Mortgage modification nation: Who really deserves a cheaper mortgage?

Nelcisco, a regular commenter here, is now working in a booming field in California -- loan modifications.  We talked today and he told me he's worried that loan work-outs might become trendy -- even for borrowers who don't really need them:

"My biggest concern is that people who are not in distress and not in need of a loan modification are going to start pursuing loan modifications. And that’s where it’s going to get ugly. That’s where you’ll see the backlash."

Reporter David Streitfeld explores the same thorny issue in Friday's New York Times: How do you determine who really deserves a loan modification that reduces their mortgage payment? How do you prevent people from deliberately defaulting their way into a lower payment? And what do you say to the "sober souls" who borrowed responsibly and keep on paying the mortgage on their upside-down houses while everyone around them gets a break?

“Why am I being punished for having bought a house I could afford?” asks homeowner Todd Lawrence of Norwich, Conn. “I am beginning to think I would have rocks in my head if I keep paying my mortgage.”

This is going to be messy. If banks are cutting deals, everyone is going to want a deal. Pimco's Paul McCulley tells Streitfeld, "“If the lunch truly is free, the demand for free lunches will be large."

Also quoted: economist Peter Schiff, who says underwater borrowers will strongly consider defaulting in order to get government help: “If the government says, ‘Prove that you can’t afford your house and we’ll redo your mortgage,’ then people are going to try to qualify,” Mr. Schiff said.

Two cents: This story is a reminder of a key factor in the housing bubble that started all this: The American consumer shares and spreads business tricks and trends at lightning speed; the American government, by contrast, is very slow to catch on. So, during the bubble, consumers quickly learned from each other how to buy real estate with no money down, how to suck the equity out of their homes and spend it, how to squeeze into a big house by paying a tiny teaser rate. There's little evidence government regulators learn as quickly -- during the bubble, they simply didn't notice the degree to which consumers had embraced risky, and ultimately disastrous, borrowing.

--Peter Viles

Your thoughts? Comments? E-mail story tips to Peter Viles

Comments

[Rational Renter]

Here's a simple answer: no one deserves a loan modification.

Foreclosure isn't a death sentence.

[Rational Renter]

It's maddening. MADDENING. Sheila at the FDIC, please understand the following:

1) YOU CANNOT STOP FORECLOSURES WHEN PRICES ARE FALLING. It's an impossibility. Sure, you can reduce them, but that just delays the inevitable correction.

2) PRICES WILL NOT STOP FALLING, because income levels do not support current values.

We have a choice. We can let the market correct sharply - it will hurt, but we can very much survive it. OR, drag out the correction for a decade and balloon the national debt past a point of no return in the process. There is only one correct answer.

[Laker]

Rational Renter,
You STOLE my word, i swear!.
That is the solution, instead of boggling our minds figuring who deserves to get free lunch and who needs to pay for his lunch. NO BODY GET'S FREE LUNCH!
You want lunch, go WORK, EARN money, and BUY your lunch. I'm so sick of this socialistic communistic system we developed. My god, can somebody wake up and scream.

What's wrong in heaving those deadbeat go and RENT for crying out laud. Let those that can't pay send the keys to the bank. If the bank lowers the price, there will be buyers to buy. ohhhhhgggg

My cousin bought a house in OC about year a half ago for $630,000. Today that place is worth $480,000. He has some neighbors that make less than 1/2 of what he makes. He took a 30 year fixed, they took ARM with 0 down.
So the deadbeat neighbor that bought same house next door to him will get a loan modification, keep the house and pay 30-50% less than what my cousin is paying...Why? coz he spend years, time, money and sweat to educate himself so he could get a good job and afford the house. The deadbeat neighbor is a super market employee that never finished high school, yet he gets rewarded by the government and gets subsidized mortgage.
THIS IS SPREAD THE WEALTH - it is disgusting.

[Laker]

"...“This is not about trying to create fairness,” said Michael H. Krimminger, special adviser for policy at the Federal Deposit Insurance Corporation,....“The goal is to keep people in their houses...."

Hey Krimminger, if that is your goal, why don't you set the mortgage to zero or some symbolic $50 per month for the rest of their lives. This will guarantee that you will keep people in their houses !!!
WHAT A MORONIC government. This existed 40 years ago in the soviet union. Every Russian paid a joke amount equivalent to $50 for his housing which belonged to the government.

