Friday, January 8, 2010

Why HAMP Is Destined To Fail

The Presidents much vaunted HAMP program to encourage homeowners to stay in their homes and reduce the number of foreclosures is at risk of collapsing.

The program as envisioned was a way to keep the money flowing into the coffers of bankers. With a mortgage modification, banks are allowed to declare the entire amount owed as an asset on their books instead of writing down their assets if they actually had to report the current market value of the properties. Just another example of helping Wall Street at the expense of Main Street.

For decades now common wisdom had homeowners doing all they could to save their homes. It was with that idea in mind that the worst of the predatory lending occurred over the past few years. Lenders threw money at people who truly had no hope of paying it back figuring if they bundled the lousy assets with good ones to offset them, they could dilute the bad loans. In a normal environment, they could have gotten away with it. Unfortunately, greed won over common sense. The banks kept lending as fast as possible to individuals who often didn't understand what they were signing, or who were lied to because of the pages and pages of fine print that allowed the lender to hide the true cost of the loan. This isn't to say there wasn't fraud on the part of borrowers as well, because there was, but the lure of easy money was incentive for lenders even when they knew the borrower was lying.

I received an offer on one of my listings a couple of years ago for $100,000 above what I knew the property was worth. The offer was accompanied with a separate Addendum for my seller to contribute $100,000 to redecorate the property. Total fraud! The buyer stated she could get an appraisal that would meet the inflated price. This was before the crack-down on appraisers and escrow companies who were in collusion and giving each other kick-backs. Needless to say, the offer was rejected.

Wall Street in the meanwhile didn't care who received the loan or how. All it cared about was generating more mortgages which were bundled into so called "Mortgage Backed Securities", blessed with AAA ratings, guaranteed by AIG and sold to investors around the world who more often than not bundled them with other securities which were sold to other investors etc. When the Sub-Prime loans started re-setting upward after two to three years and the homeowners could no longer continue to afford their payments, the whole house of cards started to unravel. Investors holding these now shitty securities went back to the sellers of the securities. They turned around and went to AIG and the major banks who created the whole mess. AIG guaranteed over $1 trillion in toxic securities while only having a few billion to actually pay off the investors. Which brings us up to big bailout at the end of 2008.

Wall Street, not Main Street gets bailed out to the tune of several hundred billion dollars. Instead of keeping lines of credit open for small businesses, the bailed out "To Big To Fail" banks shut off the credit forcing many a small business to fail, paid out ridiculous bonuses to their executives in the face of their failure, and jacked up interest rates on consumer credit cards to 30% or more. The American public are not stupid, they see what is going on.

Here in Las Vegas, home prices fell over 50% in the past year. Condos dropped even faster. Homeowners who paid $300,000 for a home during the bubble watched as their homes value dropped to $150,000 or lower. To protect the banks, congress has refused to allow cram-downs by bankruptcy courts. That's not to say ALL mortgages are exempt from cram-down. If you happen to be lucky enough to own more than one home, the second home is eligible for cram-down in a bankruptcy. As a result, a homeowner upside down on their mortgage has four options:
1. Continue to make the payments no matter how high they go.
2. Get a loan modification from their loan servicer.
3. Short-Sale the property.
4. Walk away and allow it to be foreclosed.

Few homeowners will be able to keep up payments when they adjust up. Getting a loan modification is a major hassle. Over 40% of loan modifications made over the past year are already past due. Many homeowners who start the loan modification process drop out over the hassle the banks put them through. Many a bank employee has told homeowners they need to be behind before the bank will consider a loan mod which is not true. Homeowners who did this more often than not received a loan modification with terms that dropped their interest rate or extended the payments out, but the banks tacked on the past due up front. In some cases this resulted in a new payment higher than the original unaffordable one.

Short Selling the property where the lender agrees to accept a sale for less than the property is worth is a major headache to close. Most Short Sales take a minimum of four months to get bank approval and close. The buyer often finds another property in the meantime. The banks rarely know what the left hand and right hand are doing. As a real estate agent you may get bank okay from the Loss Mitigation Dept. for the short sale only to have the bank foreclose before the property closes. Some homeowners are under the mistaken impression that a short-sale won't affect their credit the way a foreclosure will. Unfortunately, they both count the same. The big difference is banks can go after a short-sale homeowner for a deficiency judgment for the difference between sale price and the mortgage for six years after the sale, while under a foreclosure they only have six months.

The last option of course is foreclosure. Even with a loan modification 60% of the homes in Las Vegas are up-side down. In some cases by Hundreds of Thousands of dollars. If you know you won't see the value of the home rise to the purchase price for the foreseeable future, your essentially paying rent with a tax write off. Walking away looks like a pretty good option. Recently, more and more economists are saying walk away. Now I know some of you are saying "but what about your obligation to make good on the mortgage?" Well there are two sides to that question. It comes down to banks saying do as we say not as we do. As Roger Lowenstein reports in the New York Times

John Courson, president and C.E.O. of the Mortgage Bankers Association, recently told The Wall Street Journal that homeowners who default on their mortgages should think about the “message” they will send to “their family and their kids and their friends.” Courson was implying that homeowners — record numbers of whom continue to default — have a responsibility to make good. He wasn’t referring to the people who have no choice, who can’t afford their payments. He was speaking about the rising number of folks who are voluntarily choosing not to pay.

Businesses — in particular Wall Street banks — make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral — perhaps because no one assumed it was moral to begin with. But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials. Former Treasury Secretary Henry M. Paulson Jr. declared that “any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator — and one who is not honoring his obligation.” (Paulson presumably was not so censorious of speculation during his 32-year career at Goldman Sachs.)

The moral suasion has continued under President Obama, who has urged that homeowners follow the “responsible” course. Indeed, HUD-approved housing counselors are supposed to counsel people against foreclosure. In many cases, this means counseling people to throw away money. Brent White, a University of Arizona law professor, notes that a family who bought a three-bedroom home in Salinas, Calif., at the market top in 2006, with no down payment (then a common-enough occurrence), could theoretically have to wait 60 years to recover their equity. On the other hand, if they walked, they could rent a similar house for a pittance of their monthly mortgage.

In recent weeks we have seen banks start giving out billions for bonuses like there was nothing wrong. Well there is something wrong when the only way you can pay out bonuses is by using TARP funds to do it.

In addition, the administration has been playing up the moral obligation to pay your mortgage. There is something galling and very oily having Paulson, the ex-CEO of Goldman Sachs teaching us financial morality. Also in the past week, we have learned Brad Birkenfeld, the only UBS executive charged with a crime, is going to jail. His crime, blowing the whistle on UBS and their illegal tax havens for the wealthy. You remember UBS, they are the Swiss bank that received $5 billion in bailouts from AIG. TRhe other bit of economic news had to do with then Head of the NY Fed Tim Geithner counseling AIG to hide what they were doing.

When you add it all up together, walking away IS a moral choice for many upside down homeowners. If any pundits want to rant about moral obligations, remind of what the bankers have done in the past and continue to do today. I see nothing moral in supporting a bunch of blood-sucking leaches destroy the middle class in this country. When bankers start showing the slightest morality for what they have done to the American people, you might, just might then have a leg to stand on.