Trouble for the Dodd-Frank mortgage rescue plan

The L.A. Times reports this morning that the Dodd-Frank mortgage rescue plan is in trouble in Congress: "Mortgage industry intransigence, voter anger over possible government aid for speculators and economists' fear that thousands of homeowners might just walk away from troubled loans are contributing to a potential stalemate."

The Frank plan would ask lenders to write down troubled mortgages by roughly 15%, and then put federal guarantees behind the newer, cheaper mortgages.

The anti-bailout sentiment so widespread on housing bubble blogs appears to be a factor in the bill's troubles: "'There is no sympathy for anything that smacks of bailout,' said Allen Sinai, chief economist of Decision Economics Inc., who recently testified in favor of the Frank bill. 'The outrage has shown up very quickly, and means that at this point the government can only go so far.'

There is also the question of how well the Dodd-Frank plan would work, and the risk that it would stick the government with a large pile of bad debt. A congressional report on the plan concluded it would not stop the sharp drop in housing prices, and raised other serious issues. For example, if the government is essentially paying 85 cents on the dollar for mortgages through new guarantees, the mortgage industry has strong incentive to game the system by selling only those mortgages that are worth less than 85 cents on the dollar. Only the weakest, least valuable mortgages would get rewritten. Relatedly, borrowers would have new incentive to manipulate their personal finances to qualify for the program  -- if it means missing a few payments, some borrowers would deliberately miss mortgage payments to qualify for a cheaper mortgage, the congressional report predicted.

Your thoughts? Comments? Email story tips to peter.viles@latimes.com.

Comments

[Michael Snyder]

Only Congress would need to commission a study to determine what is common sense to the rest of us.

[LeftLA]

LOL @ Michael.

As I've been reminding friends who are in a snit over the bailout question: Congress moves so slowly that they won't get anything up for a vote until after the NEXT boom and bust.

[Winfield J. Abbe]

Let's revoke the bailout of Bear Stearns. It isn't complete yet anyway. Let's fire the head of the federal reserve who hates the free enterprise system so much, and hire someone who will "debailout" this junk mortgage company which violated all the established rules of banking. Then let's all observe what the free market does to the gambling casino in New York which is propped up by senior citizens being forced to accept almost zero interest rates on their certificates of deposit, thereby encouraged to risk their life saving in the New York gambling casino, also in patent violation of the "free" enterprise system Mr. B and his cronies purport to follow but secretly deny and lay awake nights to destroy and corrupt. Mr. B ought to do us all a favor and resign or be fired. Better yet, why not follow some of his predecessors in 1929 out of a skyscraper window?

[Dave P]

For starters, a program like this needs a bar that's extrodinarily high. 15%? That pretty much encompasses every mortgage written where the borrower didn't put a large chunk down. That established no penalty whatsoever for both the banks and borrowers that used historically risky low/no down payment financing.

40% is more like it. If not 40% of the loan, the mortgages should be written down to 40% of the purchase price. That may sound steep, but the bank is getting off the hook of their most troubling loans. That should not come free.

You are still going to have people/banks gaming the system, but whenever you put large incentives like this on the table that is bound to happen. At the very least you can protect the government (read: our tax money), from being holder of ridiculously high mortgages. At 40% off, we should be close to a place where they can be sold off when they get foreclosed.

That is, of course, making the rather large assumption that the gov't would actually foreclose once they get these back. Gov't officials being responsible for kicking thousands out on the street doesn't seem like it would really happen. Too much politcal blowback.

[Roger Moore]

@Michael Snyder

It's unfair to criticize the CBO study based on the summary of a summary presented here. Most of the common sense part is just background information at the front of the study. The real meat of the paper, and the reason that Congress commissioned it, is because it gives legal and practical advice about the likelihood of different strategies working.

As an example, there's a good sized discussion of how disagreements between first and second mortgage holders in 80/20 finacing act as an impediment to revaluing those loans. It's an important issue for a lawmaker considering the issue to understand, and it's not something that I've seen discussed here at all. It certainly doesn't look like a "common sense" issue; it's a nitpicky detail issue that a broad, common sense approach would overlook. Getting those details right is exactly why Congress needs this kind of study.

