Mortgages

I have an ongoing project in which “expected relocations” is a variable.  So I’ve been trying to keep tabs on word about just how bad the real estate market has become in certain portions of the country.

One influence on my variable is easy enough to understand: how many people are underwater on their mortgages?  Even if they’re keeping up with the mortgage payments, there is a certain amount of distress in the market brought about by folks who cannot sell their houses because they owe more than the property is worth.

So, this article at Bloomberg caught my eye:

Almost one-third of U.S. homeowners who bought in the last five years now owe more on their mortgages than their properties are worth, according to Zillow.com, an Internet provider of home valuations.[…]

The highest percentages of homeowners with negative equity were located in California. In four of the state’s metropolitan areas — Stockton, Modesto, Merced and Vallejo-Fairfield — the number of homeowners whose mortgage debts exceeded the values of their properties topped 90 percent, Zillow said.

In five more California areas — the Inland Empire (Riverside-San Bernardino), Bakersfield, Yuba City, El Centro and Madera — the percentages were more than 80 percent.

With so many home-owers underwater…is it time to rename California as “Atlantis”?

Seen at the Washington Post:

Mortgage lenders hunting for delinquent homeowners who have dodged their phone calls and letters are employing aggressive new methods to track them down, potentially making every knock on the door or fancy envelope seem like part of the pursuit. Even wedding invitations are suspect.

The idea, they say, isn’t to twist arms. Instead, it’s to avoid foreclosures, which have cost the mortgage industry billions of dollars in the past year.

Ocwen Financial is negotiating a deal with HomeFree-USA, a nonprofit group, to go door to door in the Washington area to strike deals with elusive borrowers. Fannie Mae is offering foreclosure lawyers up to $600 to help find solutions for these homeowners. Wells Fargo is disguising its letters in different colored envelopes, including some resembling wedding invitations.

Of course, the story also deals with some of the unfortunate aspects of the dunning side of the credit industry—getting lost in phone-menu hell, repetitive calls from bill collectors. But at least there are some signs that lenders are realizing there might be more effective ways to address problems in their mortgage portfolios.

There’s still plenty of noise circulating about the “Hope Now Alliance” plan—both in the “it doesn’t go far enough” vein and in the “it doesn’t help avoid a market crash” class. However, an opinion piece in the New York Times by Paul Krugman caught my eye.

Although the column has a bit more of a “heaven help the poor consumer who didn’t consider the consequences…” tone than I’m comfortable agreeing with, there is one observation that merits highlighting:

This is supposed to help investors, because foreclosing on a house is expensive: there are big legal fees, and the house normally sells for less than the value of the mortgage. “Foreclosure is to no one’s benefit,” said Mr. Paulson in a White House interactive forum. “I’ve heard estimates that mortgage investors lose 40 to 50 percent on their investment if it goes into foreclosure.”

But won’t the borrowers gain, too? Not if the planners can help it. Relief is restricted to borrowers whose mortgage debt is at least 97 percent of the house’s value — which means that in many, perhaps most, cases those who get debt relief will be borrowers who owe more than their house is worth. These people would be nearly as well off in financial terms if they simply walked away.

You know; that would be illustrative of the societal cynicism some of us seem to feel towards Washington these days—and the White House in particular: a program, spun as aid, that can be viewed as seeking to bolster the portfolios of investors by keeping the serfs attached to their properties for a bit longer than they would otherwise be….

I realize that I could be coming across as a bit overly capitalistic on the mortgage mess. And, while it’s true that I’m not happy about the prospect of directly or indirectly subsidizing some bad decisions / bad bets made by others, I would be remiss if I didn’t mention that I can easily believe in there being plenty of schemes in play to take advantage of borrowers in trouble. For example, consider this report, which made the local broadcast news circuit about a month ago (from WBIR):

Homeowners facing foreclosure are being warned that some companies are preying on borrowers facing financial distress.

