Representative Zoe Lofgren, a California Democrat, proposed securing meaningful principal write-downs for underwater homeowners by allowing a temporary reduction in the interest rates of those homeowners who file for bankruptcy.

She presented the plan in a letter to President Barack Obama earlier this month and it was discussed by the Democratic lawmakers and FHFA’s acting director Edward DeMarco on Wednesday.

A cramdown is a would-be bankruptcy process whereby a borrower would file bankruptcy, and as part of a reorganization plan, cram a principle reduction of a mortgage down a lenders throat. (Not just a “temporary” reduction in interest, by the way, but a true write down of principal.)

Seems counter-intuitive, doesn’t it?

“Hi, Judge. I’m a bankrupt borrower, but I could afford my house if I owed less, and had to pay less interest. The lender won’t agree. Will you make them, please.”

How does someone who is “bankrupt” afford a house?

It’s simple, in some cases anyway.

The largest debt of a cramdown borrower would be the mortgage. The borrower ** would be ** able to afford the house mortgage ** if ** the mortgage amount was equal to the value of the house – not 125% or 150% of the value of the house. If the interest rate were lower, that would help too.

Who loses in this scenario?

Fannie Mae and Freddie Mac – those GSEs that hold 75-85% of all mortgages in the US. (Oh, and some private banks that hold the balance. After all, what’s good for the goose…)

Can Freddie and Fannie afford to take the hit? THAT’s the question.

We’ve (as a Country) already dumped 2 TRILLION dollars into the economy. The Government (that’d be you and me by the way) will need to pay for the write offs any cram down allowed. How much more would that be – and where would it come from?

Here’s my $0.02.

The economy limps along like overcooked spaghetti. It’s going nowhere until the banks can get rid of the toxic debt, and consumer confidence rebuilds. Take the losses now, and we can start the recovery sooner. Yes, the losses WILL BE staggering. The bankruptcy courts will be overwhelmed. (I’d bet that some smart folks will start renegotiating those loans without the need for bankruptcy court intervention if the law allowed a borrower to do it through a bankruptcy proceeding – after all, it’d be cheaper for the banks that way…)

But, once the borrowers start paying on their loans again, once borrowers “feel” like they have readjusted on their homes, confidence – i.e. certainty – returns. And with certainty comes spending. With spending comes an uptick in the economy, and the ability for everyone to start making money again. Even he Banks. THAT’s how we pay for the losses Fannie and Freddie will take. We tax our way through it, with the increased economic activity.

Hell no, it’s not pretty. But it could work!

What is H.O.M.E. ?

The Hardship Outlays to protect Mortgagee Equity Act (HOME) is the legislation currently being discussed in Washington. HOME proposes to allow underwater homeowners to make tax-penalty-free hardship withdrawals from their 401(k) retirement accounts to avoid foreclosure.

The way the tax code currently stands, individuals who make early hardship withdrawals from their 401(k) accounts pay a 10% penalty in addition to income taxes. HOME pushes to remove the penalty and grant homeowners the right to withdraw up to $50,000 to either pay a delinquent mortgage, make up for lost household income or incorporate it in a lender’s loan modification arrangement. The legislation provides withdrawals be capped at 50% of the 401(k) account and requires the withdrawn amount be spent within 120 days. Proponents of HOME believe the plan gives distressed homeowners one last alternative to foreclosure while avoiding additional government expenditures.

This is the MOST STUPID of all the dumb, dumber and dumbest of the Federal Programs I’ve seen yet.

Let’s think about it.

The Homeowner should take money out of a 401(k) retirement account and dump it into an underwater home loan.

What stupid goober thought this one up? Some Banker I’d bet.

Who wins in this? The Banks – who get paid on a mortgage that should be flushed down the toilet; and the Federal Government (those folks that de-regulated the Banking Industry and allowed all this to happen in the first place) – who will have to continue to bail out the Banks if the homeowner defaults.

