December 8, 2008 12:42PM
The Problem of Re-Defaulting on Mortgages
By Ray Hennessey
-
Share:
Second chances aren't producing first-class results.
According to the Office of the Comptroller of the Currency, 36% of mortgage holders who had received a re-worked mortgage from their bank were late on payments three months after they got the new loan terms.
Worse, 58% of mortgage holders were more than 30 days late six months after their loan modifications.
What does this mean? A number of things. First, some of these mortgages were so badly underwritten that borrowers, even with a rework, can't hope but stay current (a situation that will only get worse as unemployment rises).
Second, some reworks just aren't good enough and will probably have to be modified further.
And, lastly, the numbers of delinquencies will rise even further, despite the best efforts of Congress and the banks.
-
Share:
The amount of equity in a house IS irrelevant if you can afford the payment. The main reason? You signed a legal contract to pay that amount each month until the loan is repaid. Simple as that. Job loss? Medical bills? Overextended? Too bad – you signed the contract – it didn’t say anywhere in the contract that it’s null and void if bad things happen to you.
I’m disgusted with people out there that took the risk of buying a home they couldn’t afford and now don’t want to face the music when the risk didn’t go their way. Pay your mortgage! Get a second or third job. Sell some of your crap. And finally, learn your lesson. This country is starting to make me sick with the lack of personal responsibility.
If I purchase a stock and that stock declines dramatically as a result of bad management, poor economy, etc. I hold myself responsible for the purchase of that stock. When the banks invested in debt instruments (mortgages)with housing as collateral, they made an investment. They must of had some understanding of the risks associated with the investment before they made the decision to loan.
During the last forty years the average person has applied for loans on assets that they certainly didn’t qualify for. This is nothing new. The only difference is the fact the banks didn’t loan the money when they knew the individual did not have the capacity to pay it back. I hold the banks to a much higher degree of responsibility for the current crisis than the homeowners. Banks are in the business to assess risk. Your average “joe” is not.
Hi Ray. Here’s something I wrote in this regard.
December 10, 2008
Turn “toxic” mortgages to AAA – Bring back Debtors Prison
(Really, I’m Serious)
The Treasury Department has a plan to limit forclosures by employing Fannie Mae to offer mortgages with rates as low as 4.5%, roughly 1 percentage point lower than current rates. As part of the proposal, Treasury would buy mortgage securities backed by Fannie Mae and Freddie Mac, in addition to those guaranteed by the Federal Housing Administration.
The Federal government can buy these mortgages and renegotiate the payment plans with homeowners in such a way that it will significantly lower their payments to a point where they can afford to make them. However, there is one problem: According to Brian Sullivan of Fox Business News -The watchword in housing is becoming “re-default”. Mr. Sullivan quoted the Comptroller of the Currency John C. Duganhas who indicated that new data shows more than half of loans modified in the first quarter of 2008 fell delinquent within six months and after three months, nearly 36 percent of the borrowers had re-defaulted by being more than 30 days past due. After six months, the rate was nearly 53 percent, and after eight months, 58 percent.”
Those are some staggering numbers to say the least. During the election campaign season, all we heard about were the evil financial institutions a/k/a “predatory lenders” as though they were our only problem. As I wrote in my Sept 17th column “It’s the Morality Stupid” – we will get nowhere if people do not stop blaming others and start taking responsibility for their own part in this mess. Throughout their campaigns, politicians have encouraged this scapegoating and refuse to tell people what they need to hear, which would be something to the effect of “America –it’s growing up time”. They do not dare call millions of people “predatory borrowers” when in fact – a good spanking is sometimes just what we need. (Although the prodigals of Washington are guilty of the same sins.)
The MrArbitrage mortgage bailout plan would be similar to the Treasury plan in that I advocate drastically cutting mortgage payments by allowing people to restructure their mortgages, lowering the interest rates and perhaps add an extra 5-10 years to the duration of the mortgages if necessary. The only problem is that most Americans habitually live beyond our means. So if we rescue them now – the results have shown that in a few short months –many FURTHER extend their financial obligations even with their new found cash flow. The bottom line is that it isn’t fair to the tax payer to make them buy all these mortgages when 50% or more of them will prove “toxic” even after being restructured.
Given the unprecedented circumstances of our economy and our penchant for blaming our problems on everyone but ourselves, a viable bailout would require innovative motivators and deterrants to make these mortgages investment grade.
I do believe there is a way that Congress could actually buy back these mortgages and make a positive return despite the possibility that 50% of them may be issued to deadbeats.
BRING BACK DEBTORS PRISON.
When reading about the common practice of throwing people into debtors prison during the 18th century, I always thought it was counter productive in the long run. Although the thought of possibly having to go to jail could be a good deterrent to prevent people from accumulating debt in the first place, once people were there – they couldn’t work anymore to pay off their debt so the loaner might get their pound of flesh but financially they were getting the shaft.
Thanks to the wonders of modern technology, we can have the ability to promulgate such a policy while eliminating the cons of debtors prison. We have a form of “rehabilitation” known as “house arrest” in which the participant is fitted with a high tech ankle bracelet that uses a GPS system to monitor the whereabouts of the individual wearing it and will alert the authorities if that person leaves their property. It can only be removed by the authorities and it is always turned on. This means that it would not require paying people to guard all of those on house arrest. When someone leaves the property, the alarm will go off and the proof would be conclusive. They can have a “three strikes and you’re out” policy where if the participant violates the rules by leaving 3 times – then they would be required to serve time in an actual jail for a week or so before going back to their homes. Most people would avoid that.
Now, I know this concept will raise some eyebrows but the key to this is that the plan would be completely voluntary.
