit Union National Association (CUNA), compared to $1.53 billion for banks.
According to CUNA, there are more than 8,000 credit unions in the country.”
“WASHINGTON — The government’s latest plan to help struggling homeowners eliminates a major bottleneck by giving mortgage investors more incentive to agree to refinancings. But lawmakers said Thursday they might go further after the November election and force reluctant investors to do more.”
Last year, the biggest convention excitement was getting to see middle aged mortgage bankers fire up their lighters watching Pat Benatar sing “love is a Battlefield.” This year, it was quite different. While the army of suits were in evidence, on a couple of the days, there were actual protestors (about 20) screaming at us as we entered the Moscone Center in San Francisco. Their posters, banners and signs proclaimed “Housing is a Right,” which as a base human need, could garner strong appeal. However, bankers make loans not housing…and frankly, there are no “rights” to that.
I did notice that the protestors didn’t have a lot of stamina, as they all left pretty early in the morning. But apparently, that was a ruse to bring their protests inside. The Convention did have a lot more security than ever before, so after the two big intrusions into the general session, many were wondering how they got in. Apparently – THEY REGISTERED! I got that from a friend that works for the MBA.
As I walked through the gauntlet, I waved and was cordial…and I was told I “should go to jail and didn’t deserve a bailout.” Funny thing is…I didn’t get a bailout.. nor did 99% of the convention. Those titans of the mortgage industry don’t wander among the booths picking up toys, pens and post-it notes. In addition, most of the bad guys are gone – beset by repurchase demands, losses and withering lines of credit. Those left are mainly small business owners hoping to find relief to continue serving their clients and keep their employees.
When the protestor in the general session with Rove and McConnell went onstage, she made a beeline for Karl Rove intending to execute a “citizen’s arrest.” While he is not my favorite Machiavellian politico, I still doubt he knows there is a T in mortgage. I assume Dem McConnell wasn’t a target because they didn’t recognize him.
It made the news, which is probably all they were hoping for…but it reminds me of the concept of drowning and being angry with the water.
We all hope for change, and are working our best in the craziest environment most of us have ever seen.
Stumble it!
