December 10, 2009

Rewarding Forgiving Their Riskiest Borrowers

"Wells Fargo has forgiven an average of $46,000 in principal, or 15 percent, for the 43,500 option-ARM loans it has modified this year through September, said Franklin Codel, chief financial officer at the bank’s home-lending unit. The San Francisco-based lender has cut as much as 30 percent off the loan principal in a few “rare exceptions,” with the ceiling typically capped at 20 percent, Codel said."

Wells Fargo Cuts as Much as 30 Percent in Principal From Loans [Bloomberg]
It's The Principal Of The Underwater Mortgage Matter [SocketSite]

First Published: December 10, 2009 9:15 AM

Comments from "Plugged In" Readers

Hmmmm. So Wells gave away about $2B of taxpayer money. That's about $7 for every man, woman, and child in the country.

Enough to make taxpayers grumble, but not nearly the amounts that we're throwing away on pointless wars.

Posted by: The Milkshake of Despair at December 10, 2009 9:52 AM

Hmmm, they give 15% back for a loan that allowed people to go 25% underwater on a home that dropped 20-30% in value.

That leaves the homeowner on average 30-40% underwater. Not hard to see how this story ends!

I saw the HAMP conversion to permanent mod rates are running around 2-3% for those who actually got a temp mod from one large lender.

Posted by: tipster at December 10, 2009 10:04 AM

wish i had a crystal ball four years ago. damned if i could afford the place, i would have bought it and rode out the storm. i figure since its my tax money thats paying for these fools now i should have gotten in on the party.

Posted by: anon$random at December 10, 2009 10:13 AM

Milkshake, how do you figure they "gave away" taxpayer money. I want to see the trail that implies a bona fide giveaway.

The gov't is a shareholder in WF, I know that, but I don't quite get from there to the "giveaway".

Posted by: TrippKnightly at December 10, 2009 10:13 AM

It sucks being a conservative investor (me=frugal saver risk averse). Next time around I'm gonna be a wild and crazy guy.

Posted by: Justice? at December 10, 2009 10:13 AM

ARM reset tsunami = never going to happen. Like I predicted.

Posted by: anonn at December 10, 2009 10:47 AM

I want my loan cut by 20-30%! Why should only the irresponsible and the deadbeats get the prizes?

Posted by: Dave at December 10, 2009 10:48 AM

Who do you have your loan with, Dave? If you have Wells or Countrywide, now BofA, it might be worth your while to lob them a phone call.

Posted by: anonn at December 10, 2009 10:55 AM

Read the whole Bloomberg article. This is potentially just the tip of the forgiveness iceberg. WF got $117,300,000,000.00 of Pick-A-Pay paper in their aquisition of Wachovia according to the article. Woof!

Posted by: OneEyedMan at December 10, 2009 11:02 AM

The article is not crystal clear, but yes, it looks like they have $117 billion in pick-a-pay loans and (from a different data source) 15.3% are already "seriously delinquent," and that is before they have recast! But they have written down $2 billion. And this is just one bank's share of the mess.

Nope, nothing to see here folks. Move along. The tsunami will be avoided when, um, housing prices skyrocket over the next three years and incomes go up 20% a year.

Posted by: anon at December 10, 2009 11:15 AM

"forgiving the riskiest borrowers"

hmmm.....who did they borrow from....ahhh - yes, of course....they borrowed from risky lenders - but forget about those lenders and lets pick on the "irresponsible" borrowers. Forget that wall street banks paid gazillions in their years long lobby efforts to relax to repeal "dated" regulations, and the moment those regulations are lifted they sell mortgages as securities and make gagillions.....yea, forget about all of that and lets pick on the stupid "reckless homeowner".

Most people on this site just love to continue to sit on the sidelines and lob insults at those who choose to win and sometimes loose in the real estate investment game. Keep sitting and stay out of the way:-)

Posted by: whodunit at December 10, 2009 11:39 AM

ARM reset tsunami = never going to happen. Like I predicted.

I'd take the other side from you in that wager.

WFC portfolio is a toxic mess. Even after modifying $15 billion, it still has $100 billion left to go:

http://healdsburgbubble.blogspot.com/2009/05/reset-chart-from-credit-suisse-has.html

G'luck wit dat....

Posted by: Debtpocalypse at December 10, 2009 11:40 AM

So, you're all still calling for a tsunami then? OK.

Posted by: anonn at December 10, 2009 11:47 AM

I don't know what a reset tsunami means, but you don't think that when these loans recast in 2014/2015, that there will be problems?

Moreover, you don't think any of these people will have problems if they try to sell their house less than 10 years after buying it?

I mean, maybe 5% loans can stick around forever, but at some point someone's going to have to pay down the principal. Seems like that should have some negative effect on the housing market. Still a few years before we find out.

Posted by: sfrenegade at December 10, 2009 11:53 AM

117B (or whatever) is not much, given the new zombification/bailout normal. I agree with anonn (I think for different reasons), though that's not to say WFC will survive (which is hardly relevant, and I neither know nor care).

The biggest risk to this new-normal is that enough of the population will remain miserable even with the coming midterm-election bailouts/stimulus/payoffs that we get regime change anyway. It's very easy to pander to this feeling.

