September 13, 2007
JustQuotes: Forget Subprime, Will That Apply To Alt-A As Well?
“Congress, banking regulators and President Bush all are promoting a potential way for subprime borrowers to avert foreclosure. Called loan modification or loan workout, it means changing a mortgage's terms to make the payments more affordable.”
“Lenders are uniformly unwilling to make loan modifications for homeowners whose interest rates are resetting higher, said Rick Harper, director of housing at Consumer Credit Counseling Services of San Francisco, which talks to about 1,000 delinquent borrowers a month.
On the other hand, he said, for people with short-term financial crunches - from job loss, illness or divorce, for instance - lenders today are more amenable to modifications and forbearance.
The catch-22 is that the homeowners who most need loan modifications are not those with temporary problems. They are people who signed up for adjustable-rate mortgages and now cannot make the escalating payments.” (Modified mortgages: Lenders talking, then balking)
First Published: September 13, 2007 7:19 AM
Comments from "Plugged In" Readers
I don't think this should be surprising or unexpected.
Loan modifications and/or forbearance are basically there to help borrowers through some short term financial hiccup with the expectation that the individual is likely to recover and continue making payments.
With the 'affordability products' offered to borrowers for the last several years the problem isn't that the borrower has some unexpected financial trouble, the problem is the loan itself.
I think it is becoming exceeding clear that many people were given loans they had no hope of ever paying off.
Borrowers did not stop and think about making the payment beyond the initial teaser rates, Mortgage brokers abused the lending standards, banks did not perform their due diligence, and the secondary market paid no attention until borrowers started defaulting in large numbers and their Mortgage Backed Security funds started losing money and collapsing.
I wish there was some solution to allow these people to keep their homes but, the fact is, many recent borrowers simply should have never been approved for the loans.
Unfortunately the only options appear to be selling for at least what you owe, refinance, or be foreclosed on and the bank resell the home at market rate; loan modification, for most, simply will not help.
Posted by: badlydrawnbear at September 13, 2007 8:00 AM
With all the new constrcution and long DOM - you have to believe a major stahl is around the bend...
Posted by: Michael L. at September 13, 2007 8:18 AM
I dunno what "a major stahl" is (steel? huh?) But, staying on-topic:
"the homeowners who most need loan modifications are not those with temporary problems"
I'd argue that the opposite is true: Homeowners with permanent problems are the ones who most need not to be in their current home. Or job. Maybe a job bailout is what is required... yeah. Give them all overtime or moonlight work.
Posted by: SerialJingleMailer at September 13, 2007 9:20 AM
As badlydrawnbear mentioned, these mods will not help people who have no capacity to repay their loans under any scenario (besides the Mega jackpot). This is the financial equivalent of trying to push water uphill - eventually you drown. Banks know this and see no reason to lose more money. Better to foreclose and auction now rather than delay foreclosure a year and auction at a discount in a year.
But it was interesting to finally see the criteria for the FHA Secure program implemented by the Bush administration:
- ARM must reset between 6/05 and 12/09
- Must be current on payments
- Must have at least 3% cash or equity
- Demonstrated income sufficient to service the loan
- Most importantly: maximum loan amount $362,790
Posted by: Dude at September 13, 2007 9:29 AM
A little late, but at least Greenspan finally admitted he screwed up,
"While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late," he said a CBS "60 Minutes" interview to be broadcast Sunday. "I really didn't get it until very late in 2005 and 2006," Greenspan said.
I am not sure why Greenspan didn't get it, there were major economists like Shiller (of the Case Shiller Index) and John Talbot ("The Coming Crash in the Housing Market") predicting this since 2003.
