HARPooned: Fed Mortgage Mods Let Owners Spear Self In Foot

Headlines showed up recently praising a revamped Mortgage Modification program proposal coming out of Washington.  The official acronym is HARP.  Here are some highlights courtesy of Housingwire:

The plan...allows borrowers in privately funded loans to refinance into a lower rate Federal Housing Administration mortgage. The program would be expected to cost between $5 billion and $10 billion through a tax charged on the banks.

A separate option under the program would apply to borrowers in Fannie Mae and Freddie Mac loans as well. Anyone who refinances could reduce the term of their mortgage to less than 20 years. If the borrower commits to keeping the monthly payment where it is, the GSEs or the FHA would cover the closing costs estimated at roughly $3,000 per refinance.

This is government intervention in the market at its worst.  To understand how bad this policy is, you have to follow the money chain.  Currently, many banks own loans issues to homeowners during the housing bubble.  Many of those loans went bad over the past few years and those banks are now licking their wounds trying to rebuild capital and stay afloat.  For the good loans that are left, the bank receives a monthly payment that includes interest and a portion of principal.  This is income to the bank.

What the HARP program proposes is to refinance the bank's good loans (i.e. eliminate its income source) and lend the homeowner money from FHA (a loan insured by my tax dollars and yours). At prevailing rates which are far lower than rates on loan issues several years ago.

So what kind of crazy consequences could come from this kind of policy?  There are several.

First, the program has the potential to handicap the banks even further.  By holding good loans that have interest rates above prevailing interest rates today, the banks can make use that money to repair their balance sheets and return to health.  If those loans are refinanced, it means that the bank looses that income and must reissue those funds in new loans at todoay's lower rates.  This reduces their income stream and postpones their return to health.

Even more sinister however is the effect that future inflation could have on these banks.  If the bank reissues its entire portfolio at today's record low rates, when rates increase, it means that the banks will be loosing money again hand over fist as borrowers have no incentive to refinance at punitively higher rates.  Inflation could drag banks back into insolvency at interest payments on savings and deposits exceed interest income on loans.   

Think about FHA and all these government owned loans.  What does it mean to the taxpayers if their money is sitting in super low interest loans as inflation pushes interest rates up?  These loans become a loss on the public balance sheet.

Add interest rate risk to the fact that the Feds want to tax banks to pay for a forced divestiture of their assets and you have a recipe for gross unintended consequences.  It's the equivalent of thugs ransacking your house, taking your valuables, and then sending you a bill for their efforts.

It might be tempting to say, "Hey, those slimy banks deserve it!".  Well, not all banks are slimy.  Unfortunately, this policy proposal will affect the good as well as the bad. How much better off will the public be when their good banks whither? The public should not be surprised when their local bank gasps for air after having been HARPooned by the Feds.       

Hungry Hungry Repos: Banks Take Preemptive Possession

One of the things I do as a Realtor is help folks sell their homes on short sale.  To find these clients, I use one of the oldest prospecting methods in the book...the door knock.  Usually, I show up and let the owner know their home is headed for foreclosure and then discuss some options with them.  As you can guess, it's a sensitive conversation.  However, it has been a source of business for years. 

While I was scouting homes today I noticed a curious thing.  Of the homes on my list, 60% of them had keyboxes on the front door with notices from bank-contracted asset management companies saying that the home was vacant.  This is very interesting because the banks do not own the homes.  Yet, somehow the property has been deemed vacant by the lender and the property has been rekeyed...all before the property is even returned to the bank via trustee sale.

How would you feel if I rekeyed your home on a whim while you are on vacation?

I wonder if these folks participated in a deed-in-lieu of foreclosure with their lenders.  Either way, to find 60% of my prospective short sale list "pre-possessed" by banks is a pretty alarming development.

I inquired with Bill at CalculatedRisk to see if he had any insight.  From his response, it appears that most trust deeds allow a bank to protect the collateral on their loan in the event that a home is in danger of being damaged.  Winter weather can pose a real threat via plumbing which might explain the preponderance of pre-possessed homes.

Let's see what happens when I contact the owners and let them know their homes have been re-keyed.  

Fudgery: Uncle Sam's Mortgage Manipulation Madness

I found this interesting video online today:



New guidelines for refinancing (aka HARP) have come out to "help" homeowners again who are underwater on their homes.  After the failure of the first push to modify mortgages, I doubt this push will be any more successful.

My favorite quote from the video:

"Will it be enough? Maybe.  Maybe not.  But its definitely a step in the right direction."

Really?  What direction might that be?  Entrenching people in their homes as debt slaves?  Creating dis-incentives for bond investors to enter the market so they can lend to folks who actually qualify?

The answer is to let the market find its equilibrium by allowing homeowners who are underwater and lack the income to service their debt to foreclose.  Foreclosure eliminates excessive and bad debt.  It resets home prices at lower and truly affordable levels that are related to household income and not manipulated according to gimmicky government programs.

Foreclosure is uncomfortable and often traumatizing to the homeowner.  However, with so many homes already reset to lower prices, the chances are high that a homeowner will be able to rent a home in the same neighborhood for less than they were paying on their mortgage prior to foreclosure.

Foreclosure is the natural solution to excessive debt.  The sooner that nature can take its course, the sooner our economy will be on the mend, and this tough period in history will be behind us.  

My Mortgage Mod: CitiMortgage Bets On Low Interest Rates?

Last week I received a curious package via UPS at my doorstep. I hadn't ordered anything so I was surprised that somebody would overnight something to me.

I opened the package to find a giant over-sized envelope that read "Don't Delay. Return your  modification agreement today!"  Hmmm...I don't remember ever requesting a modification of any of my mortgages.  Here is the cover letter I found inside (click to enlarge):

  
This particular loan is on an investment property we own.  It appears they have sent us this package just as our ARM is due to start adjusting.  The question I have is why would CitiMortgage offer this?  One of my favorite real estate industry blogs is CalculatedRisk.  I emailed Bill (CR) and posed this question:

What incentive does Citi have to do this?  If inflation is really in the cards, fixing a 5.5% rate is going to kill them when rates increase to 9%.  However, if a rate reset increases my payment, they would take a haircut on the property in the off chance that I foreclose due to cash flow constraints.  

Is CitiMortgage betting that low interest rates are foreseeable for the next decade? (betting on a Japanese style real estate market?)

Bill responded:

Hi Jeremy, I've heard similar stories (but with different details).  This sounds like one of those blanket mod programs with the bank offering to modify all loans that meet certain characteristics (like ARM, non-owner occupied).

Citi has probably decided that the losses will be less for the loans as a group if they offer this program.

Also - Citi might be able to sell the loan easier after this mod (seems weird, but it could be).

When I called CitiMortgage, the gal on the line confirmed this approach.  They are more concerned with loans staying current and performing than they are with interest rate risk.  I accepted their terms and we should be well on our way to a recasting of amortization and a rate reduction.

Here is a copy of their agreement they sent me (click to enlarge):

I find it interesting that they make a fuss about the property needing to be in my name and not sold to another party as would be the case if I had sold it in a seller-financed transaction.  Most mortgages have an acceleration clause regardless of this modification agreement.  I find it interesting that they recognize the possibility that I may have seller-financed the property to a buyer and therefore cannot qualify for the modification but they don't threaten to call my existing loan either.  Perhaps this is recognition on their part of a credit deprived housing market?
   
Another interesting side note here is that because our loan was interest only, I have been paying about $100 a month more on the loan to pay down the principal.  If I continue to do this with the new rate and term in place, the mortgage payoff on the home goes from 30 years down to about 20 years from the present day.  This modification will save me 5 years!  Wohoo!