According to a new study from the University of Iowa, questionable fees and claims were added to half of the foreclosure cases they examined.

One lender claimed that the borrower owed $1 million when they actually owed $60,000.

You’d think that there’s plenty to be done to clean up some of the dirty tricks some lenders may engage in, as well as seeking to curb some of the craziness/usury that lead us to this point in the market, without the government attempting to prolong the inevitable.

I mentioned as details of Bush’s mortgage plan started to emerge that I was trying to reserve judgment until I saw some discussion of the downstream effects.

Perhaps unsurprisingly, the talk online seems to have focused on some of the same ideas I’ve had—”it won’t help many people”, “it’s unfair that those folks should be helped out when we behaved responsibly”, and “it might provide some cushion to soften a nasty economic mess”.

Two articles I’ve encountered seem worthy of note.

At “Bits of News”, Garrett Johnson has a ranty post chock full of quotes from other articles and graphics to support his assertion that the plans are a bad thing, and are doomed to drive the country to something potentially worse than the Japanese real estate crisis of the last decade.

Over at Calculated Risk, there’s a rather lengthy monologue that doesn’t take quite as pessimistic a view, but is most notable for a technical discussion as to how the plan attempts to preserve contract rights, and how that explains some of the eligibility criteria being used.

At this point, I think I’m going to settle on mortgage relief as being a “damned if you do; damned if you don’t” thing. Any sort of relief will screw up the mortgage and real estate industry as contracts and rates have to begin considering the risk of federal intervention. Failing to provide some relief permits a high rate of foreclosures to continue, prompting some nasty consequences to the greater economy.

And, as to the fairness point….perhaps it’s time to remind myself that, despite executive or legislative decrees to the contrary, life frequently isn’t fair.

From the New York Times:

The Bush administration reached an agreement with the mortgage industry today on a plan to freeze interest rates for up to five years for a portion of the two million homeowners who bought houses in the last few years with subprime loans.[...]

The agreement, to be formally announced on Thursday by President Bush, is expected to include numerous limitations that would exclude many — if not most — subprime borrowers, according to industry executives who have seen it. It would exclude those who are delinquent on their payments — about 22 percent of all subprime borrowers, according to First American Loan Performance, an industry research firm.[...]

Mortgage companies could also exclude borrowers whom they conclude are making enough money to afford higher monthly payments. Barclays Capital — extrapolating from a similar program recently unveiled in California — estimates that only about 12 percent of all subprime borrowers, or 240,000 homeowners, would get relief.

I’ll reserve judgment until I actually see some numbers. In particular, I’m going to be interested in seeing some discussion about the potential downstream effects of the proposal.

Meanwhile, receiving a “legislative survey” propaganda mailing from my state representative today (in which she requests the opinion of her constituents on various tax proposals being tossed around in the halls of the Connecticut state capitol) reminds me that the Windsor Dems are going to be pushing to implement a revaluation this coming year. The result of that will probably be a 15-20% bump in our property tax.

I wonder if I could trade my grumbling about possibly footing the bill to bail out some folks who gambled and lost in return for a bit of stabilization on the property tax front….

The Secretary of the Treasury, Henry Paulson, held a press conference Monday that discussed….well, it’s probably a bit much to call it a plan. Perhaps it’s best described as a focusing of effort. Quoting his prepared remarks:

While the reality is a bit more complex, in the interest of simplicity, there are four categories of subprime borrowers. There are those who can afford their adjusted interest rate; these homeowners need no assistance. There are also a substantial number of homeowners who haven’t been making payments at the starter rate on their subprime loan and may not have the financial wherewithal to sustain home ownership; some of these homeowners will become renters again. A third category of homeowners might choose to refinance their mortgage - putting them in a sustainable mortgage while keeping investors whole. This is the first, best option. Servicers should move quickly to assist those who can refinance.

