Wednesday, February 18, 2009

Mortgage Subsidies for the Chinese

Saw a hilarious thing today. As I was driving home on the highway I was slowed considerably when I was stuck behind a 1964 Dodge Dart automobile going about 30 m.p.h while the driver was talking his head off on his cell phone! The whole irony of a guy driving an ancient car but totally immersed in his technology telephone caused my to laugh pretty loud. Awesome stuff.

Government Plan to Help 10 People to Cost 75 Billion Dollars
I was rearing to go today in preparation for the Government mortgage plan that was to surely reward the foolish and take from the sound. I had already formulated a few thoughts to write down. Then a funny thing happened. The mortgage plan was on its merits silly, out of touch, and utterly feckless. If this is the kind of plan we get when we do actually get details, I cannot wait to see the new bank rescue plan should Timmy G ever get around to it.

Thanks to the site Capitalist Preservation I was able to get breaking coverage even while at work (yes I have a real job!). I was chuckling in my cubicle as I started to look over the details, most especially the questions and answer page and example listings.

Let's start with the Q&A page here:
How do I know if I am eligible?
Complete eligibility details will be announced on March 4th when the program starts. The criteria for eligibility will include having sufficient income to make the new payment and an acceptable mortgage payment history. The program is limited to loans held or securitized by Fannie Mae or Freddie Mac.

I have both a first and a second mortgage. Do I still qualify to refinance under the Homeowner Affordability and Stability Plan?
As long as the amount due on the first mortgage is less than 105% of the value of the property, borrowers with more than one mortgage may be eligible to refinance under the Homeowner Affordability and Stability Plan. Your eligibility will depend, in part, on agreement by the lender that has your second mortgage to remain in a second position, and on your ability to meet the new payment terms on the first mortgage.

Will refinancing reduce the amount that I owe on my loan?
. The objective of the Homeowner Affordability and Stability Plan is to help borrowers refinance into safer, more affordable fixed rate loans. Refinancing will not reduce the amount you owe to the first mortgage holder or any other debt you owe. However, by reducing the interest rate, refinancing should save you money by reducing the amount of interest that you repay over the life of the loan.

Is my lender required to modify my loan?
No. Mortgage lenders participate in the program on a voluntary basis and loans are evaluated for modification on a case-by-case basis. But the government is offering substantial incentives and it is expected that most major lenders will participate.

I owe more than my property is worth, do I still qualify to refinance under the Homeowner Affordability and Stability Plan?
Eligible loans will now include those where the new first mortgage (including any refinancing costs) will not exceed 105% of the current market value of the property. For example, if your property is worth $200,000 but you owe $210,000 or less you may qualify. The current value of your property will be determined after you apply to refinance.

That is a whole lotta NO's and a very small price window to qualify under.

The next act in the comedy show was the "real world" examples to make it easier to see what is offered. Full page here (PDF file).

First up, family A:
In 2006: Family A took a 30-year fixed rate mortgage of $207,000 on a house worth $260,000 at the time. (The family put just over 20% down.) They received a Fannie Mae conforming loan with an interest rate of 6.50%.

Today: Family A has about $200,000 remaining on their mortgage but their home value has fallen 15 percent to $221,000.

Their “loan-to-value” ratio is now 90%, making them ineligible for a Fannie Mae refinancing.

Under the Refinancing Plan: Family A can refinance to a rate of 5.16%. This would reduce their annual payments by nearly $2,350.

Forget about the whole new LTV allowances, did you see that 20% down line! That is a pure laugher. If the government thinks there are going to be a lot of loans like this they are dreaming. If Family A really put down 20% they would not be on the verge of foreclosure anyway. Classic.

Now onto family B:
In 2006: Family B took a 30-year fixed rate mortgage of $350,000 on a house worth $475,000 at the time. (The family put just over 26% down.) They received a Fannie Mae conforming loan with an interest rate of 6.50%.

Today: Family B has about $337,460 remaining on their mortgage but their home value has fallen to $400,000.

Their “loan-to-value” ratio is now 84%, making them ineligible for a Fannie Mae refinancing.

Under the Refinancing Plan: Family B can refinance to a rate of 5.16%. This would reduce their annual payments by nearly $4,000.

Another whopper straight out of fantasy land. 26% down! Dreaming once again.

Families A and B may exist out there, but they are not really the issue. How many non-conforming loans are out there? How many were repackaged to Fannie/Freddie? Imagine an easier and far more common scenario using family B's numbers:
In 2006: Family B took an interest only mortgage of $475,000 on a house worth $475,000 at the time. (The family put nothing down.) They received a non-conforming loan with an interest rate of 6.50%.