Why – WHY! – would someone with an ounce of sense want to spend “good” retirement money on a “bad” mortgage? They won’t.

Write off the loan losses.
Take the hit.

Yes, it will hurt the already hurt economy even more. But then – and only then – will we be able to begin a true recovery.

Historical trends don’t lie. At least that’s what “smart people” are saying. And “they” are saying that we have not reached bottom, yet.

first tuesday – a real lestate publication that I’ve come to enjoy, and agree with (on almost everything . . . almost) pegged a 15% decline yet to come.

http://firsttuesdayjournal.com/the-equilibrium-trendline-the-mean-price-anchor/?utm_source=first+tuesday+Students&utm_campaign=93ae2b9454-Monthly_Email_October_11_2011&utm_medium=email

Yale economist Robert Shiller agrees, and sees an even bigger drop to come.

http://www.slideshare.net/RealtyTrac/why-is-real-estate-not-rebounding

So, what’s one to do?

Grab on tight to buyer-investors. Make what feels like low-ball offers. They may give the client room to survive the coming downturn, and still propser, 5 – 7 years from now.

Vickie Elmer, of the New York Times recently reported that “About a third of the 65-and-older households that owned a home in 2009 had a mortgage, according to the Census Bureau’s American Housing Survey, which also put homeownership in this age group close to 81 percent during the second quarter of this year.”

“And lenders … expect to see a debt-to-income ratio of no more than 40 or 45 percent…”

What does that do to the value of housing that a “senior” can afford?

If retirement income is $2,000 per month, and 45% of that can be sued for “debt” then housing debt should be capped at about 31%. 31% of $2,000 is $620, and if the interest rate is 5% over a 30 year amortized loan, that’s $115,000 (before taxes and insurance are factored in.

Better go buy that REO house in the California central valley now.

The L.A. Times recently reported that the Fed is now looking to find ways to dispose of the 248,000 homes it owns (through bank REOs) by either selling them in bulk to investors who will be required to rent them, or to sell them on rent-to-own basis.

“One idea could be to create pools of foreclosed properties that would be sold in bulk to private investors, who would then rent them out, helping reduce taxpayer losses on the bailouts of Fannie and Freddie. Another idea could be for investors to buy homes and then rent them on a rent-to-own basis.”

http://latimesblogs.latimes.com/money_co/2011/08/foreclosure-obama-housing-market-rent-fannie-mae-freddie-mac.html

Who is kidding whom here? “Rent-to-Own”? What are we – a mattress store?

The Fed will give a new buyer a break by allowing them to rent, then buy at a price (presumably) fixed at the time they enter into this agreement (thus allowing the buyer to get some upside?) Or, is the program designed to let the Renter buy it at market value several years from now, if they qualify? (That way, the Fed gets the upside, and the rental value. It beats having an empty house…)

Why not just take the mark-down to market value today, and reform the existing loan – and allow the current owner to keep it?

Either way, there is going to be a loss.

SB 458 – effective July 11, states no liability will inure to sellers of short sale 1-4 unit properties in California with respect to second position loans. (Recall that first position loans sold short lost recourse liability becasue of SB 931 in 2010).

Good news? Or bad?

Some say it will actually hurt sales in California, becasue banks won’t have any incentive to deal and will just foreclose. Maybe.

I’d bet neither law stays on the books very long. Huh? Why not?

The US and State Constitutions have Ex Post Facto laws. Fancy words that mean, in essence, “Thou shalt not pass a law that interferes with a preexisting contractual relationship.”

Isn’t that just what these laws did? Change the preexisting contractual relationship between a bank and a borrower?

With hundreds of BILLIONS of dollars at risk, don’t you think the banks will challenge the laws? I would.

We’ll all find out in about three years. That’s how long it takes for a trial, and then an appeal. (Longer if it goes to either of the Supreme Courts – state or federal.)

Sellers (and listing brokers?) of residential real estate seem stuck in the ‘olden days’ of value. They are stuck with the old price. It’s the “sticky price” problem. They seem to ignore a reality: Value is based on CASH PRICING.