[dudeman1961]

15%?!

For those who have lost 40% of sales price, how will this stop the walk-aways?

And it's the BANKS that get the bailout!!

evil = congress + banks + developers

[Andrew Z]

You can bet your sweet ass that I would miss a couple payments if it meant them re-writing my loan. No way should someone who can't pay get their prinicipal reduced with a fixed rate while I am upside down paying against a principal much higher because I made my payments.

[HulaGirl]

OT? Maybe not..

Just called CountryWide to change my mailing address and received a hard pitch to add a equity line of credit: WTF?!!

If I was game enough to take it, theoretically I could walk and get in line for my hand-out, er, "bail-out".

When I asked the rep. why they'd offer me a HELOC in the days of vanishing equity and upside mortgages, she said that they wanted to "reward" me for my excellent credit.

Sounds like they don't give a f*c& as they know a bail-out is on the way. A bail-out for them.

[Truth2Pwr]

Gradually it's dawning on the folks on Capitol Hill. Nobody wants their help!

Not the mortgage industry, not the taxpayers, hell not even the homeowners want to be saved. They just want to "walk away now".

Leave it alone. It's a market correction. It's perfectly natural. Don't f*ck with it. The sooner it's over, the sooner it'll be over.

[blackbox]

Nah, the bailout of Bear Stearns was perfectly fine. It was a fantastic bailout for JPM and for my portfolio! It's the bailout of the stupid and irresponsible home owners that I object to. Finally, some common sense is kicking in to stopping the bailout bill currently in the US congress. Dodd and Frank are thiefs, liars, and fools for trying to push this bil past the american taxpayer without debate, or care of the opinions of honest, responsible, and hardworking americans. Okay, the Smart Americans that thought the housing bubble was in fact just a bubble, and a burst was in the horizon.................

[the problemwithcaring]

"Only the weakest, least valuable mortgages would get rewritten. Relatedly, borrowers would have new incentive to manipulate their personal finances to qualify for the program -- if it means missing a few payments, some borrowers would deliberately miss mortgage payments to qualify for a cheaper mortgage, the congressional report predicted."

Duh. People are doing it now with only a whiff of an incentive from lenders - (getting access to your lenders loss mitigation programs, etc.) when they are late on payments. Once those incentives include guareentees of better rates, who in their right mind would struggle to pay on time?

[MyLessThanPrimeBeef]

Here is David Callaway from Marketwatch dot com about China's interfering with free market capitalism.

http://www.marketwatch.com/news/story/
china-flips-switch-market-bolts/story.aspx?guid=%7BB11EECF4%2D6D9F%2D4D5C%2DBDA2%2D9D26133B7098%7D&dist=MostReadHome

Who cares?

Why doesn't he write about our own Bolshevik comrades in the Federal Reserve, the tovarishes in our own government manipulating the market?

This guy really sounds like an Imperialist.

[LA-Architect]

Finally, some attention to the other side. The majority of Americans are against a bailout for people who banked on the constant appreciation of their houses to finance their lifestyle. There are too many responsible people on the sidelines just waiting for prices to come down to earth. Why shut them out to bail out people who can't afford their houses in the first place? If they have to walk away from the house that they were renting from the bank, and rent from a third party, then so be it. Perhaps the next time they will be more prudent with sign loan documents.

Shame on the government for not exercising due diligence in preventing this fraudulent lending in the first place.

[jonM]

if the freak-dudd plan passes, i will create a website to solicit home owners to intentionally miss a few payments to qualify for the plan.

[MyLessThanPrimeBeef]

Roger Moore, common sense is for the government to stay out, to stop the manipulation.

With that common sense, Congess doesn't need to know the disagreement between 1st and 2nd mortgage holders, the meat part, because that would not be Congress's business. It would be just between the two private parties and the homeowner.

In short, Congress doens't need to spend any money to know it should stay out and let the market sort itself out.