But note the current political rhetoric (even from Ron Paul!) centers around preventing people from losing their homes "instead of bailing out bankers". Even Obama is upset about banker bailouts (see his jobs summit speech, lol)! But you can't have one without the other to a certain degree.

So until we get someone viable who says "it's okay to lose your house and become a renter until you can really afford a house" the bailouts will continue. There would have to be an external event *we don't know about yet* which forces change, but what could it be?

The best we can hope for is a very slow "easing" of the bailout mechanisms, but on a timeframe much longer than non perma-renters would possibly wait (a solvency tax).

I'm curious: have any bears with savings caved in yet? How long are you willing to wait?

Posted by: dub dub at December 10, 2009 11:55 AM

A tsunami is a water formation resulting from earthquakes, volcanic activity or landslides.

Rather than speak in metaphor, I will say plainly that I see lower prices in the Bay Area high-end market (where I currently rent, and expect eventually to purchase) persisting through Spring 2012.

There may be zigzags between now & then, but we'll still be 10% to 20% lower from current levels at that future point in time.

You calling a "bottom" in that same market?

Posted by: Debtpocalypse at December 10, 2009 12:00 PM

I don't know what a reset tsunami means, but you don't think that when these loans recast in 2014/2015, that there will be problems?

First off, now it's 2014/2015? That's a new one.

Secondly, show me a bank and I'll show you a loan renogatiation program.

Posted by: anonn at December 10, 2009 12:14 PM

"First off, now it's 2014/2015? That's a new one."

It's really not, at least among people who understood how Option ARMs work. Credit Suisse's analysis has been known to be flawed for a while. Resets may become a problem if rates go up. Recasts should make a difference when they happen (typically either 10 years or when the ratio hits a certain number -- what kept the recasts from happening sooner as Credit Suisse predicted is that many of the ratios are based on the original loan value instead of the actual home value).

In any case, lots of people only stay in a house for let's say 7 years, so cracks could start showing up sooner.

Loan renegotiation levels are a joke thus far, but I suppose that could change, if the banksters decide to start booking losses.

Posted by: sfrenegade at December 10, 2009 12:24 PM

WF's toxic portfolio, inherited from Wachovia, begins to recast in 2014/15, and the problem will continue until these have all washed out. There will be, and are, massive defaults long before then. Other lenders have a quicker recast problem, and we're seeing some of that now.

All of this is among the reasons why I don't see any real recovery in the housing markets in SF and more broadly for many, many more years. We may hit bottom and trudge along it before then, but we're 6 or 7 years or longer away from sustained recovery out here. Other areas of the country where toxic loans were not so prevalent will recover sooner. The goobermint will "declare victory" and stop the massive giveaways when SF and California still are in the middle of the problem as it will not be a system-wide crisis then but only a local one.

Posted by: anon at December 10, 2009 12:24 PM

anonn -- do you have any thoughts on whether the government will stop propping up housing markets? If it does, what do you think will happen in the housing market? Do you think prices would be similar to now if the government hadn't intervened so heavily?

Posted by: sfrenegade at December 10, 2009 12:26 PM

No, it IS a new one. Fourteen and 15 now, eh? This site is probably rife with bears arguing tsunami via links to charts showing resets in 08, 09, 10, 11 and even 12. Now it's 14 and 15. Convenient how the coming tidal wave is always very, very far away. Many would think that a possible r.e. recovery nationwide could even occur within six years time, I'd guess.

Posted by: anonn at December 10, 2009 12:36 PM

I have no idea what other folks said -- I'm specifically talking about the loans from Wells Fargo which are likely to recast in 2014-2015.

There might be other banks that have other terms, as I mentioned, and Credit Suisse's chart might be considering those when saying some recasts will happen in 2010, 2011, and 2012.

I'm not sure why you feel the need to lump everyone together instead of responding to specific arguments people are making.

Posted by: sfrenegade at December 10, 2009 12:51 PM

annon, I'd be very interested to hear your answers to some of these questions, as you are probably the most consistent bull on the site.

I see from your 12:36 response that you don't think the large number of low down payment/pick-a-pay/stated income etc. loans made in the last few years will cause a problem in the next few, as alleged by many bears - can you tell us why that is?

And further, I'm curious to hear your views on the question posted by sfrenegade at 12:26. Do you think the major interventions made by the government in the last year to the debt and housing markets had a significant impact on the housing prices we see today, and if you do, what's your view on the impact of them being withdrawn? Or do you believe they won't be?

Thanks...

Posted by: Po Hill Jeff at December 10, 2009 12:55 PM

Um, because we're communicating in a context that has precedent, and it was new to me?

Again, ignoring the fact that Wells is already rolling out adjustment plans, isn't it possible that the market might rebound by 14 and 15? Therefore rendering moot the calamitous effects of thousands of resets occurring?

Posted by: anonn at December 10, 2009 12:57 PM

Po Hill Jeff,

I'm seeing big banks rolling out adjustment plans right now, and lots of people getting their rates and even pricipal adjusted.

