In reference to: “Mandatory Mortgage Modifications and the U.S. Constitution.”
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.
The Political Pull of the Loan Modification
Since the inception of the crisis, Congress, the media, consumer groups and pundits have laid a very simple solution out for mortgage loans…. MODIFY. That seems simple right…. If the terms of the loan are onerous, predatory or no longer sustainable in a depreciating real estate market then ink up that contract and modify those terms. On the other side, the clouds will part, the sun will come out and the lender will bask in the glory of …. Wait… did you say permanently?
Many see no problem with this…but perhaps there is a nifty analogy we can run with…one that strikes close to home.
“Hey, Dad… can you come to the dealership with me… I want to buy a new car.”
“Sure, son… back in the day, my first car was only $500….
“Wow Dad… who would have thought that I could afford a new Hummer working down at Circuit City! Thanks for letting me borrow the money; you know I am good for it…that assistant manager position is as good as mine!”
“Well son, the good part is that you can help me out with that great interest rate, and gas is cheap and they have an amazing resale value…this was a good investment for you…”
“Dad, I am sorry that I haven’t paid you in six months, you aren’t going to believe how much gas costs me… I can’t afford to pay the insurance…and the value of SUVs has gone through the floor… And Circuit City is considering downsizing because no one can afford to buy new HDTVs paying $4 a gallon for gas.”
“Son, everyone goes through a rough time… but you need to figure out how to keep your Hummer on the road. Without it, you will have no way of getting around, it is your only piece of credit… and how will you get a new job without a car? In addition, that money is part of what your mother and I put aside for our retirement… you made a commitment to pay it back. I don’t want to have to repo the car and sell it, but you aren’t giving me a lot of choice.”
“Well Dad, I think I have it figured out… I know that you and Mom gave me your hard earned money, and I know that I promised to pay our agreed interest rate, but I have a solution that saves us both… I won’t pay you any of the back money I owe you… and I want you to cut that interest rate in half and I am only going to pay you back about 70% of what I borrowed. That way, I can keep my car on the road and you don’t lose everything, so I won’t have to move in and sleep in the guest room you made into Mom’s sewing room. In return, when I sell the Hummer… I will give you half of whatever I get in profit!
BUT:
• Your mortgage lender is not your Dad.
• Your mortgage lender is a “for-profit” enterprise.
• Your mortgage lender is comprised of thousands of Dads and their 401Ks, their IRAs, their pensions… all of whom are trying to not have to move into their kid’s sewing room as they watch their savings dwindle.
• Most mortgage lenders do not operate in the “from the goodness of their hearts” strategy of capitalism.
The Bush Administration and HUD floated out their own brand of snake oil with the HOPE for Homeowners plan. This “encouraged” lenders to mark down their loans to 90% of whatever market value “out of the goodness of their heart.” The notion that the “invisible hand” will guide them to cooperate out of their own self-interest was publicly debunked by Mr. Free Market himself, Alan Greenspan. For a chuckle, this is the riveting marketing pull that they clubbed together to incent banks to participate:
Why would my current lender accept taking less money?
Mortgage lenders across America are taking a terrible hit on their financial books since they have more foreclosures than they can handle. Each foreclosure they have has to been sold in the market place. When a foreclosure is place on the market by a bank, the bank has to pay the listing agent and buyer’s agent up to 6% commission. This amount of money is an additional sum lost on top of what the house is currently worth.
Home prices have continued to decline as more and more foreclosure properties are placed into the retail real estate marketplace. Lenders carry the holding costs as well as many other costs while waiting for the property to be sold. The cost can be enormous. It is more cost effective for many lenders to accept the terms offered by the FHA program.
Wow…does it smell in here? Are you serious… you want a bank to essentially forgive debt to avoid paying a realtor? No tax incentive, no deferred income incentive, nothing… just the “out of the goodness of your heart if the numbers happen to work” marketing plan for a path to saving the country, better yet the world, from certain economic collapse?
THE DEVIL IS IN THE DETAILS
While brilliant minds were conjuring up notions of a crest of goodwill and pre-emptive strikes on evil “do-nothing” originating banks and servicers bent obstructing this wave of modifications, they forgot the whole “practical” application part. There is no mustache twirling mortgagee poised over the homeowner tied to the train tracks… mortgage loans are owned by everyone… and I mean everyone. Every mutual fund, bank, pension, 401K, IRA, annuity etc… was heavily invested in MBSs. The servicer owned the rights to collect checks and disburse escrow account funds, not the right to arbitrarily “mark down” the value of an asset they don’t even own.
Even for banks that actually own their own portfolio mortgage loans, it is like asking someone to sell at the bottom of the market, putting on a cheesy grin and saying “thanks for taking one for the team.” Come on, these are the same guys that built this house of greed.
THE LAW OF UNINTENDED CONSEQUENCES
Tell me who hasn’t had this thought… IF I can reduce the value of my mortgage by even 5% or more AND have my interest rate reduced by NOT making the payment for 90 days… UM… WHY WOULDN’T I DO THAT??? Oh, because my credit might suffer? Um… that would be great if there were any money to borrow or if I could sell my home for a new one – which, oh by the way, would be impossible considering there are 18 other homes in my neighborhood for sale – including the one with the amazing fence and pool that is appraised $20K below my bottom line.
EATING CAKE
So while thousands suffer… there is little HOPE to go around. The program will have the same effect as voluntary immunizations…never available for the ones that need it the most. We can also have the TOOTH FAIRY LOTTERY and the Sally Struthers SAVE A HOMEOWNER campaign, but until banks have incentive (perhaps tied to the freaking $700 BILLION that the taxpayers just gave them) to modify, there is no reason to expect that they will.