And this -> "... The borrower, who lives in suburban Los Angeles, took nearly $200,000 in cash out of his house and then paid less than the monthly interest due on his new loan.
He now owes about $350,000 on a house that is worth only $150,000. He asked not to be identified for fear he would not get a modification, which could reduce his mortgage to $142,500.

You tell me, the bank can't sell the place for more than $142,000? Are they taking a 60% haircut?

[Banks and other mortgage lenders]

Peter wrote:
"This story is a reminder of a key factor in the housing bubble that started all this: The American consumer shares and spreads business tricks and trends at lightning speed; the American government, by contrast, is very slow to catch on. "

Are you forgetting any important players here?

Let's see...homebuyers, check...government, check...nope, nobody missing.

[Another rational renter]

I agree. The media wants people to believe that people who can't afford their homes will be homeless. There are plenty of nice homes to rent until they can afford a house with a legitimate down payment and normal interest rates. I earn about $250k (and will likely get killed by Obama's tax plan) and I can't afford a house. These housing prices need to return to a normal level so that average Californians can afford a home. This will not happen (at least in the near future) with this bailout.

Basically, people who do the right thing are being screwed by having to pay for every level of this scam from bailouts to homeowner to bailouts to investment banks and insurance companies. I hope everyone votes out their elected "representatives" like I'm trying to do.

[fresno dan]

Exactly
But to me, the other side of the question shows why this really won't work. How do you decide who WON'T get help? By defintion, the person can't meet their mortgage. Should somebody who bought a 750K house be able to get help? Should anybody who put 0 down get help?
Should a two earner family get precedence 1 wage earner (because the one laid off will eventually get a job)? ANY fraud or untrue statements in a loan application disqualifies you? Should nobody get help if they would not be able to make the payment under a 20% down, fixed 30 rate loan?
and on and on...

[Anonymous]

They should just make the modifications undesireable for the average on time mortgage payer.

Ex. lower interest rate, same loan balance (ie. more affordable, but on the hook for more interest vs. prinipal over time - a bad general financial strategy for the finances of the borrower at retirement time)

Only principal reductions should be limited to forgiving additional late charges (ex. fees tacked on after 1st default), cap the principal reduction so it never goes below what the person owed had they paid on time the whole time.

[Dan]

This is a *beautiful* example of....
The law of unintended consequences!

From the Wikipedia page:

Unintended consequences are outcomes that are not (or not limited to) what the actor intended in a particular situation. The unintended results may be foreseen or unforeseen, but they should be the logical or likely results of the action.

Discussions of unintended consequences usually refer to the situation of perverse results. This situation often arises because a policy has a perverse incentive and causes actions contrary to what is desired.

[Doug in Toronto]

Give a break to everyone? That would be socialism (horrors!) Give a break to a 'favoured few'? That's what the rich have had all along. Does this mean foreclosed is the new privileged??

[SoCalJim]

Most people in our government are idiots and/or crooks - dum dum Dems and Ruplicant's alike.

[jag]

Lets create a new proposition callled NO FREE LUNCH! Then we let the American people vote on it not our bought off government.

[syscom3]

Modify the mortgage this way:

Produce a new loan using current market price of the property at current 30 year interest rates.

If the owner can meet the new monthly payment (subject to verification of course) then there should be no problem.

[Willard]

Not to mention how this problem will affect people who have saved and want to finally buy a home and will be asked to bear the burden of a 10% rate for a jumbo when the gov and banks are rescuing distressed buyer and providing much lower rates.

[bigunit]

ARR - Anybody making nearly $250k per year can own a home in SoCal; they just can't live in Santa Monica, Beverly Hills or a handful of other elitist neighborhoods. I also disagree with your portrayal of the impending Obama Tax as "going to kill you" making little sense considering you've already been raped by lack of a mortgage interest write-off. A little advice: Get into the market in the next couple years and you will be making more $$.

I do agree that artificially propping-up home prices is a recipe for disaster.

Banks should allow deadbeats to stay in the homes until beginning the listing process; then give them "cash for keys" so they'll have a rental deposit.

Make the loan mod process more painful to deter opportunist such as those mentioned by Laker. Perhaps a Scarlett Letter type approach on participants credit rating?

