“I’m from the government and I am here to help,” those are words that cause varying degrees of alarm in most Americans.  Now the Obama Administration wants banks to simplify their many credit products including mortgages and credit cards and — this time at least — they may actually be here to help.  But the lenders hate it, of course, and are working hard to oppose any changes to the current system that got us in our present mess.

In the eras of our fathers and grandfathers people bought houses, got mortgages, paid those mortgages off and sometimes had a ceremony where they burned the mortgage document, itself.  Today, however, we are in an era of continuous debt.  People buy houses, get mortgages, pay some on the mortgage, refinance with a new mortgage (often taking cash out) then the cycle starts all over again.  The only time most modern homeowners are truly out of debt is if they decide to go from being owners to renters, which usually happens late in life.  This transition from paying-off our mortgages to not paying-off our mortgages isn’t something invented by consumers but by lenders who realized keeping us in as much debt as possible for as long as possible was good for profits — very good.  But it’s not so good for homeowners.

The Obama Administration is trying to force product simplification on the banks.  This means simpler loan and credit agreements written in plain English and the elimination of many exotic loans like 100 percent financing and interest-only.  Unfortunately for the banks, these products tend to have higher profit margins, especially as consumers fall behind and are hit with penalties and punitive rates.  Eliminating junk and deceptive credit products will eliminate a lot of bank profit and the bankers don’t like that.

There’s an interesting cycle here.  Banking used to be a pretty mundane industry with relatively low profit margins and accompanying lower rates of pay for bank executives.  Then came bank deregulation, exotic loans, booming bank profits, and huge annual bonuses — all paid for by American homeowners who were, frankly, pretty dumb about their finances.

So to save us from ourselves the Obama Administration wants to force simplification and — frankly — common sense on the lending industry.  It’s a whole new take on Truth in Lending. That ought to be good, right?  Not if you are a bank president expecting to give yourself a multi-million dollar  year-end bonus.  So there is an inherent conflict here that will be played-out in the months to come.  What Obama is trying to do is clearly the right thing, but it will be an uphill battle against very entrenched special interests with a lot of money to throw at the fight.

It is very doubtful that Obama will win and that’s a shame because the longer term implications here should be very troubling to everyone — even to the bankers.

cringely Blog banks, financial crisis, mortgage crisis, Obama Administration

Home-Account is all about new mortgages and refinance mortgages and not particularly about mortgage modifications, but as consumer advocates we’ll keep covering this topic because it affects millions of Americans — most of whom will eventually want another mortgage.

A few days ago we covered the idea of paying someone to help you modify your mortgage.  The banks say you don’t need it, that mortgage modifications are free, but we pointed out that SAT prep courses show that professional preparation CAN help in such complex matters.

The question is who do you trust to provide that help?  There are plenty of scammers out there who will charge you money and then have you fill out the exact same forms you can get from your loan servicer directly.

Since we’re not in the loan modification business, we don’t have a list of quality firms that help in such things, but there are other bloggers who do and one of those we tend to trust is a guy named Martin Andelman.  His post on the matter can be found here: http://mandelman.ml-implode.com/trusted-loan-mod-firms/

cringely Blog mortgage modification

As we predicted two weeks ago mortgage rates are heading down again and, not surprisingly, mortgage and refi applications are heading up.  We’ll be riding this roller-coaster for months to come.

More interestingly, we’re finally starting to see some action from loan servicers on mortgage modifications under the Obama program.  The number of modifications is growing but is still far less than had been predicted and will probably never reach the millions of modifications originally touted by the Obama Administration.  But the most important part of what’s happening is how servicers are applying the Obama rules in actual practice and what result that is having for homeowners.  News on this front is NOT good.

Under the Obama program servicers are required to take mortgage modification applications and associated financial information but they are NOT required to automatically lose a lot of money on every mortgage.  Rather the servicer has to balance the financial impact for the actual owner of the loan of modifying the mortgage versus foreclosing on the property.  Under most circumstances it is better for the lender to modify than to foreclose because foreclosures are expensive.

But the Obama program has a target of making the monthly payment no more than 31 percent of the homeowners CURRENT income.  What if that income is zero?  Then foreclosure makes more sense.  In fact foreclosure makes more economic sense to lenders in cases where there is any substantial reduction of income.  Yet another reason why there are likely to be more foreclosures and fewer modifications to come.

This is likely to get even uglier.

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Take a look at the chart, above, which comes courtesy of the Federal Reserve.  It makes the point that private label mortgages, which are mortgages securitized by Wall Street firms, mainly investment banks, are responsible for most of the mortgage mess we are in as a nation.  There is a lot to understand here and it is particularly damning if examined closely because it shows Wall Street to be at best incompetent and at worst criminal.

All of these organizations and organization types do the same thing — they buy or fund mortgages then package thousands of those mortgages together into securities they sell on the open market.  If the quality of every security was the same then the percentage of bad mortgages would exactly match the percentage market share for each player.  Yet that is far from the case.

