Sunday, November 2, 2008

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, 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.


teddy bear said...

Just before voting in US let's look at possible historical similarity with Great Depression period ;)

US Electoral Maps before and after Great Depression

time for volte-face CHANGE??? :D

Source of Maps:

Jeff said...


Thanks for sharing.

Wow! Obama better enjoy those 4 years in office. Up 10 in the polls makes him a virtual lock to win the presidency. McCain needs a miracle.

It doesn't matter who wins on Tues. anyway The government is broke and there is now way Obama will have the money to implement any of his spending ideas.

4 years and done!

ZMonet said...

"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!"

I know we've been over this, but the only way I see that a neighborhood will know that someone has been modified is if the person who got modified tells others in the neighborhood. If they think there would be reprisal, they won't. The only other way I could see people being informed is if they bothered to go to their county/town records and dug through the liens. I know that someone could use Lexis to look up this information, but how many people have access to such services and how many people are actually just looking up their neighbors lien information?

I have a big problem with these workouts. I would have less of one -- albeit this is relative -- if the workout got recorded as a sale, just like when the bank forecloses on the property. In this way at least there would be some transparency and when someone went to buy the house next door, the "workout" would come up as a "comp." There will be no transparency though as the object here is more to pump up value of the homes than it is to keep people in the homes.

What a mess!

Jeff said...


We will just have to wait and see what the disclosure rules will be regarding these modifications.

I think they will be transparent. If they aren't then no one is going to buy a house because they don't know what the loan amount is.

How do you buy something so important without having full disclosure?

I would guess they would have to make it transparent because of this.

Your right! It is a mess!

ZMonet said...

I don't think we've heard about disclosure procedures because I don't think there are any. I'm betting that they intend for this to be a private matter between the bank(s) and the individual with the loan(s). If they gave someone a 3% loan (as opposed to say the 6-7% the person was supposed to be reset to) do you suppose this information would become public? Doesn't that have as much bearing on the value homes? Likewise, when they reduce the loan from $500,000 to $350,000, they'll just quietly do it with the signing of a few documents. Hasn't INDYMAC (under gov. control) been doing these workouts? I've heard nothing about disclosures in those cases.

As for your question of who would buy a home under these conditions? Well, as long as everyone is going along with the music, nobody really stops to ask. Didn't we learn that with this latest bubble?

Jeff said...


Good points

My point is would you pay 500k for a house that might only have an $350,000 loan on it? HOw would you know what you are buying?

How could you trust the system without full disclosure? I would rent until I knew all of the numbers. Its too big a decision.

I would go along with the system as long as I know what I am getting myself into.

Its going to be interesting to see how this all gets worked out. Once this ball gets rolling I am sure we see how it works.

ZMonet said...

"My point is would you pay 500k for a house that might only have an $350,000 loan on it? HOw would you know what you are buying?"

I'm not sure what you're saying. I think people buy houses every day without knowing exactly how much the owner of the home owes on the property.

My wife and I recently came close to purchasing a property. I was looked upon as VERY STRANGE when I raised the issue that I had concerns about the owner being able to make it to the closing table because they owed more money (between 1st and HELOC) than we would be buying the home for. The realtor wanted to know how I found such information.

My point is that people usually buy a house and don't care how much is owed on the house. The "knowing what they are getting themselves into" is more the decision of whether they can afford the home, whether the home is worth that much and the likelihood of closing. What is the difference between you buying a house where someone owes $350K on the house because the mortgage was written down to $350K or because the owner has paid down to $350K?

I guess we'll just need to wait and see.

Jeff said...


I GOtcha. As long as the house was priced at the modified price of 350k then I wouldn't care either.

I would need to know what the loan was modified to before I bought something. I don't care how much of the modified price that the owner paid down on.

I think the modification change on the loan needs to be disclosed not the loan balance.

I would also want to see what other houses in the neighborhood were modified to as well.

Its just a total mess Zmon. Buying a house just became a whole lot more complicated which will make the housing freeze that much deeper.

It could take years to straighten this out!

growler said...

Hey Gents,

I would imagine a new Deed of Trust or Note would be recorded with the county to verify the new principal balance. THus these recrods will be available to you.

Jeff said...


Thats how I see it too. LAck of pransparency in general is what got us into this whole financial mess.

Total transparency will be the name of the game that gets us out of it.

ITs certianly going to be interesting.

ZMonet said...

"I would imagine a new Deed of Trust or Note would be recorded with the county to verify the new principal balance. THus these recrods will be available to you."

I just question the intelligence of the consumer and the greed of Realtors (tm). Consumers can hardly be bothered to look and see what the home last sold for even if it readily available on a site like Redfin. The idea of someone going to the town hall to check out records seems improbable for me, at least for the majority.

One of the problems with these bubbles, as I see it, is that if you in the minority (say 5%) are doing the "right thing" and 95% are doing the "wrong thing," then everything moves on without you. Houses go up. Stocks that have no business going higher do. Fundamentals matter so little these days...until they do...and then we just inflate everything away.

Why am I so negative?

Jeff said...


LOL...Yeah I feel like I am negative too sometimes.

A good realtor will be able to navigate us through this mess.

I have a feeling that none of us will be buying a house anytime soon so we can cross this bridge when we come to it.

Down the road we can share our realtor stories as we pick through the carnage.

ZMonet said...

Don't even get me started on realtors. I think they are the biggest crooks out there, generally speaking. Most feed off the fear and ignorance of their clients. No other profession allows for such conflicts of interests. Realtors serve getting the deal done, not serving you, and until their business model changes I refuse to use one. I'm heartened that services like Redfin are popping up.

Jeff said...


Here here.

They are the slime of the earth. This downturn will hopefully weed out the crooks and leave us with the ones who know what they are talking about.

I don't trust any of these slimeballs. I watched realtors put their own family members into homes they had no business being in!

growler said...

I predict there will be very few (if any) realtors after this mess. They have no credibility. Zip.

Jeff said...


I can hear them now "But now is the time to buy" "real estate always goes up!"....NOT