November 21, 2007
JustQuotes: What’s The Cause And What’s The Effect?
“Countrywide, GMAC, Litton and HomeEq - which collectively service more than one quarter of subprime loans to people with poor credit - agreed to maintain the initial, lower interest rate for some subprime borrowers whose rates are scheduled to jump significantly higher. To qualify, borrowers must occupy their homes, have made their payments on time and prove they cannot afford payments with the higher interest rate.”
"Property values are falling dramatically, primarily because there are so many foreclosures already on the market in some areas," [Larry Litton Jr., chief executive of Houston's Litton Loan Servicing] said. "Clearly, it is not good for our investors to have the real estate back. It feels like a no-brainer for a loan servicer to keep the payment where it is, keep another piece of real estate off the market and keep the borrower in the house."
First Published: November 21, 2007 8:02 AM
Comments from "Plugged In" Readers
*must not rant, must not rant, must not rant*
Posted by: badlydrawnbear at November 21, 2007 8:31 AM
what a hoot!
This is all just PR so far anyway... it's a VOLUNTARY program run by only 4 companies (making up 25% of the California Subprime Market).
And it's ONLY for people who are
-have made all their payments
-can afford the pre-reset payment
-can't afford the post-reset payment
so a very very very small segment of the SF market...
Let's see what happens when they try to put this in action, especially with countrywide with solvency issues and PERHAPS on the way to bankruptcy...
but it does bring up a point we've discussed before... NEVER rule out a governmental bailout. who knows what the result of a bailout would be... but it clearly changes the realm of possibilities.
next up: Freeze all mortgages? or at least Jumbo and Alt A? That would certainly hold up SF values... although it would also mean that you'd have to be insane to lend to a Californian in the future, since the contract can be changed so quickly just like that!
Posted by: ex SF-er at November 21, 2007 8:44 AM
ok, so my question about the program is ... how do they 'prove' they can't afford the higher payment?
Wouldn't this require the banks to basically go back and re qualify the borrower to see what they can truly afford?
Considering that many of the stories being printed in the media are of borrowers going low doc or no doc and discovering either before or after signing that their income has been grossly inflated to help them qualify.
Is the bank just going to ignore that? Are borrowers going to take the risk?
Posted by: badlydrawnbear at November 21, 2007 8:58 AM
This is great news! I'm predicting another banner year of 10-12% price growth in 2008 on the backs of this rate freeze. What better gift to the fiscally challenged than a "get out of foreclosure free" card?!
Posted by: Jimmy (Bitter Renter) at November 21, 2007 9:15 AM
quit asking questions.
This is why this is nothing more than a PR move.
When you get to logistics, it starts getting a little sticky.
It reminds me of the Ohio and Massachussetts foreclosure bailout plan proposed earlier this year. They set up a super fund to help all these future foreclosure victims... then they found out that very few people actually qualified for it.
In the end, the problem is that SOME people can't afford their homes. They never could. they were allowed to stretch into a risky finance product... and now those seeds are coming home to roost.
If you make $80,000/year you cannot afford a $700,000 home. Plain and simple.
Thus, we'll see rollouts of lots of programs designed to delay the pain until
-incomes catch up (and luckily for us we're devaluing our dollar rapidly... now we need that to translate into income inflation)
-home values come down.
Posted by: ex SF-er at November 21, 2007 9:16 AM
This is all just feel-good PR. The fact is that mortgage lenders always have, and always will, workout a loan where it makes financial sense to do so, and this simply says exactly that: "we'll do so under certain, narrow circumstances where it makes financial sense to do so."
If a lender is looking at a likely default and foreclosure, resulting in, say 75 cents on the dollar to the lender, the lender will restructure the loan to receive, say 90 cents on the dollar. That's all this is and is no different from what lenders have always done. The requirement of "proof" that the borrower "cannot afford payments with the higher interest rate" is simply shorthand for the lender's concluding that this borrower is likely to default at great cost to us unless we refinance at less cost to us.
End result is the bank doesn't lose quite as much money as it would otherwise be expected to do, and the borrower gets to keep paying the lower rates on the same principal on a home THAT IS NOW LIKELY WORTH LESS THAN THE PURCHASE PRICE. This is just politicking.