Yes, the intervention of government has had a huge effect on housing. Particularly the interest rate manipulation. I am not one to ascribe one cause to a market's behavior, tho.

I do not believe the government will pull back on these measures until several quarters of growth is reported. Not this federal government anyway. And we're only just finishing year one of four.

Posted by: anonn at December 10, 2009 1:03 PM

I believe I linked this piece from a WSJ blog last month (old news, folks). You're really missing the best parts:

The San Francisco company is issuing thousands of interest-only loans that will defer borrowers' balances for as long as six to 10 years... The move to shift Pick-A-Pay borrowers into interest-only loans helps Wells Fargo avoid hefty write-downs on Pick-A-Pay mortgages that would likely result from foreclosures.

And the cited real world example -- welcome to Zombieland:

Danny Annan, an Orange County, Calif., engineer, said Wells Fargo recently offered to reduce his loan balance by $100,000 and transfer the remaining balance to a six-year interest-only loan with an initial interest rate of about 4.9%, Annan said. The offer will leave Annan more than $100,000 underwater on his home.

Posted by: EBGuy at December 10, 2009 1:09 PM

"Again, ignoring the fact that Wells is already rolling out adjustment plans, isn't it possible that the market might rebound by 14 and 15?"

So somehow people who weren't even able to make IO payments before are automagically going to be able to pay principal now? And not only that, but they'll be able to pay more principal than they started with because they had a negative amortizing loan?

Maybe if you make the assumption that housing prices will go up as they did between 2003 and 2007 (or whatever) between 2011 and 2015, these people will be able to pay off the principal by selling, but it doesn't seem plausible for them to make ongoing mortgage payments after a recast without a severe infusion of cash or a big increase in household income, both of which seem unlikely.

Certainly Wells Fargo's principal reductions will help, but assuming that $46K is 15% of a zero-down mortgage, that implies $307K in principal. If we're talking about houses that were bought for $307K, they might still be underwater with a 15% reduction.

Posted by: sfrenegade at December 10, 2009 1:10 PM

EBGuy -- I saw that article too. That's why I'm a lot less confident that loan modifications will be effective than anonn seems to be.

Posted by: sfrenegade at December 10, 2009 1:13 PM

You're essentially saying that you're a housing bear. I agree. You're a housing bear.

Posted by: anonn at December 10, 2009 1:17 PM

Amonn is just using his characteristic strawman arguments: "Fourteen and 15 now, eh? This site is probably rife with bears arguing tsunami via links to charts showing resets in 08, 09, 10, 11 and even 12. Now it's 14 and 15."

I'll spell it out for you anonn. NOBODY said that the recast problem doesn't get big until 2014/15. Many lenders peddled these products with recasts that hit long before then. It was just WF/Wachovia who had such a long period before recast. That came to light about 9 months ago. So this hits long before 2014/15, but WF's part of it means that the problem will take years longer than previously thought to finally wash out of the system, prolonging the downturn.

Posted by: anon at December 10, 2009 1:17 PM

Because I don't understand why you're arguing future recast. Why isn't the present, where banks are taking steps to prevent recast right now, in your reasoning?

Why is everyone selling in six years? Why is everyone not paying their reduced IO? Why is everybody making less money?

Every factor you argue needs to be reduced by a multiplier. Let alone what the local real estate market is doing. Some regions never even really saw much of a spike in the first place.

The idea that each and every one will hit a time limit and be unable to sell -- even during a given year -- isn't grounded in reality.

Posted by: anonn at December 10, 2009 1:24 PM

anonn: I have loans with several institutions (on different properties.) I do have one mortgage which is with Wachovia (they're still operating as Wachovia at this point, though obviously they're s subsidiary of Wells.) But I can't imagine they'd modify my loan given that I'm current and nowhere near underwater, lots of equity in the property. If I have trouble paying -- which is getting close to being the case -- they could foreclose and easily recoup the full amount.

So what incentive would they have to offer me squat? Btw, I'm not saying that I deserve some sort of bailout, just that those of us who have been responsible and not leveraged ourselves to the hilt get punished -- we have to go on paying our bills while the irresponsible folks get big chunks of theirs cancelled. At our expense, yet.

Posted by: Dave at December 10, 2009 1:29 PM

May I please have an answer as to whether you are in "the bottom is in" camp?

Thanks.

Posted by: Debtpocalypse at December 10, 2009 1:29 PM

I'm so happy I don't suffer from 'netspeak. "Straw man" this, nazi that, ad hominem this, blah blah. It's all often such a toolish cop out. There's no straw man argument. Six years off is six years off, and a lot can happen in between. True or false?

Posted by: anonn at December 10, 2009 1:32 PM

"Why isn't the present, where banks are taking steps to prevent recast right now, in your reasoning?"

I think I explained that above in response to you and EBGuy. The loan modifications don't appear to be likely to succeed, and in fact stats show that most loan modifications fail.

"Some regions never even really saw much of a spike in the first place. "

I already accounted for this partially by pointing out what a typical loan value for a modified loan was. But note that a large percentage of Option ARMs from Wells were in bubble markets. Bubble markets were typically where Option ARMs were felt necessary. (and note that the guy in Orange County is still way underwater after a $100K principal reduction!)