Let’s do some numbers:

Organization        Mortgages (millions)          Troubled (100,000)              % Troubled

Banks/Thrifts              8                                            397                            4.9

Fannie Mae                18                                            444                            2.4

Freddie Mac               13                                            232                            1.7

Ginnie Mae                   6                                            378                           6.3

Private Label                8                                           1734                         21.6

All of these organizations perform similar functions, all employ the same staff functions, all buy, for the most part, from the same pool of available mortgages, except of course there are varying requirements for each organization like the maximum loan, minimum credit score, etc.  Yet the variation from best to worst is as high as 10-to-1.  How can that be?

From a strictly statistical standpoint it CAN’T be.  In theory the population of mortgages, like the population of homeowners, should be represented by a normal (bell shaped) curve, with the bad mortgages taking up a small section on the left side of that curve.  It should be a small section because, since these mortgage pools are designed by statisticians, in order to be statistically acceptable the risk must generally be within two standard deviation from the norm.

Here’s how it SHOULD look:

About 2.15 percent of mortgages are expected to go bad, which means that some of the government-backed and bank/thrift mortgages were a little better and some were a little worse, but they are all clustered not too far from that 2.15 percent number, which is as it should be.  And remember this is during an unprecedented world financial melt-down.

Then ther eare the private-label numbers, which are precisely TEN TIMES worse than expected.  Statistically that’s crazy, but NOT crazy if the population of mortgage holders isn’t normal.  fir example, if the population included a large number of people who had no intention to actually make their mortgage payments, which seems to be the case here.

Remember that these private label numbers include those from all Wall Street firms, including — presumably — some that weren’t intending to be crooks.  So the bad numbers within these numbers are actually even worse — far worse.

What’s particularly damning about these data is that the non-private label numbers are so good, yet some of those government programs DON’T EVEN TAKE CREDIT SCORES INTO ACCOUNT.

One particular irony here is the notion that the Clinton Administration, forcing an end to blue-lining and encouraging lenders to make more lower-income mortgages, exacerbated the mortgage crisis.  Some people claim this policy change is the entire basis of the current problem.  Then why isn’t it reflected in the bank/thrift and various Federal program numbers?  Because those people are wrong and theiur claim is simply a ruse.

What these data say about the private label (Wall Street) mortgage securities is that there was systemic fraud.  Wall Street would like to pin that fraud on homeowners, but itis so pervasive that it really has to be more properly pinned in the statisticians who allowed it to happen and on their bosses who ORDERED it to happen.  These aren’t just bad decisions, they are statitically impossible with a normal population.  These are CRIMINAL acts costing billions of dollars and damaging the nation as a whole.  Yet who is going to jail for it?

Nobody so far.

cringely Blog banks, fannie mae, FHA, foreclosure, foreclosures, freddie mac, mortgage crisis

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A healthy business has lately emerged helping troubled homeowners apply for mortgage modifications from their lenders, typically for an upfront fee ranging from $50-$500.  Yet both the lenders and the government urge homeowners not to use these services, pointing-out that mortgage modifications are supposed to be free.  Which side is right?

Both.

There are two issues here, both wrapped in the kind of semantics Bill Clinton would appreciate: 1) what is the definition of “free?” and; 2) is one mortgage modification just as good as another?

From the perspective of the homeowner, hardly any mortgage modification is “free.” While it may involve no up-front fee, the way most modifications have been structured to date tends to work very much in favor of the lender, which actually makes MORE profit from the modified loan over time.  And paradoxically, many modifications actually make monthly payments go UP, not down, because missed payments are folded back into the principle.

So in the sense that a bank prefers a modified loan to a foreclosure, which almost always results in a financial loss for the lender, yes, the lender and borrower have allied interests.  But that’s as far as it goes: once the modification route has been chosen lender and homeowner alike will try to get the best deal they can, which comes inevitably at the expense of each other.

When it comes to modifying mortgages the banks have professionals who do this every day while most homeowners have never tried such a thing, which is why having outside help — even outside paid help — CAN lead to better terms for the homeowner.

On the other hand, there are plenty of scammers out there who will take $250 to run people through the same forms they could complete themselves for free down at the bank.  So there is a downside to taking professional help if that help isn’t really professional.

The government, alas, has so far come down on the side of the lenders, giving the force of President Obama’s political capital to the idea that all modifications are the same (they aren’t) and that people can’t get help that will ultimately save them thousands of dollars (they can, though not without effort).

The solution to this dilemma is two-fold.  First we need a more realistic and enlightened attitude on the part of the government, which seems to hardly ever meet a banker lately that it doesn’t like. Second, we need to promote non-profit and consumer-oriented mortgage modification advisers, possibly through federal programs like the Service Corps of Retired Executives (SCORE).

Just like your kid actually CAN improve his or her SAT score by preparing the right way, getting experienced help can level the bargaining table when it comes to mortgage modifications, sometimes even giving the advantage to the borrower, which the bank and — by proxy — the government doesn’t seem to want you to know.

cringely Blog mortgage modification

The Obama Administration will tomorrow unveil its plans for a new regulatory agency with sweeping powers over mortgage and other lenders, yet the only real question is how will the banks game this system, too?