[jb]

We need to step up the pressure - Dodd/Frank have to go. We need a politician to go down so that they understand that whoring with the banks/developers has consequences. Dodd is one of the most egregious - lets get him first (note, I am a democrat). Tar/feather and run his ass outta town.....

[JPG]

Check out this story from the CBS Early Show last month:

http://www.cbsnews.com/sections/i_video/
main500251.shtml?channel=/elements/2008/03/17/
earlyshow/contributors/raymartin/videoarchive3942829
_1_videosection_page.shtml

Try to ignore the correspondent and his sympathy for the idiot real estate agent who thinks she should be able to keep her $1.5 million home for $2800 a month. This woman admits she didn't read the loan paperwork, yet seems to think the bank or someone else should be helping her keep "her" home. What a joke.

I'd be willing to bet that for every homeowner facing foreclosure through little or no fault of their own (i.e. they got laid off, sick, disabled, etc.), there's 20 idiots like this woman who have no one to blame but themselves.

It's amazing to me how the mainstream media keeps getting this story wrong (and I used to work for ABC News). The lead-in to the story blames falling home prices for the rise in foreclosures - instead of reporting reality, which is that bad loans to people who couldn't really afford their homes has caused the rise in foreclosures which in turn has caused home prices to fall.

Sounds like someone who matters is finally starting to hear the people on blogs such as this, but I'm still skeptical that Frank-Dodd is dying anytime soon. Legislators frequently ignore CBO reports they find inconvenient.

[$30/hr.]

By the time any government attempt to affect the economy - "stimulus" checks of a $600 advance on next year's tax bill, for example - is actually enacted and flows in to the system it is already too late, the problem is not static.

The true intent of the legislators is to simply give the appearance of doing something.

Please contact your employee in Washington to tell them they do not have your permission to bail anybody out, citizen or industry.

[Ann]

Read the actual bill. The LA Times buggered up the explaination of the terms.

http://www.house.gov/apps/list/press/
financialsvcs_dem/press0417083.shtml

It is NOT 15% off the loan value as it is now..

It is 15% off the CURRENT APPRAISED VALUE.

BIG difference.

Say a loan is $400,000 and purchase price was $420,000.

If the value has fallen 25% at the time of the refinance, the property is now worth $315,000.

The refinanced loan would be limited to 90% of current value or $283,000. The lender would only get 85% of current value or $267,700. (And there is the 15% that the LA Times alludes to but does not explain.) The additional 5% of the loan goes to the FHA as financing costs.

No second loans would be permitted. Therefore if there is a first and second mortgage situation, both lenders have to agree to accepting some share of the 85% of current value or the second lien holder walks aways and the 1st takes the 85% of current value. (Good luck if the 1st mortgage holder wants it all and won't share, and the 2nd won't release - then it is no deal.)

The original lender takes the hit on the hypothetical loan to the tune of $132,300 or 33% of what it is owed (drop in value to date + 15% of current value.)

[Mohamad]

VOTE THESE CROOKS OUT OF OFFICE! THE AMERICAN POPULACE IS OUTRAGED!

[Bung]

You made your bed, now sleep in it. The price of housing must come down. How else will people be able to save for retirement?
Wait until all these spendthrifts want to retire and start crying about social security and why it does not maintain their standard of living.

I have no sympathy for people that can't manage their money and expect others to bail them out.

[Yoski]

I love this one:
"some borrowers would deliberately miss mortgage payments to qualify for a cheaper mortgage"
Some borrowers would actually do that? No kidding Sherlock!
How about the VAST MAJORITY of borrowers would do that.

[Debbie]

When housing gets to where people can afford a 30 yr fixed loan PEOPLE WILL BUY AGAIN AND IT WILL ALL BE OVER. Why would it be fair to help what's left of this mess and what about the people who lost there homes already. But most important the people who pay there bills .Bottom line imho you signed the loan and you need to pay it off.

