Force banks to avoid foreclosures?

We read through the entire, 10-part "Dust Up" on LATimes.com devoted to the foreclosure crisis, hoping to find a nugget we could pass on. And here it is: a consumer advocate argues lenders should be forced to avoid foreclosures by modifying loans so that borrowers can afford to keep their houses indefinitely.

Paul Leonard, the director of the California office of the Center for Responsible Lending, writes, "When loans are modified, borrowers should be able to afford their loans over the long term at the so-called fully indexed rate, not just the current payment level. Public agencies should be monitoring and holding lenders accountable for affordability outcomes from foreclosure-avoidance efforts."

If we understand it correctly, this means that lenders would figure out how much the borrower can afford to pay, and then restructure the loan so that the borrower can keep the house by paying that amount.

As promised, our two cents: an interesting thought, and we disagree. If the borrower can afford only the initial two-year "teaser" payment, but not the payments in month 25 and beyond, the borrower, sadly, cannot afford the house.  This is the crux of the foreclosure crisis: People agreed to buy houses that they could not afford. Yes, the lender might have tricked them. If the trick was fraudulent, prosecutors should wake up from their long naps and take action. The lender has the option of being generous -- and perhaps self-serving as well -- and modifying the loan to lower the payments. But that should be an option, not a mandate.  And if it becomes a mandate -- a bad idea, we think -- it most certainly should not be subsidized by taxpayer money.

Your thoughts? Comments? Insights?
Photo Credit: LATimes.com

Comments

[lioness]

Well, why don't we just scrub the whole concept of capitalism right now? And while we're at it, the Declaration Of Independence, too...I seem to remember a phrase like "...life, liberty and the PURSUIT of happiness...," not the "guarantee of a free ride when you live beyond your means and get into financial trouble." Every decision has a consequence. If this idea is mandated, we should replace the stars and stripes with the hammer and syckle (sp?) and be done with it.

[Gunga Din]

Cool. I could afford my housepayment..Until I lost my job. I've been out of work for six months and it doesn't take a genius to figure out that my housepayment + taxes and Insurance ($2160.00) has just about eaten up my savings. I can't afford my house now. Should my lender foreclose on me or bail me out like Chrysler? Problem solved as soon as I find work. But what if it takes me another six months? Is it worth it for the lender to foreclose on me in this market or will they be smart and choose to work with me. I have equity but don't want to use my house as the proverbial ATM. FYI I have perfect credit and no credit card debt...yet.

[AnnS]

Most DEFINITELY NOT at taxpayer expense!

The cost of being stupid and/or greedy and/or acquisitive and/or having an overdeveloped sense of entitlement is dealing with the consequences.

One woud have to be thick as 2 bricks when told that the interest rate is X for 2 years and then resets to a different rate not to ask:

(1) What will the new rate be; and

(2) How much will the new payment be when it resets.

Even if they did ask and were told what the new interest would be and how much the payment would be, if they plowed ahead gambling that 'God willing and the creek doesn't rise' there would be a miracle that would somehow magically increase their income to cover the higher payment.

These people were stupid or gambling. Oh well. That's what happens when one doesn't have the sense to come in out of the rain.

They are reaping the consequences of their own conduct. TOUGH!

[shizzyfinn]

Wow, some red-blooded economic tough-talk in the posts above (ah, how the hammer-and-sickle references still envigorate me!). Though I must point out that AnnS, with all the hard-nosed "reaping the consequences" bluster, completely avoided addressing the great point presented by the previous poster, which was that many homeowners are in trouble not through "being stupid and/or greedy" but because of hard luck.

Is the idea of bailing them out (aka helping out your fellow American) really such a travesty? Don't worry about footing the bill...banking industry profits would hardly even budge if legislators told the industry to kick down a lilttle cash for some sort of lender insurance program. All of our precious taxpayer monies would be untouched, still free to be squandered on welfare for oil companies, unnecessary wars, and interest on the national debt.

[Cal]

I don't see where Paul Leonard was advocating a gov't bailout in this case. He is saying when lenders modify the loans they should be held to the same standard as if the loan was originated under the new federal guidelines released, that the borrower shows that they can reasonably repay the loan based on current information. Basically that would require a smaller monthly payment (larger loss to the bond holder).

I actually think that the above would actually result in more foreclosures (fewer people able to qualify under the higher standards) but more successful workouts (those who qualify have a high chance of success). Many workouts simply do not work.

