News about solutions to falling prices in Single Family Real Estate has been prolific and articles in the media and on the internet appear like mushrooms on a pile of manure. My opinion as to the long term solution to this problem has not changed. The only viable solution to stabilizing the housing market is for lenders to mark loans to the market as quickly as possible (with or without government subsidies), take the losses that result, keep people in their homes and move on. If they do not act, the market will, by continuing to fall until prices reach a sustainable level for homeowners and an attractive level for investors. Because of continued job losses, affordability will continue to drop and then prices will drop and so on...
Bankruptcy Law, Seattle Bankruptcy Attorneys, Bankruptcy Filing,
Marking loans to the current market value of the properties would involve large and perhaps insurmountable losses to lenders and major losses to investors in securitized debt instruments. In the early stages of the deflation of the real estate bubble, lenders and servicers chose to ignore the problem and simply hope that it would go away. When TARP was passed, consumers expected that the hundreds of billions of dollars involved would result in saving some homes. This has not been the case since there were no mandated requirements that institutions taking TARP funds had to use any of the funds to help bailout homeowners. A recent article illustrates the intransigence of bankers, describing TARP funds as " a No-Strings Windfall to Bankers".
Legislation, Systemic Approaches are Flawed
Legislative efforts like "Hope for Homeowners" were more window dressing than practical solutions since they did not force lenders to participate. In the absence of mandated participation and a mark to market approach, lenders and servicers will continue to kick the can down the road for as long as possible. I have heard this described as "an orderly transition to a stable housing market".
How can we logically expect politicians who have taken money from the financial system to support measures that will alienate their patrons? We can when their own personal interests are threatened and when people hit the streets to vent their frustration with the massive public denial of reality by Financiers and our "Elected Officials". So far I see little evidence of Americans in visible protest of the systematic destruction of life as we now know it.
Systemic approaches to loan modification typically feature temporary interest rate reductions and extensions of terms to 40 or even 50 years. These tactics will not resolve the underlying pricing problem and may actually increase payments for homeowners and taxpayers. These voluntary Loan Modification programs are failing and will fail because they do not address the pricing issue.
By now, every taxpayer is aware of the daily announcements from lenders and the government about newly discovered losses that will have to be papered over by taxpayers like "FDIC faces $10 Billion Dollar Blast".
The problem is the millions of homeowners whose financial and personal lives have been turned upside down by the loss of their homes and the millions who will in 2009-2011. Many Americans have taken a hard line about bailing out homeowners who used liar loans or simply speculated on their real estate. On an emotional level I can certainly understand this, but if the value of all of our homes is forced down by the market in the absence of a real solution from lenders and government, then we all lose, regardless of any negative feelings about slackers.
The problem has spread from Subprime loans to Alt-A and A paper and even to commercial real estate as the consumer is less and less able to afford existing problem loans. We are in a downward spiral and there are currently three major schools of thought regarding the best solution to stem the tide:
Loan Modifications - Several proposals have been made for systemic loan modifications which have all but failed in the marketplace because of push back from investors in pooled mortgage securities. Loan Modification efforts by individual lenders have largely failed because they consist of temporary rate drops and extension of loan periods and do not address the issue of falling values. Evidence of this the fact that more than 95% of loans modified do not have principal reductions and more than 50% of loan modifications go back into default in 120 days or less. An onerous condition of most modifications is that the borrower has no future recourse if they accept the modification offered. Unless the borrower is represented by a competent attorney or other experienced professional, their results have tended to be dismal.
The big recent news is that J.P. Morgan has pro actively contacted the Trustees of the largest mortgage investor pools they work with, to secure the Trustees consent to modify loans in any of the pools in the Trusts under their control. Chase announced a similar effort to modify investor loans earlier this month.
As long as prices are still dropping, there will be pressure on investors and their Trustees to let servicers modify loans in pooled trusts. In real life, each request for modification is analyzed by the lender to preserve the highest net present value for the lender. So far, the results of this approach have been to increase foreclosures since this has been the path of least resistance for lenders and servicers. The unintended consequence has been an increasing avalanche of foreclosures that will sell for far less value than they are carried for on the books and the bank must pay all related costs to manage and maintain the properties.
Legislative analysts are looking at programs that would subsidize losses for lenders from taxpayer money. It is hard to say if taxpayers are in the mood to support this approach after the clear abuses and lack of oversight in the first allocation of TARP bailout funds.
Bankruptcy Cramdowns - The concept of a Cramdown is that a Bankruptcy Judge could look at the individual situation of a petitioner and make a decision in their judgment on a modification to the existing terms that would fit the situation of the petitioner. This approach has been demonized by the finance industry out of a stated fear that all contract law could be changed (abrogated) and of course that the Judges would be far more liberal in their markdowns than the lender would be. The other hazard suggested by lenders is that freely allowing Cramdowns would greatly increase the future costs of home lending.
Citi muddied the waters further by publicly announcing that they would support some form of Cramdown Legislation (Bank Industry Slams lawmaker-Citi mortgage deal). This is in direct opposition to the American Bankers Association position against any form of Cramdowns but not surprising since Citi has taken billions of federal dollars in the bailout and they are undoubtedly under pressure from regulators.
A CNBC writer came out with "Reasons Not to Modify Home Loans" in Nov. 2008. Her main fear seems to be that allowing Cramdowns would create more Bankruptcies by making them more attractive to homeowners. I do not believe that this will be the case. Despite the increased difficulty of bankruptcy created by the 2005 reforms, many people will go this route when all other options are exhausted. I do not think it will become the solution of choice in 2009.
The best Academic writing I have seen on the Cramdown approach is by Adam Levitin on a Blog called "Credit Slips". Levitin is an Associate Harvard Law professor who offers empirical evidence that the Cramdown approach can work in his posting on "Cramdowns and Future Mortgage Costs". He makes a very compelling case and many people believe President Obama will get some form of Cramdown legislation passed, or use the threat of it to get the industry to act on their own.
Lower Mortgage Loan Rates - This approach has been bandied about in the press with discussion of 4.5% mortgage rates. This sounds great until a would be borrower applies for a loan and finds out that they must basically prove that they do not need the loan and have plenty of cash, in order to get one. An article in the Wall Street Journal says that "Low-Interest Mortgages Are the Answer" as a mechanism to "arrest a decline in house prices".
To me any artificial fixed rate for mortgages below risk adjusted market rates is another form of government subsidy at the expense of taxpayers. Since the beneficiaries of lower rates would appear to be primarily well financed and solvent borrowers, I can't see this as a even a near term solution. It would be nice for purchasers at current or below market prices, but only kicks the can down the road for refinances of balances that are too high based on pricing fundamentals.
The next six months will be critical in determining what method or combination of methods will come into play in the marketplace.
Bankruptcy Attorney Sacramento
Is Bankruptcy Right For You? Talk to Bankruptcy Attorneys Free and Confidential. Licensed bankruptcy attorneys are available. Attorneys will call you to discuss your case for free. Find out if bankruptcy is right for your situation.
Rating of Bankruptcy Attorney Sacramento
Get Online Application at online Bankruptcy Lawyer.
0 comments:
Post a Comment