Jul292014
Surprisingly, Mel Watt is not forgiving principal on underwater loans
In apparent recognition that principal reduction is a bad idea, Mel Watt is not forgiving debts on underwater loans owned by the GSEs.
Principal reduction is the worst policy option. The economy is weighed down by excessive mortgage debt, causing borrowers to pay money to lenders that would otherwise be spent on goods and services stimulating the economy. The proper macro-economic solution suggests removing this debt would boost economic growth, but how should this be accomplished? There are two options: (1) foreclosure and bankruptcy, and (2) widespread principal forgiveness. Advocates on the political left want to see principal forgiveness. Conservatives, on the other hand, point to the problems of moral hazard, the central issue in the housing bust.
Every decision we make in life has consequences. If we save regularly and invest wisely, the consequences are wealth and peace of mind. If we spend foolishly and speculate wildly, the consequences are periods of feast and famine, delusions of grandeur, enormous entitlements, and when times are tough, unbearable stress. Positive results come from good decisions and visa versa. That’s how people distinguish wise from unwise and learn to make decisions to achieve positive and desirable ends. When people do not endure the negative consequences for their poor decisions, they come to regard their poor decisions as wise ones, and they repeat the same mistakes.
Bailouts by their nature create moral hazard. The purpose of a bailout is to prevent an individual or family from enduring the consequences of their bad decisions. It simply is not possible to have a bailout without moral hazard, it’s only a matter of degree. If widespread principal reduction became common policy, borrowers would respond by borrowing and spending recklessly because they know they will get their debts forgiven. At that point, it becomes free money for the taking — with you, the taxpayer, paying the bills.
Lenders and loan owners have problems. Lenders made loans their borrowers can’t repay, and now both parties to the deal are turning to the US taxpayer for a bailout. Somehow, these two groups have convinced themselves they deserve some of my money. I was not a participant in their transaction; I did not sign on to the risks and rewards of the deal they made, yet both groups feel I should be compelled to bail them out. Screw them both. Their problem is not my problem.
Excessive debt is a problem, but rather than widespread principal forgiveness, there is another solution in the system: foreclosure and bankruptcy. Both parties to this private financial transaction want to avoid the consequences of foreclosure and bankruptcy because it will cost banks their money and borrowers their houses and their credit. They want the taxpayer to pick up the tab.
I was greatly concerned when Mel Watt took over the GSEs that he would loot the GSEs for political gain by forgiving mortgage principal. Perhaps he understands moral hazard after all because so far he has resisted calls to forgive mortgage principal on GSE loans.
After foreclosure, trying to buy their house back
By Dina ElBoghdady July 26
After 20 years in their house, Jaime and Juana Coronel lost it to foreclosure when Jaime’s landscaping work dried up in the recession and the couple fell behind on payments.
If these people lived in their house for 20 years, why isn’t their mortgage nearly paid off? About half way through the article, you find out they owed $452,000 on a modest house they’ve owned for 20 years. They likely HELOCed over $300,000 out of the property to have such a large mortgage. Does anyone think forgiving principal for borrowers like these is a good idea?
As the eviction process dragged on, the Coronels regained their financial footing and wanted to buy the house back from its new owner, Fannie Mae. The mortgage finance firm was eager to offload the modest ranch house in a working class suburb just east of Los Angeles.
“We asked, ‘Why don’t you sell it to us?’ ” Juana said. …
Perhaps because they are deadbeats, and we shouldn’t be giving loans to people who’ve proven they can’t manage mortgage debt.
One of the most effective ways to ward off foreclosure in such cases is for lenders to reduce the size of the loans. Policy makers and many of the nation’s largest banks reluctantly have come to embrace this type of debt relief — called principal reduction.Buy-back arrangements like the one the Coronels requested amount to a principal reduction. The couple is asking Fannie to sell them the home at its current market value, which essentially would leave them with a smaller mortgage and lower monthly payments while positioning them to build equity if home values rise.
Selling them the house — the house they lost due to HELOC abuse — would be a nearly a $200,000 gift, paid for by your tax dollars. Personally, I’m not in favor of that. Are you?
Now that Melvin Watt is in charge, all eyes are on him.Toward the tail end of his two decades as a North Carolina congressman, Watt pushed for targeted principal reduction for underwater homeowners. But he’s been silent on the issue since taking the FHFA post in January, except to say he’s studying it. Watt, a Democrat, downplayed his previous support for such debt relief when pressed about it during his Senate confirmation hearing.
