Behind the new foreclosure freeze: The fear factor

Conventional wisdom holds that Wall Street is driven by two emotions: greed and fear. Today we see the second of those -- the fear factor -- on public display, in the form of the latest effort to forestall foreclosures.

(Headline for those who missed it: "The Bush administration, trying to deal with a worsening housing slump, announced a new initiative today aimed at helping homeowners about to lose their homes. For qualified homeowners, it will put the foreclosure process on hold for 30 days.")

Banks and lenders are afraid -- afraid of a deepening housing crisis, afraid of the political blowback, afraid of writing down more bad loans, and very, very afraid of being stuck owning foreclosed houses that are declining in value every day. The knife is still falling; banks and lenders do not want to catch it. But don't take my word for it. I get my best stuff from the comment section:

DS: "Truly, the banks are scared.  The are doing what they can in public relations spin to keep more American homeowners from handing them their keys.  They don't want more homeowners to say, 'Thanks for the loan Wall Street, but we are moving.'  And I am sure once the market changes, the banks will be asking for the keys."

jeff: "They know that owning these properties is the worst of the evils and ultimately destroys their balance sheets.  If they can manage to find a way not to have to write off the loan and continue to receive payments then they won't have big writeoffs."

Todd: " Ain't going to work. It just ain't. People do not want their home, which has severely declined in value."

perks: "This has NOTHING to do with helping out buyers.  It has EVERYTHING to do with the fact that the banks are so buried in defaults and foreclosures that they need the breathing room."

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com
Photo Credit: L.A. Times

Comments

[Joseph...The Real Estate Guy]

What a joke!!!

How about a 365-DAY-STAY?

They instigated/created the problem.

[kat]

Maybe someone out there can answer a question for me because my personal opinion on this mortgage "crisis" is that about 90% of it is fueled by the media.

Are banks really that "scared"?

Even though default rates have quadrupled because of these stupid sub prime borrowers the overall default rate is deminimus in light of the lending industry as a whole. I saw a guy from my bank and asked him how he was weathering the foreclosure crisis (jokingly) and he said they did not have one singel mortgage in default.

Since this very bizarre episode in real estate history is mostly confined to real estate pustuls of greed such as southern California, Vega, Florida and other areas of the country (where people think mortgage payments are contingent on whether the value of the home goes up) is it really enough to throw the country into a Wall Street fueled depression

The rest of the people in this country - 96% of us - are paying our mortgages like we were long before all this started and will be doing so long after it's over. So even are more than 90% of the Californians living in the epicenter of this mess.

Are these deadbeats really enough to bring down the economy in light of the fact that the overwhelming majority of us pay our mortgages?

[CD]

The system is broken. In a "Gravitas" way.
It will never be the same. Moral Hazard is what killed it.
Those guys want us to play by rules that Bankers do not obey. This is a middle class revolt. We are in a dead end. This only shows their desperation and their fear.
Paulson is an idiot.

[Tombstone Realty]

I like Warren Buffett's announcement that he would *graciously* insure the insurers - with the exception of the real estate hogwashery.

Stock market is soaring despite that last bit on the end thar.

Flailing in the dark, and hoping to hit a light switch - that's all this is.

[Dave]

I have no sympathy, everyone was in on the swindle.
1 The buyer thinks he can get a bigger house on a loan he can't repay and doesn't understand the terms of.
2 The real estate agent gets a percentage of the selling price, so of course he wants the price up.
3 The broker, same thing.
4 The mortgage company thinks they'll get tons of interest on the loan, and if the 'owner' defaults, they can resell and profit.
5 Wall street likes MBS's doesn't care what happens in the end.
6 The local government gets property taxes based on the valuation, so they like high prices too.
7 The federal govt. likes the illusion that all this money creates of a 'booming' economy.

Everyone deluded themselves.

[Maggie Knowles]

I think it's great that banks are finally acknowledging that it's better to work it out with a new loan with affordable terms rather than foreclosing. I just hope that it's not too little too late. If they qualified people based on teaser rates, then they should give the folks the teaser rates (fixed) for the term of the loan. Not sure if that's what will happen, but it should. That's what the lenders and Wall St. get for being greedy. They knew what they were doing.

