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

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Treasury, FDIC working on $500-billion mortgage workout plan

Federal officials are moving closer to a plan that would provide government guarantees for as much as $500 billion in troubled mortgages, helping millions of people stave off foreclosure.

The Treasury Department and the Federal Deposit Insurance Corp., are working on details of a plan outlined last week by FDIC Chairwoman Sheila C. Bair (pictured). The plan, which would cost $40 billion to $50 billion, would be modeled on mortgage modification programs being implemented by Bank of America Corp.’s Countrywide unit and by the FDIC for mortgages serviced by the failed IndyMac Bank.

The idea is to use loan guarantees and other enhancements to encourage lenders to modify mortgages, lowering monthly payments to a point that borrowers could afford them.

Andrew Gray, an FDIC spokesman, said the agency has had “productive conversations” with Treasury and other Bush administration officials, but it was too early to speculate about the framework or size of a potential program.

Treasury spokeswoman Jennifer Zuccarelli said, “the administration is looking at ways to reduce foreclosures, and that process is ongoing. We have not decided on a particular approach.”

-- Jim Puzzanghera

Photo credit: Bloomberg News

The unfairness of government-backed mortgage modifications

The L.A. Times today leads the newspaper with a look at Countrywide's plan to modify up to 395,000 mortgages -- 125,000 in California -- to make the mortgages affordable to buyers who are living in houses they otherwise can't afford. In some cases, those modifications will result in borrowers paying just 2.5% interest on their mortgages.

The Federal government took action last summer to encourage mortgage modifications by putting government guarantees behind the new mortgages, but for whatever reason that program doesn't appear to be attractive enough to banks. Pimco's Paul McCulley accurately described the basic unfairness of that effort months ago:

It runs against the streak of basic fairness in a lot of Americans. You’re going to provide a handout to the fool. The fool is going to be rewarded and I, the taxpayer, will be put at risk at the margin for that handout to the fool. When all I did was exactly what I was supposed to do. Where is the fairness here? It’s a hard question to answer.

I've long believed mortgage modifications should be between the lender and the borrower. The lender should be free to do whatever it wants to maximize the value of the loan. If that means foreclosure, foreclose. If that means a generous workout that is ultimately better for the bank than foreclosure, then work it out.  On the surface, Bank of America says that is what's happening here: it will modify loans if modifciation makes sense for the bank:

Not every borrower will qualify. One reason, said Bank of America executive Steve Bailey, is that the loan owner's expected earnings on a modified loan must exceed what it would expect to recover in foreclosure.

The Federal government, through the FDIC, has announced an aggressive effort to modify loans serviced by IndyMac, the failed bank. But as the indispensable Tanta reported yesterday at Calculated Risk, that ambitious program is off to a slow start. Tanta reports the FDIC originally said it thought it could save up to 40,000 out of 60,000 troubled IndyMac mortgages, but to date has only reached out to 15,000 borrowers, and has modified only 3,500 mortgages.

-- Peter Viles

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Schwarzenegger backs McCain-like mortgage bailout

News item: California Gov. Arnold Schwarzenegger today urged Congress to consider buying troubled mortgages, a homeowner bailout similar to the one proposed by Sen. John McCain.

From the A.P.:

A day after urging congressional leaders to consider a new jolt for the ailing economy, the Republican governor said Washington needs to "put money into the housing market." California has been devastated by the mortgage crisis, with thousands of foreclosures and median home prices falling sharply.

"The key is to make people stay in their homes," the governor said during a panel discussion with investor Warren Buffett. "I think that this is the direction that the second economic stimulus package should go in."

Money should be used to buy loans, he explained, after the value of homes has been adjusted to reflect lower market prices.

His proposal appeared to mirror John McCain's prescription to ease America's mortgage crisis...

Here's a complete transcript of the governor's remarks.

--Peter Viles

Photo Credit: A.P.

Former Bush aide: Refinance everybody at 5.25%

Former White House economic advisor Glenn Hubbard -- that's him pictured just to the left of the president -- is proposing a sweeping plan to boost housing prices by offering across-the-board, government-backed 5.25% refinancing to all American homeowners. Here's what Hubbard and Chris Mayer wrote in the Wall Street Journal last week:

We propose that the Bush administration and Congress allow all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25% (matching the lowest mortgage rate in the past 30 years), and place those mortgages with Fannie Mae and Freddie Mac. Investors and speculators should not be allowed to qualify.

What's the point? To drive up housing prices. Yes, to drive housing prices higher -- to put value back in mortgage-backed securities, to end the credit crisis. Seriously:

... the cost of buying a house is now 10% to 15% below the cost of renting across most of the country. Rising mortgage spreads and down-payment requirements are what's still driving down housing prices. We need to stop this decline.

He's saying housing is too cheap and we need to use the government to make it more expensive. I'm not making this up. This guy, Glenn Hubbard, was chairman of the Council of Economic Advisers under the current president.

Ideas like this one explain why I'm not certain housing prices will continue to decline back to historical levels in relation to income. In short, I'm not sure the government is willing to stand by while air rushes out of the housing bubble.

It's true, housing prices in much of America are too high relative to income, which means they should continue to decline. But further declines in housing prices will cause more economic pain for many homeowners, and the government seems hellbent on bailing out current homeowners at the expense of future home buyers.

-- Peter Viles

Your thoughts? Comments? E-mail story tips to Peter Viles
Photo: Associated Press

Inland Empire leaders fear a bailout wipeout

There's an excellent piece in today's Wall Street Journal reporting that business leaders in the Inland Empire are worried that the federal bailout could do lasting damage to the area's housing market.