“You’ve got to understand that I was a member of Congress representing my constituents, many of whom were underwater, and advocating for relief for them,” Watt said. …
In other words, he was pandering to his constituencies.
When I read that statement, I felt a huge wave of relief because it tells me he isn’t going to reduce principal.
After losing their home in 2010, Fannie agreed to let them rent the property. Jaime had retired by then, and the couple tapped his union pension to pay the rent, which was $430 less than their $2,180 monthly mortgage payment, they said.
Fannie Mae allowed them to stay in their home and cut their payment by almost 25%. Sounds like a good deal.
Three years later, when Fannie wanted to sell the house, it moved to evict the couple. That’s when the Coronels approached the company about buying it back. They were pre-qualified for a loan that they could afford given Jaime’s pension and the Social Security checks they receive, Juana said.
Fannie agreed to sell it to them — for $452,000, the amount they owe on their loan. (They owe this much in part because they refinanced into what they now recognize were abusive lending terms, they said.)
That is the worst excuse I’ve ever seen offered up. Notice how the reporter put that in hoping to arouse left-wing partisans without delving into the issue of how they borrowed and spent several hundred thousand dollars through excessive mortgage equity withdrawal.
But the home is worth about $260,000, said Peter Kuhns, an organizer at the Alliance of Californians for Community Empowerment, a grass-roots group funded with dues from members, including the Coronels.
Fannie’s offer made no sense, Kuhns said. It refused to sell the home to the Coronels for the same price it would ask of anyone else,
They won’t sell it back to them because it amounts to a $192,000 gift of principal reduction.
including Wall Street firms, he added. “What often ends up happening is big Wall Street-backed investors come in, buy the property and turn it into a rental,” he said. “How does that help the local economy or the neighborhood?”
Notice more pandering to left-wing readers who bash Wall Street investors and renter neighborhoods. Shameless.
So the Coronels, who have yet to be evicted, pushed back.
In June, Fannie offered to modify their mortgage and shave the amount they had paid in rent off the loan. Watt even weighed in, and urged the couple to keep working with Fannie. But, he emphasized, a principal reduction is off the table.
Mr. Watt, I take back everything bad I wrote about you. Your stance makes you a hero in my eyes.
“While we continue to study this issue carefully, at this time neither Fannie Mae nor Freddie Mac offer principal reduction in the form of a discounted payoff for a new refinance or as a component of a modification,” Watt wrote in a letter e-mailed to Kuhns. …
Watt did not stake out the agency’s position on that front.
Rather it was his predecessor Edward J. DeMarco, who concluded that the potential benefit of principal reductions was “too small and uncertain relative to the known and unknown costs and risks.” DeMarco said rewriting valid contracts to lower the amount of a loan could spook investors who own the mortgages and encourage homeowners to game the system.
Yes, it would encourage homeowners to game the system, and the cost to the taxpayer would have been enormous.
Ed DeMarco saved the taxpayers billions of dollars with his unpopular stance, and he lost his job because of it. It’s pleasantly surprising to see Mel Watt continue this policy.
The fear was that such relief would be costly for taxpayers, who had already ponied up billions of dollars to bail out Fannie and Freddie after the government seized them at the height of the financial crisis. …
Now that Watt is in, housing advocates want action.“It doesn’t have to take any longer than it’s already taken to reverse what we’ve known is a destructive policy,” said Kevin Whelan, national campaign director for the Home Defenders League. “This is a specific policy that really can be changed quickly,”
Yes, it could have been changed quickly’; in fact, I expected an announcement within weeks of Mel Watt beginning that the policy was being changed. The fact that the policy hasn’t been changed, and that Mel Watt openly supports it is a great sign that it may not change at all.
Principal reductions climbed steadily after that, peaking at a 20 percent share of all the mortgage help that troubled borrowers received in December 2012, Goodman said. They started to trail off last year as home prices climbed and fewer borrowers were underwater.
Rising home prices make principal reductions unnecessary. Of course, flatlining home prices may increase pressure on Watt to do something, but delaying implementation makes the policy appear less needed, which is a good thing.
Still, there are about 1.6 million more foreclosures than is typical in a healthy market, so it makes sense for FHFA to allow for limited and well-targeted principal reductions, especially in communities with deep-seated problems, said Mark Zandi, chief economist at Moody’s Analytics.
