Mar142012

Everyone hates the mortgage settlement, except the banks

Despite a vigorous public relations campaign by both government officials and bank representatives, the sheeple are angry over the terms of the bank settlement. Loan owners are upset because they are not getting the break the believe they deserve, and prudent borrowers are upset because they know others are getting handouts. The only people who are happy with the settlement are bankers, and perhaps government officials who look like they did something.

Rage grows over mortgage deal

By Les Christie @CNNMoney March 13, 2012: 11:00 AM ET

NEW YORK (CNNMoney) — As more details emerge about the massive $26 billion foreclosure settlement between the five biggest mortgage lenders and the states’ attorneys general, a growing number of borrowers are realizing that the deal will do little, if anything, to help them out.

Many borrowers were making payments with the false hope that the settlement would bail them out. When people lose hope, the become sad and despondent. Many people cover their sadness with anger.

I have long argued these people never had any real hope. It was always an illusion fostered by lenders to get them to make a few more payments. Some thought I was just being cynical.

Proponents of the settlement deal tout that roughly 1 million homeowners who owe more on their homes than their homes are worth are expected to have their mortgage balances lowered through principal reductions and another 750,000 would be able to refinance into loans with lower interest rates.

However, that’s only a fraction of the 11 million homeowners who are currently underwater on their homes, according to CoreLogic. And it’s also a mere sliver of the 3.5 million people who lost their homes to foreclosure over the past four years.

“The impact [of this settlement] will be small,” said Mark Zandi, chief economist for Moody’s Analytics. “It’s not a home run; it’s a single.”

This settlement will impact between 5% and 10% of loan owners by the optimistic estimates of government officials. Since no relief program actually helps a fraction of what the government says it will help, I estimate the actual number of loan owners impacted by this settlement will be less than 150,000. There will be a few more loan modifications, some principal forgiveness on a few deeply underwater loans that will leave the owners less deeply underwater, but that’s about it.

Principal reductions will also only apply to certain borrowers who have mortgages still held by the five major lenders: Bank of America, CitiBank, Wells Fargo, J.P. Morgan Chase and Ally Financial.

Borrowers who have a mortgage held by Fannie Mae or Freddie Mac — roughly half the market — are out of luck. Loans insured by the Federal Housing Administration are also ineligible.

“If it’s offered to one group, it should be offered for all,” said Stacy Ovendale from Seattle, who says her home has lost nearly 50% of its value. “When my mortgage was written up, I had to take whatever program was available to me at the time, which happened to be FHA. … It’s so frustrating because my loan is with Bank of America but since it’s FHA, my mortgage is current and I have chosen to be responsible, there is nothing they can offer me in the way of principal reduction.” …

This loan owner is frustrated because the bank isn’t willing to give them free money? I don’t feel sorry for this woman. I understand her frustration. She sees irresponsible borrowers getting a break, but she gets nothing. However, she doesn’t deserve anything. The irresponsible borrowers should not have been given a break either. The poison of moral hazard is evident.

To Cat Gouldman, who lives in the D.C. area, it’s a raw deal. Like her mortgage, most loans are not retained by the original lenders. They’re sold to Fannie or Freddie. Borrowers aren’t given a choice when their loans are sold.

In fact, the mortgage Gouldman and her husband took out changed hands several times. First, it was sold to Wells Fargo, then to IndyMac and then it was taken over by Fannie. Her home has lost about half of its value, she said, and she’s upset that she won’t be able to get the same principal relief that other borrowers will receive.

“This is not the right message for the federal government to send out,” she said. “Do homeowners walk into banks asking if their loan is backed by Fannie Mae? I don’t think so.”

Principal reduction is not the right message for the federal government to send out.

I think it’s a travesty,” said Derek Buckingham of Everett, Wash., who has a Freddie loan. “The government appears to still have no accountability for the problems they helped incentivize the banks to create.”

The evil banks justify his bailout, right? The variations on this bogus rationalization are endless.

Some borrowers may qualify for much larger reductions than others, as well.

Bank of America, for example, said it will slash mortgage balances by an average of $100,000 or more for roughly 200,000 homeowners. The goal, according to BofA, is to reduce the amount owed on the home to 100% match the current market value.

Bullshit. BofA is trying to milk this settlement for maximum public relations value. The “goal” is to get borrowers to believe they will get principal reductions to 100% of value. The reality will always fall far short of that goal.

Meanwhile, the other four major mortgage lenders, CitiBank, Wells Fargo, JPMorgan Chase and Ally Financial, are expected to reduce qualified borrowers’ principal to between 115% and 125% of the value of their homes — an amount that the Department of Housing and Urban Development said should average about $20,000.

Let’s be clear. The real goal is to reduce principal balances as little as possible. Lenders will seek out the sweet spot where borrowers see equity as a hoped-for goal they can reach if they keep paying for a few more years. If borrowers believe they will have equity again, they will keep paying. Lenders need to rekindle hope among the hopeless. Those borrowers in Las Vegas who are 60% underwater have no hope. If their principal is reduced so they are only 25% underwater, they may keep paying. The amount of the write off in principal reduction will be far less than the write off in a foreclosure, and they might get a few more payments.

For the homeowners who bought responsibly and made their payments faithfully, the real inequity comes in the fact that their tax dollars are paying for government-funded programs to prevent foreclosures while irresponsible borrowers accrue the benefits like the ones offered in the settlement.

I wonder if the reporter reads this blog?

So, these people who are underwater get a break from the banks, and other hard working folks like us get screwed?” wrote Karthik Subramanian, of Aurora, Ill., in an email.

That’s exactly right. The prudent get hosed while the irresponsible get a break.

“What I think is unfair, is that people who didn’t overleverage their homes, who paid their mortgages on time, who didn’t borrow more than they could afford, even if the bank said they could afford more, the people who had good common sense and have done the right thing, are left with all of this business loaded on their backs,” wrote Jamie Smith of Sonoita, Ariz.

Another blog reader… Everyone who didn’t participate in the madness is being asked to pay the bills of the grifters who did.

That said, every homeowner could benefit from such bailouts if they help to turn around the ailing housing market, where home price declines and slow sales continue to threaten the fragile economic recovery. The settlement, however, may not help enough borrowers to do even that, said Moody’s Zandi.

While homeowners may benefit, renters are screwed in every way. Renters pay for the bailouts with their tax dollars, and the aid goes to keeping house prices high so renters cannot afford to become homeowners. Nobody cares about renters.

Bankers are thrilled about the settlement. It’s public relations bonanza as bankers take write-offs on their bad loans. The banks avoid future litigation, and loan owners obtain the false hope necessary to make a few more payments. Bankers got everything they wanted from this deal. Borrowers… not so much.