And the fourth category is those with steady incomes and relatively clean payment histories who could afford the lower introductory mortgage rate but cannot afford the higher adjusted rate. We are focusing on this group, determining who they are and what steps may appropriately assist them.

The dividing lines between the groups apparently isn’t fully fleshed out. However, already some folks are noticing that it may be more advantageous to be in one group than another. For example, consider this thought from WiseBread:

Perhaps even better than being in category three, though, would be to find yourself in category four.

At this stage, there are no rules written to establish who falls into this fourth category. However, it occurs to me that one of the reasons that someone might be able to afford a mortgage at a teaser rate, and yet not be able to afford it after a reset, is if someone has too much other debt. If that’s the case, it might be awfully tempting for such someones to take on a big chunk of extra debt and thereby move themselves out of category one and into category four.

It seems clear that if you just blow all that money on high living (or, you know, medical bills), that you’d find yourself in category four. (Don’t borrow too much and put yourself into category two. That’d suck.) But maybe there’d be some way to borrow the money and then spend it not on high living, but rather something of lasting value. Depending on exactly how the rules end up getting written, it might be something as simple as savings bonds; it might have to be something risky like land or a long-term, interest-free loan to your brother-in-law. Then, once you’d kept your loan from resetting, you could probably get your money back—if whatever you bought really was a thing of lasting value—and pay off that extra loan that put you into category four.

While I applaud the notion that a fix to the mess could provide the opportunity for some to turn a bad situation into a more advantageous one, I am miffed that such a benefit will likely come as an expense to the rest of us somehow, in the form of an additional burden on government expenditures (to the extent there’s federal financing or insurance provided).

And there is the whole “if we had known about this coming down the pike, we might have gone with an ARM mortgage…” syndrome.

However, I suppose that I should take some comfort in the concept that government action to cushion this crunch will hopefully head off additional economic instability if foreclosures were to spike, etc.

And, on the seeming unfairness front…well, we do have the premise underlying parts of capitalism that with taking greater risk, there is a chance of greater reward (as well as greater loss). By taking the safe, responsible route, my family won’t reap the benefits of the bailout, but at least we haven’t had to worry about a massive interest rate reset impacting our budget.

Seen at the Wall Street Journal (subscriber link):

In a sign that the housing crunch is increasingly resonating on the campaign trail, Sen. Hillary Clinton is expected to call Monday for a 90-day moratorium on home foreclosures, as well as a five-year freeze on the rates of adjustable mortgages—an idea the Bush administration is already considering.[...]

But the plan she is about to announce is striking on two levels. Calling as it does for a 90-day moratorium on foreclosures and a five-year freeze on interest rate adjustments for existing mortgages, the Clinton plan goes further than those of her colleagues. More striking is that the centerpiece of her proposal—a freeze on interest rate hikes for adjustable-rate mortgages—is similar to a plan being concocted by Mr. Bush’s Treasury secretary, Henry Paulson. Indeed, news reports over the weekend about his plans, disclosed by The Wall Street Journal on Friday, are what prompted Mrs. Clinton to float her own proposal, which she is doing in the form of a letter to the Treasury secretary.

I have to say that one thing that has been refreshing about the Bush Jr. Presidency is that the administration has shown remarkable resiliency against being swayed significantly by polling data. I had almost forgotten what it was like to have a President (or President-wannabe) shift opinions and tempt the voting public as commanded by the pollsters.

Also…you know, if I had known that ARM rates would be federally frozen if the credit market turned tough, I’d have gotten one too. We opted to have a higher monthly payment for the protection of a traditional, rather than gamble against an ill-timed rise in interest rates.

I can’t help but wonder what the mid-to-long term effects would be of an ARM rate freeze. For example, I’d assume that for a significant period of time, ARM’s would either be difficult to find on the market or would contain a very significant risk load to reflect the potential cost of future federal intervention. That, and other reforms, would likely aggravate the real estate market cool-down, from which there would presumably be many ripple effects in the larger economy.