Banks are reasonably eager to refinance certain kinds of mortgages — what they lose in interest, they make up in fees and other compensation. But the banks are not keen on refinancing a lot of the mortgages that the government would like to see refinanced: those for “underwater” borrowers, who owe more on their houses than their houses are worth.
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Think of it from the lender’s point of view: A loan on a house that exceeds the value of the house is an inherently risky loan. In effect, the banks already have made a bad bet: They’ve got (for example) $250,000 hanging out there for $200,000 in post-crash house. Banks aren’t going to be inclined to reduce the risk premium on upside-down mortgages. But even with that risk, the bank would rather have a performing $250,000 mortgage on its books than a $200,000 house that it might have a hard time selling if it is foreclosed on, which has to be maintained and insured, and which generates no income between the foreclosure and the sale. So the risk of default ought to encourage many banks to refinance borderline cases: A $250,000 mortgage at 4.5 percent is not as valuable an asset as a $250,000 mortgage at 6 percent, but it’s still a more valuable asset than that $200,000 house. But most banks have fairly low foreclosure risks: Those mortgages are mostly insured, often by the government, and those insurance premiums already have gone out the door. Most people don’t want to default, even though it is easy to do so, so the lenders have a pretty good reason to think they’ll win if it comes to a game of mortgage chicken with people who are current on their payments.
There is a way to get banks to agree to a haircut on those mortgage refis: Taxpayers take the haircut for them.
Because the federal government more or less owns Fannie Mae and Freddie Mac, the Obama administration very probably could agree to have those firms bear most of the refinancing losses — all without ever going to Congress or offering any transparency in the finances. And that is what is under consideration: another bailout, courtesy of the U.S. Treasury and the taxpayers laboring in its shadow.
How much good would a refi do for these underwater households? To take our $250,000 example (the median price of a new home hit a peak of $262,600 in March 2007), probably not that much. Lending Tree’s mortgage calculator estimates the difference between a $250,000 mortgage at 6 percent and one at 4.5 percent to be $232 a month. Modifications under other government mortgage-relief programs have similarly run a few hundred bucks a month, and have served far fewer borrowers than their planners had estimated. The old rule of thumb was that the upper limit of a mortgage ought to be 2.5 times income, so a $250,000 mortgage ought to imply a $100,000 household income. (I know, I know, everybody ignored the rules, borrowers above all.) While $232 a month is not nothing, it’s probably not the difference between solvency and insolvency for a $100,000-a-year household. It is true that in the age of Obama, there are a lot of households that used to earn $100,000 a year and now do not (not to mention the curious case of the missing millionaires), but $232 a month is probably not going to be a sufficient lifeline for nouveaux pauvres, either. And if it were, wouldn’t it be simpler to send them checks for $232 than to have the corrupt and bloated beasts known as Fannie Mae and Freddie Mac burrow deeper into the mortgage business, when we ought to be extricating them from it? But a straightforward bailout probably would require passing a law, going to Congress, letting the people’s elected, accountable representatives have a say in things, disclosing who got what on what terms, etc. — not Obama’s style.
Most of the impetus of our national monkey-with-mortgages agenda has been delaying foreclosures and propping up housing prices — along with transferring risk and losses from private parties to the general public. Pushing down mortgage-interest rates encourages higher prices: Borrowers don’t pay as much attention to the real price as they do to their monthly payment. But if we really want to stabilize the housing market, we should be doing the opposite: speeding up foreclosures and letting prices fall until they find buyers who want them and can afford them. That’s the only way to let normalcy return to the housing market. The Cato Institute’s Mark Calabria points out that Bank of America alone has 200,000 mortgage borrowers who haven’t made a payment in two years. Extrapolating B of A to the market as a whole, he estimates that (very roughly) 400,000 to 500,000 borrowers haven’t made a mortgage payment in two years or more. The chance of a borrower’s getting caught up on 24 months or more of back payments is slender.
Those refinances would put a few bucks into the pockets of people pressed for money, which the neo-Keynesians at the White House love (stimulus!). But there are two sides to a loan, and those homeowners’ gain must be somebody else’s loss. It probably won’t be the banks. It’ll be the suckers who in their majority voted for hope and change in 2008.