“Everyone involved is becoming much less rigid about this,” said Mark Zandi, chief economist at Moody’s Analytics. “People are feeling more relaxed about going down this path, and other loan modification programs are moving in that direction.”
Mark Zandi proves he is a clueless shill over and over again.
I was very critical of the appointment of Mel Watt to head the FHFA where he controls the GSEs. I was very concerned he would rip off the US taxpayer to help his cronies on the political left. Based on his actions so far, it appears my concerns were unfounded. So far, Mel Watt has refused to reduce principal balances, and his slow moving silence on this issue tells me he may not do so. If he continues with Ed DeMarco’s policies of not forgiving principal, Mel Watt may turn out to be a most pleasant surprise.
[listing mls=”OC14160318″]
Housing Wire’s Trey Garrison on Economists
Despite six months of optimistic spin on negative housing reports, weak jobs reports and a seemingly tone-deaf Federal Reserve, the economy has soldiered on.
If anything, it’s a testament to the underlying strength of the free market’s resolve that the economy hasn’t collapsed under the weight of regulation, reckless monetary policy, and an army of chief economists who apparently spell “economist” a-p-o-l-o-g-i-s-t.
(I’m compiling now all the dumbest pronouncements, downturns labeled “unexpected” and top-line BS reports where the real data buried deep down tells the ugly truth about the housing market and the economy for a special year-end piece – right now it’s just in a folder labeled “gartman.” By the way, if you headline a report with “unexpectedly” more than five times in a row, time to hire a new economist.)
Until we’re dealing with an actual, fact-based assessment of the economy and the housing market, we can’t figure out how to fix what is broken.
One thing is for sure — all the spin in the world won’t change the momentum of 2014.
The thing is, people finally waking up from the media illusions of the first half would have known that if they hadn’t bought into that MOPE* illusion in the first place.
The best directions in the world won’t help you get somewhere if you don’t know where you are standing.
(*MOPE = Management of Perspective Economics. It’s the foolish idea that if The Fed and the media create the image of growth and the belief that things are getting better, then the economy will actually grow and things will actually get better.)
Trey accusing others of spin. Pot meet kettle.
If you can’t refute, attack.
Way to deflect!
Dispirted really.
el O accusing others of attacks. Pot meet kettle.
Perhaps, but his perspective is closer to reality than the economists he lampoons, and his writing is hilarious. His term MOPE is an accurate view of how the federal reserve, the government, and the financial media relate to one another.
I think if you read closely, he revises his own commentary just as much as the economists that he criticizes. For instance, he’ll predict a big miss in the jobs report one week and then when he’s wrong, he’ll change the subject to “not the right kind of jobs are being created” the next week. Oops! This is just as bad as any mainstream economist in my opinion.
Blackstone adviser: Investors worried about ‘serious correction’
A global economic advisor to private equity firm Blackstone (BX) is warning that he may need to change his positive outlook on 2014 if housing stays slow.
Furthermore, he’s not the only one.
Vice Chairman of Blackstone Advisory Partners, Byron Wien’s monthly market commentary for August cites positive to complacent attitudes of secondary market investors, but also fires a warning.
“The indicators are not universally positive,” he writes. He then cites slow housing data before moving onto monetary policy changes from the Federal Reserve.
“Many investors are worried about a shift in Federal Reserve policy triggering a serious correction in the market,” Wien said.
The housing numbers first. Housing starts dropped to 893,000 in June. Building permits also declined.
“For the economy to move toward 3% real growth in the second half and for unemployment to continue heading to lower levels, housing has to be strong,” he said.
“But there are enough other positive signs that I am not altering my favorable forecast,” he adds. “If housing continues to be weak, I will probably have to change my view.”
Wien also sources a Bloomberg Global Poll that found 47% of stock investors think the market is close to a bubble, with 14% saying we are already in one.
Is this approach to keeping homeowners a model to fight blight?
It’s obvious it would be a bad idea to offer principal reduction through government programs, or through the GSEs – homeowners would default intentionally to qualify and the owners of those mortgages would be in effect subject to uncompensated takings.
But a Boston non-profit has another approach, and they say it’s fighting blight without involving anyone who doesn’t want to be involved, the Washington Post reports.
