The taxpayers are absorbing bad bank debt through the TARP loan modification program. It is a direct transfer of wealth from Main Street to Wall Street.
Irvine Home Address … 5212 SKINNER Ave Irvine, CA 92604
Resale Home Price …… $699,000
I won't ever leave while you want me to stay
Nothing you could do that would turn me away
Hanging on every word
Believing the things I heard
Being a fool
You've taken my life, so take my soul
That's what you said and I believed it all
I want to be with you as long
As you want me to
I won't move away
Ain't that what you said?
Ain't that what you said?
Ain't that what you said?
Liar, liar, liar
Three Dog Night — Liar
The newest liar loan is sponsored by the US government. The HAMP loan modification program is merely documenting the bad loan underwriting standards that collapsed to bring down the housing bubble. The effect of these loan modifications is to transfer the bad debt from the lender to the US government. In short, it is government orchestrated theft. Taxpayer money is being given to the banks. And what's worse, the poorer the loan quality on the banks books, the bigger the bailout.
Does anyone really think that homeowners can afford to pay 60% of their income for housing? Apparently, the architects of the latest loan modification program called HAMP do. Government officials are touting that they are saving the housing industry by modifying more than 1 million loans to date, and converting 170,000 of those to "permanent" status, with many more to come.
Those so-called "permanent modifications" cost the Borrower 31% of their income today, but the Borrower still has 61% of their income going to total debt obligations (credit card, HELOC, car payment, etc.). These statistics, known as the Back-end Debt to Income ratio, can be found on page 6 located PDF here. Although not disclosed, we believe most of these loans exceed 100% LTV today as well. This is nothing more than a fully documented version of the same garbage that took down the banking system two years ago, and this time the Federal government rather than Countrywide and New Century are underwriting it. Almost all of these Borrowers will eventually re-default.
Last Friday, I wrote about The Mechanism For Diverting Bank Losses to the US Taxpayer. This program is a manifestation of the same thing. Take a toxic mortgage, modify it with a government guarantee certain to fail, and a toxic mortgage is moved from a bank balance sheet to the government's balance sheet. It is a direct transfer of wealth from the US government to the banks in a thinly disguised rip off.
It is very obvious that the architects of HAMP are short-term focused, and are tricking us into thinking they are solving the problem by calling these permanent modifications. Until these loans are renamed, let's call them "Liar Loans 2," except this time the liar is the Bank of the United States rather than the Borrower because this modification is anything but "permanent". We do believe that stabilizing home prices and the banking system are critical to the recovery of the U.S. economy, but let's at least tell the truth about what is being done.
The truth is that the banks are off-loading their toxic crap. First, about $1,200,000,000,000 was purchased by the Federal Reserve indirectly through their GSE purchases, and now billions more are being recycled directly through bogus government loan modification attempts.
I wonder how many of these will be done without borrower knowledge or consent? The bank could modify the loan themselves, and when the borrower continued to be delinquent, the bank could then turn to the US government to make them whole.
Did you realize each loan modification made this transfer of liability and it is designed to fail?
What this means for you is that the housing recovery that is being touted by elected officials is far from assured. There will be fewer homeowners thrown out on the street this month than would have occurred otherwise, but they will be tossed out later. The modification programs have helped stabilize home prices around the country, mostly because they have created so much confusion that people can live in their home for free for one year or more, and are buying time for thousands of banks to continue improving their balance sheets with earnings from good loans, while deferring the write-off of bad loans. The biggest beneficiaries of this program are the banks with the largest Home Equity Loan portfolios, which are also the banks needed to provide capital to businesses to start hiring again.
The banks are embarking on a program of widespread borrower squatting until loans can be modified. Last week we looked at The Lender Decision Tree and Limited Resale Inventory. They are choosing squatting over foreclosure because when they foreclose, declining neighborhood values encourage too much strategic default. Of course, the squatting causes its own issues including moral hazard, but the banks are so desperate they are choosing moral hazard to stay alive — a zombie existence.
This is the problem of zombie banks. Rather than allocating capital toward making good, new loans, banks must constantly buffer their loan loss reserves to cover the losses on the very stupid loans from the past. New banks can make new loans. Zombie banks cover losses on old loans. If we had nationalized the banks back in 2008, we would have eliminated the zombie banking problems.
How does this change things? We will be adding 170K additional future foreclosures to our forecast, with many more to come, and guiding our clients through these turbulent times by analyzing every indicator we can get our hands on. Despite the negative tone of this email, there are and will continue to be plenty of opportunities to make money, particularly taking advantage of the distressed selling that will go on for years, but having a long term investment horizon. Also, the national housing market is becoming more local than ever, which means those with local market knowledge, or the ability to roll up all of the local factors into a national view, will make the most money. In other words, those who do their homework will get straight A's.
Unfortunately, the real estate industry's only prospect for growth for the foreseeable future is in distressed properties. One of the effects of this property loan distress is going to be continuing deflation as lenders finally take the painful write downs they are trying to avoid.
Future interest rates
We are at the bottom of the interest rate cycle, and it is very unlikely that mortgage interest rates will go much lower, but I don't see rates rising very high very fast either. Part of the reason is that I believe the The Bernanke Put: The Implied Protection of Mortgage Interest Rates is very real, but I also think we have some huge deflationary headwinds blowing. The amount of second mortgage debt on the books of the banks is very troubling. The losses are certain to be much larger than the banks are currently willing to admit.