Today: Family B has about $475,000 remaining on their mortgage but their home value has fallen to $400,000.

Their “loan-to-value” ratio is now 118%, making them ineligible for a Fannie Mae refinancing, or any other anywhere, anytime.

That example is a generous one at that. There are so many others so much worse.

The final family C example from the government is the only one I really cannot figure out:
In 2006: Family C took out a 30-year subprime mortgage of $220,000, on a house worth $230,000 at the time (they put less than 5% down). Their mortgage broker – Mom & Pop Mortgage – sold their loan to Investment Bank. The interest rate on their mortgage is 7.5%.

Today: Family C has $214,016 remaining on their mortgage but their home value has fallen -18% to $189,000. Also, in November, one parent in Family C was moved from full-time to part-time work, causing a significant negative shock to their income.

Their loan is now 113% the value of their home, making them “underwater” and unable to sell their house.

Meanwhile, their monthly mortgage payment is $1,538 and their monthly income has fallen to $3,650, meaning the ratio of their monthly mortgage debt to income is 42%.

Under the Homeowner Stability Initiative: Family C can get a government sponsored modification that – for five years – will reduce their mortgage payment by $406 a month. After those five years, Family C’s mortgage payment will adjust upward at a moderate, phased-in level.

This seems like a "kick the can down the road" plan meant to hide reality a bit longer. Sort of a conforming exploding ARM if you will. Again, how many will even want this deal?

There is some more stuff about how the government and the lenders will work out the numbers, but it is complicated.

Consider how many loans were obtained using fraudulent information. Will the government make sure all documentation is done this time? I could go on, and on.

So what was the point if the plan is so weak? Two things come to mind:
1.) The government will be able to say "look, foreclosures are dropping! We rule!". Sadly the mainstream media will miss the fact that Fannie/Freddie and others have a foreclosure moratorium on since December. Now others major players are waiting until after March to proceed. Of course foreclosures are going to drop for a while, none are being initiated!.
2.) That 75 Billion is not going to be used, not enough people will qualify. Do not expect that money to sit tight though, there will be sweetheart deals aplenty (think Chris Dodd of Conn.) for the government cronies to get new mortgages.

So what about that other 200 Billion dollars, the real meat of the plan?

Mortgage Subsidies for the Chinese
Late last week I read an article that covered the Chinese finance minister calling for more explicit guarantees of agency mortgage debt, ie Fannie/Freddie debt. (sorry, I could not pin down the link!) And now the government extends those guarantees from 200 Billion to 400 Billion in an afternoon. Ask and you shall receive. Hat tip Housing Doom and these relevant articles:
Central Banks Continue Retreat From Agency Debt
Twice As Effective Twice As Sovereign Fannie-Freddie Backstop Swells

Hence all the "conforming loan" language reiterated about 100 times in the government releases. This is an obvious effort to placate foreign mortgage debt holders that the US had their backs, no matter what.

What could be causing this stir? Take a peek at this compilation of mortgage performance for non-agency loans! One line shows us that as of 1/31/2009:
Delinquent (30,60,90 days,REO&Foreclosure) = 24.13%
A full quarter of all loans are in some form of foreclosure proceedings. That is scary!

Granted those are non-agency, non-conforming loans but how much better are the number for those? Might you want a more explicit guarantee if you held a ton of that paper? Yup.

A long post, but the events of today need some serious study. There is more going on below the surface than we can see. Transparency has gone the way of the dinosaur for over 8 years and it seems it will stay extinct for some time to come. Please use the comments section to add to this discussion.

Have a good night.


watchtower said...

Our whole system seems to be built upon lies and the accompanying corruption.
Our society's morals have been in a tailspin for some time now, case in point, when I was young "Andy Griffith" was on TV, today there are shows that have rendered the TV almost useless to my family because it would embarrass me for my 9 year old daughter to be in the same room with it on.
I believe morals matter, I don't think you have to be "religious" to understand this either, it's just good common sense whatever your veiwpoint is.
This just looks like a break down in every sense of the word.
Common sense tells a person that if you make $12 an hour, you don't need to be thinking of buying $100,000 house let alone twice that amount.
And then you always have somebody at the ready to cash in on someone else's stupidity.
We will be fortunate if this doesn't eventually end up in a war...on our own soil this time.

Newton's 3rd law says: "For every action there is an equal and opposite reaction", IMO there is no getting around it, sooner or later the piper has to be paid.

watchtower said...

Before somebody flames me, I know Newton's 3rd law is a mechanical law, I was just using it to convey a thought that I had trouble expressing.

Anonymous said...


I dang sure ain't gonna flame you because you are absolutely right.