Posted by: sfrenegade at December 10, 2009 1:33 PM

Did you ask me that question previously debtpocalypse? I honestly do not know. I'm building 20 percent market shifts into any numbers I put together for r.e. ventures right now. But then again I have always operated that way.

Posted by: anonn at December 10, 2009 1:36 PM

I think I explained that above in response to you and EBGuy. The loan modifications don't appear to be likely to succeed, and in fact stats show that most loan modifications fail

I read what you wrote and I don't think you made a persuasive argument. Now you're talking about most loan mods fail, and you have stats to prove it. I'd like to see those statistics. I think in practice it will look like a multiplier times a multiplier, resulting in a much smaller number than the critical mass argument you're trying to make.

I noticed the guy in Orange County said nothing about needing to sell, having a bad job situation, having a hard time making payments, or even planning to sell any time soon. Why extrapolate him?

Posted by: anonn at December 10, 2009 1:44 PM

You can also take your "bubble markets," factor that in actuality only so many transactions ever really occurred in a year's time. How many, really, does the bank need to be concerned about? Of those, only so many used ARMs. Then put a fine point on the market itself. Obviously certain parts of Orange County, LA County, Seattle and the Bay Area have retained value better than other parts of the country. Which of those used ARMs? How likely are the people who used them to face financial hardship in six years? Will the markets themselves rebound?

All of these things are multipliers. Whether or not you're bearish or bullish on housing, all of these factors are multipliers.

Posted by: anonn at December 10, 2009 1:49 PM

This is probably a stupid question, but I'll ask anyways. Rather than simply write down a loan balance, why don't banks simply split the loans into two with the "writedown" portion having its payments deferred until the sale of the property ? Sort of like an additional lien.

So instead of writing a $500K loan down to $450K, this could be split into a "normal" loan of $450K and a deferred loan of $50K. The homeloaner doesn't need to pay interest on the $50K until the sale of the home, so the effect on their monthly payment is the same as with an outright writedown. So the immediate stimulus aid effect is identical, but this isn't a complete giveaway.

When the home eventually sells, the bank has a chance to recoup their "writedown" deferred principal. Of course if appreciation isn't large enough to cover the deferred loan, the bank loses, but at least they would have a chance of recovering their writedown in the future.

The deferred loan could even be at 0% interest and the bank will have a much better long term revenue prospect.

This strategy seems to be much more in the interest of the bank's shareholders and the taxpayers who are the ultimate backstop.

What is wrong with this scheme ?

Posted by: The Milkshake of Despair at December 10, 2009 1:52 PM

It was on Calculated Risk today:

http://www.cnbc.com/id/34366352

Only a small percentage of people qualify. And only a small percentage of those people end up staying in the program by staying current on payments. There's your multiplier.

"I'm seeing big banks rolling out adjustment plans right now, and lots of people getting their rates and even pricipal adjusted. "

Oh really? The stats above don't say that.

In addition, re-defaults are extremely common. There are numerous articles on this, and here is but the first one on google:

http://www.usnews.com/money/blogs/the-home-front/2009/4/3/high-redefault-rates-obamas-loan-modification-nightmare.html

Again, a nice multiplier for you, since you seem to like that term.

Posted by: sfrenegade at December 10, 2009 2:02 PM

The Bay Area was a common place for Option ARMs:
http://bayarearealestatebubble.blogspot.com/2009/09/option-arm-loans-in-bay-area-ugly.html

Again, this is well-known. Also note that while you keep insisting that "multipliers" are somehow important, you're forgetting that the people who are forced into transactions are the ones that set the market. Small numbers have a large effect on the overall market because so few homes are sold from year to year. We've talked about this on SocketSite before.

Posted by: sfrenegade at December 10, 2009 2:08 PM

"What is wrong with this scheme ?"

Not that much wrong with it, but you have to figure out a way to do it. How big are the write-downs? Are the loans securitized or not? (then you need bondholder permission, and in many other cases, the banksters might want government guarantees) What happens if the homeowner wants to sell before the sale price covers the deferred portion? What happens if the homeowner redefaults?

I do think write-downs are what's necessary to get the lead out of the housing market. But banks don't seem to be willing to make them for fear that they'll go insolvent doing so.

Posted by: sfrenegade at December 10, 2009 2:13 PM

I'd ask you to reread the articles your linking to. You seem to think they provide a cut and dry "ah ha" sort of moment for some reason I'm not understanding.

Whether or not you have seen people getting their rates and principal adjusted or not, or whether the article that only talks about HAMP has "stats" that say what you think they say also isn't really what we were talking about.

Everybody knows that the Bay Area was a common place for option ARMs.

So let me get this straight. You think it's all about HAMP, and nothing else, right? That's where you're arguing from?

Your point is that the future Wachovia assets are also all going to be negotiated by HAMP, or not?

I don't get it. These banks are doing their own negotiating with borrowers too. You can choose to believe that, or not. I care little. Just no more HAMP articles "stats" showing little. Nobody even qualified for it the first time it was rolled out, and that's pretty much what your first article was all about.