Posted by: badlydrawnbear at September 13, 2007 10:53 AM
Hell, I'VE been saying since 2003 that this is Greenspan's fault and I failed Econ 101! Money should never be that easy to get and interest rates on a home should never be that low. Greenspan far overcompensated for the stock market crash by dropping interest rates. The fact that they be lowered AGAIN makes me sick! For what? To help people that should have never been so stupid to begin with? So now we all will pay for their mistake? I say bring the Fed funds rate back up to 10%+ and let's all live in a world again when houses are priced at $300k, rates are high but not outrageous, and average incomes can afford the average home. Then maybe we won't all stress ourselves out over the simple staple of shelter and we don't need to read SocketSite all day to vent our frustrations (sorry SS)
Posted by: anony at September 13, 2007 11:13 AM
The rate cut won't really do much. From the same article: "At least 73 percent of subprime loans are tied to Libor, compared with 25 percent of prime loans." LIBOR is approaching 7% today vs. 5.4% a year ago. Those loans are toast regardless of Fed Funds.
Loans tied to Treasuries get some breathing room since the flight to quality has pushed yields down. But in either case, if you have a $600K loan tied to Fed Funds, and the Fed Funds rate is lowered by 25 bps, what does that get you? $125 a month.
Posted by: Dude at September 13, 2007 11:22 AM
What is the saddest about this is that the people who really COULD have afforded a regularly priced home had to compete with the irresponsible idiots who were given as much money as they got, so the only way for the responsible one to get the home was to overpay.
Someone who could have easily afforded a 250K home in Sacramento had to pay 600K for the same home because 100 idiots who could never afford even the $250K were given 600K and told to spend it on housing. The first guy had to overpay, then hope for continued increases so that he could refinance. Now, as that house sinks back to 250K, he'll keep overpaying for the next 30 years or he's lost everything. Either way, how was that guy helped?
So when I hear these mortgage bankers saying how "helpful" they are that they put people in homes who could not have gotten them in the first place, I just think, "no, you screwed a whole generation of hardworking people out of a chance to buy something affordable by giving cash to everyone else".
Posted by: tipster at September 13, 2007 11:26 AM
Well....Greenspan is in his 80's. Maybe he really doesn't get it, but my dad, who is only slightly younger, gets it. He's been complaining about Greenspan for years and blames him for this mess.
Posted by: anon at September 13, 2007 11:30 AM
well this made me do a double take ...
he said of the critics. "It was our job to unfreeze the American banking system if we wanted the economy to function. This required that we keep rates modestly low,"
1% was "modestly low"!?!?!?!? I remember that as being "jaw droppingly low".
Posted by: badlydrawnbear at September 13, 2007 11:33 AM
On topic of "Will That Apply To Alt-A As Well?", the dataquick numbers for NorCal are out today.
Posted by: Dude at September 13, 2007 11:47 AM
2004 was a special time. Interest rates at record lows - what a great time to get a fixed mortgage. Greenspan recommended people take out ARMs.
Posted by: Emmett_Brown at September 13, 2007 11:58 AM
While Stockton I have never personally been to Stockton and I know it isn't the Bay Area (although I do know people who commute in from Stockton to BA jobs) I thought I would add this as another data point
With a population of nearly 300,000, Stockton has acquired the unfortunate distinction of having the highest foreclosure rate of any US city, with one in 27 households left counting the cost of the credit crunch, according to Realtytrac, an online marketplace for foreclosure sales.
"People are just walking away," said Taylor. "We've seen houses with food still on the table from when the sheriffs have come knocking."
Lupe Dominguez washed his car in his driveway two doors down from a shabby bungalow with a front window covered in a yellow and black poster announcing a public auction with a fifty thousand dollar starting bid.
While I know this has been happening in Detroit MI for sometime, I never would have expect this in CA, esp so close to potential employment.
Posted by: badlydrawnbear at September 13, 2007 11:59 AM
"LIBOR is approaching 7% today vs. 5.4% a year ago."
Huh? Where are you getting your figures from?
1 month LIBOR 5.75 5.33
3 month LIBOR 5.69 5.39
1 year LIBOR 5.13 5.40
Posted by: rut at September 13, 2007 12:53 PM
Sorry, that was a typo. Meant to say approaching 6%. I go to British Bankers Association - bba.org.uk
3-month $ LIBOR currently over 5.7% vs. 5.3% a year ago.
