Sep302013

The bank settlement agreement facilitated borrowers losing their homes

The housing bust losers portrayed themselves as victims and heroes. Their whining got the attention of opportunistic politicians like California Attorney General Camilla Harris who used this issue to political advantage. When Attorneys General from a number of states reached an agreement with the major banks in early 2012, many housing advocates loudly proclaimed a great victory for homeowners. When I first read through the details of the settlement agreement, it was apparent to me that the banks greatly benefit from foreclosure settlement while borrowers were left out in the cold. About a month later, the general public and mainstream media caught on to this fact. By then everyone hated the mortgage settlement, except the banks. A few months later, some industry insiders came forward and admitted the loanowner bailouts were designed to benefit banks. Then to add insult to injury, the relief aid that did make it to the State of California ended up being diverted to other programs. In the end, banks agreed to pay a few pennies in guilt money to former loanowners, but little was done to actually keep them in their homes.

My initial conclusion when the deal was reached was that bankers should be giddy over it. They received good public relations for taking write-offs they were going to take anyway, they insulated themselves from future litigation, and they convinced a few more loan owners to sign up for false hope and make a few more payments. Bankers got everything they wanted from the deal. Politicians grandstanded and “stood up for the little guy” while actually doing little or nothing of substance for them. At the time, proponents of the settlement deal touted that roughly 1 million homeowners who owe more on their homes than their homes are worth were 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. I noted that no relief program actually helps a fraction of what the government says it will help, I estimated 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.

Many borrowers and misguided advocates were hoping for substantial principal reduction. I pointed out that 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 who are 50% underwater have no hope. If their principal is reduced so they are only 20% 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 the banks might get a few more payments.

By far the biggest farce of the settlement deal was allowing banks to count short sale losses and forgiveness of deeply underwater second mortgage debt toward their settlement payments. In effect, this allowed them to get a credit for losses they were certain to take anyway. It was obvious to me that banks would use this avenue to the maximum degree possible because it didn’t really cost them anything. The mainstream media didn’t pick up on this, and many loanowner advocates actually believed the banks were going to make deep principal reduction write downs to keep people in their homes. When banks count short sale losses toward the settlement amount, the loanowner moves out of their former house. Short sales don’t keep people in their homes, they facilitate their departure. This isn’t at all what loanowner advocates had in mind. Unfortunately, it was exactly what the banks had in mind when they got this loophole put into the settlement agreement.

Mortgage relief didn’t help many keep their homes, critics say

Just 20% of the aid doled out by five giant banks under last year’s national $25-billion settlement has gone to forgiveness of first-mortgage principal.

By E. Scott Reckard — September 25, 2013, 4:41 p.m.

When five giant mortgage firms signed a landmark $25-billion mortgage settlement last year, officials hailed debt forgiveness as the primary strategy to preserve homeownership.

The banks hoped to avoid further enforcement action over widespread foreclosure abuses; federal regulators and state attorneys general aimed to prevent even more foreclosures.

“This isn’t just about punishing banks for their irresponsible behavior,” Housing and Urban Development Secretary Shaun Donovan said. “It’s also about requiring them … to help homeowners stay in their homes.”

This is a classic example of the public statements from public officials contrasting with reality. This was never about keeping loanowners in their houses. Their statements to the contrary were about manipulating loanowners into making a few more payments while their false hope withered. It was intentional deception by public officials on behalf of their banking overlords.

Advocates for borrowers took such comments to mean that the banks would prioritize debt write-downs on first mortgages, which banks resisted before the settlement.

Anyone who truly believed the banks would do that were embarrassingly naive.

Now, with nearly all the promised relief handed out, it is clear that the banks had other ideas.

Now it is clear? It was clear then to anyone who isn’t blinded by wishful thinking.

The vast majority of the aid to borrowers, it turns out, came in the form of short sales and forgiveness of second mortgages.

What a surprise!

Just 20% of the aid doled out under the national settlement went to forgiveness of first-mortgage principal, the kind of help most likely to keep troubled borrowers in their homes. In terms of borrowers helped, just 15% of the total received first-mortgage forgiveness.

And those who did recieve first mortgage principal reduction only saw their balanced reduced to a level that still left them deeply underwater. They were less underwater than before, but they were still deeply underwater. As I mentioned above, lenders would only reduce first mortgage principal to the threshold of hope. They wanted borrowers to have hope in order to make a few more payments. Anything more than that, and the bank would lose too much money.

The five banks collectively delivered twice as much aid using short sales, in which owners sell their homes for less than the amount owed and move out, with the shortfall forgiven.

In all, the lenders sought credit for nearly $21 billion related to short sales and $15 billion related to second mortgages. That compares with $10.4 billion in write-downs on first mortgages.

I am surprised the amount of first-mortgage forgiveness was that high.

To put this number in perspective, remember that Banks are still exposed to $1 trillion in unsecured mortgage debt. If they wrote off $10.4 billion of a $1 trillion problem, that only amounts to 1% of the total loanowners are collectively underwater. It really is a drop in the ocean.

This also underscores the silly optimism of housing advocates. Even if the banks had forgiven all $25 billion in underwater first mortgages, that would have only amounted to 2.5% of the total problem. This relief was never going to touch that many people or provide substantial relief.

In California, Atty. Gen. Kamala D. Harris expressed a similar preference for debt forgiveness in announcing the settlement in February 2012.

“We insisted on homeowner relief for Californians,” she said, “that will allow them to stay in their homes.”

If that’s what she insisted upon, and if that’s her measure for success, her efforts were a dismal failure. As I pointed out above, even the extortion money the State got didn’t make its way to loanowners in California.

But the mortgage relief here followed the same pattern as nationally.

