House Democrats lobby to give free money to loan owners

In what can only be described as buying votes, Democrats in the House of Representatives are lobbying to forgive principal on GSE held mortgages.

Irvine Home Address … 27 SHEARWATER Irvine, CA 92604

Resale Home Price …… $725,000

I never saw the end in sight;

fools are kind of blind.

Thought everything was going alright,

but I was running out of time.

Take my words, read 'em every day,

keep 'em close by, don't you let 'em fade away,

So you'll remember what I forgot to say,

write this down.

Write this Down — George Strait

The legions of hopelessly underwater loan owners are all praying for a write down on their mortgage. It's a false hope, but with falling prices and little prospect of a recovery any time soon, false hope is all many of these borrowers has left.

US House Democrats press for mortgage write-downs

Reuters — WASHINGTON | Tue Nov 22, 2011 4:33pm EST

Nov 22 (Reuters) – More than 20 Democrats in the U.S. House of Representatives on Tuesday called on the regulator of Fannie Mae and Freddie Mac to help underwater borrowers by allowing their loan principal to be reduced.

The regulator has faced increasing pressure to permit the write-down of principal by the two government-controlled mortgage finance providers as a way to help some of the millions of Americans who owe more than their homes are worth. The Federal Housing Finance Agency, however, has stood fast out of concern such a change would undercut finances of Fannie and Freddie.

We strongly urge that you reconsider your refusal to allow principal reductions to achieve better-performing (loan) modifications and avoid the extreme losses of unnecessary foreclosures,” the 21 lawmakers wrote in a letter to the FHFA.

Nobody is discussing the bigger issue of moral hazard. If you give away free money, it will encourage imprudent borrowing because the borrowers know they can petition for a bailout and get it. That's the real reason we shouldn't consider principal reductions.

I am relieved the FHFA is resisting increasing the losses on the government's GSE portfolio. Giving away free money will certainly do that.

As for the congressmen, their argument is specious. How does giving away free money avoid extreme losses? Doesn't that guarantee losses? Are the congressmen really arguing that by giving away some now taxpayers will lose less later? Does anyone else see the insanity in that?

Fannie Mae and Freddie Mac provide guarantees to investors against the possible default of loans, which encourages banks to make new loans. The two companies are the biggest sources of U.S. mortgage financing, and regulations on their activities have a widespread effect on the mortgage market.

Fannie Mae and Freddie Mac, which were taken over by the government in 2008, have together received more than $145 billion in taxpayer-funded support.

Given an expanding gap between U.S. home values and mortgage balances, many Democrats and housing industry representatives have argued for comprehensive anti-foreclosure efforts that include principal write-downs.

They are arguing against the cure to the problem. If they really wanted to bring down the gap between home values and mortgage balances, they would foreclose on underwater borrowers and put them out of their misery. These congressmen are correct that the gap between what the houses are worth and what is owed needs to be reduced, but their method of doing so is all wrong. Principal forgiveness will not deter irresponsible borrowing in the future. Foreclosure has consequences, principal forgiveness does not.

Mortgage modifications usually involve a reduction in the interest rate but not the principal balance of the loan.

In the letter, Democrats estimated principal reductions for troubled borrowers would lead to lower defaults and reduce the risk of default for about 20 percent of Fannie and Freddie's portfolio.

So they want to give away the money because the GSE might lose it? How stupid is that?

Efforts to reduce principal debt are rare, often voluntary. Fannie and Freddie are also concerned that writing down loan balances would create a moral hazard — the concept that rescue efforts breed further behavior that exacerbates the existing problem — prompting other borrowers to stop making timely loan payments.

They shouldn't just be concerned, they should be quite certain principal forgiveness will lead to moral hazard. No borrower will ever be prudent again. If borrowers believe they have no risk in the transaction, they will take all the money they can get under any terms available because they know they will get bailed out if things go wrong.

“The performance of the enterprises' mortgage modifications leaves much to be desired for homeowners, for the housing market, and for taxpayers,” Representative Brad Miller, a Democrat and a member of the House Financial Services Committee, said in a statement. Miller, who has proposed legislation to reform housing finance, led the Democrats in writing the letter.

Some economists see principal reductions as central to cleaning up the housing mess and preventing foreclosures.

Some economists are really stupid.

Settlement talks between the government and some of the biggest mortgage servicers to clean up alleged foreclosure abuses include widespread principle reductions in their agreement.

There's the money shot — the false hope to keep more loan owners paying. Widespread principal reductions are coming, right?

If there is principal reduction in the agreement, it will be targeted to the most severely underwater borrowers who are most likely to strategically default anyway. By reducing the principal a little, they will get a few more payments out of the borrowers before they implode. Perhaps this is what the Democrats had in mind when the proposed principal reduction, but I rather doubt it.