If you want to obtain a sweet rate of 4.5% on your mortgage, lower your payments and save your home despite your lack of credit worthiness, the tax-payers will give it to you – if – you agree to the terms.
You get the low rate and lower payments.
If you are responsible, your cash flow improves; you get out of debt and back on your feet.
If you fall more than one month behind on your payment, per our agreement, we put you under house arrest until you get current. It could be a week, a month a year or more. That’s up to you.
A little elaboration on what “house arrest” means:
You go to work; then you go straight home.
If you lost your job, you can go on job interviews.
If you can’t find the job you want because those available are “beneath you”, you may want to humble yourself for a while and wait those tables because the more you fall behind on your payments, the longer you will be on house arrest. You may want to temporarily work TWO jobs if one doesn’t pay enough.
This way we are temporarily taking away distractions that would entice debtors to go further into debt with their new found cash flow. It essentially puts a significant part of their social life on pause until they pay their obligations and they may be a little embarressed for being on house arrest. In many cases, people in this country NEED to be embarrassed. I know there are recluses who might find house arrest appealing but the majority of us are not J.D. Salinger. 99% of us would not like it after a month. It is one thing to hide away in your home -at will- and quite another not to have a choice.
Societal Benefits
This form of debtors prison would actually have some societal benefits as it would not take parents away from their family and there would be much less physical danger to the participant than putting them into a cell with Bubba where they could possibly have a Ned Beatty moment. This method worked for Martha Stewert; in fact, she could even design the ancle braclets.
Benefit to Housing Prices?
This could not only quell the enormous spike in forclosures, it could even be an impetus for home buying if the terms would be offered to future home purchases as a part of a stimulus package from the Treasury; an investment of Social Security Funds into personal/privatized accounts and by state pension funds. People need to know there are consequences involved beyond a low credit score. Implement this plan and The key would be the enforcement of “debtors prison” because the days of credit based upon honor went out the door with the 10 commandments.
Currently, the prodigals in Congress take the incoming Social Security money and “invest” it in Treasuries, earning a lousy 3% or so, while they go out and spend the proceeds on programs that have no return on investment beyond a notional benefit to society.
With this program, they could actually hold the mortgages in lieu of Treasuries, put them in a “lock box” then bundle and resell some of them to institutions. At this point I would feel more comfortable buying a debtors prison backed mortgage than a security supported by a questionable rating from S&P or Moodys.
http://www.tableofwisdom.com
Soo people bought a house for 400k and then find out its worth 200k and now are mad that they have to pay more for the house than its worth? Isn’t that like trading a twenty dollar bill for a ten dollar bill? I guess some people are stupid. The same concept is when somebody sells nifty gadgets for the increadible price of $19.95 but wait there’s more…
If you paid too much for your home that’s purely your fault. You drove by and saw that neat house that surely is worth a lot more than the asking price. You signed the mortgage obligation. You were certainly not tortured into the aggreement. Suck up the loss. If it bothers you so much now then sell it for whatever you can get even if you end up owing a few years wages. Better yet just walk away and owe the full note. I’d like to see that the unpaid balance remain on your credit history like an unpaid federal loan. you never get away from those. Move to Bolivia or China for all I care. Just do not expect me or any other taxpayer to bail out your sorry butts. Responsibility really means something doesn’t it.
Anyone that has been to credit school knows the 4-C’s of credit. The first one is character. Anyone who agrees to a loan that they could never really repay has a character problem. No modification will fix that flaw. There are real excpetions, but most of these failed because they are bad character loans. These people do not yet have the discipline of character to own a home.
I think these mortgages are redefaulting because these are people who really don’t have a strong desire to own their own home. They were tossed into the homeowner situation without really being committed to what the responsibilities of a homeowner entail. They are not homeowner material. These people have to exit the market NOW.
Bottom line: Not everyone can, or, should own a house. Neither of my grandparents (both sides) ever owned a house. Don’t give me the equity argument – just look how that’s working out for so many who should be renting.
The point is they bought the home and promised to pay. Sometimes you make money sometimes not. The y bought a HOME not an investment and the idiots that can not understand the concept can’t fathom why anyone would pay for something that has lost value. That’s the problem; why pay for your car it lost value when you signed the loan paper or the cloths you bought with that credit card certainly not worth much now that you’ve worn them. I comes down to ability and character, you have to have the backbone to pay because you said you would and you must have the ability to pay. Those who have lost the ability will have to move on and take the loss, life is not fair but those who have the ability to pay and choose not to should be made to live with some long term consequences.
“Being underwater on the mortgage doesn’t change the payment, completely irrelevant.”
Its most certainly relevant – the payment for a $400,000 mortgage for a home that is now worth $200,000 is certainly relevant.
Why? How about perceived value – people do not like to pay double what something is now worth – even if its just a loss on paper unless you try to sell – but how long if ever will that home price reach the level of the mortgage?
Try losing a job, then being offered a job elsewhere and you need to sell a home now upside down – then it becomes relevant
What a shock. So the people that had sub prime loans are not a good credit risk!!! Did anyone really think they would be. They got to live in a nice house for awhile. Now they can go back to renting. Big deal!!!
What would anyone expect? They were taught that if you don’t pay your mortgage, someone will give you a lot of money. Under the new system, 3 defaults should result in home ownership without having to make any payments.
You forgot #4: why scrimp and save to pay off a mortgage when the government has already been willing to cover your debt?
Third… people have had their loan modified at the existing balance are coming to the realization they are way upside down on their home [that their mortgage is for FAR more than their home is worth and will likely never recover or will take years to recover]