Whenever I make a prediction that goes against the conventional wisdom, I take the risk of looking the fool. On those occasions when I am right, it’s very satisfying. Even though I know I shouldn’t, internally, I enjoy a silent I-told-you-so.
Almost four years ago now, lenders embarked on their plan to modify loans to get people over the “rough patch” caused by the recession. From the beginning I said these programs would fail largely because the people being helped simply couldn’t afford their homes. They were Ponzis. When a borrower has gone Ponzi, the “rough patch” is when they are cut off from more Ponzi borrowing. Their diminished income has nothing to do with lower wages they earn due to the recession. Ponzis became dependent upon fresh infusions of borrowed money to sustain their lives and their debts, and lenders are foolish to continue to enable this behavior because Ponzis don’t have the capacity to repay the loans. They don’t earn enough money.
Since I firmly believed the problem was one of permanent Ponzi dependency rather than a temporary decline in income due to a recession, I stated on many occasions that all loan modification programs would fail. Conventional wisdom was that these programs would succeed because the US economy would recover from recession and the people receiving loan modifications would go back to work and regain their earning power. It hasn’t worked out that way. It never could. Diminished earning power was never the problem — unless they count the Ponzi borrowing as earning power. Ponzis certainly do.
My view is even more cynical. Despite the widespread ignorance spread in the mainstream media, I think bankers themselves always knew these programs were going to fail. I believe they were using loan modification programs merely as a ruse to get a few more payments out of hopeless Ponzis. Any income is better than no income, and since they were already processing foreclosures faster than the market could absorb them, modifying loans and getting something was preferable to letting the loanowner squat and pay nothing. Loan modification programs were classic can-kicking. Lenders pushed the problem off into the future when they could more effectively deal with the necessary foreclosures. We are three years into their can-kicking policy, and the policy is starting to unravel as defaults are rising. And the end is nowhere in sight.
By Jody Shenn – Nov 19, 2012 11:52 AM PT
New delinquencies on reworked mortgages held by bonds without government backing jumped in September, a sign that some of the fuel for housing’s recovery isn’t sustainable, according to JPMorgan Chase & Co. (JPM)
At least the US taxpayer is not going to eat those losses.
A record of more than 28,000 modified home loans within so- called non-agency securities turned delinquent, a rise of 24 percent from the prior month, JPMorgan analysts said in a Nov. 16 report. …
Aggressive modification activity has partly driven the sharp decrease in the housing market’s “shadow inventory” tied to bad loans, the analysts led by John Sim wrote. While individual homeowners with reworked mortgages are performing better, an increase in the total number who’ve gotten aid means they represent a threat to rising property prices.
“We are now seeing a wave of re-defaults from the modifications over the last two years that failed,” the JPMorgan analysts said. “This wave should last through 2013.”
And this will get worse. The loan modifications from 2012 will fail in large numbers as well. Most of the new loan modifications were given to deeply underwater borrowers, investors, Ponzis and others who were excluded from most previous loan modification programs. There is no reason to believe lowering the standards for loan modifications to include more borrowers will increase the effectiveness of these failing programs.
Shadow inventory in the U.S. fell to 2.3 million homes as of July, down 10.2 percent from a year earlier, according to a report last month from CoreLogic Inc. The firm’s tally includes seriously delinquent loans, homes in foreclosure and bank-owned properties that haven’t been listed.
…A jump in first-time delinquencies seemed largely contained to loans serviced by Bank of America Corp., according to the analysts from Amherst, and those at JPMorgan, who wrote that “it may be possible there were reporting lags or other operational problems” that “artificially” boosted the lender’s figures.
“Contained?” Aren’t you suspect whenever you read the word contained when referring to the housing crisis? Also, notice the glib excuses offered for the problem.
While modified loans are increasingly important to non- agency investors, there’s “significant uncertainty” about their future performance “given the lack of historical precedent for the current situation,” Nomura Securities International analysts including Paul Nikodem wrote in a Nov. 16 report.