Harris negotiated separate commitments from the three biggest mortgage servicers — Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co. — and predicted that short sales would be a relatively small portion of the relief at $3.1 billion.

But a tally released Tuesday by UC Irvine law professor Katherine M. Porter, Harris’ appointed monitor for the program, put the total at $9.24 billion.

That’s roughly equal to the $9.2 billion in aid delivered through principal forgiveness. But more than half that total was applied to second mortgages, Porter said.

So the amount of short sales written off was three-times larger than expected, and the amount of principal forgiveness was much, much smaller? Hmmm… who would have guessed that?

Just 84,102 California families had first- or second-mortgage debt forgiven, compared with the initial prediction from Harris’ office that 250,000 borrowers would get such help.

So less than a third of the estimated number of borrowers were actually helped. Hmmm… who would have guessed that?

Bank officials said the high volume of short sales in part reflected an enormous backlog of borrowers who, before the settlement was announced, already had failed to qualify for various loan modification programs. Other borrowers decided not to keep their homes, they said, for such reasons as divorce or a job offer in another city.

“The decision to pursue a short sale versus a retention option rests with the homeowner and not with the servicer,” Wells Fargo said in a statement released by Tom Goyda, a bank mortgage spokesman.

Is this person suggesting people chose short sale over principal forgiveness? Give me a break.

Some foreclosure-prevention counselors and officials at advocacy groups nonetheless expressed disappointment that more first-mortgage debt was not eliminated.

“We all wish there had been more principal reduction, which is what is most helpful in keeping people in homes,” said Kevin Stein, associate director of the California Reinvestment Coalition, a 300-member alliance that lobbies on behalf of low-income and minority neighborhoods.

And if wishes were horses, we’d all have ponies. I joke about wishful thinking, but it’s rare to actually see someone put their delusions out there for public consumption.

Still, Stein said, the program set a good precedent, demonstrating that debt forgiveness can benefit lenders and borrowers alike without causing a wave of intentional defaults, as critics had warned.

Complete and utter bullshit. There were two reasons this program didn’t create more strategic default. First, house prices went up, so many people chose not to default because they had hope again. And second, the main reason more people didn’t strategically default is because there was so little aid given that it was not motivating. If a widespread principal forgiveness program had been implemented with significant reductions, everyone would have strategically defaulted to take advantage of it.

Bruce Marks, founder of Neighborhood Assistance Corp. of America, a major housing counseling group, had a harsher assessment of the lack of aid to keep people in their homes.

“It just shows you that the banks are running the government,” Marks said. “There’s virtually no benefit to borrowers, and yet you give the banks credit for short sales and getting second liens wiped out — something they were going to have to do anyway.”

Finally, someone with a clear vision of reality.

The housing crash made second liens almost worthless in foreclosure sales. Second-mortgage holders don’t get a dime until first mortgages are paid in full. With housing values deflated, that left banks unlikely ever to collect.

Government and banking officials say borrowers nonetheless benefit when second mortgages are wiped out, which removes a major blemish from credit reports and clears away a common obstacle to first-mortgage principal reduction or short sales. What’s more, they said, forgiving second liens makes borrowers more likely to continue paying first mortgages because they believe that they can recover their home equity.

Eliminating second mortgages gets many borrowers to the threshold of hope. Government and banking officials readily admit that this was the goal of their principal reduction programs.

Bank of America alone has forgiven nearly $10 billion in second liens, winning praise from Porter, California’s settlement monitor, and other observers. The BofA program automatically wiped out 150,000 underwater second mortgages that had gone delinquent unless the borrowers, for tax reasons, opted out.

More than a third of those customers had equity in the homes restored, BofA mortgage spokesman Rick Simon said, and more than half wound up with a loan-to-value ratio of less than 120%. …

Banks have realized that 20% underwater is the threshold of hope. That’s why so many mortgage balances were reduced to this level. Who knows, if the rally keeps going, these people might have equity soon.

In any case, the banks appear to have fulfilled their pledges of relief, although that won’t be official until Smith, a former North Carolina banking commissioner, has finished auditing the banks’ reports, expected by year’s end. His next report is due out by the end of this month.

Even if the banks haven’t quite written off enough yet, they still have plenty of additional losses from short sales coming up to meet their quotas. And none of those short sales will help borrowers keep their homes.

 

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25462 MORNINGSTAR Rd Lake Forest, CA 92630

$575,000 …….. Asking Price
$375,000 ………. Purchase Price
5/13/2002 ………. Purchase Date

$200,000 ………. Gross Gain (Loss)
($46,000) ………… Commissions and Costs at 8%
============================================
$154,000 ………. Net Gain (Loss)
============================================
53.3% ………. Gross Percent Change
41.1% ………. Net Percent Change
3.7% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$575,000 …….. Asking Price
$115,000 ………… 20% Down Conventional
4.28% …………. Mortgage Interest Rate
30 ……………… Number of Years
$460,000 …….. Mortgage
$114,663 ………. Income Requirement

$2,271 ………… Monthly Mortgage Payment
$498 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$120 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$73 ………… Homeowners Association Fees
============================================
$2,962 ………. Monthly Cash Outlays

($420) ………. Tax Savings
($630) ………. Principal Amortization
$178 ………….. Opportunity Cost of Down Payment
$92 ………….. Maintenance and Replacement Reserves
============================================
$2,181 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$7,250 ………… Furnishing and Move-In Costs at 1% + $1,500
$7,250 ………… Closing Costs at 1% + $1,500
$4,600 ………… Interest Points at 1%
$115,000 ………… Down Payment
============================================
$134,100 ………. Total Cash Costs
$33,400 ………. Emergency Cash Reserves
============================================
$167,500 ………. Total Savings Needed
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