[Zeppelin]

Let the prices fall to a "REALISTIC" affordable level for the masses. Real simple, if it is "AFFORDABLE", it will sell on its own... NO Rocket Science here, boys and girls. Obviously, people are too stupid and too impulsive to live within their means. I believe it is an educational thing. Start teaching our next generation the simple ABC's of Money Management while still in school. Obviously the parents have FAILED to instill this knowledge. I learned the hard way... Maybe "ENGLISH" should be replaced by "Money Management / Budgeting"!!! Start by sending all of these ELECTED PUBLIC SERVANTS there FIRST!!!

[Charlie]

The goverment should insure bank deposits up to the FDIC limit. That's all.

Bad banks should fail. Good banks will take their place and as a result, we'll have a better banking system. Look at Japan as an example of what happens when bad institutions are propped up instead of being allowed to fail.

Many financial institutions have solved issues by getting outside investment. They didn't need a government bailout. If institutions think they'll be bailed, they have no incentive to try and work things out on their own. The end result will be the government ends up spending several multiples more than is actually needed.

They goverment focus on changing our economy so it's sustainable instead of trying to maintain the broken current economic model of creating ever bigger piles of debt. No pile can grow forever. Eventually it collapses and the bigger the pile, the bigger the collapse.

[repo4sale@yahoo.com]

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2=New law 50% of all cars in 5 years must be Electric & 25% must 50 mpg hybrids!
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5=In 10yrs USA will be #1 AGAIN!
6=USA Debt & Social Security paid in Full!
7=If necessary, Guzzler tax for big engines & Tax Credit for Sipper & Elect. Cars!
8=$1-2 Trillion Cost to reduce oil 70%!
9=Tell me Johnjasonchun.com is not right!
10=USA will be #1 again till 2050 or longer!
11=We can buy out Canada & Mexico based on Energy Efficiency and Surplus!
12=Every Illegal can get a temp 5 year green card by purchasing a home in foreclosure and making payments for the term of their green card. Filing a tax return, paying taxes and staying employed. 5 years extension for being good. 11th year can file for citizenship!

[Neil Howard]

I have a HECLO and my property is worth $400.00. This home equity lone was for $50,000, with Washington Mutual the leader in the sub-prime lending. They sent out thousand of letters reducing the lines of credit with out an apprisal or notice andreduced my line to $17,500. And would not send me the ccurrent appraisal and said it was based on the zip code. I have direct waterfront property, bordering a poor neighborhood. Why doesn't the Banking Commision go after WAMU who started this whole mess in the first place? My credit rating is pristine well over 800 and have never been late on any payments. Sen. Dodd, wake up and back those that maintain great credit a prevent banks such as WAMU from sticking it to good payers?

[MARK]

The reason that Chris Dodd and Barney Frank are pushing these bailouts is that nearly 80% of their career contributions have been from the Real Estate and Building/Banking industries. They want to make sure banks get bailed out, that the National Association of Realtors' members continue to get their commissions, and, probably, that their personal "investment properties" don't lose any more value.

With soaring food and energy prices, the responsible public is already paying for the mess brought on by those speculating in Real Estate these past 10 years. Essentially, the 2-4% of homedebtors who lied on loan docs and/or HELOC'ed themselves into keeping up with the Joneses have already been helped through the reckless actions of the Federal Reserve in cutting interest rates; the responsible are paying for this via debasement of the U.S. Currency (inflation) and low interest rates on savings.

Send an email to Dodd, Frank, and your U.S. Congressmen: NO TO BAILOUTS FOR GREEDY SPECULATORS!

[Justin McCarthy]

Thanks, Ann...That astute observation seems to turn the whole premis of risk associated with this plan on it's ear... As well as beg the question of whether the "congressional report on the plan" should be taken as seriously or have as much credence as this article assigns it.

[Richard]

Ann,

Let's make your story more realistic. Assume your homeowner still owes the lender $395K, and now the house appraised at $315K, who would pay the difference, $80K in your case, between them? Remember the lender would only cut the principal from $315K to $267.7K.
With the $80K debt, the homeowner would walk away anyway for their best financial interest.

Will this proposal work?

Richard

[Tony]

Renting is not a crime. Can somebody please pay my rent!