All I Ever Really Needed to Know I Learned in Kindergarten
- by Robert Fulghum

Most of what I really need to know about how to live, and what to do, and how to be, I learned in Kindergarten. Wisdom was not at the top of the graduate school mountain, but there in the sandbox at nursery school.

These are the things I learned: Share everything. Play fair. Don't hit people. Put things back where you found them. Clean up your own mess. Don't take things that aren't yours. Say you're sorry when you hurt somebody. Wash your hands before you eat. Flush. Warm cookies and cold milk are good for you. Live a balanced life. Learn some and think some and draw and paint and sing and dance and play and work some every day.

Take a nap every afternoon. When you go out into the world, watch for traffic, hold hands, and stick together. Be aware of wonder. Remember the little seed in the plastic cup. The roots go down and the plant goes up and nobody really knows how or why, but we are all like that.

Goldfish and hamsters and white mice and even the little seed in the plastic cup - they all die. So do we.


Anonymous said...

What effort you put into this nonsense...... ;)-<


PS: Gold and Silver are on the rise with the dollar.... WTF!!! ???!@@!@!

Anonymous said...

"Gold and Silver are on the rise with the dollar.... WTF!!! ???!@@!@!"

Deflation baby, every other currency in the world is falling like a rock G, money fleeing from those countries ( EU, Britan, Russia) is go into gold or the dollar and the gold market isn't big enough for those flows. Gold also at this point isn't used to settle debt payments.
People in those countries had better worry about higher inflation. Here we will have just the opposite. This will also crush any exporters in the US leading to higher unemploment. ( CAT, DEERE ) Deflation for now

GawainsGhost said...

Over at Naked Capitalism, Yves Smith had a link to an article by Willem Buiter that pretty much blows the administration's whole plan out of the water.

Buiter has it exactly right. The solution is to make the foreclosure process simpler and cheaper for the creditor, not more complicated and expensive to allow a defaulting borrower to remain in a home. But I'll let him make the argument.

What concerns me about this bill is that it does nothing to address the fundamental problem that caused this crisis--mortgage fraud and appraisal fraud.

I got an assignment on a repossessed home last year. It was a monstrosity of a manufactured McMansion in a mobile home park subdivision. This house had sold for $280,000 in 06. An appraiser had to value the home at that sales price or higher in order for the lender to justify the loan.

It was foreclosed on, and less than two years later I sold it for $45,000.

There is something seriously wrong with this picture. And it's only one of thousands.

Several of these companies are now asking for historical price opinions on foreclosed properties. They send me a copy of the appraisal and ask for a comparative market analysis and price opinion at the time of the sale. Why? Because they're questioning the appraisal. I have yet to come across one that didn't overvalue the property by at least $25,000.

The whole thing is a scam. The mortgage brokers, who are unregulated by the way, got their fees. The appraisers got their fees. The lenders got their fees, then promptly securitized the mortgages and sold them on the secondary market to unsuspecting buyers. Now the whole thing has gone bust, and the inevitable result is the net loss of trillions of dollars of wealth. But those involved in the scam get to keep their money.

I'm disgusted. I consider it a crime to sell a naive buyer an overvalued home with negative equity. I consider it an egregious crime to sell a naive buyer a toxic mortgage--interest only, adjustable rate, option-ARM, whatever.

There was a reason why the regulations in effect until the late 90s required that borrowers made a substantial downpayment and banks kept the loans on their books. It was to protect the borrower as well as the creditor in the unfortunate event of default due to job loss, medical emergency or what have you. These regulations produced stable house prices and led to the growth of a prosperous middle class.

But that was all thrown out the window in the last decade. And look at the result.

There is plenty of blame to go around. The government, corrupt politicians, the Fed, F&F, Wall Street, the banks, the mortgage brokers, the appraisers, the realtors, the buyers and sellers all contributed to this fiasco.

There is nothing in this bill that is going to solve the fundamental problem, which is sytemic fraud. Rather, what this bill does is prop up and perpetuate a failed and corrupt system. And forces tax payers to pay for it.

But it's like I say, the American people always get the government they elect. They seldom get the government they deserve.

It's time for a revolution.

Lisa said...

GYSC-I looked up the bill. They tried to get this in last year, too. There is major opposition because investment would move out of the US. This is an extremely idiotic bill, and the sponsors should be removed from the country...I mean, I mean country.

Anonymous said...

Irish bank workers are being spat at and threatened with physical violence by customers who are incensed at scandals in the industry, a union said on Thursday.
The IBOA, which represents over 20,000 workers in Ireland's financial sector, said staff at banks had been facing growing abuse.

Hope no one is naive enough to think it can't happen here.