— Kevin D. Williamson is a deputy managing editor of National Review.
Nationally, there are still tens of thousands of foreclosures per month. But even though the rate is much less than a year ago, it's because of delays in foreclosure and the banks' reluctance to take on properties in areas with a glut of foreclosures. External Link
So all the government can do is either delay all of this more, like pulling the bandaid off very slowly, or just get out of the way let its free citizens do what they do best and sort out their own affairs.
That said, it will be a slow process whether or not the government tries to "help", because the huge number prior foreclosures make more foreclosures unattractive, even to banks. We're talking several more years, not months.
We used to pass laws, with actual rules and restrictions. Now, unelected officials to make rules and restrictions with the power of law. Hope and change truly is everything some of us expected it to be.
Agreed. It's the administration trying to look like it's "doing something" when there will be no real results of this policy. Home prices need to fall in order to begin climbing again.
This really chaps my hide. It is another bailout for banks. I can see helping responsible homeowners in a bind but not everyone underwater. We bought responsibly, less home than the banks said we could afford. As a result, we not only would have no problem paying our mortgage for two years if hubby lost his job, but our current home that we purchased in 2003 is worth 30% more than we paid for it. Plus we refied and owe only 14 years. Why should the responsible pay for house flippers and speculators and those who purchased way more house than they can afford? I am NOT talking about those who have lost their jobs in the Obamapression merely about those who were not responsible. I am tired of being taxed to death and yet not able to access any help for my autistic son because we 'make too much' and not being able to dedcut his college expenses for the same reason. Enough with the bailouts. We are trying to save enough so that our son will never have to rely on the government if the government will allow us to keep some of what we have EARNED.
One other point to remember: The trashing banks took for processing foreclosures too quickly because of the sheer numbers. No doubt many have slowed the process down to ensure compliance (and avoid bad PR) which is certainly exacerbating the problem.
It sure looks like this proposal is just about the same thing as the Freddie, Fannie, Community Investment Act shenanigans that caused this whole economic mess in the first place.
Insanity is doing the same thing over and over again and expecting a different result.
Kevin, I don't have an issue with your take on the plan, just on your thoughts on $232.
Most normal Americans would be gaga over anything that reduces their monthly expenses by $232. You must be loaded because that would help my family a ton and we earn 120K/year. And your comment about "just send them a check" is kinda silly since that check needs to come every month for 30 years. Is that what you're suggesting?....because it's 84K.
I'm not trying to get personal, but anyone who has their income adjusted 2.3% and it helps "a ton", especially at 6 figures, is living way too close to the edge. I think a wiser way would be to live so that a 10,20, or 30% decrease wouldn't mean a family collapse. Most people who can do this, don't.
Merits, you are absolutely correct. We don't even earn $120K and $232 would be nice for extras, but it would not help us "a ton". We are able to put about $250 a month away in savings outside of our IRA's. Way too many people used their homes as ATM's when the prices were going up and are now paying the piper. Homes are not investments, they are expenses (very large expenses) and should be treated differently from a stock portfolio.
If the banks were allowed to do a commercial transaction, unfettered by silly regulations, they might be able to save some people (particularly those who are unemployed as compared to "over-housed"). Why not let the bank come to an agreement with the borrower to adjust the maturity of the loans (to reduce monthly payments) and, as one example, have a profit splitting arrangement for the proceeds in excess of some agreed amount when the property is sold?
For those who say the banks will take advantage of the borrower I'd revert: (i) hire a lawyer to help and, (ii) does that risk outweigh loosing the house?
In any event, no more subsidies paid for by the rest of us who play by the rules. People who do stupid or risky things should not be sheltered.
We attempted to refi our primary mortgage via the Home Affordable and Stability Plan (HASP) in 2009, but couldn't because of a HELOC on the same property. The lender of the HELOC wasn't willing to maintain their subordinate (2nd) position unless we first paid off about half of the HELOC balance, which just wasn't doable for us, so the refi fell through - leaving the HELOC lender in the same position (2nd) that they would've been in had they allowed us to refinance the primary.