A house I know

When I first began writing for the IHB back in February of 2007, I had just moved into a property in University Park. While I was looking for that property, I made an offer to rent this property. At the time, the asking rent was $2,700, and with the prevailing 6.3% interest rate, the house was well over rental parity. It's amazing what a difference a 4% interest rate makes.

At the time, one of the main reasons I didn't rent this property was because I knew the owner was a speculator who just bought the property, fixed it up, and was using an Option ARM with a 1.5% teaser rate to keep his monthly cost down. In other words, I knew he was going to blow up.

He did. Despite putting $142,000 down on this property, the negative amortization and declining value prompted him to give up. He quit paying sometime this year, probably when his payment recasted to fully amortizing and the cost of ownership started burning a hole in his wallet.

Foreclosure Record

Recording Date: 09/23/2011

Document Type: Notice of Default

The description says it's an equity sale, but I rather doubt he has much flexibility to lower the price and still pay off the loan. This will probably die on the MLS and either become a short sale or an REO.

With 4% interest rates, this house costs less to own than to rent. The price is still ridiculous, but the cost of ownership is what it is. The buyer of this property will be saving money versus renting, and for a single-story home in Woodbridge, that's not all bad.


This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707


Irvine House Address … 27 SHEARWATER Irvine, CA 92604

Resale House Price …… $725,000

Beds: 3

Baths: 2

Sq. Ft.: 1538


Property Type: Residential, Single Family

Style: One Level, Contemporary

Year Built: 1979

Community: Woodbridge

County: Orange

MLS#: S679826

Source: CRMLS

Status: Active

On Redfin: 10 days


Equity sale in North Lake, Woodbridge! Move-in ready. Upgraded maple kitchen cabinets, granite countertops, stainless steel appliances. Neutral ceramic tile, carpet, paint and decor. This highly-desireable floorplan boasts private Atrium off master bedroom. Nice open floor plan, great for entertaining. Walking distance to Eastshore, Lakeside & Woodbridge High.


Proprietary IHB commentary and analysis

Resale Home Price …… $725,000

House Purchase Price … $740,000

House Purchase Date …. 11/17/2006

Net Gain (Loss) ………. ($58,500)

Percent Change ………. -7.9%

Annual Appreciation … -0.4%

Cost of Home Ownership


$725,000 ………. Asking Price

$145,000 ………. 20% Down Conventional

4.02% …………… Mortgage Interest Rate

$580,000 ………. 30-Year Mortgage

$140,790 ………. Income Requirement

$2,776 ………. Monthly Mortgage Payment

$628 ………. Property Tax (@1.04%)

$0 ………. Special Taxes and Levies (Mello Roos)

$151 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$82 ………. Homeowners Association Fees


$3,637 ………. Monthly Cash Outlays

-$643 ………. Tax Savings (% of Interest and Property Tax)

-$833 ………. Equity Hidden in Payment (Amortization)

$203 ………. Lost Income to Down Payment (net of taxes)

$111 ………. Maintenance and Replacement Reserves


$2,475 ………. Monthly Cost of Ownership

Cash Acquisition Demands


$7,250 ………. Furnishing and Move In @1%

$7,250 ………. Closing Costs @1%

$5,800 ………. Interest Points

$145,000 ………. Down Payment


$165,300 ………. Total Cash Costs

$37,900 ………… Emergency Cash Reserves


$203,200 ………. Total Savings Needed


33 thoughts on “House Democrats lobby to give free money to loan owners

  1. Mark

    Some economists see principal reductions as central to cleaning up the housing mess AND preventing foreclosures.

    Some economists are really stupid.

    I think if your requirements are to have a clearing market and not foreclose you need (ongoing) principle reductions. Just ignore the question of where the money for this will come from. Of course if you don’t want to keep pumping money in from outside you need either foreclosure or a stuck market. I don’t think the economists were silly, just answering the silly question they were paid to answer.

    Meta-economics: the study of the buying and selling of economists?

    1. Irvine Observer

      The $325,000 estimate seemed low at first glance. However when you look at newer homes (same approximate square footage) with more amenities in Irvine (built within the last 10 years) transacting at $250-$290/sq foot, something like this should probably transact in the low $200/sq foot range – therefore $325,000 would seem reasonable.

  2. Casual Observer

    @Swiller…that might be a bit low, but $700K is way over the top. It seems to me that if principal reductions were at all possible they would have been done by now. My understanding of the whole MBS thingy is that ANY change in the terms of the original mortgage contract would have to be approved by the OWNER of the contract, i.e. the INVESTOR…..not Freddie/Fannie. Do these “Senators” know what they’re talking about?