Posted by: anonn at December 10, 2009 2:18 PM

Why are people still arguing about this? Most of these bad loans, whether directly or indirectly, are or will be owned/backstopped by the government. If some portfolio threatens to sink some bank, the Fed/Treasury will just buy it and write off the losses (read: send the bill to your kids). Or they take over the whole bank with the same outcome.

Think they're really going to foreclose on people en masse? Or let large banks fail? Seriously?

The recast problem will be a non-issue, and not because anonn was "right" but because nobody correctly predicted the scope of the bailout(s). Somebody the other day posted that the government would own 25% of the real estate in this country in a few years (I'm paraphrasing but close). May not be that crazy of a prediction after all.

As I've said before, the sky never falls so long as we can borrow more sky. You guys need to stop looking at real estate and mortgage finance like rational, independently functioning markets - those died last fall.

Posted by: Legacy Dude at December 10, 2009 2:19 PM

But banks don't seem to be willing to make them for fear that they'll go insolvent doing so

Sorry, but you're making this up. Banks are doing write downs and interest rate reductions currently.

Posted by: anonn at December 10, 2009 2:20 PM

The recast problem will be a non-issue, and not because anonn was "right"

See, that's where you're wrong. This is all going down precisely because I said it would on an internet blog!

Ha. No, but if saying, "The banks and government are not going to allow the same thing to happen with sub prime to happen with ARMs" isn't calling it, then OK, I never said it.

Posted by: anonn at December 10, 2009 2:23 PM

"So let me get this straight. You think it's all about HAMP, and nothing else, right? That's where you're arguing from?"

Umm, no, and that's not what I said. Re-read and try again. Or don't and be non-responsive, like the first time.

But also, show us proof that banks are affirmatively making non-HAMP loan mods, other than just saying it, if you're going to make the claim.

Sadly, Legacy Dude might have a point, but not because anonn's predictions are actually right, but because of government stimulus.

Posted by: sfrenegade at December 10, 2009 2:36 PM

Buddy, the Bloomberg article atop the thread we're communicating within is showing just that!

Choose to believe that banks aren't doing non HAMP write downs, loan mods, and interest rate changes. It matters little that you don't care to understand that reality.

"Show us" ? Huh? You're pretty much by your lonesome here.

What's your deal? Seriously? Pretty much everybody knows that this is going on. Every homeowner who has an ARM is getting phone calls right now! Do you listen to AM radio ever? Wow.

Posted by: anonn at December 10, 2009 2:44 PM

Again, that's non-responsive. The article above is only about Option ARMs. You're suggesting that other underwater people are able to get loan modifications?

It's becoming more and more clear that you have nothing substantive to say, and most of your replies are basically "you're wrong, even though I have no justification." And no, I don't listen to AM radio. I'm done with you because you really don't seem to know very much.

Posted by: sfrenegade at December 10, 2009 2:47 PM

Were we talking about something other than option ARMs this entire time? If so, when? What do you suppose reset tsunami is all about, then?

I have nothing substative to say?

That's rich.

You're sitting there saying that you're not willing to believe that non HAMP loan mods are happening. And now you're trying to attack me for some reason. Enough already. You don't know what's going on and you want to talk to other like minded people. I get it.

Posted by: anonn at December 10, 2009 2:54 PM

"Are the loans securitized or not? (then you need bondholder permission, and in many other cases, the banksters might want government guarantees) What happens if the homeowner wants to sell before the sale price covers the deferred portion? What happens if the homeowner redefaults?"

I'd think that the bondholder would be happy to participate in this split loan program given that the alternative is to simply lose the writedown amount. If the homeowner sells before appreciation covers the deferred portion then we are no worse off than the current "immediate writedown" program.

My proposal certainly is not perfect, but would be better than straight up giveaways. The scenario that bugs me is :

2006 : homeowner gets loan for $500K
2009 : homeowner receives a $50K writedown
2019 : homeowner sells home at a $100K profit

I think that at least $50K of that $100K profit ought to go back to the lender.

Posted by: The Milkshake of Despair at December 10, 2009 3:22 PM

FWIW, my sister had a 5 year IO ARM with Wells that was set to recast last May. I went in with her: her balance was ~$15K away from the $417K conforming loan level. I asked the loan officer, "So, if this recasts, my sister is going to hand you back the keys. If I write a check for $14,999 to qualify for a conforming loan, will Wells write down $1 of principal?" He said, "No." She was current, which was probably part of the problem. At least she now has a 30-year fixed loan she can afford (thanks to familial capital infusion): it was important from my perspective to take the interest rate risk she was running off the table for a house she plans to occupy for 10 years.

Of course, it appears that she should have gone delinquent to curry eventual favor with the bank... which is a measure of how ridiculous everything's become. It would further appear that her recast came a few months prior to Wells relaxing their willingness to write down principal

Anonn, thanks for your answer.

Posted by: Debtpocalypse at December 10, 2009 3:29 PM

Honestly, what I'm hearing is that it's no longer necessary to intentionally miss a few months of mortgage payments in order to get on their radar. The banks are much more receptive now. Here's an example. It's readily searchable. You can Google "Countrywide underwriting errors" + "Bank of America" + ARM + "mortgage modification" (or some permutation along those lines) and get an idea of one very big California story that's taking place right now. One that has nothing to do with HAMP.