[TakeFive]

There will be some abuses, but I don't think there will be a tsunami of loan mods. The reason? People are flakes, even when it comes to serving their own self interest.

I helped a few people with mods and the effort required to get the most minimal documentation from them is discouraging at best. And a hardship letter? Forget it. I end up writing these myself.

No. Most people I’ve encountered in a foreclosure situation have a deer in the headlights demeanor and will not put forth the extraordinary effort required for a mod. Or they give up the first time the lender says no, usually after several weeks of waiting.

[Really?]

250K a year and you can't afford a house? Where are you looking? How many acres do you want?

[dino]

if you foreclose, isn't your credit pretty ruined...? so why would you want to to do that? to save a few grand? I dont get it

[356man]

It's bad enough we taxpayers are having to bail out the greedy and stupid banks, now it extends to homeowners of the same ilk? Sorry if they overextended themselves, tough $**t, rent until you can responsibly afford to buy a roof over your head. What is my motivation to be responsible and pay my mortgage? People are like water; always looking for the path of least resistance, in this case regardless of the outcome.

[fezco]

So Greenspan and the corrupt banks built this house of cards; Paulson and the FDIC are out there with the taxpayer's hot glue gun trying to stick all the cards together.

[sheila]

Pete says:

"So, during the bubble, consumers quickly learned from each other how to buy real estate with no money down, how to suck the equity out of their homes and spend it, how to squeeze into a big house by paying a tiny teaser rate."

Uh, you really think that consumers were "learning from each other?" WTF? this was ALL instigated by, pushed by, and hugely profited by.... Lenders and Brokers. Who were instigated by, pushed by and hugely profited by... Investment banks selling derivatives and mortgage-backed securities.

as usual on this blog, all the blame goes to the admittedly greedy tools used by the Corporatocracy to enrich themselves, and the bogeymen of "government" and never to the villains who orchestrated the biggest pyramid scheme in history - Big Bankers.

face it, people, your beloved Corporate Masters have betrayed you and are impoverishing you.

[OverIt]

This is America and as such we don't ever "Spread the wealth" nearly as much as we "Share the debt". I don't expect that to change now or ever.

Before any discussion of loan mods occurs there has to be a initial review of previously stated income. Did the borrower EVER truly qualify for the loan they were given or did they simply attest to earning 100K a year as a fry cook? If that is the case (and there will be many of such situations) the borrower cannot be allowed to modify their loan - period. It's my understanding that this is policy now and I hope it's being enforced.

[Mmm donuts]

syscom3 wrote: Modify the mortgage this way: Produce a new loan using current market price of the property at current 30 year interest rates.

I love this idea. The reason they won't go for that though is that solution would not put a floor in housing prices. Many Congress folk are on the record saying price stabilization of the housing market is one of their explicit goals and a necessary pre-condition to economic recovery. In my view, the sooner we get to real price discovery the sooner the economy can begin to recover.

[yinyang]

We are becoming a nation of people who feel it is not only okay but justified to cheat, lie, and swindle each other and the rest of the population. Personal responsibility is discouraged by the govenment. White collar crimes are rarely prosecuted because FBI is so stretched. Our nation is eating ourself from within just to keep a facade of prosperity. Hope is being replaced by anger and desperation. Welcome to the new dawn.

[Nelcisco]

You all make great points, and trust me I'd rather continue to do loans but when lenders are getting more writedowns than fundings there is a deep problem, my last mortgage deal blew up because their down payment assiatance program ended this month.

All of you as of this point make a compelling aguement, my objective in this niche market is to help stop the bleeding or else like I said on another post banks will lose their status or may I say rating as a bank and become more of a RE company, and what that means is banks are in the financial services industry (obviously) not in the real estate business as far as house inventory but in RE financing unless I'm missing something, so liquidity is what keeps them in good ratings by moodys and if they obtain too much inventory, well,what does that do to their liquidity? Then we'll reading more pieces like the one Tuesday on the credit card crackdown where responsibles young guys like Laker with a 796 fico will get their credit limits slashed down to their balances

This bailout is a no win situation just like the $700 billion,or is it 810b? But better main street than wall street and something has to be done.

Hey, I'm not just in this for the buck, I take to heart what all of you are saying and I'll act in a responsible way.By the way Pete was very delightful to speak with.