Obama puts the squeeze on mortgage companies
Filed under: Economy, Investing
The Obama administration has for months pressured the mortgage industry to bail-out homeowners who have fallen behind in their mortgage payments. Now, it wants the industry to try harder.
According to the Wall Street Journal, "The Obama administration is pressing mortgage-servicing companies to step up their efforts to modify troubled loans under its housing-rescue program, the latest sign of frustration with the pace at which mortgage companies are reworking troubled loans."
One problem: the results of the government-mandated kindness have been terrible.
In April, the Office of the Comptroller of the Currency said that re-default rates on modified mortgages were "both high and rising during the first three quarters of 2008." An astonishing 41 percent of modified loans were seriously -- 60 or more days -- delinquent in the first quarter. The figure rose in the second quarter to 46 percent and the trend appeared to be continuing during the third quarter.
According to the OCC, the reasons for the high default rates are not clear. They could be a result of poor underwriting -- which was a huge problem during the bubble -- excessive borrower leverage or the general poor state of the economy. There is another problem to consider: psychology.
About 20 percent of U.S. homeowners have mortgages that are "underwater" -- meaning they couldn't pay off their mortgages if they sold their homes. In other words, what is supposed to be their biggest asset has become their biggest liability. People are loathe to put good money after bad, no matter how much affection they might feel for their residence. The problem is spreading to home equity loans, where the American Bankers Association said that defaults have reached an all-time high.Bankers are against cramdowns -- allowing bankruptcy judges to reset the value of mortgages -- but I don't see how they can be avoided. I know that some will say that this rewards people who bought more house than they could afford and turns contract law on its head.
But the alternative of letting the market "sort out" the mess of the housing market is too painful to contemplate.
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Reader Comments (Page 1 of 3)
7-10-2009 @ 1:02PM
rip300rog said...
The only solution is to let the market sort it out. When govt. puts its big heavy hand in the way and forces lenders to modify mortagage payments for borrowers who really never qualified except for the heavy hand of govt forcing the lenders to loan the money in the first place then how can anyone expect a rebound? There will be no rebound in house prices until we hit bottom naturally and set a clearing price for all the over building, fix and flipping, Freddie and Fannie sub prime loans and inflated apprasials that govt is in large part responsible for. As painful as it might be for some, the alternative is to try and bubble our way out like the govt is trying to do now.
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7-10-2009 @ 12:11PM
Bonnie said...
Speaking of putting contract law on it's head? What exactly is it then that the credit card companies are doing to their customers? I think a bankruptchy lawyer has every right to cramdown a mortgage loan. Who better than he or she can tell if a person can afford the new mortgage. Get real anyone who files bankruptcy has lost a lot and is not being rewarded for anything. The banks will still make money over the life of the loan. People need to think for themselves and quit believing media.
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7-10-2009 @ 12:12PM
marc said...
The problem is the banks do want to take your home. They have already been bailed out for the losses. Then they can resell the home at a 100% profit. Original money created from thin air, then becomes real money after it is all said and done.
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7-10-2009 @ 12:40PM
Rudy said...
Well when you give billions to banks and dont expect any accountability for the money you get greedy people who put us in this situation to spend that money to stimulize the selves!! i been waiting for a modification for 11/2 years and still nothing so i stopped paying them and they can kiss my untanned ass! I will file bankruptcy it the only thing that's fair i just feel we the people have been forced out of government and have completely been replaced by the buddy system, ir their buddy hello world if not you do not matter!! People should stay away from and boucott evrfy bank and put their money in credit unions to show the banks we still have power and boucott AIG, CitiGroup, wWells Fargo, Bank of America and any of thier assets bring them down afterall they have billions of our dollars and dont have to account for it. SO BRING THEM DOWN!! If you have a loan throughh American Home Mortgage Services get out of it they are crooks!!!
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7-10-2009 @ 12:37PM
Frikn' Had It said...
Either way the responsible persons that live within their means bail out the irresponsible lending banks and borrowers that do not period, no grey-area there. Loan those persons more since they learned from their first failure, well that didn't work either. This almost sounds a little like those financial and auto manufacturers that were to big to fail. Bottomless money pit encouraged again by those in government responsible for the entire collapse in the first place . . .