Posted by: anonn at December 10, 2009 3:39 PM

MS, The scenario that Wells Fargo is trying to avoid :

2006 : homeowner gets loan for $500K
2009 : homeowner receives no writedown
2010 : homeowner ruthlessly defaults
2011 : Wells sells home for $400K (minus at least another $30k for transaction and holding costs)

Posted by: EBGuy at December 10, 2009 3:40 PM

EBGuy - Why would the homeowner ruthlessly default in 2010 under my proposal ? The monthly payments are identical to the straight up writedown.

Are you saying just knowing that the bank wants a bite of the future sale appreciation is enough motivation to ruthlessly default ?

Posted by: The Milkshake of Despair at December 10, 2009 4:00 PM

Shake, this idea was brought up by many economists a while ago. I think Hussman articulated it first/best in what he called PARs, or Property Appreciation Rights. Here's an index of his writings on the topic, which began last fall:

http://search.freefind.com/find.html?id=46186163&pageid=r&mode=ALL&n=0&query=property+appreciation+rights

There'd be several minor problems with the concept, IMO, in terms of administration and logistics, etc. But that's small stuff. The biggest reason why it'd never work? Because nobody gets bailed out.

If you ding people for the reduction upon exit, they'd likely default anyway now. Easier to get your credit ruined and rent for less, then start over in a few years. Heaven forbid we hold anybody accountable for bad financial decisions...they might not be as stupid next time.

Posted by: Legacy Dude at December 10, 2009 4:58 PM

Why would the homeowner ruthlessly default in 2010 under my proposal ?
Because they are $100k+ underwater and could rent an equivalent home/condo for much less than they are currently paying for (P)ITI. The banks, by splitting the difference with the homeowner, are taking the calculated risk that the owner will be persuaded to keep making payments. I believe your idea was more prevalent a year or two ago; I think that train has left the station given the current deterioration of the market.

Posted by: EBGuy at December 10, 2009 5:01 PM

Thanks for the explanation EBguy and Dude. This makes sense, but still doesn't make me feel good about how the government subsidies are being doled our fairly.

Posted by: The Milkshake of Despair at December 10, 2009 6:01 PM

still doesn't make me feel good about how the government subsidies are being doled out fairly.
No government subsidy that I know of (that's what annon has been going on about); this is Wells looking into their crystal ball and getting religion. No taxpayers were harmed in this transaction (at least until Danny Annan walks and the Fed buys some more MBSes... or TARPII).

Posted by: EBGuy at December 10, 2009 6:10 PM

The re-default rate on Option ARM modifications is pretty high:

http://www.calculatedriskblog.com/2009/09/fitch-on-option-arm-recasts.html

As of September '09:
"To date, 3.5% of the approximately one million 2004-2007 vintage securitized Option ARM loans have been modified, in an attempt to mitigate effects from the payment shock. Modification types have included term extension, conversion to interest only loans, interest rate cuts, and others. These modifications have been somewhat successful, with 24% of modified Option ARM loans being 90+ days delinquent, compared with 37% of the overall Option ARM universe. However ... Fitch expects a high default percentage for modified Option ARM loans."

I'm not really sure why anyone would consider these modification programs to be successful. A large number of people will certainly re-default.

Posted by: JimBobJones at December 10, 2009 6:19 PM

Twenty four percent of 35,000 is 8400. How many of those 8400 first wave HAMP guinea pigs had their "modifications" set to higher payments? The first iteration of HAMP was a mess. I feel like a teacher grading term papers. Look what this thread is about, then explain how your link is applicable.

Posted by: anonn at December 10, 2009 6:27 PM

Who said the modifications were under HAMP?

Do you see any references to HAMP in the referenced article:
http://www.businesswire.com/portal/site/google/?ndmViewId=news_view&newsId=20090908006052&newsLang=en

In any case, unmodified Option ARM loans far outweigh modified ones, and they were 37% delinquent as of September, so the number is probably higher now.

Posted by: JimBobJones at December 10, 2009 6:34 PM

The last part of the article, which is what you quoted, didn't say HAMP. But that's what it was. The numbers are mirrored the other article. http://www.cnbc.com/id/34366352
And besides, your link specifically says that it is not talking about Wells Fargo product, which is what this thread is about.

I agree that 37% of 1M in September is a lot. Again, tho, the banks are now addressing these issues more directly. I wonder what percentage of that group was intentionally delinquent, hoping to trigger the banks to act? That was the second set of rules, after HAMP. We're now on loan mod 3.0 believe it or not.

Posted by: anonn at December 10, 2009 6:43 PM

I don't see any numbers mirrored in the CNBC article -- care to be more specific? The CNBC article refers to 3 million loans that were part of HAMP. The links I sent and the links in the Calculated Risk article refer to 1 million Option ARM loans with no mention of HAMP.

Posted by: JimBobJones at December 10, 2009 6:54 PM

And actually, calculated risk doesn't even know what it's using the quote for, or what it is. They say so, with this coda, "This is a somewhat confusing press release. The recasts will probably lead to higher defaults, but negative equity is the real problem."

