August 20, 2008
Mortgage Modifications: Short-Term Solution To Long-Term Problem?
The intended impact of lowering mortgage interest rates for IndyMac borrowers who are currently delinquent:
“We hope to keep tens of thousands of troubled borrowers in their homes and avoid the negative consequences that foreclosures can have on the broader economy,'' [FDIC Chairman Sheila Bair] said.
The unintended impact (and food for thought):
Bair's efforts may lower the value of mortgage-bond holdings by delaying foreclosures until home prices are lower, said Julian Mann, a mortgage- and asset-backed bond manager at First Pacific Advisors LLC in Los Angeles, which oversees $11 billion.
∙ FDIC Will Modify Mortgages for Some IndyMac Borrowers [Bloomberg]
First Published: August 20, 2008 12:45 PM
Comments from "Plugged In" Readers
Let me elucidate what is being said here.
Sheila Bair (FDIC): "We hope to keep tens of thousands of troubled borrowers [who would be much better off walking away] in their homes and avoid the negative consequences that foreclosures can have on the broader economy, [and in the process we hope to transfer those negative consequences to the hapless fools participating in this program, and away from the balance sheet of their betters, the banksters and the Wall Street fraudancial companies generally - after all, we know where are bread is buttered."
Julian Mann: "Bair's efforts may lower the value of mortgage-bond holdings by delaying foreclosures until home prices are lower, [and therefore in view of the potential balance sheet hit here, the SEC and FASB will need to relax the accounting reporting rules, thereby allowing our managers to continue to convince pension plans and foolish little investors to continue to give us more capital with which we can pay ourselves on average $661K per employee per year. If things look really bad, like if that average per employee payout is reduced to something south of $500K, the Fed in our opinion will need to directly monetize these assets, thereby transferring the wealth of the little people directly into the pockets of us, their betters, through the hidden tax of inflation.]"
Posted by: Satchel at August 20, 2008 4:11 PM
2008: We hope to keep [an amount that equals less than 3% of the loans outstanding] of [No Doc] borrowers in their homes.
2009: Well, the two borrowers of these liar loans we actually helped (out of the tens of thousands we "hoped" to help) were able to document their income and assets sufficiently to qualify for the loans. The rest could not, or wisely chose to walk away. Fortunately, once the press was looking the other way, the company we sold all this crap to foreclosed on them.
Posted by: tipster at August 20, 2008 4:45 PM
Yeah, hopefully tipster's scenario will come to pass. The problem with this plan is that the FDIC, in its role as receiver, is a fiduciary for the bondholders, unsecured creditors, uninsured depositors, etc. They cannot help out these defaulting borrowers for the public good at the expense of these other interests. If they really go forward with this (and IndyMac is just one of many to follow), the lawyers will be busy -- which is good; don't get me wrong . . .
Posted by: Trip at August 20, 2008 4:55 PM
Spare us the prognositcations. Because here's a recap.
SS Bears last summer: Every homeowner in San Francisco will lose 20% equity within a year.
SS Bears this summer: We may in fact be at bottom. And once inflationary indices are brought into account San Franciso homeowners may see anywhere from a 10% equity loss to a potential 5% gain over the next few years.
You and others like you are really not doing so hot thus far, Tipster.
As to the issue at hand, why are "predatory" adjustments necessary? These are rates that -- if they are being paid -- actually make money for various institutions. If studies determine the predatory adjustment necessitates mass "walk aways," then why not issue fiats extending the status quo?
Posted by: fluj at August 20, 2008 4:58 PM
I didn't know about this board a year ago, but it sounds like, from fluj's description, the SS Bears' predictions last summer ended up being pretty dead on. Somewhat high for some parts of town and somewhat low for others, but pretty darn accurate given how confused things were back then. But I don't think anyone in their right mind is predicting a 5% gain after inflation in the next few years.
Posted by: anon at August 20, 2008 5:37 PM
When the pay option arms reset and the lenders start to foreclose, call me.
As for holding the status quo, those teaser rates or option arm payments generating negative equity are "kinda" tough to make money from.
If you can sell the assets for 60 cents on the dollar, at least you can get back in the game and put that money to good use. Maybe make it all back in 5 years.
Beats hoping the gardener will pay back that $1.2M loan any time soon. :-)
Posted by: tipster at August 20, 2008 5:45 PM
"Spare us the prognositcations. Because here's a recap."
Anyone else notice that fluj seems extra feisty these days??
I mean, this thread is not about SF specifically, but indymac lending all over the US (not that *I* could legitimately ever call someone else out for being OT!).
