November 7, 2008
JustQuotes: Proposing To Change The Terms To Protect The Principal
"[Governor Arnold Schwarzenegger has proposed] imposing a 90-day stay for the foreclosure process for owner-occupied homes [in California] that have received notices of default. Lenders could be exempted from the stay by proving they have an "aggressive modification program" to keep borrowers in their homes.
The loan modifications would be modeled on the approach used by the Federal Deposit Insurance Corp. to help borrowers of the failed IndyMac Bank. New monthly payments would have to be 38 percent of borrowers' incomes. To reach that level, lenders could reduce the interest rate, increase the loan length up to 40 years and/or defer some of the principal balance until the home is sold or refinanced. The governor's office said such modifications could cut payments by 25 to 30 percent."
∙ Governor proposes plan to avert foreclosures [SFGate]
First Published: November 7, 2008 1:00 AM
Comments from "Plugged In" Readers
as you can see, the govt will try anything to keep housing prices above the level of affordability.
This program may be modeled after what Indybank Federal is trying, but as we all have learned Indymac Federal's mod program has been a failure. Not sure why we keep going to the failure-trough for solutions. Evidently people don't understand the problems caused by securitization of mortgages or the problems caused when most of the banking sector is insolvent and only operational because of governmental welfare programs to banking elite.
it is very difficult to even do these mods... and even if the banks allow these modifications they will have massive write downs and they'll be even more insolvent than they already are. There would likely need to be a change in accounting rules to allow the banks to do this without having write downs.
it seems pretty clear that at some point we will have an RTC like solution to this mess, with all the toxic mortgages dumped on the government. then the govt can decide what to do with the mortgages.
the banking sector will be able to walk away. Uncle Sam will pay the bill. Then free marketeers will say "see, govt is wasteful" as the fat cats pocket even more bonus money.
basically, only fools do what i did. You know... save, act prudently, live within my means, follow the law, abide by my contractual obligations, tell and document the truth.
I'll tell you one thing, I'm emptying my bank accounts and hiding all my money and will default on my mortgage as soon as it becomes clear that the RTC is up and running and the massive homeowner bailout is starting (which it SHOULD do by the way... we're bailing out the richies so why not liars in their homes?)
I want my bailout too.
Posted by: ex SF-er at November 7, 2008 4:40 AM
given California's crushing debt load, it would be interesting to know:
would the state of CA get more tax revenue overall if they maintain high property values (and thus property taxes) but transactions go way down due to affordability issues, OR if they allow housing to correct which would cause decreased property tax revenue but increase other RE tax revenue like permits etc...
I'm guessing they crunched the numbers and found out that it's the former?
Posted by: ex SF-er at November 7, 2008 5:17 AM
"basically, only fools do what i did. You know... save, act prudently, live within my means, follow the law, abide by my contractual obligations, tell and document the truth."
Here's a theme song for you ex SF-er, Weird Al Yankovic's "Dare to be stupid"
Posted by: diemos at November 7, 2008 6:32 AM
Whadda pandering socialist girlieman.
He's nothing more than Gray Davis after years of steroid abuse.
Next, he'll try to relieve the burden on beach sand by imposing a revocation of the tides.....
Posted by: Debtpocalypse at November 7, 2008 7:21 AM
You folks are focusing on governor Schwarzenegger-Hoover's mortgage thing, but I'm absolutely stunned he proposes a sales tax increase *and* a payroll tax increase as well?
Or is today April Fools?
Posted by: dub dub at November 7, 2008 8:47 AM
California's tax burden is insane - and spending is completely out of control. And the psuedo-Republican Terminator is raising taxes. Imagine if Newsom were governor. ex SF-er has once again posed the key question - why is govt trying to keep housing costs high? The vast majority of current and future Americans will be far better off in the long run when prices are allowed to bottom out.
Posted by: FSBO at November 7, 2008 9:09 AM
This plan would not prevent all foreclosures, but it will keep some people in their homes, without the feds being responsible for their mortgages. That is a good thing.
Posted by: Dan at November 7, 2008 9:18 AM
No, it's not. Government intervention and forced renegotiation of contracts feels like a serious overstepping of bounds even to me, a person to center-left. Second, bailing people out shirks personal responsibility and leads to a sense of 'the government will always help me'.
I would reluctantly support it if they very carefully screen people such that those that are only falling victim to foreclosure based on market conditions, such as a declining home value and a loss of a pension, or something like that, and did not intervene on behalf of people who bit on the idea of a giant home, because 'prices will always go up'.
The government should do what only it can do, not everything it can do.
Posted by: rr at November 7, 2008 9:30 AM
I can't wait until they start giving homes to the dolts that could not afford them in the first place ala principal reductions. Taxpayer-funded instant equity is surely coming. You wanna talk about adverse incentive?
When Joe Cultcab, who paid $700K for a McCondo that's worth $500K today, finds out that Sammy Slowfood next door just had his mortgage reduced by $200K, you'll see defaults and restructuring requests galore. This will make things worse for lenders, not better.
The ones who suffer the most here, IMO, are the first-time buyers who bought at the peak of the bubble with large downpayments.
Posted by: Dude at November 7, 2008 10:32 AM
As someone who studied hard, works hard and saves a TON of money every year, bailing out fools who overstretched themselves, in effect distorting the market in favor of existing owners (old people) at the expense of new entrants (young people). F**K IT!! and F**K THEM!!