Posted by: Trip at November 21, 2007 9:23 AM
I see. A year or so ago I looked into buying a home. I decided I could not afford to despite a mortgage broker assuring me I could. If only I'd known that I would never be held responsible for the reset, I may have bought!
Posted by: location at November 21, 2007 9:23 AM
OK, I am just a tad peeved. This is BS. So, although I had foreseen the state of the RE market now two/three years ago, I did not anticipate a friggin' bailout, and this is exactly what this is, an effin bailout. If I had known that the banks would keep the rates down for these sorry people who made such poor/greedy decisions, I could have/would have picked up two or three properties myself and still be paying 4% - 5% interest rates now ... not because I can't afford to pay a conventional loan, but just because I CAN still continue to enjoy the lower interest rate. Pfffffft!
Posted by: S&S at November 21, 2007 9:31 AM
"I decided I could not afford to despite a mortgage broker assuring me I could. If only I'd known that I would never be held responsible for the reset, I may have bought!"
location: IMO you're looking at this the wrong way. The borrowers are not necessarily getting a great deal either. The reason that this workaround has come up is because you have borrowers who:
-have a home loan they soon can't afford
-they CANNOT refinance into something they can afford, or sell the property
Thus, they probably owe more on the house than its worth (otherwise they could refinance or sell the house vs being foreclosed upon)
so would you REALLY want to be in a situation where you owe more on a home than its worth??? Imagine years of homepayments, and then to still owe MORE on a property than it's worth???
sounds like throwing away money to me. it is similar to sharecroppers, or renting!
S&S: the bailout hasn't even started yet. Just wait until your taxes are increased to pay for a GOVERNMENTAL program that reworks these loans!!! Or that guarantees the loans!!! or for when Fannie/Freddie fail!!! (seen the news reports of the Senators asking to raise conforming limits to $1 Million?)
The S&L scandal can be a guide for you going forward... all taxpayers will pay through the butt to keep "the American Dream" alive for the bankers!
Posted by: ex SF-er at November 21, 2007 10:03 AM
So for all of us who were financially responsible and waited for the dust to settle during the frenzy period while saving funds for a deposit greater than 20%, we are now told that we made the wrong decision? I could have easily qualified for up to $900,000, but decided to hold off and rent for two years. (Sold my place in Chicago 2 years ago) I don't feel this is justice for those of us who play by the rules.
Posted by: anon2 at November 21, 2007 10:29 AM
Well I agree it is likely just PR -- but if it is not, anyone thinking that this will maintain prices is simply not educated in Econ 101. If the govt can unilaterally allow firms to change contracts then any people who may be thinking about investing in pools of money to fund mortgages will think twice. The best case would be new loans at much higher rates and terms. The likely case would be a further freezing of new capital to fund mortgages.
The only other solution if your only goal is to keep the value of your home at artifically high prices is to hperinflate -- but personally I doubt anyone really wants hyperinflation (just think Germany in 1930's).
Posted by: Cal Housing Bear at November 21, 2007 10:30 AM
ex SF-er: I agree with you. And in reality if I had it to do over again, I wouldn't change my decision. I'm just too conservative to go against the fundamentals.
Posted by: location at November 21, 2007 11:52 AM
Good analysis, Trip, ex-SFer -- this is not a bailout, it's a delayed writedown.
But on that point, won't they have to revalue these new assets on their balance sheets -- essentially take some writedown anyway because of the new (bogus) terms. Anyone know the accounting requirements?
A bending of accounting requirements would be an "innovative" non-cash bailout tactic, tho presumably it would catch up with us eventually.
Posted by: dub dub at November 21, 2007 2:19 PM
Gotta love gov't bailouts! This is what makes America great. Rewards those who take risks, such as buying property, and punishes those who don't by taxing them more!
Posted by: A at November 21, 2007 4:48 PM
The question of the day is who is going to pay the difference to bond buyers? I definitely smell a bunch of class-action lawsuits against bond issuers/sellers. If I'm a fund loaded with these bonds and my cashflow is going to change rapidly and instantly killing lowest tranches I would be worried.