About 35 percent of outstanding securitized subprime loans have been modified and more than 25 percent of so-called option adjustable-rate mortgages, according to the report. About $216 billion of securitized non-agency mortgages are being paid on time after previous delinquencies, Amherst data show.
Recidivism rates after 12 months for modified subprime mortgages have declined to about 40 percent from almost 80 percent for loans reworked in the third quarter of 2008, reflecting loan servicers offering larger payment reductions and more cuts to balances, according to the Nomura analysts.
A 40% failure rate is being touted as a great success? A full 40% of these loan modifications fail within one year. That’s atrocious. After a few years of 40% attrition rates, none of these loans will be left.
I guess a 40% failure rate is better than the 80% failure rate they used to have, right?
Think about it, why would anyone continue to pursue a policy with a 40% failure rate? Can-kicking anyone?
Fannie Mae and Freddie Mac’s burgeoning holdings of modified mortgages, which drove non-performing loans at the government-supported companies to a record last quarter, also cast “doubts on the true health of the housing recovery,” Jim Vogel, an FTN Financial analyst, wrote in a Nov. 16 report.
As the various loan modification programs unravel over the next several years, the foreclosure machinery will continue to plod along processing foreclosures a the rate the market can absorb them. Lenders will continue to kick the can to delay foreclosure as long as possible, but eventually they will need to force out those who can’t afford their homes, and they need to boot out the committed squatters who merely want a free ride. When the inevitable foreclosures occur, the fools who thought the problems were behind us in 2012 will be surprised as foreclosures continue for three to five more years at a measured pace. We will see reports about the few success stories, and politicians will justify the enormous taxpayer expense of the bailouts and other failed programs as saving the economy. Only a few of us who are paying closer attention will realize it’s all bullshit.
Cashed out at the peak
The former owners of today’s featured property — multiplied by several million borrowers — illustrate why loan modification programs fail. These owners when Ponzi. They developed a lifestyle based on frequent cash infusions and piling on debt. They more than doubled their original mortgage , and even though interest rates have cut in half since then, they couldn’t afford the payments without the continued infusion of borrowed money, so they imploded. The house is now REO.
- The house was purchased for $378,000 on 9/19/2001. The owners borrowed $378,000 in a seller carry-back loan. They put nothing down.
- On 12/12/2002 they refinanced with a $384,000 first mortgage.
- On 9/13/2004 they obtained a $150,000 HELOC.
- On 9/7/2006 they refinanced with a $690,000 first mortgage.
- On 10/20/2006 they opened a $100,000 HELOC.
- Assuming they maxed out the HELOC, the total property debt was $790,000, and total mortgage equity withdrawal was $412,000.
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Proprietary OC Housing News home purchase analysis
$599,900 …….. Asking Price
$378,000 ………. Purchase Price
9/19/2001 ………. Purchase Date
$221,900 ………. Gross Gain (Loss)
($30,240) ………… Commissions and Costs at 8%
$191,660 ………. Net Gain (Loss)
58.7% ………. Gross Percent Change
50.7% ………. Net Percent Change
4.1% ………… Annual Appreciation
Cost of Home Ownership
$599,900 …….. Asking Price
$119,980 ………… 20% Down Conventional
3.41% …………. Mortgage Interest Rate
30 ……………… Number of Years
$479,920 …….. Mortgage
$108,422 ………. Income Requirement
$2,131 ………… Monthly Mortgage Payment
$520 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$150 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$2,801 ………. Monthly Cash Outlays
($330) ………. Tax Savings
($767) ………. Equity Hidden in Payment
$127 ………….. Lost Income to Down Payment
$170 ………….. Maintenance and Replacement Reserves
$2,001 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$7,499 ………… Furnishing and Move In at 1% + $1,500
$7,499 ………… Closing Costs at 1% + $1,500
$4,799 ………… Interest Points
$119,980 ………… Down Payment
$139,777 ………. Total Cash Costs
$30,600 ………. Emergency Cash Reserves
$170,377 ………. Total Savings Needed