Is It Too Late to Rescue Mortgages?

I would postulate that most borrowers who are re-defaulting on modified loans aren't doing so because of unemployment. Even with the unemployment as bad as it is in some areas, it's not high enough to explain a 50% re-default rate - unless you believe that most loans went into defalt the first time because of unemployment (or unstable employment). I would guess that Mr Mortgage has it right that people (esp in So CA, FL & NV) don't want to pay on a $450k loan when the property is worth only $300k. Cutting the rate to 4.0% and/or stretching out the term to 100 years doesn't change the fact that they're way upside down. People who could pay are taking a walk. And let's not forget that many of the properties that were foreclosed over the last couple of years - and are now languishing on the resale market - involved fraud, flipping and zero-down reduced doc loans to straw buyers.

Regarding the overall issue of whether it's "too late" to rescue mortgages: I would say that it's not so much "too late" as "too complicated". You rightly ask: "How do we distinguish which homeowners can still be saved, and which are so far gone that they’ll have to be left by the wayside?" You neglected to ask: "how do we know which homeowners are even in need of 'help' in contrast to those who, in a premeditated fashion, are ceasing to pay their payments - which they had the means to pay - merely in order to put themselves in a position to get a bailout (modification)?".

The only way that foreclosures would be significantly diminished would be to start handing out bailouts ("modifications") that in many cases will be unnecessary and/or overly generous. Other homeowners, seeing such bailouts being offered will start to "game" the system in order to get their own free loan write-down. It's completely predictable. The first example that comes to mind: While ceasing to make mortgage payments you list your house for sale through a FSBO assistance company (one that puts it on the MLS). Meanwhile you make the house utterly unappealing, with dog crap in the yard, a noxious odor upon entry, etc. After 60 days "on the market" with no offers, you've established a reduced value of your home which you can use to extract a generous modification from your lender. I'm sure other more creative ways to "game" the modification/giveaway system will be crafted by people more devious than me.

There is simply no effective single solution to "the foreclosure problem". Every property is a case-by-case situation. And then there is the as-yet-unanswered question of whether servicers really have as much lattitude as they've assumed they have to make loan modifications and apportion the resulting losses to the investors in the mortgage pools. The suit last week against BA/Countrywide demanding $8-80 billion recompense for mortgage pools that were diminished in value due to modifications, if decided in favor of the claimants, could cause servicers to decide that they will face smaller losses by going through the normal, predetermined foreclosure process than if they try to sidestep that process, modify the loans and then stand accused of having violated their underlying investors contracts, being therefore unable to pass along any of the losses.

Seems to me that it's way too much of a cluster-fvck for Sheila Bair at the FDIC to be able to fix it by simply declaring that loans should be modified en masse.

The other factor that is being ignored in the statistics relating to the 50% re-default rate is that nobody is looking at what the "modifications" are. Most of the "modifications" are simply a recapitalization of the delinquent amount (increased principle) and reamortized at the same rate or maybe a little better. Basically the "modifications" result in the payment remaining the same or increasing from the original terms in 90% of the cases as well as increasing the principle balance creating even more of a negative equity position. Once the borrowers sit back and look a little deeper at there post "modification" situation it makes no sense to continue making payments when they can move down the street and rent for half the payment.

There are no easy solutions to this mess, I just don't agree with bailing out the Banks and Wall Street firms (car companies etc...) that created this mess if the people that are paying for it don't see any benefits. Deflating the debt is the only practical solution and that will only be obtained by forclosure and market forces or principle balance reductions, both these solutions will result in the banks becoming insolvent unless the government (tax payers) keeps giving them cash to keep them afloat. We are only at the begining of the cycle so be ready to give the banks more and more cash in the form of equity infusions or FDIC guarantees on the portfolios of acquired banks. But at the end of the day the homeowners and tax payers are going to pay the price and see very little benefit.