The Administration means well, but their concern for the welfare of major bankers at the general expense of American homeowners is a consistent cause for concern.  The Treasury announced yesterday, for example, that five national lenders had received $3.1 billion in TARP funds specifically for mortgage modifications and that this was the start of $18.7 billion in such funds to be spent on mortgage modifications from a $75 billion total fund.

Reading into these figures is an exercise in frustration, as has been most ObamaMath.

The $3.1 billion, for example, represents TARP funds that have been SPENT for mortgage modifications.  Under the law lenders can qualify for a $1,500 upfront fee per modified mortgage, though that payment comes only AFTER the mortgage has been modified.  $3.1 billion divided by $1,500 implies that these five lenders have altogether COMPLETED the modification of 2,066,667 mortgages or about four percent of all home mortgages in America.

Nope, it hasn’t happened.

A month ago the Treasury Department claimed this same program had so far resulted in OFFERS of modified mortgages to 55,000 homeowners.  Now the agency is implying that in four weeks they’ve ramped that up by more than two million.  Except that’s NOT what they are saying, just what they are IMPLYING.

What’s more likely, in fact, is that the banks are being paid for mortgage modifications IN ADVANCE, which isn’t the way it is supposed to be.  No homeowners are receiving ANY Federal housing benefits in advance.  But then homeowners aren’t beleagured bankers, they are just people losing their homes.

cringely Blog mortgage modification, Obama Administration, TARP, Treasury Department

It takes months or years to decide to move or to buy a first home or a new one.  It takes weeks or months to find a new home once that decision is made.  It takes days or weeks to get a mortgage and move-in.  NOTHING about buying or selling a home is fast in a normal (non-bubble) market and we are DEFINITELY in a non-bubble market.  Yet that market seems fixated this week on two thoughts: 1) that the housing market has hit bottom (it hasn’t), and; 2) that mortgage rates have peaked (they have — for now). These short-term effects are probably NOT the correct things for Americans to fixate on at the moment, however, because the housing crisis is far from over.

Mortgage rates that had risen close to a point on average over the last few weeks have subsided in the last few days by about a quarter of a point.  Homebuilders, who are in a very justified panic in any case, are breathing slight sighs of relief that are probably not justified.  The storm of mortgage refinance that had been driven by sub-four percent rates has subsided but may now resume, though with less intensity, as rates drop back a bit further.  But against this we still have more than eight percent of U.S. homes in foreclosure — nearly all homes that WILL BE LOST.  This can only have the effect of driving down prices further.

Yes, the recession may be easing when measured in terms of stock prices (always a leading indicator) or corporate profits, but housing can only go lower and a huge part of the U.S. economy measured in skilled jobs is dependent on housing, so we’ll see employment remain depressed, too.  The Fed will keep buying mortgage securities, driving interest rates back down a bit, and it will be increasingly a buyer’s market for months to come.

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It was the best of times, it was the worst of times.  This week we continue to see the recession appearing to ease (that’s good) while the housing and mortgage markets are becoming less friendly with rising rates and foreclosures, alike.  What this means for Home-Account subscribers is that while rates will probably drop some in coming weeks there is a good chance that drop will be short-lived.  Meanwhile the banks that have been holding-off on foreclosures will give up that behavior with the result that home values are likely to be pushed 5-10 percent lower overall in coming months.  This puts potential buyers in the awkward position of either wanting to wait for lower prices or buy now for lower rates.  This tradeoff will become increasingly important in coming weeks and we’ll be following it closely.

On the government front there may well be brewing a problem with mortgage modifications enabled under recent legislation.  Specifically there is a potential conflict between regulators who seem to think they’ve created a class of mandatory modifications (ones the bank, under certain circumstances, MUST approve) and the general position of lenders that any modifications are still voluntary on their part and can’t be forced.  We’ll see where this leads but it is unlikely that the banks, with their ability to drag their heels on paperwork, can be forced to do anything.

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Mortgage rates turned higher last week jumping nearly half a point even as the Federal Reserve was buying more mortgage backed securities in an attempt to keep rates down.  This change of direction might be temporary or it might be permanent.  It might have come because Treasury Secretary Timothy Geithner was in China begging the Chinese government to keep buying T-bills, please.  Begging leads to loss of confidence among investors who then demand higher yields, hence the rise in mortgage rates.  So maybe when Geithner is home and the market has turned its attention to some other cause for panic rates will drop back.  After all, the Fed still has plans to buy another $700 billion in mortgage backed securities, having already thrown $500+ billion at the task.  But what happens when that money is gone?

It is evident that the Fed can, at best, keep mortgage rates down only temporarily.  The Fed has always known that and now the rest of us know it, too.  They have been pushing rates down in hopes that the housing and banking sectors would recover through policy-induced booms in refinancing (helping the banks) and first-time home-buying (helping boost the value of starter homes).  Alas, the hoped-for recovery will probably take longer than the Fed has patience, which is the true lesson of last week’s rate bump.

What does this mean for Home-Account subscribers?  It means that we are far from finished with this crisis, that the housing market has yet to hit a low, and that it will probably take a Plan B on the part of the Obama Administration to get us out of this mess.  Until that Plan B is hatched and explained to us the values of prudence and transparency we live by here are more important than ever. Keep up the good work.

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