But fluj is setting up a straw man. Most of the bears' prognostications have been somewhat nuanced. As one of the more vocal bears, I think I've been pretty good on my predictions, especially on macro issues like US equities, interest rates, the dollar, and especially Chinese stocks (I have to give myself a pat on the back for that one, and I sincerely hope I saved some SS readers some money there).
For the record, I expect a 30% nominal decline - on average - for SF from the peak. Declines will vary by neighborhood and by broad desirability of property (better neighborhoods less decline on average, bad neighborhoods more/SFHs less decline, 1/1 condos more, etc). But if you randomly picked a large number of properties in 2006/07 (the peak) and you checked their prices in 2-1/2 years, the decline on average will be 30%.
BTW, I never made any prognostocations on SS until December 2007.
Patience, fluj, patience. Rome wasn't destroyed in a day....
Posted by: Satchel at August 20, 2008 5:50 PM
"I didn't know about this board a year ago, but it sounds like, from fluj's description, the SS Bears' predictions last summer ended up being pretty dead on. Somewhat high for some parts of town and somewhat low for others, but pretty darn accurate given how confused things were back then. But I don't think anyone in their right mind is predicting a 5% gain after inflation in the next few years."
I'm not going to argue with you if that is truly your perception.
Posted by: fluj at August 20, 2008 5:51 PM
Oh yeah it was OT, Satchel. But predictin's predictin'! It was you two who made the thread about seeing the future. I just ran with that is all. OK. I have you down for 30%. Diemos 50. Anybody else?
No kidding neg-am minimum payments don't generate money. There are plenty of different vehicles out there. Some of them reset after a fixed period to a toxic rate, etc. You know this.
Posted by: fluj at August 20, 2008 5:59 PM
"SS Bears last summer: Every homeowner in San Francisco will lose 20% equity within a year."
True in District 10 but the "Real SF" (TM) has held up nicely.
"SS Bears this summer: We may in fact be at bottom. And once inflationary indices are brought into account San Franciso homeowners may see anywhere from a 10% equity loss to a potential 5% gain over the next few years."
Fluj, fluj, fluj. Hear you nothing that I say?
We're at the top not the bottom. Once the Option ARM resets have done their work we'll see 50% off and Case-Schiller below 110 by 2011.
And my prediction goes back to May 8 2007.
Posted by: diemos at August 20, 2008 6:03 PM
Oh, no, Diemos don't get me wrong. I know you are a man of your word. You haven't wavered. I apologize for the all encompassing generalizations. Sometimes they are used for the sake of ease.
Posted by: fluj at August 20, 2008 6:07 PM
De nada, fluj.
"Most of the bears' prognostications have been somewhat nuanced."
(hangs head.) Sorry Satchel. When I first decided to come out with my predictions I thought about being nuanced and thoughtful. Then I said, "What the heck, no one's going to believe me anyway" so might as well throw propiety to the wind and be the "Mad prophet of doom". Every blog needs one.
Repent! Those who have tasted the iniquity of negative amortization shall know the fires of foreclosure! Repent! The end is nigh!
Posted by: diemos at August 20, 2008 7:12 PM
Well, if they are going to do this for those seriously in arrears but not for those up to date on their payments, why would anybody keep making those payments?
I'm beginning to feel awfully foolish for paying my own mortgage on time (even though I still have hundreds of thousands of dollars in equity).
Posted by: BT at August 20, 2008 8:49 PM
SS Bears this summer: We may in fact be at bottom.
I believe I have pointed out time and time again that the 89/90 correction took 54 months to play out. This correction is several orders of magnitude larger then previous ones. If the peak is was somewhere in 06/07 (depending on how you measure it) then we are 1-2 years into a minimum of a 5 year cycle.
I believe I pointed out, not predicted, that the ARM reset schedule that began on Oct of 07 and would continue into Sept 08 would result in a surge of foreclosures. Since foreclosures take 6 months or so to occur from the time owner's stop payment their would clearly be a delay between the resets and the foreclosure.
Now we are facing a similar wave of resets with Alt-A and Option ARMs that is likely to hit more "prime" markets and will take us through 09.
Sorry, this isn't the bottom and this isn't over.
Posted by: badlydrawnbear at August 20, 2008 10:05 PM
I too stand by my prediction early this year when I said that subprime loans would not be a big problem for SF like they would be in the burbs, and that option arms were SF's problem and that would only start at the very end of this year: it was largely next year's problem.
And fluj, even if I was wrong, I explained my reasoning and people were free to disagree. It's a prediction, and like any prediction, a lot of external events can influence it, or it's timing.
That's all anyone can expect.
Subprime was not really part of the SF market, so its direct impact will be small. The impact of subprime is indirect: empty nesters in the burbs can't sell their homes and move to SF (because all the subprime sales have dropped the value of their homes), so it reduces demand a little.