[Anthony]

Those stupid enough who bought at the top of the market should be appreciative in losing their "white elephant" to foreclosure! You won't be homeless, you'll just be a renter. And all that debt will be written off. Lower home prices in a few years to come...but anybody who buys now is just catching a falling knife. There are still way too many people obsessed into believing that Real Estate is the end-all, be-all "investment." Once public sentiment turns solidly against real estate, it will be a sane time to buy. We're no where near that yet...

However, Congress' actions are deplorable...they should not even be thinking about reducing mortgage balances for those who signed documents stating they would pay "X" dollars for their overpriced houses. Where is my $150,000 for being responsible. I agree with the previous posters, send an email to your Congressperson expressing your displeasure with their proposals and the likely damage it will cause the U.S. economy.

Let the free market bring house prices down to affordable levels!

[js]

Hey folks, here is some vital info that many of you may not be aware of, but that congress needs to quickly learn about, or we may see Bubble Part 2 before long. That is, even if only a small part of the market is comprised of investors, it turns a buyers' market into a sellers' market. Once the balance is tipped in favor of sellers, the overbidding starts, and panic and greed take over. The problem that led to our current 'crisis' was one of AFFORDABILITY. We need to insure that prices are in historic balance with incomes, and are not now propped up due to to a bailout, or the re-entry of investors!! In the more desireable areas, there is quite a bit of pent up demand, as buyers wait for the bottom. There is still a huge number of investors out there, as well. Unless we insure that investors cannot pump up prices by competing with real home-owners, we are at risk of another bubble. Our current tax code is in large part responsible for keeping investors in the market. Here are other vital issues that aren't being discussed, but need to be brought into the awareness of legislatures: 1. It is very easy to check the 'owner-occupied' box, therefore, how will they target a bailout to 'owner-occupants' only? They have NO idea how prevelant this practice was and probably still is. Also, this means that the 'NEW FHA' will be handing out mortgages to investors, with this lax oversight. 2. The 'NEW FHA' is making loans in bubble markets TODAY that require only 3% down, and up to 55% Debt to Income!! (Homes that will soon be upside down, and that we taxpayers will soon be paying for) 3. The 'NEW FHA' does not require termite reports - let alone section 1 'clearance' therefore, we taxpayers will be on the hook for homes that may have extensive damage. There is NO sanity with this FHA "Reform"!! If we don't insist on sane underwriting guidelines for FHA loans (20% down, 28% Debt to Income, termite inspections, etc) - then we will only have ourselves to blame! Apparently, they need our input to let them know that we can't be hoodwinked into believing that they are doing this bailout to 'help out the poor homeowner'! It is clearly bad political calculus on their part! Tell your congresspeople AND Mr. Bush that we WON'T stand for it!!

[steve matulis]

Everyone, make sure you send an email, postal mail, or call your congressman and compain about this BS.

Visit this website and below is a suggestion about what you can put into the mail contents.
http://www.congress.org/congressorg/
issues/alert/?alertid=11216396&type=ML

----

I realize that many of your constituents have serious issues because of the state of our economy and seemingly endless waves of foreclosures. However, I truly believe you ought to seize this as your opportunity to do what's RIGHT, not just what keeps you in office. Do what's RIGHT for America --- Let the markets correct without continual meddling by Congress, The Fed, and the White House.

Remember that many of your constituents own their own homes and will gladly vote you out of office if you bail out speculators, flippers, and other risky folks. In my neighborhood, many people chose to rent because an end to the housing bubble was all too apparent. These people kept saving and spending wisely, knowing that prices would correct and their prudent behavior would be rewarded. If you support the bailouts, you will be rewarding people who've spent recklessly like drunken sailors for years --- at the expense of those who acted responsibly and conservatively.

I will be calling into your office and stopping in as often as possible to make myself clear If you don't do your part toward letting our markets correct on their own, without bailouts -- IMMEDIATELY, not after the next election, I will do my part and vote to replace you. I am distributing flyers around my neighborhood, including all the big apartment buildings. Several thousand residents in my area will be watching. Please do the right thing - it is in your best interest and in America's as well.

-------

[mcserc]

6% comission to sale your house? That's some crazy $$$ we are spending!