I have audited both Fannie and Freddie loans serviced by various lenders and the problem is a power struggle between the servicer's and Fannie/Freddie, neither care for each other. In reference to Fannie and Freddie these two of the most disgraceful, disorganized, poorly mismanaged institutions known to society, irresponsible spenders and an ego they can't shake, as if both forgot they are insolvent. A giant playground for corruption in the past and in the present. Both also can't admit that their automated underwriting are huge mistakes and by the way presently they are still making the same poor underwriting decisions they where making for the last 7 years and sending into foreclosure homes with less than 7 payments collected. We are still awaiting major upper and middle management layoff announcements from these two institutions by early 09' and the Government to slowly dissolve the functions of these two entities they are a major distraction and both should be delisted from any publicly traded exchange.

If the Hope Now statistics from the first half are respresentative, then the recidivism numbers should not be surprosing. Most of the loan mods they did were not mods at
all, but simply repayment plans that resulted in payments being HIGHER than the originaly defaulted payment. The surprise is the number of homeowners who have NOT defalted again on those plans.

When a loan modification is based on sound underwriting of verified income with housing expenses of 31% or less of gross income the chances of re-default are going to be a LOT less than a repayment plan.

There are no "move up" buyers and "first time" buyers are hamstrung by the welcome
return to normal underwriting guidelines. Demand will NOT stabalize home prices ...
only restriction of supply can do that, which will require significantly slowing the
foreclosure rate.

A loan modification that sticks almost always represents a higher net present value
to the investor than a short sale or foreclosure. They should be done whenever the
homeowner can qualify with verified income for the modified payment. If you don't
agree, I'd love to hear another plan to stabalize home values.

DOUG JONES
Santa Ana, CA

it's very complex this time around. i think banks need to lend to businesses. businesses can produce product and provide services. employees will have income. then people will be able to pay bills and eventually start spending again.

at the same time banks need to get mortgage loan requirements back to traditional lending guidelines. and mortgages have to get back to normal spreads with othr debt instruments. the rates will then be lower. people will be more likely to borrower to purchase and refinance homes.

people will gain confidence if banks will show confidence in lending. money is the blood/life of economies. and when an infusion is required it needs to go to the proper place(s) not at all unlike a patient in the hospital.

unfortunately the process will move slowly and the situation will worsen because of stubborn politics. politicians do not and have never understood business. they are lawyers, most of them. they need to defer to those who run businesses successfully in good times and difficult times.

for example, giving money to the banks with the hope it will get to "the little people" (that would be us) for mortgages and vehicle loans was foolish. If someone gave you cheaper money the first thing you would do is shore up your asset/liability ratio and pay down or pay off higher cost of capital. and that's what the banks did.

another point is ya don't tell everyone that the government wants to get mortgage rates to 4.5%. borrowers will just wait now until the rate gets there. brilliant, just brilliant. don't tell anyone. just do it. all this did was keep the real estate and mortgage activity down.

americans and the world are looking for financial leadership. we are getting it to some degree. but it is not getting to "the little people". until this happens confidence will remain low. putting money into the system but stopping the flow at the doors of the banks does absolutely no good. it's similar to a patient in the hospital in need of an infusion of blood. it can be seen on the table next to him. but he can't have any.

and no wonder why the people's confidence is low. no wonder why citizens have a very low regard for politicians. just look at what happen yesterday. the govenor of illinois was arrested. the governor. you got to be kidding me. we elect people to public office and they become self serving. unbelievable. and this type of activity goes on all over the country. i think a better system for selecting public representatives has been long over due. its the only job one can apply for and get for just saying what everyone wants to hear.

well, enough.

thank you for giving me the opportunity to respond.

let me know your thoughts

I went though it. So I know. The banks reduce mortgage 0.5-1% and call it a modification just to please the govt. ie $50 - $100. No wonder the mortgages weren't saved. When congress asked for report of quantum of modifications the answer was that they don't have the data - i.e. they prefered not to have the data.

Here's a plan to stabilize home values: Don't just do something; stand there. Values will stabilize, trust me.