I'm not saying that I'm in favor of a government program - nobody put a gun to our head to take out a HELOC or the original mortgage for that matter. That's why we've been living the life of misers (sorry, consumer-driven economy!) as we send all available cash to pay off our mortgage early and get out from under the thumb of the banks.
The further shenanigans of this administration conjure up the famous Rick Santelli rant that started(IMHO) the tea party uprising. "Who, here, wants to pay your neighbor's mortgage?" This latest scheme would throw another log on the tea party fire
As an attorney who does a fair amount of foreclosures on behalf of loan servicers, my experience has been that the people who have jobs and can afford to refi or qualify for loan modifications have done so. What we are left with is a ton of loans that are one or two or even three years delinquent and the State government is doing everything it can to make it as difficult, expensive and time consuming to foreclose. This helps no one except the cynical politicians who can beat their chests and say they are doing something for the voters. We absolutely have to get through these foreclosures and flush out all the bad paper. Dragging this out is just prolonging the agony in the housing market.
I generally sympathize with all the posters who urge free market positions regarding the mortgage debacle caused by the previous over-leveraged and preposterous market bubble and unrealistic loan qualifications encouraged by years of government interference with the market.
However, from my own bitter experience, I can honestly say that there are many people like me and my family whose position, due to the general economy and housing deflation, is rather hopeless, with no real honorable solution available to us short of financial suicide. I don't pretend to know what, if any, solution might both help people like me and also not further encumber the economy and housing market, but I'd sure like to find one.
In 2007, I lost my job (had to close my very small 25 year old, formerly successful company, actually) and was buried in debt from being personally responsible for some large business loans I had taken out, expecting a typical rebound as had happened in years past, in a desperate attempt to keep my people working and doors open, that had become virtually un-payable due to the then ongoing depression in the auto supply sector in the Detroit area. Already having moved to a smaller and less expensive home some years before to get a handle on our expenses and pare them to a reasonable minimum, we were merely glad that we were at least not "under water" at the time. We started to use up our very prudently put-away retirement savings to partially make up for our own deficit formed by the difference between our lower expenses and my much, much smaller earnings, along with my wife's limited income from her current two jobs. Four years later, and still not fully employable in any area for which I am qualified and experienced, due to the pathetic economy and my advanced age, which would yield more than my present small income, and just now making a small comeback in freelancing my services, we face a personal Hobson's choice of a dishonorable and credit wrecking foreclosure now, retaining some small fraction of our former savings, or spending all of our saved retirement and most likely still having to eventually foreclose. Our house, which as recently as three years ago was still worth about 20% more than we owed on the mortgage, is now worth, at most, about 60% of what we owe, and that is only the theory put forth by the tax assessor, despite living in a very lovely, older, well kept and established neighborhood inhabited by very conscientious upper middle class citizens in one of the very best school districts in the state. We would probably have to wait years, if ever, to sell our house at even the tax assessed value represented by that 60% of our mortgage debt. We will clearly run out of savings before any true evaluation rise catches up to our debt. Only an immediate and very sharp rise in economic fortune, either on a personal micro or national macro level, or both, will do much to reverse what seems to be my inevitable fate as of now. And, with the current government in place, this seems as likely as Paul Krugman's call for space aliens to attack the earth to be answered next week.
The only reason I am revealing so much about my own situation is that there are probably many other people like me caught in the same vice of real estate deflation who can't really afford to either sell and move or stay where they are - a terrible situation that they arrived at through either no or little fault of their own. Yes, I myself could have made better decisions and avoided some of my current circumstances, but not by much, and I don't think many other Americans could have done much better in the same circumstances.
So, to all you people so quick to dismiss the difficulties faced by those who are in situations similar to mine and merely call for letting the market fall where it may with what you may see as merely a good dose of "financial castor oil" for those unfortunates on the wrong end of the market, I say that things are much more complicated than you might think; perhaps there needs to be some other limited action as well to reestablish some equilibrium in the market as it applies in some situations. What exactly that might be, I must anxiously leave to the formulations of others with more knowledge than I have.