Posted by: anonn at December 10, 2009 6:55 PM

Did you read any of the articles you're linking to, or skim them? Be honest? Six stanzas down. They get to the 1M figure, which was derived post vetting. This is all the same Fitch source material, man. You and fronzigade are just throwing up links, and they aren't even apropos. Again, this thread is talking about Wells product anyway. Fitch specifically says he's not talking about that in your first link.

Posted by: anonn at December 10, 2009 7:02 PM

I'm calling shenanigans. There are no items mirrored -- please provide exact quotes of where the data are the same. The overall universe of Option ARMs is highly relevant to the discussion in this thread of whether or not you seem to think there will or will not be an "Option ARM tsunami." Since when does HAMP only apply to Option ARM loans?

It seems like you are just throwing up irrelevant noise to obscure real points.

Posted by: JimBobJones at December 10, 2009 7:09 PM

Are ya? Are ya calling shenanigans after I called shenanigans? Do you know how press releases work? What is that you find so clear cut, when the writers don't, particularly?

Again with the HAMP to option ARMs thing. When weren't we talking about option ARMs? You guys keep wanting to talk about HAMP.

Posted by: anonn at December 10, 2009 7:23 PM

I've made dozens of real points. You and fronzi have linked to articles you didn't even read.

Posted by: anonn at December 10, 2009 7:24 PM

I'm not talking about HAMP. You are.

None of the links I gave reference HAMP, and none of the stats mirror HAMP stats. Okay?

Posted by: JimBobJones at December 10, 2009 7:40 PM

No, not OK. The bottom of your first link was talking about HAMP. You might not think you're talking about HAMP, but you are. It's the same source material. The cnbc one just looked at it a little bit differently. What are you concluding from these stories anyway? The authors of the blogs are ending them with words of not unclear confusion. And I clearly showed you 8400 is the actual number. You understood that. I went on to ask what part of the remaining 37% intentionally didn't pay, in order to trigger action. I don't think you understood that.

Posted by: anonn at December 10, 2009 7:55 PM

I'm curious: have any bears with savings caved in yet? How long are you willing to wait?

Haven't caved yet. I'm willing to wait until my husband and I both feel relatively secure in our jobs. If San Francisco never calms down, we may consider moving to a lower-cost city.

Posted by: RenterAgain at December 10, 2009 8:01 PM

What a long strange trip it's been. A couple of years ago we were told that everyone was rich and could easily pay their loans and now we are told that the SF market will be saved by cheap government loans, and loan mods to keep people who can't pay in their homes.

"I'm seeing big banks rolling out adjustment plans right now,"

There are no banks. Not in the sense of independent free-market entities attempting to loan out money for profit. There are no private entities making loans unless the government insures them against loss or the borrower puts a substantial down-payment into a first loss position. The "banks" are just a front for the government. Our financial system is now a government run Potemkin village.

Our dear friend Satch got it right. Since the government was already on the hook for all losses through FDIC, the GSEs, PBGC, etc. once the equity in the financial system evaporated the game became keeping the debt serfs paying as long as possible. For the moment, anyone who balks gets a loan mod. Why not? Keep them paying whatever they can and delay realizing the losses for as long as possible.

"Many would think that a possible r.e. recovery nationwide could even occur within six years time, I'd guess."

Indeed, indeed. Many things are possible. It's even possible that our Potemkin financial system will be able to keep the bubble inflated until wage inflation gets us back to the point that these values can be sustained by normal 30yr amortizing loans. But that wage inflation would have to be matched by a collapse in the dollar to keep us competitive with out trading partners. So eventually our masters will have to throw either the dollar or the housing market under the bus. Which will it be? As Willie Wonka would say, "The suspense is killing me. I hope it lasts."

"I want my loan cut by 20-30%! Why should only the irresponsible and the deadbeats get the prizes?"

It's like a game of Whack-a-Mole. Every time they do something to keep the market away from its natural equilibrium it has an unintended consequence. Give people mods to keep them in their home? Suddenly everyone wants a mod. What chump is going to keep on slaving away to pay their mortgage when everyone else is being let off the hook.

Extend and Pretend. That's going to be our future for a while. Maybe they'll even be able to "fake it till they make it" but I still doubt it.

Posted by: diemos at December 10, 2009 11:49 PM

"It's the same source material."

Yes, because clearly a report from 3 months ago and a report from this week must be based on the same source material, even though you can't prove it. Nice try to obfuscate the real issues, as you often do around here.

Posted by: JimBobJones at December 11, 2009 8:18 AM

Agree with you diemos. It's sort of the same illusion we went through during the boom. All of these extraordinary measures will fail -- subsidizing interest rates, moratoria on foreclosures, remodifications, etc. Reinflating the bubble is not the answer.

Posted by: JimBobJones at December 11, 2009 8:25 AM

You have a funny way of terming obfuscation, considering most people find accusations pointed and clear. On the other hand your Fitch quote is obfuscation to a tee. The blogger doesn't even find meaning in it, yet you tried to pass it off as somehow telling. Superfluous links are obfuscation. Maybe you'll read the items you link to in the future. You're welcome.