The nonprofit group Boston Community Capital buys homes in Massachusetts, Maryland and Rhode Island that are in foreclosure or close to it, and then resells or rents them to the former owners at a price that reflects the property’s current market value. Some housing experts say the group’s initiative — known as Stabilizing Urban Neighborhoods (SUN) — offers an interesting model for buy-back programs. Massachusetts Attorney General Martha Coakley has singled it out as a way to address blight in hard-hit neighborhoods.
The initiative has kept about 500 families in their homes since its launch in 2010, said Elyse Cherry, the group’s chief executive. It has foreclosed on three homes since then, and it’s default rate is below the national average at under 5 percent, Cherry said. Borrowers who are late on their mortgage payments due to hardship or in some stage of foreclosure are eligible to apply if they have a steady income. The program generally reaches out only to people who are in their homes, and works to keep them there.
Where is the non-profit getting the money to do this? If it is from donations, more power to them. It looks like they are actually putting their own money where their mouth is.
For me, the biggest problem with principal reduction is that it can be so difficult to separate the truly unlucky (and a lot of people did get into trouble through fate) and the unwise.
Oddly enough, I don’t see housing advocates pushing for mandatory rent reductions for the poor.
The article in the main post said that non-profit gets it’s money from donations from members, which include the people profiled in the story. I think it’s pretty suspect when a charity works to benefit the people who donate. The quid pro quo doesn’t smell good.
Man accidentally posts naked photo in home listing
http://www.housingwire.com/ext/resources/images/editorial/Trey-2/Austin-man.png
A Realtor will tell you that if you’re taking pictures to list a home for sale, it should be neat, clean and don’t have any junk in the picture.
It doesn’t really take a Realtor, one would think, to tell you if you’re taking pictures to list a home, you shouldn’t have your junk in the picture.
Alas, in Austin, no one told this guy.
A Texas man hoping to sell his home made a big mistake while posting an image of his home online.
His home in Austin Texas has five bedrooms, and costs $389,500. When it came time for showing one of the four bathrooms, home buyers got an unsettling surprise.
The seller didn’t realize he was naked in the photo and was seen standing in the middle of the mirror without pants.
Apparently he didn’t notice his reflection before uploading the photo. At least you can’t see that poor man’s face in the photo.
I’d bet $100 this guy knew exactly what he was doing.
Depends on how proud he was of what was put on display…
Despite blowing early forecast, Fannie Mae maintains delusional optimism for remainder of 2014
Despite an anticipated pickup in economic growth and housing recovery in the second half of this year,Fannie Mae expects the economy to grow at just 1.5 percent overall this year. Fannie revised its previous estimate of 2.1 percent growth for 2014 after a disappointing start to the year.
The first quarter of this year measured “the worst performance in five years;” and if Fannie’s 1.5 percent prediction pans out, it would be “the worst performance of Q4-over-Q4 growth in the current economic expansion,” according to Doug Duncan, chief economist at Fannie Mae.
Lower-than-expected healthcare spending was the culprit in first-quarter economic woes; but consumer spending, business capital investment, and residential investment should all contribute to more robust growth in the second half of this year, according to Fannie Mae’s economists.
Job growth and real personal income are growing, which Fannie expects to translate to a rise in consumer spending over the second half of the year.
“We expect the economy to grow approximately 3.0 percent in the second half of the year, although there is an element of uncertainty given government statisticians’ difficulty in assessing the full scope of healthcare expenditures,” Duncan said.
The housing market is continuing to recover, contributing positively to the economy, but Fannie Mae anticipates a 2.0 percent decline in home sales and a 41.0 percent decline in mortgage originations over the year this year. On the other hand, single-family mortgage debt outstanding should increase “slightly,” according to Fannie Mae.
Surprisingly, Mel Watt is not forgiving principal on underwater loans
I just want to say, the ONLY way out of this mess is to reduce the mortgage debt burden … PERIOD! This goes for everybody, no mater if you’re delinquent or not. All of it has to decline.
And on the other side (borrower), the interest have to increase, and the multiple of income to borrowing power has to decrease … PERIOD!
This is the only way out of the Zombie economy.
That’s true, but this can be made to be a very long, drawn out, hard-to-notice process. Like taking a band-aid off one millimeter at a time, we can let inflation, stagnation, and reduced economic growth do this work for us over decades. This is the path Japan has taken, and appears to be the path we have taken as well.
While a quick, painful reckoning would most likely be the best move in the long run, it would be difficult politically as the homeowners and asset-owning generation has a lot more political power than the young and hopeless.