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7-10-2009 @ 12:44PM
James Cox said...
Every time I read an article like this I shudder. It scares me to death that my government and the press have no idea whats going on. 1st of all taking a loan thats already greater than the value of the house and modifing it even higher IS NO RESOLUTION. When the out of work homeowner comes to the realization that he will never see equity he walks what options was he left. The only way to fix this problem is to adjust the principal balences under the value of the homes provide by licensed apprsers from each state. That will allow for free tadeing in housing again and slow or stop the foreclosures. Intil this is done foreclouses will eventually drive the real estate value to zero Thats Right Zero and that point since a third of the US work force is related to housing unemployent will be 20 to 305 and we are done. If something isnt done fast this will last 10 or 20 years.
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7-10-2009 @ 1:15PM
Bruce said...
My home (in CT) is worth less than I owe because I had to keep borrowing on my home equity line of credit so as to keep current. Shouldn't people like me who pay no matter the circumstances also get a cut if those who don't pay do?
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7-10-2009 @ 1:19PM
skids said...
the problem is these banks refuse to take any losses, they leave those for the government. they only wish to "mark" performing loans, therefore shoring up thier bottome line, and justifying thier bloated saleries and bonuses, while keeping the "bad paper" off the books. the corperatists are shamelessly greedy, and have only thier own interests in mind, to hell with "america".
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7-10-2009 @ 5:57PM
gabbiescorner6 said...
Wrong. The government under Clinton threatened to fine banks if they didn't get more minority loans out, Freddie Mac okayed anything that come across their desks. So put the blame where it belongs and stop being jealous of people with money.
7-10-2009 @ 6:29PM
Irish said...
I'll have to disagree with you Abbie. The banks aren't hurting at all. They've been given billions in bailout funds to cover all of their losses. They've been given billions of dollars to supposedly increase lending, which they've failed to do so far. They've been given billions to refinance mortgages, but won't budge on decreasing loan values to home values one iota. They've been given the green light to rape and pillage all credit card holders - good and bad - for a year a half by increasing percentage rates on all new AND existing balances as well as decreasing limits. They've been making millions off paper mortgages until the crash which again - getting back to the bailouts - they've recovered. AND...they're now slathering themselves with green stuff in the name of "salaries" to compensate for the maxes put on "bonuses." The banks have had an entire decade to reap billions in shady mortgages, securities sales, etc. all the while pummeling our economy so that millions lost their jobs thus their incomes to keep their homes. So where exactly did banks lose? You claim people got themselves into the hold and therefore, should be responsible to get themselves out. WELL...the SAME applies to the banks, but our government chose to EXTORT money from the public to get them out of the holes they dug for themselves. How is that an honorable, ethical, and just system? I don't blame a single homeowner for walking away. In the end, the banks get the homes back and then get to sell them for 100% profit, so how does the bank hurt there? Americans are beginning to wake up to the fact that we've been ROBBED wholeheartedly." They should be angry - VERY angry. Exactly how has the public been aided through these "economic stimuluses?" They haven't - not at ALL. I don't blame a single American for walking away from their home loans, their equity lines, or their credit card debt. In the end, they'll just be another bailout from our government so the poor little banks don't have any losses and they can keep paying themselves their million-dollar bonuses. You've been HAD...just like every other American "dream" pursuer.
7-10-2009 @ 1:32PM
L R Adams said...
Hard to believe, giving money to folks that couldn’t make it before. This gives them another chance to fail in life. Their self-worth will be even less. Destroying peoples lives seems to be a goal of people like Barney Frank, Chris Dodd and well meaning simpletons.
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7-13-2009 @ 10:53AM
carol said...
okay, you pinpointed the problem. in the meantime the problem is still there. cry all you want about your idea of what caused it. maybe you don't want your home to start appreciating again? It has to stop somewhere, and the modifications is where it has to start. or you will be down the tube too, crying all the way about who caused it. be realistic. however the problem started, everyone is now affected, hope you haven't been laid off yet.
7-10-2009 @ 1:32PM
bestleeha said...