The specific fear, according to the Journal, is that bulk purchase of foreclosed properties, and bulk sales to investors, will lead to a sharp drop in home-ownership in the area:

"We don't want the cure to be worse than the disease," said Steve PonTell, a business owner in the vast area east of Los Angeles known as the Inland Empire. He said he is worried that neighborhoods could be seriously damaged if the Treasury 'dumps' real-estate assets in such a way that leads to absentee ownership.

Government representatives in the area are now scrambling to muster support for a federal bill that would allow local businesses and governments to buy up some of the real estate to make sure it doesn't fall into the hands of speculators who have no stake in the community. The bill, introduced Sept. 27 by Rep. Gary Miller, a Republican who represents some of the areas in Southern California hurting from the mortgage meltdown, promotes the formation of regional public-private partnerships that could buy homes in their geographic area from the Treasury. This approach, they argue, would help stabilize neighborhoods and maximize financial returns to taxpayers.

Two cents: Interesting stuff. This is one of the problems with government intervention: It invites even more government intervention. So the government bailout might cause unintended consequences? OK, let's form regional government partnerships to diminish potential problems from the federal government's actions.

-- Peter Viles

Your thoughts? Comments? E-mail story tips to Peter Viles.
Hat tip: Todd in Weho, and others. Thanks.
Photo: Los Angeles Times

Hating the bailout? You won't like the next one, either.

News item: The Dow industrials more than 350 points Monday on fears the credit crisis is spreading, and the U.S. economy weakening. CNBC's Jim Cramer, love him or hate him, warned short-term investors to get out of the market today. He defined short term as the next five years.

News item from Bloomberg this morning:

U.S. Treasury Secretary Henry Paulson's $700-billion plan to buy troubled assets from financial firms may not work because it doesn't recapitalize banks, said Edmund Phelps, winner of the 2006 Nobel Prize for economics.

“There are lots of reasons to think the Paulson plan won't succeed in cleaning up banks' balance sheets any time soon,” Phelps, an economics professor at Columbia University, said at a conference today in Washington. “It may aggravate the second problem banks have, which is that they're quasi-insolvent.”

Speaking at the same conference, New York Times columnist Paul Krugman agreed, saying the Paulson plan fails to recapitalize banks, and that another government intervention, to inject capital into the banking system, is probably inevitable.

Two cents: We're up to at least* four bail-outs now -- Bear Stearns, Fannie-Freddie, AIG, and the Paulson plan. And it appears increasingly likely that a fifth bailout is in our near future. It could be a week from now, it could be a month, it could be the subject of the next president's first prime-time address to the nation in early 2009, but it's coming.

The initial argument for the Paulson plan was that it was "systemic" rather than case-by-case. Sure enough, it is systemic. That doesn't mean it will work, and that doesn't mean there won't be another, fairly soon.

*I say "at least" four bail-outs, because I'm sure some readers will count last summer's big housing bill (Remember that one? Historic and sweeping help for struggling homeowners?) as a bail-out as well.

-- Peter Viles

Your thoughts? Comments? E-mail story tips to Peter Viles.
Photo credit: AFP / Getty Images

Special Friday afternoon bailout edition: Photo caption contest

In general I'm not a fan of the caption contest. I make an exception here, though, at the suggestion of commenter "Laker," who called my attention to this A.P. photo of the president and King Henry of Wall Street  the treasury secretary, celebrating House passage of the $810 billion bailout bill.

My personal early favorite is, ""Heckuva job, Paulie," from brownonthebeach.

I eagerly await more of your best captions.

--Peter Viles

L.A. congressman's bailout blog: Why I switched from "no" to "yes"

Three Los Angeles House Democrats switched their votes on the bailout from "no" to "yes," according to the tally released by the House Clerk's office. The Democrats who voted against the $700-billion bailout earlier in the week, and then switched and voted in favor of the expanded, $810-billion bailout today, are:

Rep. Adam Schiff (pictured), whose 29th district includes parts of Burbank and North Hollywood. Schiff explains his reversal on his blog here, writing:

At the end of the day, the only reason I supported a bill in which the good narrowly outweighs the bad, is that the worst option of all, in the face of repeated bank failures, record foreclosures and soaring unemployment, would be to do nothing at all.

... The original Paulson plan, though much improved by the Congress, is still much deficient. It cannot be viewed as the end of the fiscal and economic crisis or the end of our response to it. But it may be seen as the end of the beginning.

Also switching votes from "no" to "yes":

Rep. Hilda Slolis, whose 32nd district includes parts of Azusa and Covina
Rep. Diane Watson, whose 33rd district includes parts of Culver City and Ladera Heights.

Below is the entire delegation from Los Angeles County, and how they voted on the first bailout vote, and the second bailout vote.

Update: House approves $810 billion bailout

11:30 a.m. PDT: An hour after the bailout passes, the Dow turns negative, down 41 points. Reader commentary on the bill is pretty negative too. Highlights:

Jeremy: This is a sad day for America.

Ed the Renter: This is the day the dollar died.

CraigW: This is infuriating. Throw these morons out of office.

CompaJD: Get your Pitchforks!!!!!

A couple of commenters have written in defense of the House, and the bailout:

Jim Thomlin: No, this is a great, day. Although still, even with financial armageddon on the table, 171 congressman STILL didn't have the guts to do what is right, and that is pass this bill. I'm sorry but the average person HAS NO IDEA what's at stake here.

Add your comments in the comment section, or click below to continue reading L.A. Land's earlier coverage of the House vote, in which the bailout was approved, 263 to 171.