I’m of the belief that the adjustment that we’re talking about cannot be orchestrated because it’s too difficult/political to accept the pain. The FED will do what they have to to protect the TBTF banks and keep the population in order.
SO, with that said … the only way we’re going to get true reform is to have another nasty debt crisis. I know this is going to happen … the FED can’t stop it. At some point in the future, we’re gonna have another debt crisis, followed by a complete collapse in equities, metals, energy and commodities. At this point, the FED will have painted itself in the corner, and the ONLY option will be to write down the private debt.
The Private debt is presently about 42 trillion. I think it’ll be cut in half when the next debt crisis arrives.
The TBTF banks will likely be nationalized for a period of time. Then recapitalized and broken up into regions. <—THIS IS GOING TO HAPPEN!
You could be right but I am of the belief that the Fed is strong enough to stretch out the pain a long, long time. I’m not sure I agree with you that the only option will be to write down the private debt. I suspect they will let inflation take it out rather than issue an explicit writedown.
Interest rates are so low that while the debt is a millstone around everyone’s neck, there really isn’t a lot of pressure to pay it back in the foreseeable future.
I guess we will see what will happen. The TBTF banks should have been nationalized in 2008 in my opinion. I would be incredibly surprised to ever seen them nationalized.
“You could be right but I am of the belief that the Fed is strong enough to stretch out the pain a long, long time.”
I do not agree with this. The FED has thrown everything in order to fight deflation. They’ve had ZERO percent interest rates for almost 6 years, and they’ve done 4.5 trillion in QE … and we still have no income advances (no inflation). The Bank of Japan has done this for 20 years, yet they’re still facing deflation. They can’t stop it, they can’t beat deflation … in fact, they’ve already lost.
We are a debt based society. Your debt is money to someone else. Treasury, govt debt, is money to someone else. More debt = more money. Problem is the economic cannot keep up with the growth in debt due constraints such as demographic, resources limitation, tech limitations, confident level etc…So we got further into debt until the breaking point than we’ll default = deflation. Japan is the case in point, their population is aging and declining at the same time. How can you grow/produce more under those circumstances? Nature, natural cycle, is stronger than the central bankers…We’re probably are going in the same direction but maybe with a slightly better prospect due to our open culture, currency reserve status, and resources among others.
I’m with Ripcord on this one. I think the federal reserve can create enough inflation to make the debt manageable. Basically, they will steal wealth from everyone else through inflation to bail out those who borrowed excessively. It’s a steal bailout, but as long as the people don’t get write-downs, they at least endure some consequences.
Where’s the inflation? We have had virtually no income advances for almost 15 years. The ONLY thing that has preserved the economy has been borrowers ability to use their homes as an ATM. That no longer works. Now all we do is wait for the inevitable collapse.
It’s already started with QE losing its ability assist the economy at present levels and being politically unfavorable because it benefits only the top 5% … the GDP has been revised way down, and this will likely continue.
The FED has already lost.
There certainly isn’t any inflation right now, but if they keep stimulating the economy enough, they will generate inflation. If they can manage to find that perfect middle ground where there is no inflation or deflation, I’d be shocked.
Forgiving principle on underwater loans would loot the banks, so it comes as no surprise it’s NOT actually ‘on the table’.
But… should it be? ie., a loan is simply created by a desk-jockey typing-in some digits on a keyboard and pushing the ‘enter’ button, but the interest MUST be paid in man hours.
With GSE loans, it loots the US Treasury. Of course, if the GSEs are making money, then it loots the shareholders, which probably wouldn’t cause anyone too much heartburn.
“real personal income are growing”
With so many good jobs going away, and so many part time shit jobs replacing them, I wondered how incomes could be growing at this point.
It is interesting how closely this tracks the Dow, recessions included:
http://research.stlouisfed.org/fred2/series/RPI
At a glance, I’d guess “real personal incomes are growing” for a small percentage at the top, which skews the numbers.
Meanwhile, US household income peaked in 2007/8 and, inflation adjusted or not, has gone down from there.
http://www.deptofnumbers.com/income/us/#household
There’s so much under-reported slack in employment right now. There’s no chance for sustainable and perpetual income growth anytime in the future.
We haven’t had income growth since the FED went socialists after the Tech bubble went kaput.
And to think, despite the fact that the economy sucks, and employment sucks … the POTUS wants to import and legalize millions more. Those are new and future voters.
This country is run by idiots.
“This country is run by idiots.”
This is certainly something we can agree on! 🙂