There is no simple solution, if the gov't requires loan holders to work with borrowers instead of foreclosing, rates will simply shoot through the roof (lenders will have to adjust risk based on not being able to efficiently foreclose and pass that cost on when they originate loans).

Here is the latest released
http://www.federalreserve.gov/boardDocs/press/bcreg/2007/20070629/attachment.pdf

Gunga:

Your story is the perfect candidate for a workout, the lender could add the missed mortgage payments back into the loan, or other simple steps. The proper thing to do in this situation is to contact your mortgage servicer and explain the situation, for people out of work temporarily they have several things they can do. Make sure you dont agree to anything without reading and understanding exactly what it is they are offering you though. If you have a ton of equity in your home, the mortgage people are more likely to foreclose since they are pretty ensured to receive all of their money back including the fees and cost of foreclosure. The other option of course is to sell (assuming you have equity).

[Anthrodiva]

This isn't the Great Depression, folks. Then we had people actually starving on the streets and no handouts forthcoming. This time, we are talking about keeping people in houses they simply cannot afford. Not to mention houses that wouldn't have been built (chewing up the landscape with zero property line mansionettes from Chino to Victorville) without underpinning shaky conceptualizations about money on all sides.

Hey, here's an idea, why not bunk up with friends and split the cost? Rent out a room or two. Have a family member or two buy into the property and live with you? My great-grandmother ran a farm, took in boarders, and did sewing on the side. People have come up with lots of creative ideas in the past to keep their heads above water, unfortunately it doesn't seem to be happening now, and that's kinda freaking me out.

[sheila]

ok, yes, people were irresponsible by not fully researching the long-term costs of owning these homes. and yes, they need to get a little more innovative about earning vs. spending, i totally agree.

that said, it's not as though these buyers, or many of them, were predators targeting people they felt confident would NOT understand the consequences, in order to earn the MASSIVE up-front commissions these sub-prime predators earn. maybe they were simple, very hard-working people, who were excited they could finally get a piece of the American Dream, which is marketed to them non-stop to keep them grinding away for slave wages as a cog in some corporate wheel.

the solution, and this is a tough one, should involve disgorgement of commissions to all lending execs who aggressively pursued, marketed, and "closed" these rapacious deals with vulnerable buyers. anyone who sold a loan on a house which is now in jeopardy needs to cough up his/her $2,500 - $10,000 commission and take their own hit. I'm not just guessing here. i have a friend who worked briefly at one of these places and their "leads" were mostly minorities with poor credit histories, the elderly, and people with no more than a high school education. nice, huh?

if sales commissions were paid at the time the loans were paid off, instead of at the time they were funded, we would see a LOT less predatory lending, lying, obfuscating and foreclosures. which, of course, would have meant that many more people could have afforded houses, probably many of the people currently in foreclosure, since the market would not have artificially inflated based on this false sense of "demand."

[Morgan]

What he fails to fully consider is the following:

1. Lenders aren't in control of loan modifications. The servicers are in control of the modifications - BARELY. The real control comes from the servicing agreements that were signed between the servicers and the end investors. The servicers can only do as much as is allowed in the servicing agreements. Which is not much. The lenders are really just big brokers - they passed these loans on.

2. Servicers aren't set up for modification agreements. Modification agreements taking serious thought, lots of people and lots of management-types who can yeah or ney a modification. Servicing profits are VERY thin - which means you can't have a lot of management to make unique decisions (out sourcing anyone?). However, the foreclosure process is like clock work - its much easier for a servicer to complete a foreclosure than a loan modification.

3. People on the inside at these servicers have very little experience with loan modifications and only a few lawyers to tell them what they can and can't do vis a vi the servicing agreement signed with the end investor.

4. One loan isn't tied to just one servicing agreement. Remember loans are sliced and diced in RMBS and CDOs and the same mortgage is in many different tranches of the CDOs. There can be multiple servicing agreements governing one mortgage and the most restrictive one wins out.

People that just say lenders should be mandated to make work out agreements via loan modifications vastly simplify the problem and put the onus on the lender who often is not even in the picture.

I have to give credit to a reader on my blog who enlightened me to the above here: http://blownmortgage.com/2007/07/16/do-banks-really-want-your-home/#comment-596

[Malby]

"many homeowners are in trouble not through "being stupid and/or greedy" but because of hard luck"??

Sorry, but "hard luck" is the same as stupid or greedy when it means that you are not prepared to pay your mortgage. You didn't plan for any contingencies? Like losing a job? And the guy who has money but doesn't want to spend it to save his mortgage--he's another reason that the rest of us shouldn't be taxed to provide any bailout.