But Alt-A is a much bigger problem, and we'll start to see its impact late this year and early next year, particularly from option arms.
So SF's problems, which have been very mild in terms of numbers of foreclosures will really only start to hit at the end of this year.
I stand by everything I said at 11:04 am in this thread:
Posted by: tipster at August 20, 2008 10:42 PM
"Anyone else notice that fluj seems extra feisty these days??"
I used to find fluj's comments interesting but lately they seem like a bunch of ranting, whining and name calling.
Challenge fluj's facts and you're a "hater" (wtf?) or a bear. Suggest anything other than district 10 is losing value and you're a hater or a bear. Point out a bad financial decision...it must be schadenfreude.
Is bitter realtor the new bitter renter?
Posted by: Me2 at August 20, 2008 11:35 PM
"SS Bears this summer: We may in fact be at bottom"
I haven't heard many bears capitulate and say this. I think most of the RE bears feel we are in the early stages, not the later stages. On the other hand I've heard a fair amount of non-bears say things like "if this is the worst that it is, then the upturn will be awesome!"
I've been on record many times saying I won't go on record! but my very nuanced very rough estimate (worth $0) would be about 25-30% REAL (not nominal) drop in house values from peak in the city itself and the downturn dragging out until around Dec 2011, unless people continue to default en masse prior to their resets-then possibly a smidge shorter (like Dec 2010). so I have us down for about 3.3 more years of downturn. 2.3 years more if we're "lucky".
I feel free to alter the % drop at any time because I have already said it is a piss-poor estimate that I basically made up without much data.
The duration on the other hand I feel more confident about... 3.3 years downturn, THEN the slow grind back upwards (0-2% per year above inflation... no more of this 20% increase per year anomaly that we saw in the 2000's).
diemos is the nouriel roubini-esque prophet of doom. if what s/he predicts comes to pass (50% drop) then we will have entered one bear of a recession (not impossible). I personally don't see the 50% drop occurring, because I think if we arpproach this then our govt will debase our currency (think massive inflation, although I think they'll try to avoid pure hyperinflation), and currency debasement will not be pretty... our house prices will go up, but we will pay $15/gallon in gas. that's why I speak more in terms of "real" value loss, because it helps to hedge whatever foolishness that our govt will conceive.
but in the end, who can really predict this stuff when a lot of what matters will depend on the PSYCHOLOGY of a very few people? (Hank Paulson, Ben Bernanke, Bush, next President, Pelosi/Reid/Dodd, and the Pres of Banks of England/EU/China/Japan.)
Posted by: ex SF-er at August 21, 2008 4:52 AM
"Is bitter realtor the new bitter renter?"
That was pretty funny. Well you have certainly done your bit for god and country, Me2.
My "rants" have nothing to do whatsoever with being beset with arch, high-handed, personally challenging/ realtor bashing/ and or denigrating language from six to seven sides each and every time I say something contrary to SS conventional wisdom. Not at all.
Posted by: fluj at August 21, 2008 9:37 AM
So three years for San Francisco to turn around, starting now. 2011. That means it will be five years for San Diego, right?
Why? The same gross factors are at work. This is where bears do not wish to take mitigating regional forces into consideration.
Posted by: fluj at August 21, 2008 9:52 AM
"This correction is several orders of magnitude larger then previous ones."
Just a wee terminology nit : An "order of magnitude" means "about 10 times". Two orders of magnitude are 10^2 or 100X. "Several orders of magnitude" would mean at least 10^3 or 1000X more.
I don't think that you meant to say that this correction will be 1000 times larger than previous ones. I think you meant that it will be "several times larger" instead.
If you really do mean "Several orders of magnitude" then yikes !
Posted by: The Milkshake of Despair at August 21, 2008 10:37 AM
Wasn't there a post on SS a while ago that showed that SF had relatively few Alt-A loans? It seems unlikely to me that option ARMs are really going to be a problem for SF. Wouldn't the option ARMs and the no doc loans kind of go hand in hand? I'm sure it happens but it's hard to imagine someone who can afford even a median priced SF home with a fully documented loan being stupid enough to pay less than the interest.
Unless of course they put no money down.
Posted by: anono at August 21, 2008 3:12 PM
I'm just catching up to this thread - lots of good comments. But no matter whether you are bearish or bullish on San Francisco real estate, we should all agree with Satchel's initial post (August 20 at 4:11PM). I'm finding hard to get too worked up over Putin's new Soviet Union when a more treacherous kleptocracy is at work right here.
Posted by: FSBO at August 21, 2008 5:58 PM