The only way to get out of the housing crisis is to stop foreclosures. This will allow the inventory of homes to sell off and will remove the fear of additional price declines – caused by foreclosures. The government and loan industry must take a more serious approach to modifications, allowing more people to remain in their homes. No one in my family has a house which is upside down and the only benefit that I am going to receive by increased modifications is to protect and restore the value of my home, and to hopefully restore the construction industry – which was 20% of US GNP before the 2008 crash. To do this, loan investors must follow the following plan:
1) Determine the family income and apply a ratio like 31% as the base payment (principal, interest, taxes and insurance – “Target PITI”)
2) Modify the PITI payment until it reaches the Target PITI
a. first re-amortizing the loan over 40 years,
b. then start lowering the interest rate to some level like 2% per annum, and
c. then start lowering the amortizing principal balance of the loan toward the present fair market value of the home. The remaining principal balance would not be forgiven but no interest would accrue on it as long as the loan is not in default
3) If the Target PITI cannot be achieved, there may be no alternative to foreclsoure
Implementing this plan assumes willingness on the part of the ultimate investors. According to a December 2010 report of the Congressional Budget Office (http://www.cbo.gov/doc.cfm?index=12032) the treasury department is funding the guarantees of the GSEs (Fannie Mae and Freddie Mac) under the securitization agreements (mortgage backed securities etc) even though those guarantees were never intended to be backed by the full faith and credit of the US Government. Honoring these MBS guarantees eliminates any desire by the investors to cooperate with the modification of their loans. Of course, investors would rather receive the full payment instead of a portion of the payment, but investors would rather receive a portion of their payment instead of spending money on foreclosures in a rapidly declining market if they were not receiving the guaranteed payments. Everyone realizes at this point that the investor retaking possession of homes is not likely the best solutions for either the investor or the homeowner. Maybe homeowners/borrowers were to blame for borrowing more than they could afford. Maybe no one truly comprehended the long term implications of adjustable rate or interest only loans. But we are all affected by the realities of those decisions now. I never understood why a mortgage investor would be satisfied with no verification, no documentation, 100% financing loans even if the GSEs and Congress wanted to promote full housing. Who was really lying to whom? The investors were lying to themselves and should be ashamed of making those loans. I don’t care if bond rating agencies rated these products as AAA. The investors should have had a little common sense. My office in Orlando Florida closed thousands of these loans in the first decade of 2000, and at every closing I mumbled to myself, and often questioned the lenders and borrowers, how the loans could be made (or even received) based on obvious false information (liar loans). Shame on Wall Street, and shame on the GSEs.
Initially, maybe there was justification to support the securitized mortgage market by paying the GSE guarantees, but that train pulled away from the station a long time ago. Who, other than the Federal Reserve, would be stupid enough in today’s market to make loans without the guarantee of payments by the US Government? No one that’s who. Yes, the mortgage industry must be rebuilt and re-created, like was done after the Savings and Loan crisis in the early 90s. Banks have never been a source of mortgage lending and will never be. We need some other solution, like a new federally insured loan program, but there is no reason to bail-out GSE investors. Paying the GSE guarantees only stifles a resolution of the housing crisis.
Similarly, why are we depending on the loan servicing companies, like Bank of America and JP Morgan Chase, to implement this modification policy? They are not getting paid to negotiate mortgage modifications. They are not even paid to identify the investors. A method of identifying investors needs to be created so borrowers can negotiate directly with investors, by-passing the servicers. We do not need to bog the system down with costs of intermediaries. There is no wonder why the loan servicing companies are and have been doing a completely abysmal job of short-sale negotiations and modifications. They are not being paid. Who put the GSEs in charge of negotiating short-sales and modifications. We don’t need the loan servicers or GSEs, we need to go around them and go directly to the investors. Maybe someone could create a website which allows borrowers to communicate directly with investors with instructions being sent to loan servicers when decisions are made to approve short-sales and modifications. But first we need to put the investors at risk by stop paying the GSE guarantees.
1) Determine the family income and apply a ratio like 31% as the base payment (principal, interest, taxes and insurance – “Target PITI”)
2) Modify the PITI payment until it reaches the Target PITI
a. first re-amortizing the loan over 40 years,
b. then start lowering the interest rate to some level like 2% per annum, and
c. then start lowering the amortizing principal balance of the loan toward the present fair market value of the home. The remaining principal balance would not be forgiven but no interest would accrue on it as long as the loan is not in default
3) If the Target PITI cannot be achieved, there may be no alternative to foreclsoure
Implementing this plan assumes willingness on the part of the ultimate investors. According to a December 2010 report of the Congressional Budget Office (http://www.cbo.gov/doc.cfm?index=12032) the treasury department is funding the guarantees of the GSEs (Fannie Mae and Freddie Mac) under the securitization agreements (mortgage backed securities etc) even though those guarantees were never intended to be backed by the full faith and credit of the US Government. Honoring these MBS guarantees eliminates any desire by the investors to cooperate with the modification of their loans. Of course, investors would rather receive the full payment instead of a portion of the payment, but investors would rather receive a portion of their payment instead of spending money on foreclosures in a rapidly declining market if they were not receiving the guaranteed payments. Everyone realizes at this point that the investor retaking possession of homes is not likely the best solutions for either the investor or the homeowner. Maybe homeowners/borrowers were to blame for borrowing more than they could afford. Maybe no one truly comprehended the long term implications of adjustable rate or interest only loans. But we are all affected by the realities of those decisions now. I never understood why a mortgage investor would be satisfied with no verification, no documentation, 100% financing loans even if the GSEs and Congress wanted to promote full housing. Who was really lying to whom? The investors were lying to themselves and should be ashamed of making those loans. I don’t care if bond rating agencies rated these products as AAA. The investors should have had a little common sense. My office in Orlando Florida closed thousands of these loans in the first decade of 2000, and at every closing I mumbled to myself, and often questioned the lenders and borrowers, how the loans could be made (or even received) based on obvious false information (liar loans). Shame on Wall Street, and shame on the GSEs.
Initially, maybe there was justification to support the securitized mortgage market by paying the GSE guarantees, but that train pulled away from the station a long time ago. Who, other than the Federal Reserve, would be stupid enough in today’s market to make loans without the guarantee of payments by the US Government? No one that’s who. Yes, the mortgage industry must be rebuilt and re-created, like was done after the Savings and Loan crisis in the early 90s. Banks have never been a source of mortgage lending and will never be. We need some other solution, like a new federally insured loan program, but there is no reason to bail-out GSE investors. Paying the GSE guarantees only stifles a resolution of the housing crisis.
Similarly, why are we depending on the loan servicing companies, like Bank of America and JP Morgan Chase, to implement this modification policy? They are not getting paid to negotiate mortgage modifications. They are not even paid to identify the investors. A method of identifying investors needs to be created so borrowers can negotiate directly with investors, by-passing the servicers. We do not need to bog the system down with costs of intermediaries. There is no wonder why the loan servicing companies are and have been doing a completely abysmal job of short-sale negotiations and modifications. They are not being paid. Who put the GSEs in charge of negotiating short-sales and modifications. We don’t need the loan servicers or GSEs, we need to go around them and go directly to the investors. Maybe someone could create a website which allows borrowers to communicate directly with investors with instructions being sent to loan servicers when decisions are made to approve short-sales and modifications. But first we need to put the investors at risk by stop paying the GSE guarantees.
RSS Feed
