Mortgage Modification Plan Grows as Delinquencies Soar

Good Afternoon!

Folks, the numbers are ugly.

Here is an expanded article from The Wall Street Journal on the loan modification program. It appears Bank of America is also involved:

" The plan comes amid intense national focus on a root cause of global financial turmoil: rising home foreclosures, and what the role of banks and government should be in helping struggling homeowners. The banking industry is under much political pressure address the foreclosure problem.

Rival Bank of America Corp. has two loan-modification pools in place, one hashed out with state attorneys general. At the government level, after other programs failed to halt the rise in foreclosures, the Federal Deposit Insurance Corp. recently floated a plan that could help three million troubled borrowers; it is being considered by the White House. The FDIC also is assisting strapped borrowers who had mortgages with IndyMac Bancorp, which the FDIC seized this summer. (Please see related article.)

"It doesn't make sense for us to wait" to tackle the problem, said a J.P. Morgan executive, Charles Scharf. "We've heard loud and clear and are listening to what some of the thought leaders around the country are saying." Mr. Scharf runs the retail division, which includes mortgages and branch banking, at J.P. Morgan, the largest U.S. bank in stock-market value.

The move also suggests that banks are realizing they can improve the value of their loan portfolios through mass modifications rather than foreclosures, which tend to produce larger losses. Until now, mortgage holders have been reluctant to renegotiate loans or have been doing so one-by-one, a time-consuming process. The bundling of loans into securities that are then sold to investors further complicates matters.

Nationwide, 7.3 million American homeowners are expected to default on their mortgages between 2008 and 2010, about triple the usual rate, according to Moody's Economy.com, a research firm. Some 4.3 million of those are expected to lose their homes.

J.P. Morgan unveiled the plan days after receiving $25 billion in federal capital from the Treasury's program to shore up financial institutions and get credit flowing. Mr. Scharf declined to comment on whether the bank would use any of those funds for the mortgage overhaul. "The stronger you are, the more willing you are to spend money and do a whole series of things," he said, noting that the government cash "certainly makes decisions easier."

Of the two loan-modification pools at rival Bank of America, one targets 265,000 borrowers with all types of mortgages. The other was hashed out with 14 state attorneys generals and involves 400,000 subprime and option-ARM customers serviced by the big lender Countrywide Financial Corp., which Bank of America purchased July 1."

My Take:

I think this is a disaster in the making as I said yesterday, but it may be the only move that the banks have left. One problem I see here is these loan modifications are only going to be able to be done by the banks that received money from the housing bailout. Notice that these programs weren't announced until the big banks got $25 billion apiece via capital injections from the Treasury.

This is where I see another big problem. The banks that didn't receive the money from the TARP aren't going to be able to afford to offer such a modification program. As these 7.3 million homes continue to get foreclosed on, the inability to modify will be the final nail in the coffin IMO for hundreds of banks that don't have access to the capital injections from the housing bailout.

Essentially folks, this article tells you the taxpayer are the ones paying for these modifications. The taxpayer now gets a chance to be bent over by greedy homebuyers. Are there any other ways that we can get screwed? I guess living within your means is turning out to be the wrong way to live. It appears committing fraud and lying about your income so you can qualify for a mortgage that you can't afford was the "right" thing to do in this twisted society.

Notice how JP Morgan had "no comment" when asked if the money they received from the TARP was going to be used for loan modifications. It doesn't take a brain scientist to read in between the lines on that answer. Remember these firms are all nearly insolvent. There is no way they could have done this without the government capital injections.

As I said yesterday, expect millions of homeowners that don't get modified to stop paying their mortgages. Taxpayers are going to get infuriated when this plan begins to be implemented. Wait until word gets out in a neighborhood that a neighbor's loan was modified by 100k which in turn drops the value of their own home by six digits. The guy who got modified better put a padlock on his door and buy a gun. God only knows what he might find on his lawn the next day!

This isn't going to end pretty folks. This could be the trigger that blows up the financial system. This is going to absolutely destroy the banks balance sheet. I predict you will see another massive injection of liquidity into the banks as more and more homebuyers walk away. This will put our government even deeper in debt as they continue to keep the banks alive. MBS debt will almost immediatly become almost worthless.

Perhaps this is why the cost buying a credit default swap(CDS) on the 10-year treasury has gone through the roof:

Think about this for a second folks. The cost to insure a piece of US government debt from defaulting via a CDS has risen 4 fold to 42 basis points in one year! Why would anyone pay to insure this? If this debt ever defaults the game is over because it means our government has defaulted on itself.

The soaring spreads tells you that Wall St increasingly thinks that a government default is a distinct possibility.