I am very tired of hearing "let the market sort it out." As this country has illustrated, market economics is not some infallible theory of physics. The market only works efficiently when it has all available information and everyone is dealing honestly (because you can't have all the information, by definition, if people are acting unethically). This is the opposite of what happens in a strictly capitalist society obsessed with grow margins. Especially when all the profit incentives in basically every sector of the economy go toward screwing over the consumer and not toward some beneficial societal goal.
If we simply created financial incentives based on goals that would actually benefit society, we could turn this greedy, corrupt system on its head and everyone would benefit. Instead of mortgage banks making more on default, higher interest rates, and foreclosure, you could make it more profitable to modify by lowering principal and incentivize collection of on-time payments over the life of the loan. Same with student loans: incentivize companies offering lower rates, no fees or fines on default, negotiation, fine companies for defaulting loans, and pay more for capping loans at a certain principle amounts.
The reason that we are one of the last societies that is purely capitalist is because all the rest of them have realized, through our example and their own, that it doesn't work. It creates a neverending cycle of boom and bust that does nothing but damage the economy and society as a whole--we've had numerous Great Depressions over the life of this country, all basically caused by the same principles, yet we repeat our mistakes for centuries expecting a different result (that is the definition of insanity). But, like most progressive social revelations, America figures it out last only after the populace is suffering.
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7-10-2009 @ 1:59PM
G said...
Did it ever occur to you that the reason today's fiddling with markets ain't working has more to do with past fiddling?
Quite Fwankly, Barney - y'all have tweaked things so much you wouldn't know UP if it hit you in the puss ... which ain't such a bad idea, now.
7-10-2009 @ 1:34PM
FOXYLYNX said...
JUST ONE LITTLE PROBLEM - ALL THE LOANS THAT HAVE BEEN RESET DEFAULT W/IN 6 MONTHS - I SAY THAT IS A BUNCH OF MONEY DOWN THE DRAIN. SOME OF THESE PEOPLE JUST CAN'T AFFORD A HOME, PERIOD.
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7-10-2009 @ 1:54PM
rip300rog said...
Then you should be pretty comfortable with the direction the USA is headed, bestleeha.
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7-10-2009 @ 2:21PM
bestleeha said...
Well, that depends on what you mean by "headed."
If you mean in terms of fiscal and monetary policy? Absolutely not. Frankly, I think all the "intervention" is a joke. No one has taken a hard line with any sector of the financial industry, and the entire country suffers at their hands. It boggles my mind that many of these traders and bankers were considered brilliant when anyone who knows anything about economics could see that what they were doing wasn't sustainable.
I would fire every one of them and try the lot of them for white collar crime. That includes the SEC who could really care less.
I was in business school when Enron and Worldcom happened, and we all thought it would change business practices and scrutiny forever. Apparently not. It just illustrates that greed will dominate every single time, no matter the cost.
I shudder to think that I could have been a trader.
7-12-2009 @ 12:15PM
LARRY said...
UBS WILL NOT RELEASE CLIENT INFO BECAUSE THERE ARE A LARGE NUMBER OF DEMOCRATS ON THE LIST THAT DEPOSITED CASH FROM TARP-STIMULUS,ETC--YOU KNOW WHO THEY ARE------------
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7-10-2009 @ 2:23PM
Randy said...
I have been trying to get US Bank to modify my loan since it was avail. My home is still worth aprox. $80,000 more than the loan amount. I lost my job in Sept of 08 but started a new one within a month the problem is it pays $30,000 a year less than than my last job. I did not get a loan I couldn't afford I just lost my job. I am not behind on my payments I owe nothing on credit cards I am what I believe to be a responsible home owner with a credit score in the low 800s If I am not getting any help who should? What are the banks looking for?
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7-10-2009 @ 2:34PM
arentany said...
It seems to me that the important thing to notice in the piece is that defaults have continued to rise in every quarter this year. This and so many other data clearly show that the economy is continuing on its inevitable downward fall. Those duped into investing (especially in the equity market) by membership in "fund" retirement plans will be hurt most. One legal remedy might be to hold the "expert" who controls the plan personally liable for any money lost at the time you pull out your money -- on the grounds of "special expertise" upon which the position stands. Lobby for this, for your own sakes.
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