[Justin McCarthy]

Anthony...You must be one of those "bitter voters" that Obama referred to...LOL.

"Anybody that bought a house at the top of the market" = any family that bought a house in CA in the last 3.5 years...Gee, Anthony, should families be treated like pariahs for not being able to read the market, but needing a home?

Also, a family that tries to rent an apartment with a foreclosure or multiple mortgage late pays will be lucky to get an apartment in a slum.

Have a heart, mon...

[Justin McCarthy]

Disclosure: I have a low 30 year fixed with plenty of equity, stable job....Not looking for a free ride.

The fallacy here seems to be that many think that everybody that's in trouble is a former speculator looking for a hand-out.

There also seems to be a lot of emotion getting in the way of logic. I'm guessing that a lot of these "let housing values fall to 'realistic' level advocates are renters with an agenda. Just a guess. WE ARE ALL IN THIS TOGETHER, FOLKS. If the foreclosure trend continues, there will be massive effects on the greater economy..This will NOT happen in a vacuum.

Ann: What about 2nd mortgages in this bill? Seems to me that many in the last several years have used piggyback loans instead of PMI. Perhaps the WSJ was correct a while back in recommending that any "loan modification" bill address 2nds.

Seems that S2636 would have been a better alternative for banks: Chapter 13 would have allowed courts to view the finances of individuals and see what they were capable of paying back based on past income. Would have given people that truly wanted, and could to some degree, keep their homes (primaries) a fighting chance. When people walk away completely, it must be a far less advantageous situation for banks. Eventually, banks need to "get real" with some of the loans they funded. I think they'll come 'round eventually.

[Bob Morrison]

First, of all Anyone of you true Americans that have gotten that helping hand from Mommy or from who ever should not be opening you’re Big Ass Mouths.
(You can bet your sweet ass that I would miss a couple payments if it meant them re-writing my loan.) Let me see if I get this right, one you will let your credit be ruined and number two, I will be glad to help you pack and move if you loan is denied! Wake-Up
Same old dumped downed American to much Fox News (“if it means missing a few payments, some borrowers would deliberately miss mortgage payments to qualify for a cheaper mortgage.) Looks like I need to get together a few more movers or storage units lined-up for another good old American, (Once those incentives include guarantees of better rates, who in their right mind would struggle to pay on time?) Can this person even read a Newspaper? Rate’s are Up-Up and away better rates get real give you lender a call or maybe “Hope-Now” you know the little guy’s program with the funny walk that said over and over how Home-Ownership is at it’s all time high, come on you the guy watching the store. Time to Crash-N-Burn American God help us all.

[LeftLA]

Justin: You're 100% wrong about being unable to get an apartment. Plenty of landlords, including the big management companies, will rent to tenants with foreclosures, lates or a BK. They probably will require a bigger deposit or an extra month upfront. But it is easy to get a nice place in a good neighborhood, as long as you're honest about your situation and your income will support the rent.

I get so tired of hearing that "you'll never rent again!!!" BS. It's just not true.

[The Donald]

Seriously--Our idiot elected officials, and the UNELECTED officials like the FED will learn a painful lesson on "slippery slopes" if they pass this bailout measure.

Destroying contract law as we know it and rewarding bad decisions, means that all the people or a great majority of those currently making their payments on time will do whatever it takes to get those rate cuts/rate freezes too. They will miss payments and default so they can get saved too, and the whole thing goes up in smoke.

The lesson?? It is simply time to pay the piper. The more you meddle, the more unintended consequences you will have. Housing prices are completely disconnected from fundamentals in most cities and need to CRASH HARD....

Also, remember......the ONLY REASON these politicians are going so overboard to try to "help people stay in their homes" is because the alternative is that the banks have to take on more inventory and make more writedowns, because they know how OVER VALUED these stupid debt-traps really are!!

How nice of them!! They would rather stick US with the bill......

[tuma]

The market correction has barely begun. It should be allowed to run it full course...only and only then can people be able to afford homes they can actually afford...and only then can our recovery be sustainable...
STOP the bailout now
www.angryrenter.com