    1. IrvineRenter

      The only loans I think they could successfully reduce principal on are the ones held in the GSE portfolio, not the ones they insure held by others. Talk about an unfair distribution of benefits. Those people with loans held by anyone other than the GSEs are out of luck.

    2. tazman69er

      Actually, it’s whoever has legal and physical possession of the note, not the mortgage who would have the legal authority to reduce principal…which would mean the PSA trustee who, theoretically 😉 has kept accurate records and took physical possession of the note and can produce it…

  3. wheresthebeef

    Almost three quarters of a million dollars for a 1500 sq ft box built in the 1970s! It might be cheaper to own than rent. This shows how perversely manipulated low interest rates change the equation.

    I’ll let some eager buyer scoop this place up. I might be paying $200 a month more in rent for a similar place, but at least I won’t be losing 2 to 3K per month in equity due to declining home values.

  4. Alan

    When it was built in the 1970’s, will it really be cheaper to own? How well built were these places? How’s the roof, exterior shell (even if OC does not get much rain or wind), plumbing (inside, and out to the street), etc.? Was the electric panel put in back then adequate for today and the next 10 years or so? What about the state of the water heater and AC? I guess you need a much better inspection than verifying if the granite is real and flat to have an idea of what the major maintenance and repairs are going to be on a 40-year old house. Not having seen the house so I really don’t know, but I’d tend to agree that three quarters of a million dollars is still a lot to pay.

    1. wheresthebeef

      All good points. I have a friend who bought a 1950s vintage house in Torrance earlier this year. He is learning very quickly that houses are money pits. He replace all the original windows and doors, the roof leaked during the last heavy rain, the main line backs up due to a root growing into it. The root is located between the sidewalk and street and the city claims no responsibility…potentially a 5K to 10K job to “fix” it.

      IrvineRenter, I noticed you have a maintenance cost associated with your price. I assume this does NOT include the cost of a gardener. Unless you want to spend time mowing your lawn and weeding every weekend, this needs to be added. You are probably looking at $80/month or so if you want a nicely manicured lawn serviced weekly. Oh the horror of highly educated Irvine professionals actually getting dirty and doing manual labor!

      1. lowrydr310

        Oh the horror of highly educated Irvine professionals actually getting dirty and doing manual labor!

        Tell the lazy kids to put the XBOX down for fifteen minutes and mow the lawn, trim the hedges, and rake the clippings.

        1. wheresthebeef

          When is the last time you have seen a teenager doing yardwork in OC?

          Especially in Irvine, there are SAT tests to ace and piano playing to master. Where will mowing the lawn get you in this world? 🙂

  5. Risedave

    IR has the fundamental value line and could incl. it w/ each home for sale, showing us what it would cost had there been no bubble i.e. the 4% incr. per year idea. That would be valueable information next to the HOA monthly charges, and it would also provide fodder for P.R.

    1. IrvineRenter

      It’s hard to pick a reasonable number for long-term appreciation. Four percent would probably make many of these houses look underpriced. Plus, what is the appropriate baseline price? A property purchased during the bubble has depreciated. If I put a 4% growth rate on those, the result will be a value double what it currently sells for.

      You’re right, though. PR would love it.

    2. Alan

      Um, if you grant 4% increase per year as a given, aren’t you saying that “real estate always goes up”? After that it is just haggling over by how much. Go for it! What could possibly go wrong?

  6. forouz

    My god, 700K+ for this little 1500sqft place. You would have to be quite mad to buy anywhere near this price. Gosh, now I see why the exodus from OC/California is going on.

    1. Casual Observer

      The operative word is “asking” price. This is what the seller thinks the property is worth. Not what it would sell for, appraise for. As stated in IR’s remarks, this is ‘owned’ by an investor who wanted too much in rent, now wants too much to sell. $400+/sq.ft. is a 2006 bubble price. It will never happen.

  7. Jaded and Somewhat Bitter

    Note to possibly insane realtor: If you have hopes of snagging $725K for this baby, I’d suggest more pics showcasing the actual home, as opposed to the weak horticultural display (“Still Life with Three Elephant Ears”) and tiki torch assemblage in pic #3… I for one had hoped to see far more of the highly touted “neutral tile, carpet paint, and decor”…. 😉

    1. SanJoseRenter

      Now that you mention it, there’s some interesting staging going on in those 4 pics …

      1) glass of milk on the kitchen counter
      2) glass of wine on the apparent small wine cooler
      3) plastic glass of soda on the escher living room end table
      4) phallic representation (?) on the dining room table.

      Any idea why there’s all the drinks displayed?