Posted by: cdo at November 21, 2007 9:40 PM
again, there is no good information on what this actual deal entails, so nobody can answer your question... this is why this is likely more a PR move ("we're doing something!") rather than a true fix.
(that said, I fully anticipate a real bailout at some time... like tax forgiveness for restructured loans, tax breaks to corporations who restructure loans, perhaps an S&L type bailout who knows?)
AT this point, general concensus is that the only loans being "frozen" are those loans that are on the 4 company's personal books, or the ones for which they have DIRECT servicing rights allowing them to rework loans.
"Tanta" at Calculated Risk has long posts about reworking loans if you want the details in plain old English (she is ex mortgage underwriting exec)
To be brief though: if a company holds a loan on its own books, it can do ANYTHING with that loan, they can change any term of that loan. It is not uncommon for them to rework a loan if they know that it is going to nonperform (i.e. default) IF they know that they will lose less money by reworking the loan compared to foreclosing and selling.
(Imagine if you are the loanholder... and you know that you'll get 50% recovery by a foreclosure, or 80% recovery by lowering the interest rate... which would you choose? now what if you get 90% recovery by foreclosure vs 80% by lowering the interest rate?)
Countrywide currently has $1 Billion (and growing) of foreclosures in California alone, and they are not moving well. They certainly don't want anymore. So why not say "Hey, we're a giving company, we'll freeze the interest rate for our homeowners, because we care!" smile for the photo op!
In addition, when the loan goes into foreclosure, it is counted as a Nonperforming Asset on their books, which causes cash flow problems. THey also have to write down the earnings they already booked for "deferred interest" on the negative amortisation aspect of the loan. If they restructure the loan, it stays on their books as "good". Very important for a company facing bankruptcy!!!!
As for structured products (Mortgage backed securities, etc) SOMETIMES the servicer has direct authority to rework a contract as well... IF it's written in the original contract that they can do this. This is nothing new. As for the CDO and CDS and CDS squared markets and all that, I am not sure how that all works...
Thus, I am guessing that the 4 lender/servicers are making a PR campaign about what they would have done anyway.
If they tried to rework loans that they did NOT have the authority to rework you'd see countless lawsuits from investors. It would never get off the ground, unless the Federal Govt changed some laws (since we're dealing with California homes and California borrowers, but multi-state/national lenders and investors)
Regardless, however, have no misconceptions... big investors everywhere see what's happened now in California, Massachussets, Ohio, and a handful of other states (in terms of their contract rights being threatened). Going forward, they will be LESS likely to invest in Mortgage products... thus mortgage products will need to have a higher rate of return to compensate them for the risk... hence mortgage rates will probably go UP in the future (again, I am not omniscient... there are many future paths where it could go down... just not as likely IMO).
Happy Turkey Day!
Let's give thanks to the Socketsite crew...
Posted by: ex SF-er at November 22, 2007 6:06 AM
Just check what happened in Japan after 1989. Government bailout, banks hiding non performing loans (aka Superfund), lenders "restructuring" bad loans, etc. Sounds familiar? We know what the results were in Japan. And I guess it won't be much different here.
Posted by: anon at November 22, 2007 8:09 AM
The banks are not dumb. The intereste resets are huge, usually 2 points, so that moves a 5% loan to 7%, which is huge. If the banks were making money on this loan, why risk losing money by wanting an additional 2 points. Risk, I don't think so, that is a fundamental that has long fallen by the wayside. Why charge 5% interest on a subprime in the first place, regardless of the time period. Furthermore, a sub-prime risk is expected to pay interest of more than 10% on some cases? That is just foolishness on the banks parts to have even thought this could be sustained long term. I say if a loan holder has been able to maintain payments at a reasonable rate, they deserve to pay that rate as their creditworthiness has been proven. Try hitting them with 2 point adjustments several times (greedy) and don't get surprised that they are not able to make the payments. Reunderwrite the loan holder, if they have met the criteria they really are not subprime borrowers, are they?
Posted by: viewlover at November 23, 2007 12:29 PM