[NationalBubble.com]

This plan is not going to work either. Somebody who owes 100K more than what his house is worth, why is he going to try to keep paying the mortgage. It might take several years for his home to come back in price. Most of these people bought we little or no money down, they have very little to loose. Just they credit history and if you are a subprime borrower, obviously you don't care much about your credit history.
It is much easier to just walk away and let the bank take the loss.

http://www.nationalbubble.com/

[JW]

What amazes me is that ANYONE is still buying a home in SoCal or any other bubble market while all of these knives are still falling around them. This mess has a looooooong way to go before prices hit the bottom and anybody that buys a home in a bubble market before 2012 is throwing a lot of dollars right down the toilet. The politicians don't have a clue about how to stop this runaway train and frankly, the only answer is to let it run until it runs out of steam and slows on it's own. Until then, either rent or move to a non bubble market if you must buy a home where you can find good homes that are priced properly to buyers incomes.

[Cal]

I think DS summed it up perfectly. Especially that last line..

The reason it is using Hope and Lifeline is that they dont want homeowners to feel like they dont have any options but walk away. They want them to feel like they should go through all the effort to keep the home and that they will make it easy to do so. Even owners paying 75 cents on the dollar is better than a house sitting there paying nothing on the dollar. In the end it will be sold by the bank anyways, they just dont want too many too soon.

I think many parts of all these plans will have the unintended consequence of encouraging defaults. All the programs are only helping if you arent paying (except FHA secure), once you stop paying the good deals really happen. The worst case scenario is giving the house back to the bank if they dont give you a good enough deal. Sounds like a win-win for the homeowner with the subprime loan.

[Dave]

This is like throwing out the sandbags when your big beautiful balloon is going down. It's merely making the crash a little later, a little slower, a little less frantic. It also nicely pushes back the real pain until after the November election.

The banks aren't stupid. If they can keep Joe and Mary Homeowner paying a $500K mortgage on a house worth $400K, they've stuck someone else with the hot potato. Yes, the receipts are lower, but they're not left holding the potato.

(Okay, I wildly mixed metaphors with the balloon and the potato, but you get the point.)

[sunsetbeachguy]

Per Tanta at Calculated Risk, the entire difference between business as usual versus what was announced today.

A letter to the borrower. That is it!

Banks don't have the loss mit/REO staff to deal with it.

They are wishing for some time.

An old Texas saying:

Wish in one hand and Cr@p in the other and see which one fills up first.

[GDC]

I have been seeing some real bargains out there recently. The ones priced right are definitely selling. A recent sale in Encino (in a good neighborhood) has this sales history from Zillow. Talk about huge swings in price the past 10 years.

01/25/2008: $1,100,000
09/11/2007: $1,490,074
07/29/2005: $1,835,000
05/14/2004: $1,280,000
08/25/1999: $450,000

WOW. Anyone have similar info on recent sales?

[Lou]

I have a great foreclosure plan:

Let the "homeowners" write off paying for the boxes they're going to need when they move out of the home they could never afford in the first place.

[aaron Kramer]

Kat and Maggie,
Kat - This is not a small local problem but extends to every corner of the country from LA to Detroit, St. Paul to Miami with Chicago, Atlanta, Houston
and New Orleans in between. Google any of these cities and foreclosure and you'll see all the evidence you need.

Maggie - Your right Wall St. is greedy and they are motivated by greed which is why you should question why they are doing this now! They don't want to repossess homes that are decreasing in value, it is that simple. Why do you want people to stay in homes that are decreasing in value when they have the right to walk away?

I've been stating for months that we are headed to a Depression and this just proves that my forecast is accurate. We are in big trouble and many banks are insolvent so beware false media reports and the knee jerk reaction to run to socialism to cure all that ills society.

[sfvrealestate]

"Perks" is right. It's taking three to six months to get the banks to even approve short sales. They just don't have the staff (nor do the asset management companies) to handle this.

[JohnnyB]

Kat wrote: “Are these deadbeats really enough to bring down the economy in light of the fact that the overwhelming majority of us pay our mortgages?”

It’s actually a really broad-based, widespread and systemic problem where everyone along the line maximized their profits through unregulated, fragmented and flawed incentive structures at the expense of long term sustainability for homeowners.

From borrowers -> brokers -> appraisers -> lenders -> banks -> wall street -> ratings agencies -> derivatives investors -> government.

The dynamics are now more a function of over-valued homes and corresponding income levels rather than monthly interest rates – although rates are certainly a short term factor. Ultimately it comes down to paying of the principle on the loan and folks simply cannot afford to do that based upon how much they earn. Especially considering declining home prices.