      1. Jaded and Somewhat Bitter

        …not to mention that high-powered telescope aimed at the neighbor’s bedroom window…. Although, I wonder if they’d sell me the “Easter Egg Headed Barbie (sans Arms)” centerpiece on the dining table if pressed? It would make an excellent white-elephant gift!

  8. Cali Certified Appraiser

    Just comped this out….2 model matches just sold recently, one for $555K (3 months ago, 0.03 miles away) and another for $614,500 (1 month ago, 0.06 Miles away). Declining market…this wont appraise for more than $615K (even though it’s totally remodeled….)

    Who’s the dope who’s going to bring that “EXTRA” $110,000 to close this “awesome” deal???? You might find an awesome fha buyer (@ $615K) for this bad boy, thanks FHA!!!

    Any thoughts?

    1. Irvine Observer

      $615K would mean over $400/sq ft for an older home! Nicer neighborhoods in Irvine are selling apparently nicer homes for less than $300/sq ft.

      Am I missing something about this house? What would cause this home to be more valuable than nicer homes/neighborhoods in other parts of Irvine?

  9. az_lender

    I don’t know why you use the phrase “loan owner” when a clearer term would be “house-debtor” — the “loan owner” could just as well be the lender, i.e., ME.

    That said, I completely agree with you that forcing principal write-downs will solve nothing in the short run, and will encourage more foolishness in the long run.

  10. Jane

    This house is ridiculously overpriced. It sold in 2006 for 740k and is being listed today for 725K. So in the worst real estate market since The Great Depression, this home has only depreciated 15K in 5 years? Please give me a break. Why isn’t anyone dealing with the reality of this market? Come on, you know this house is extremely overpriced. This is why these homes aren’t moving. Price them realistically for crying out loud or don’t list them at all. In the very least shave 30% off, that is 6% a year. List it for $518k. Someone will buy it within 90 days and you’ll know it was priced correctly.

  11. Mr. Baker

    I disagree, I majored in economics and when rents equal mortgage that is when it is worth buying. This is why I don’t see the market decreasing too much longer if anything we already hit bottom. These prices maybe artificially inflated but everything is in the US. Also, as forecloses come on the market you will see an increase in demand for rents and a house sitting unused next door which was foreclosed on. This will cause people to get off the fence and buy that home. It is not how much you pay for the house it is your payment. The car industry has been doing it for decades.

    1. Casual Observer

      Mr. Baker~ where in your economics education did you learn that 38% of income was too much to pay for rent relative to income? Certainly, at least at one time, the lending institutions understood this. And rent equals mortgage needs to include taxes and HOA, which in CA and some other places is more than mortgage.

    2. Kunal

      Dont forget the Cash requirements.

      For this home IHB is estimating a massive 200K cash requirements – PITI = Rent aside, people will rent because they:
      1. Don’t have cash (Down Payment etc, see calculations above).
      2. Don’t qualify for a loan.

      If its only about the “Payments” then its only about renting.

  12. Mr. Baker

    I agree Jane, but if it rents for a specified amount it will sell to investors, and they will profit if the 3.5-4% mortgage plus risk of buying is greater then the rent. I don’t see rents coming down in the future. The Fed has been printing money like it was going out of fashion. The only thing for homes to do is drag on an artificial bottom which was created by the banks. Let’s think about it, if you make a profit people will buy in. The CD rates are less then .5% at my bank.

  13. Casual Observer

    There must be a point where even investors feel it is unwise to rent to someone paying 38% of their income for rent. At that point, some folks will opt for other choices. The rental/parity theory will colapse.

  14. Mr. Baker

    I would agree Causal Observer if a place to live was a luxury, but it is not. You have only so many options and then you’re stuck with what is left. Since a place to live is a must have item they (banks + government) know you need it, so if the floor is held for a long time it will become the new norm. Private investors are purchasing property below market prices and when rent losses demand it will go down, but I see it only going up in the next few years due to shrinking rentals by foreclosures and people losing there homes. Economics is only good on current date so when data changes so does the whole model.

    1. az_lender

      “A place to live is a must have item”
      — yes, but you can live in (a) your car, (b) your mom’s house, (c) your girlfriend’s house, (d) your friend’s garage, (e) an Occupy park, (f) with 12 roommates.

  15. Joe

    There will always be irresponsible borrowers, so I don’t think principle reduction is moral hazard from the borrowers perspective, but rather from the lenders perspective. It was moral hazard in the implicit(explicit) gov’t backing of fannie and freddie, and the over-time bailouts of LTCM, etc, that led to reckless lending. So if fannie and freddie owned loans are allowed principle reduction, what does the govt say to those whose loans are held by other than fannie and freddie or those who rent? The immorality and unfairness is beyond belief.

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