Posted by: Dude at September 13, 2007 1:00 PM
What LIBOR terms are typical for an ARM -- LIBOR + 2, LIBOR +3? I've always gone the fixed route. I'm keeping my eye on some properties with ARMs that are about to reset (I think) and just wondering what they are likely to reset at.
Posted by: Trip at September 13, 2007 2:19 PM
"What is the saddest about this is that the people who really COULD have afforded a regularly priced home had to compete with the irresponsible idiots who were given as much money as they got, so the only way for the responsible one to get the home was to overpay."
I agree with this to a point. I think "people who really COULD have afforded a regularly priced home," if they were "responsible" and not already in the market, simply chose not to be buyers over the past few years. I consider myself to be in that category. Notwithstanding the fact that I make a decent, above-average salary, I came to realize in 2004-2005 that my ability to own something in SF that was acceptable to me (e.g., a smallish 2BR condo with parking in an OK neighborhood) was directly related to my willingness to do something unbelievably stupid (e.g., commit to a teaser rate, interest-only and/or adjustable mortgage with prepayment penalty provisions and/or the potential to negatively amortize). I did read the fine print and understood what could potentially happen.
The "responsible" thing to do, it seemed to me then (and still seems to me now), was not to suck it up, do something stupid to pay $850k+ for a 2BR condo. When to be a buyer in SF is to be a lemming going over the cliff, the "responsible" thing to do is to refuse to be a lemming and not buy.
The fact that the lemmings now realize that they have gone over the cliff and face impending disaster is unfortunate and sad (although it was on message boards such as these where a lot of buyers openly mocked anyone who refused to join in the frenzy over the cliff). But the market is clearly changing in favor of the non-lemmings who stood aside. It's long over-due.
Posted by: Mark D. at September 13, 2007 4:12 PM
Mark D. - your experience mirrors mine almost exactly. I pulled out in summer of '05 after having people outbid me for property OVER THE PHONE, site unseen, and by material amounts. Seems unbelievable, doesn't it? So pardon me if I have littly pity at watching this house of cards crumble today. It is indeed long overdue.
Posted by: Dude at September 13, 2007 4:20 PM
I can third Mark D.'s & Dude's experience. I bought and sold 2 properties in 2 other cities I've lived in since 1995. I started renting again when I moved to Denver at the height of their real estate frenzy and watched as downtown turned into 1 giant ‘for sale or rent’ sign after the Telecom bust. When I moved out here in '05 (job related), I was prepared to buy again until I realized that I would have to substantially decrease my quality of life if I bought. Either I would have to borrow way outside my financial means and suffer from the extreme stress of wondering how I would pay my bills when the mortgage payments increased or move into the suburbs.
I rent now, but would like to own again someday. With the 'help' of the speculators, money crazed lenders, and irresponsible borrowers, it will be a long time before prices are even close to reasonable enough to justify buying. Unless my income takes a drastic turn upward (currently only a little more than double SF's median income), the only financially responsible course of action will be to continue renting. I feel sympathy for people who got burned in this mess, but not enough to pay any more than we already are for the cleanup.
Posted by: pica1986 at September 13, 2007 5:10 PM
I can 4th that experience.
I bid on a place originally listed for $620K in late 04, that ending up selling for $750 by a buyer who never saw the property. I refused to get in a bifdding war.
I was bummed for awhile, but am happy now that i didn't go for the bid up and have also done quite well in stocks since that time. i am in a much better condition to buy now and spend about 250-300K more and with an easy 20% down than i was in late 04. I could have put 15% down at the time and probably would've gotten an ARM mortgage. While i personally would have been able to handle the reset, I'm glad i put my money elsewhere. most of my friends bought at that time with only 5-10% down, are due for a reset and are fretting.
By the end of 08, beginning of 09, I should be sitting pretty.
Posted by: Spencer at September 14, 2007 12:14 PM
Is it possible to get pre-qualified for a new mortgage loan while you are in forbearance with your present mortgage company?
Posted by: Karen at January 31, 2008 8:05 AM