Posted by: anonn at December 11, 2009 8:28 AM

Nice summary diemos. Yes, the master plan is as Satchel used to say to get people to channel their productive energy towards nonperforming assets as long as possible.

As time goes on I think that what Ex-SFer predicted years ago will come into play : prices will stay flat or even slightly up, but real values will continue to decline due to inflation. Most people have a hard time imagining the effects of inflation, but are comforted by the fact that their home's "value" which is how they perceive the home's price does not "decline". It is economic magic that produces an emotional comfort keeping people in their homes and brings in more "investors" despite the reality of declining values.

I'm in almost exactly the same boat as renterAgain. Prices have already gone well below my trip points, but that is countered by instability in the job market. Even if I was sure that prices would rise, it would be imprudent to increase my RE exposure now. I'm hoping for an inflection point where the job market (in my case affected by global wage arbitration as much as the economy) stabilizes before inflation really kicks in.

Posted by: The Milkshake of Despair at December 11, 2009 10:52 AM

I think it's late to chime in on this, but I'm with anonn, we had all kind of talk on this site that '12 was the option arm tsunami. I haven't heard '14-'15 before either. I thought most Arms were 5 year until reset. That would mean the big problem will be with this years new ARM loans.

My option ARM is at 2.9% and the full payment is lower than my original minimum payment.

Posted by: sparky-b at December 11, 2009 11:15 AM

"I'm curious: have any bears with savings caved in yet? How long are you willing to wait?"

I have not caved in yet and bought. It is still cheaper for me to rent than to buy, and until it that changes, I will wait it out.

Posted by: SF renter waiting to buy at December 11, 2009 11:31 AM

Honestly, what I'm hearing is that it's no longer necessary to intentionally miss a few months of mortgage payments in order to get on their radar. The banks are much more receptive now. Here's an example.

How is this going to work? If it's so easy to get a modification, then sooner or later almost everyone will be getting one - even those who can actually afford their payments. Who doesn't show up when you start handing out free money with little or no restrictions? Obviously that will not be sustainable.

If the standards are much tighter for granting modifications, then such a plan may be sustainable. But then the number of modifications granted will necessarily be much smaller, and there will be more foreclosures.

Posted by: anonm at December 11, 2009 4:00 PM

It's very easy to do an internet search for a loan mod outfit. Ask them to send you data about what they've been able to accomplish over very recent history. Ask about their criteria. The competition is pretty thick I gather, so they're happy to accommodate if they think you're a potential client. I did. I wanted to see what this is about because I keep getting soliciting phone calls, emails, and the ads are all over the radio. I have an email of about 20 recent loan mod cases. Some are pretty amazing. Try it.

I wouldn't call it "so easy." But it's easier than it was. It isn't particularly cheap, I'm gathering. They've all got several letters from law firms applying to various loans. They know all the loans people are in. And they tailor your package accordingly. If you have too much equity they won't help you. If you've got too much money they probably won't help you. But if you're underwater and you're looking like your rate is too much, or will shortly become too much for you to afford, and you have a job, the thinking is that they'd rather keep you in the property than ultimately deal with it as an REO.

Posted by: anonn at December 11, 2009 6:20 PM

But if you're underwater and you're looking like your rate is too much, or will shortly become too much for you to afford, and you have a job, the thinking is that they'd rather keep you in the property than ultimately deal with it as an REO.

That's a lot of ifs, ands, and buts. I agree, however, that they are only going to want to do any mods at all on places that are clearly underwater (otherwise it makes no sense from their perspective). In other words, modifications can only start to "save" a given market if that market has already seen substantial price declines. Go figure.

Posted by: anonm at December 13, 2009 12:27 PM

Well, yeah. Except in the case of option ARMs with pick a pay. The value of the house could have remained static, or even had a gain, but the borrower could have tacken an additional however much onto the back of the note. It'd be underwater regardless of a market shift.

Posted by: anonn at December 13, 2009 5:33 PM

Well, yeah. Except in the case of option ARMs with pick a pay. The value of the house could have remained static, or even had a gain, but the borrower could have tacken an additional however much onto the back of the note. It'd be underwater regardless of a market shift.

Fortunately we've been assured that very few in the Bay Area (or at least the better parts of the Bay Area) have been doing that.

Realistically, if someone has been making minimum payments and building negative equity, it is unlikely that even a 15% write down of principal will induce/allow them to continue holding the property after recast. Especially in a flat or declining market.

Remember, the pick-a-pay guys who are in trouble (ie most of them) are ones that bought well beyond their means. You don't do that because you want to spend the next 15 years pouring most of your disposable income into mortgage payments. You do it because you expect healthy appreciation, either allowing you to sell at a nice profit or to withdraw equity through a HELOC. And historically that has been the case. Once you're in a flat or declining market it no longer makes sense to hold the property. It's going to be hard to induce a lot of these people to stay, even with principal write downs averaging $46,000 (which honestly may only get some of them back to 100% of the original loan balance).

Posted by: anonm at December 14, 2009 10:27 AM

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