Thank you for your moving story (which I read with great interest, as I share with you many of your background details - longtime small business owner, history of repeated periods of foregoing my own salary and other compensations in order to make payroll and bank payments in downtimes - although some other background details had fortunately discouraged me from taking on anymore debt after 1999, and encouraged me to start aggressively paying down debt at the same time. I was in this instance lucky, but some of my own friends have had similar misfortunes to those you find yourself in the midst of.
There is nothing fair about the situation you find yourself in, and I think all decent people will truly sympathize and know that it could ' have happened/still could happen' to most of us.
But the fact of the matter is that your situation is (most likely) toast, and philosophically or ethically speaking, why is it someone else's duty to step in and risk their own family scenarios by taking on some of your misfortune and burden (If you were in a cash business, and had been on your way to the bank to deposit $50,000 in receipts, got mugged and robbed of the $50,000 cash, why would my neighbor or my cousin in California or my friend in Texas or my 2nd grade teacher in Seattle have a moral or any other obligation to pay for part of your reimbursement?)?
The government of the US, through its immoral and illegitimate fiscal policies of the last 45 years - most in the name of 'fairness' - has criminally endangered or burdened ALL of its citizens. Asking them to continue that course of action only further endangers 'us all.' This has always been a harsh/cruel world, and always will be. You say "we face a personal Hobson's choice of a dishonorable and credit wrecking foreclosure now" ... I disagree. There's no dishonor, based upon the circumstances you describe, to do what you have to do to take care of your family and pursue your future prospects, but are you willing to give up something you love (your house) to accomplish those things? Don't ask some anonymous someone else to give up something of theirs when you're not willing to give up something of yours.
Walk away from your house and start a new chapter. Easier said than done, but so what? Do it anyway - don't let the bas t ards win. They've already helped make you a victim - don't let them make you part of the ongoing problem.
There are two problems with a rush of foreclosures:
First, prices would be reduced, putting more people under water, and thus leading to more foreclosures.
Second, the condition of banks would be clarified, leading to more bailouts to preserve them.
This solution to the problem creates a new problem which might be more costly than the existing problem.
The solutions proposed involving government actions appear unlikely to be helpful. Likely the best answer is slower progress of foreclosures, allowing a barely acceptable market to continue for years to come. At least in some areas, home ownership is an unpromising choice.
Good article Mr. Williamson. The refi/modification scheme has failed to address the fundamental problem of home values that have been turned upside down. Unfortunately, the technocrats continue to overlook a simple answer: Chapter 13 Bankruptcy.
The cram down process is very simple: If a property is secured with a $350,000 loan but is only worth $200,000, the code breaks that loan into two pieces, a $200,000 secured debt and a $150,000 unsecured debt (which, when you think about it, is exactly what it is.) The 200,000 loan is treated as secured, the $150,000 is discharged with the rest of the unsecured debts.
Unfortunately, while the law allows cram downs on mortgages for investment properties, it does not allow it for mortgages on homesteads. Changing this, however, would only take adding a few words to the bankruptcy code. In fact, the process could be expanded to include Chapter 7 bankruptcies. Moreover, the entire process could be fully implemented in less than 24 hours as bankruptcy judges and attorneys around America already know the process.
The benefit is exactly what you're looking for and more: The banks balance sheets will be more accurate, but more importantly, homeowners will be more capable of staying in their homes (which benefits the homeowner, the bank, the neighborhood, and the rental market).
If everyone who could benefit from bankruptcy under this plan did so, banks would see a large portion of their assets disappear. The banks have been refusing to loan to prepare for large losses, but this would be an unanticipated disaster. Expect bailouts.
The people whose credit was ruined by bankruptcy would not be participating in the economy much for years.
Then, bankruptcy is not a good indication that mortgage payments would continue, even at a lower dollar amount monthly. A cramdown seems unlikely to reduce the chance of foreclosure.
So just as many people would likely have to leave their homes, and the bank would be accepting its foreclosure loss in two pieces, rather than one. The lack of control over recording the loss would be damage without compensation.
