Lot's of news this week, most of it bad.
Let's start with the latest fannie default numbers. The 90 day default rate is shooting through the roof. It went up 4% in one month from 3.87% in Dec to 4.03% in January. Fannie also reported a 15.2 BILLION dollar loss for the 4th quarter, 72 Billion for the year!
We had a couple of banks fail today (one in California). That brings the total to 22 so far this year. The problem bank list (from Calculated Risk) is up to 644 banks. Lately this list has been growing by about 40 banks per week.
I'm sure by now you've heard about the new foreclosure prevention plan being touted by the FDIC for banks they've seized. They are actually talking about principal write downs. I don't know about you but that just pisses me off. Talk about a moral hazard. How many people will stop paying the mortgage if they start giving write downs. I sure as hell would!
8 comments:
Do principle write downs mean that the person who skipped out on paying his mortgage gets off scot free? No consequences?
I'd imagine that there would be consequences, but I don't claim to know anything especially when it comes to this kind of stuff.
I think the consequences will be for those of us who have not defaulted.
Scot free, no, it means the person that bought a $600k house by lying about how much they made get's there loan reduced to $300k because that's what the house is worth now. They still owe, but they get rewarded for being foolish and/or greedy and irresponsible. It rewards bad behavior. And in addition to that really sets a bad precedent. The moral hazard of a plan like this is scary. I mean how many people that can afford their payments are going to stop making them so they can get a write down. What if everyone that buys a car decides to try this. Well my car isn't worth what I owe on it, so do I stop making the payments?
It's a crazy, stupid plan. If the banks are willing to mark these loans to market then do the right thing and foreclose. There are plenty of buyers that will buy the homes are market value. Don't reward people for making bad decisions, don't set a insanely bad example for future buyers.
I haven't seen the details of these plans. Are banks really forgiving the debt, or are they reducing the debt consumers pay the mortgage on (e.g. you still owe me $600K, but you can pay me like you owe $300K)?
If its that latter case, I wouldn't be too critical. Assume that the bank has already written the $600K mortgage down to the $300K value of the house (most have). What are the choices for the bank? a) Foreclose on the current homeowner, take the collateral, and sell it for $300K minus reconditioning costs (perhaps even to the same homeowner); or b) tell the current homeowner he can keep his home if he agrees to payments on a reduced amount, but any gains on sale up to the original mortgage amount go to the bank.
If I was running the bank, I'd take b) in a heartbeat. But if the homeowner was a relative I was fond of, I'd advise them to go route a). They could start anew, and begin accumulating equity on a $300K home.
I might be different, but I know how stubborn my relatives are. Most of them would take b), and not uproot their families and welch on a debt.
I'm sure most people would take b if they had the chance. The problem lies with the risk of all the neighbors finding out and then stopping making payments so they can get a similar deal. If you were $100k upside down instead of $300k but still making payments with no plane to default and your neighbor got that deal what would you do? I know plenty of people that would stop making payment to get their principal write down. I've talked about this with many of my friends and about 1/2 indicated that they would stop making payments. So instead of the bank saving a few dollars in rehab costs, they end up losing millions or billions as other homeowners want a piece of that freebie pie.
It is not really a principle write-down, but more of a payment holiday. The homeowner still owes the money (in your example $600K), but his mortgage payment would be based on a reduced amount ($300K).
I'm not suggesting this is the right way to run a railroad, but banks don't have many good options. They have a lot of $600K mortgages on $300K homes. Most borrowers either cannot or will not keep making payments on these $600K loans, but many can and will make payments on a lesser amount.
I here what you are saying about moral hazard, but borrowers are either upside down or they're not. Most of those that are really upside down are going to default, short-sell or modify their loans. This seems like a sensible way to modify.
You write about the facts and your feelings: "Lately this list has been growing by about 40 banks per week. I'm sure by now you've heard about the new foreclosure prevention plan being touted by the FDIC for banks they've seized. They are actually talking about principal write downs. I don't know about you but that just pisses me off. Talk about a moral hazard".
Well, yes, the list of banks seized by the government is growing dramatically; and yes there could be a mortgage foreclosure, or forced mortgage write downs.
But wait ... there is more .... I believe a credit crisis is coming, specifically an evaporation of credit, and a run on money market funds and an inability to access brokerage accounts .... just think how people will feel ... if that happens.
Well I wrote about these convictions in the following article.
A New Seigniorage For A New US Monetary Order And A New Currency Is Coming
http://tinyurl.com/yfvwfd2
Oldtimer, I have no problem with short sales or defaults/foreclosures. Mods are idiotic in most cases and I'm not a big fan of those. In some instances if a interest adjustment can help then I suppose that's a win-win. But to offer principal write downs is just wrong. You just can't reward the behavior that got most of those people into that situation. That just tells an entire generation of people that there are no consequences for taking on far more debt than you can handle. Don't worry, hell do it again. Uncle Sam will probably bail you out next time, is the message that sends.
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