Also, the commercial real estate bust has barely started. The only hope lenders have with commercial loans is that many of them were personally guaranteed by wealthy people or corporations that will stand by the losses. The write downs for commercial mortgages has only just begun, and as the cycle drags on, many small and mid-sized banks are going to get wiped out. There are Midwestern banks with entire portfolios of California raw land deals. The assets in many instances have a near negative current value, but loans on the books of these lenders is in the millions. Marking to reality is going to be very painful, and squatting has ruled the day. Most of the raw land deals in California are tied up in some underwater banking limbo.
The yet-to-be-recognized loan losses are very deflationary. Loan losses are the destruction of lender capital. The loan itself may have been imaginary money, but the losses are very real. This deflationary pressure will keep interest rates low for as long as it lasts. The commercial real estate bust is in front of us, not behind us.
Some loan modifications can and should work
Loan modification programs fail because borrowers are generally better off in default. Some can't afford the debt service under any circumstances. They can get out from under their debt and be much better off than hanging on for fantasies of better days to come. However, when borrowers have plenty of equity and if they could afford their payments under normal circumstances, then loan modifications are a good solution. Unfortunately, there aren't many people who have equity and can afford the debt under normal repayment terms.
The owner of today's featured property purchased for $275,000 on 3/22/1999. Or at least that is what my data source shows. I don't think this is right. I think he paid $345,000 based on the $276,000 first mortgage, $28,000 second mortgage. I suspect there was also a $41,000 down payment, but I can't be sure. I doubt this was cash-out purchase in 1999.
The mistake this owner made was taking out an Option ARM for $320,000 on 11/2/2007. He may have fallen on hard times when he opened a HELOC on 6/19/2008 for $80,000. This owner went through the entire bubble without refinancing, so he didn't start refinancing for HELOC abuse.
Recording Date: 01/27/2010
Document Type: Notice of Sale
Recording Date: 05/11/2009
Document Type: Notice of Default
This guy defaults on his Option ARM, but he still has 50% equity in the property, so foreclosing on him simply forces him to sell. This is a borrower for whom loan modification program are designed. He needs his Option ARM converted to a low-interest fixed-rate mortgage so he can stay in his house. He could afford the smaller mortgage under stable terms. He did for seven years without Ponzi borrowing.
I support loan modifications for borrowers like this guy. Unfortunately, he is the exception rather than the rule. Most are over extended Ponzis waiting for their bailout to continue building their huge pile of debt to support their fake lives.
He was given a small private loan to cure his default.
Recording Date: 02/22/2010
Document Type: Notice of Rescission
Perhaps he has come to accept that he can't afford this house any longer and he must sell. That is sad… Well, it is sad to a point. He is still going to sell and pocket $350,000 for being an owner during the housing bubble.
In the year since the program got rolling, it has generally failed to lower payments. Of the 3.4 million eligible loans, 228,000 have been permanently reduced, while 155,000 have been rejected during the trial period, according to Treasury Department data compiled by the nonprofit Pro Publica.
"If they're rejected, collection starts again immediately," said Ali Tarzi, housing supervisor for the San Diego nonprofit Community Housing Works.
Robles said his payments were lowered by about one-third for nine months, and he paid them all on time. In February, he got a letter saying he'd been rejected from the program because he had too much in savings to qualify.
Then he got the bill for $10,500, the sum of the difference between nine months of lowered payments and the amount he was supposed to pay, plus interest charges and late fees. He also learned his credit rating had fallen steeply, thanks to two reports of being 60 days overdue, and two of being 30 days overdue.
"I was like, how can you do that?" he said. "I never missed a payment!"
Treasury guidelines say that when borrowers go into a trial modification, their credit status should freeze: If the borrowers are delinquent, they stay delinquent; and if they're current, they stay current, though the guidelines allow lenders to report that the payment is being modified, which causes a small credit hit.
Irvine Home Address … 5212 SKINNER Ave Irvine, CA 92604
Resale Home Price … $699,000
Home Purchase Price … $275,000
Home Purchase Date …. 3/22/1999
Net Gain (Loss) ………. $382,060
Percent Change ………. 154.2%
Annual Appreciation … 8.1%
Cost of Ownership
$699,000 ………. Asking Price
$139,800 ………. 20% Down Conventional
5.01% …………… Mortgage Interest Rate
$559,200 ………. 30-Year Mortgage
$144,900 ………. Income Requirement
$3,005 ………. Monthly Mortgage Payment
$606 ………. Property Tax
$0 ………. Special Taxes and Levies (Mello Roos)
$58 ………. Homeowners Insurance
$0 ………. Homeowners Association Fees
$3,669 ………. Monthly Cash Outlays
-$735 ………. Tax Savings (% of Interest and Property Tax)
-$671 ………. Equity Hidden in Payment
$273 ………. Lost Income to Down Payment (net of taxes)
$87 ………. Maintenance and Replacement Reserves
$2,624 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$6,990 ………. Furnishing and Move In @1%
$6,990 ………. Closing Costs @1%
$5,592 ………… Interest Points @1% of Loan
$139,800 ………. Down Payment
$159,372 ………. Total Cash Costs
$40,200 ………… Emergency Cash Reserves
$199,572 ………. Total Savings Needed
Baths: 2 full 1 part baths
Home size: 2,324 sq ft
($301 / sq ft)
Lot Size: 6,240 sq ft
Year Built: 1972
Days on Market: 81
Listing Updated: 40310
MLS Number: P722993
Property Type: Single Family, Residential
GREAT LOCATION IN IRVINE. THIS HOME NEEDS A LITTLE TLC, BUT HAS A GREAT FLOOR PLAN AND LARGE YARD.A WINE CELLAR IS IN BACK YARD. A HUGE FAMILY ROOM OFFERS AN AREA FOR THE ENTIRE FAMILY TO RELAX. THIS PROPERTY HAS BEEN REDUCE $25000 AND WE ARE LOOKING FOR A FAST SALE.