And if you disagree, F**K YOU TOO.
Posted by: Jimmy (Bitter Renter) at November 7, 2008 11:36 AM
As a fellow hard-studier, hard-worker, who's saved +30% of gross income since the turn of the century while renting, let me rise to express my support for Jimmy Bitter Renter's intemperate remarks.....
Posted by: Debtpocalypse at November 7, 2008 11:44 AM
Your handle says your bitter, but I just don't see it.
Posted by: sparky-the-bear at November 7, 2008 11:51 AM
Re hypersavers: Evidently, it's possible to type while nailed to a cross...
Posted by: dub dub at November 7, 2008 11:51 AM
Uhhh... trying to clear markets in the middle of a panic is not particularly "efficient" in my book. The loan mods aren't forgiving principle and are only for owner occupied properties, so I think the angry savers should chill out. Owners with multiple properties or those who were leveraged and anticipating appreciation will provide more than enough inventory on the downward slide...
Posted by: EBGuy at November 7, 2008 12:35 PM
Well, I guess we'll just have to agree to disagree then. Effectively the government, or the banks, or someone, is providing a zero-interest loan for an indefinite period of time. Who pays for the lost interest payments over all those years? New borrowers, and/or taxpayers.
How about this: Fannie and Freddie can implement a new loan program that any owner-occupier of their home can take advantage of. It will be called the "Jimmy (Bitter Renter)" loan program.
Its a zero-down, zero payments, infinite duration neg-am loan. The government gives you a free house, tacks on the interest to the loan balance every month, and when you sell, since we no longer have any market forces at work, they are guaranteed to get their money (plus interest!) back, and they can roll it over into a new loan to the next guy, who also won't have to pay a dime.
Presto! Instant 100% homeownership, guaranteed.
Doesn't that sound good? Free houses for everyone, and no mortgage losses, ever!
Posted by: Jimmy (Bitter Renter) at November 7, 2008 12:51 PM
time to repeal prop 13 and make the older homeowner's pay their due
Posted by: spencer at November 7, 2008 1:02 PM
The banks are NOT giving away money. What they are doing is coming up with ways to try to keep the idiot buyers from walking away. So they basically are extending the negative amortization period for a longer amount of time with the hope that somehow, things will get better and the home will be worth so much more in 5 years, the buyers can sell the home for more than the loan balance plus the negative amortization.
Of course, all that wishful thinking doesn't get the banks their money any more than it got me a pony when I was 5. But why not try it. The only thing that will do is it will suck down capital, preventing any recovery (can you say "Japan Lost Decade") and preventing future homeowners from being able to buy, because there will be no capital left - it will all be in a bunch of overpriced homes containing frogs who are slowly being boiled.
Will it help keep prices up? Nope, but it will slow down, and draw out, the decline, just like Japan. And by then, the bank executives can try to unload the loans to some sucker (like the USG) or just find a new job, but the bank won't take the loss like it would in a foreclosure situation, so it makes the executives look good.
Sure, they'll throw in a couple of principal reductions so they can say that "Through a combination of principal reductions (mostly to our relatives) and refinancings, we have helped 100,000 "struggling" (stupid) "homeowners" (debtors) stay in "their" (our) homes (and keep making the payments). Congress will declare the problem "solved" and ignore it altogether.
Watch the language carefully in these announcements - it's not a giveaway, it's just a delay in the day of reckoning.
Posted by: tipster at November 7, 2008 1:13 PM
Effectively the government, or the banks, or someone, is providing a zero-interest loan for an indefinite period of time.
Where do you see that? Cite me chapter and verse and I will join you at the barricades. They are talking, worst case, about balloon payments at the end of a forty-year mortgage (not neg-am).
While I doubt this woman's story, I saw a maid on the news a couple of nights ago claiming her interest rate went from 6% to 12%. Clearly she would be helped by this plan. Unfortunately, I bet the reporter did a sloppy job, and the poor women had an IO or Option ARM and no amount of modification will help her out.
Posted by: EBGuy at November 7, 2008 1:22 PM
One possible scenario might be to let qualifying homeowners decide whether or not they want to take the following offer:
The govt. pays off their existing loan and provides a new one with the following features:
a) fully amortized,
b) possibility of some reduction in principal (case by case basis), c) 4% interest rate (higher than what it has to pay out on treasuries, so a net win),
d) possibility of some extension of loan term (case by case basis), and finally
e) full recourse (similar to IRS) so that default is extremely difficult.
Posted by: The Professor at November 7, 2008 2:01 PM
ex SF-er said it best at the top. Prudent savers are at risk of getting screwed on this deal.
When EVERYONE suddenly had access to more capital for housing, the price of housing had to go up. Incomes didn't really rise; we just all had access to more capital, tho under the stupidest of terms.
Now that the easy capital is gone, the housing price has to be allowed to come back down.
It's just that simple: housing costs escalated out-of-proportion to incomes. The only way that can happen is when accessibility to capital is inflating.
There's only two ways to keep the housing price where it is: either wages have to rise or capital has to become easily available again.
It will probably be left up to inflation to fix this mess, as wages rise while the housing price stagnates.
Posted by: El-D at November 7, 2008 2:23 PM
Well, leaving it up to inflation is all well and good, but how long is that gonna take? Probably a decade.
Now that the idiot money is gone, prices can't fall fast enough.
Posted by: Jimmy (Bitter Renter) at November 7, 2008 2:39 PM