It’s not several thousand deadbeats representing a few billion dollars in delinquent mortgages. It’s millions and millions of homeowners all across the country who took out over-priced mortgages, refinanced existing mortgages and tapped home equity lines of credit to the tune of multiple TRILLIONS of dollars.

These flawed mortgages were taken off lending bank’s balance sheets, mixed together into derivative based gobble-de-gook by wall street investment banks and sold throughout the world with the backing of lap dog rating agencies erroneous seals of approval (SEC allowed this improper bank to rating agency relationship). Investors it seems couldn’t purchase them fast enough. Most realize now that this was essentially a big Ponzi scheme.

The current valuations are built from a house of cards and there’s no way to rebuild the weak structure into a solid structure without first collapsing it and rebuilding the foundation from the ground up.

The solid foundation rests upon the proper valuation of assets and risk. From homes to investment products.

There will be much pain along the way…

[Michael Snyder]

A close look at Warren Buffet's offer to insurers reveals it to be suicidal for any takers. Municipal bonds are the only portion of the portfolios he's interested in and even those will cost 150% of their current rates to insure. His proposal is actually a reflection of the weakness in the bond market as he's specifically excluded any instrument linked to subprime and real estate. I'm hoping the market's positive reaction today is more a reflection of buying into weakness than Mr Buffet's offering. On the bottom line it's the leveraging of mortgage backed securities that has the banks running scared. Even in a depressed market that 50 cent on the dollar loss on the initial loan ( worst case after resale of the property) is peanuts in comparison to the ten, fifteen, up to thirty to one margin calls on the CDOs backing those loans. That's why they're scared. Without time to raise some serious capital these ratings firms are toast.

[EKG]

Please tell me when the people who have paid - and continue to pay - their mortgage payments on time, every month, are going to be given a 30 day free pass?

[socal]

I'm a pessimist about the market, yet I'm about to buy a home. The reason is I think it is starting to look somewhat affordable now. The agreed price is 25% below mid-2005 price. So I will be moving from a rental condo to a house almost twice the size and have roughly $600 more in monthly expenses. Am I crazy??

[MyLessThanPrimeBeef]

Socal, you will be crazy if you don't immediately not pay the first 3 month mortgage payments so that you can get the 30 day freeze in order to get the lender to lower your monthly expenses to more than say $200 more, instead of the $600 more as it stands now.

[FromHouseFlipperToBurgerFlipper,]

This is absurd, and very desperate. I wish I could vote for giving the flippers, speculators and dead-beats a 30 day reprieve. I would vote NO!

I exercised, and still exercise, responsibility on how much house and debt I can afford. Why do the people that gambled and LOST get government help while the responsible get nothing?

L.A. housing prices are going to fall a lot further.

[Ace]

FromHouseFlipperToBurgerFlipper,

Your name cracks me up! Thanks for the laugh!

[Fourth Generation]

Look at it this way. The banks are just trying to keep the people in their overvalued houses paying something rather than holding an empty devaluating property. As you can see this is another scheme by the lenders/banks to save their rears, not to help the homeowners that were way over their heads purchasing houses they cannot possibly afford.

[Michael Snyder]

Upon further reflection; and reading the entire transcript from Warren Buffet's interview this morning on CNBC I've come to the conclusion that old fox is going to rock the boat so hard the market will have to adjust. http://www.cnbc.com/buffet watch
In insuring the ratings of municipal bonds Buffet covers BerkHath's investments in those bonds as they are held by their insurance subsidiaries, neatly increasing the value of his entire portfolio while charging a tidy fee for the service. Good work if you can get it.
As for his offer it's certainly a choice between the frying pan or the fire. Either way he's effectively calling the player's bluff on the subprime tainted investment instruments and they will likely run their course much faster as a result of Warren's end run.

[tew]

GDC posts that s/he is seeing "some real bargains out there" including a home bought in 8/99 for $450k that just sold for $1.1M in 1/08.

That's over an 11% annual increase over 8.5 years. That doesn't sound like sustainable price appreciation in an economy with low single digit inflation.

Maybe the structure was demolished and something very nice was built after the 8/99 sale. Otherwise, the logic that this is a "bargain" because it is down from even higher prices is like saying that dot com stocks were a bargain after they fell 25% in early 2000.

Many dot coms went to zero. It's unlikely a home price will fall to zero (but it does happen and is happening now in depressed areas). However, like stocks, home prices ultimately revert to what fundamentals will support. The more they are driven up by frenzy and margin-fueled speculation, the more they ultimately fall.