Yup. Those REO speculator investor buyers are setting the new market value of EVERYTHING.

And why not?

Isn’t “value” what a willing buyer will pay a willing seller – absent outside influences? And isn’t financing an outside influence? We only need to look at what the ability to get easy money (i.e. stated income loans with teaser initial rates and optional payment plans) did to values in the last 10 years. Now that governmental influence in lending money has reversed itself – making it feel nearly impossible to get a loan – even for a well qualified, fully documented loan applicant – prices are still ‘in the gutter.’ How come?

Because that’s where they belong.

Take a look at any chart that goes back, say 30 years. You can see the line of price increase is a relatively shallow one. If you take out the last 10 – 15 years, the place where today’s prices hits is just about in line with the historical norm. This ‘market adjustment’ has ben huge – no doubt about it. But is adjusted to where it ought to have been in the first place – absent government interference.

So, cash is king. It always has been. And a cash price value is THE value. That a borrower might be able to borrow dollars to buy at the cash price just gives that borrower leverage. What a nice thing. If you can get it.

The recession is over…technically.

Californians who consider the condition of the state’s economy today will generally agree we are in the throes of an ongoing real estate recession. To those who are unemployed or delinquent on their mortgage — millions of Californians — the term recession is synonymous with personal financial hardship.

The media laughed in the face of the National Bureau of Economic Research (NBER) when they recently announced the Great Recession officially ended in June 2009. Consumer confidence remains desperately low as the weak employment numbers that began in 2007 still plague almost every California industry, indicating to society that we have a long way to go before we stabilize.

Almost two years after the supposed “end” of the recession, the public remains flooded with stories emphasizing the plight of the common man who has not yet escaped the clutches of economic depression. Yet, even so, most economists agree June 2009 properly marks the official end of the economic cycle that reared its ugly head in December 2007.

Obviously, there is a major disconnect between market analysts and the unemployed (and underwater) constituency. Over 1.5 million Californians are still struggling to find replacement jobs and pay their bills, making it nearly impossible for any of them to believe the economy is approaching recovery.

So are we or aren’t we done with the Great Recession? To fully and accurately answer such a question, we must first conclude what exactly a recession is and who decides when one begins or ends.
What is a recession?

The NBER defines a recession as a period of at least three quarters when “a significant decline in economic activity spreads across the economy,” taking multiple economic factors into account, such as employment and gross domestic product (GDP).

The precipitating event of a recessionary period is the money-tightening activity of the Federal Reserve (the Fed). The Fed directly influences the three-month Treasury bill (T-Bill), which represents the short-term interest rate and determines the base price of borrowing money for the short-term.

This apolitical entity can stimulate business and economic growth to stave off price deflation and job losses by lowering short-term interest rates. Conversely, the Fed fights inflation and overheated employment by continually raising short-term interest rates until the correction is achieved.

Further, the three-month T-Bill is juxtaposed with the ten-year Treasury note (T-note) rate. It is the bond market investors, not the Fed, who set the rate for returns on their ten-year investments in government notes. Bond market investors take into account the Fed’s management of the short-term rate (called monetary policy) to forecast the future rate of inflation, future demand for money and the desired fixed rate of return needed on their investment.

The T-bill and T-note rates form the yield spread.

In tandem, the T-bill and T-note rates form the yield spread, the difference between the three-month T-bill controlled by the Fed and the ten-year T-note controlled by market investors.

When bond market investors forecast less future growth as a result of the Fed’s upward short-term rate activity, they accept a lower long-term rate. Thus, the yield spread narrows, forecasting a less vigorous economy in the near future. On the other hand, a widening yield spread indicates much less danger of a future decline in business activity and demand for money.

When a yield curve goes negative — short-term rates exceed long-term rates — one can be confident we will be in a recession within 12 months. This held true for the 1989 recession, the 2001 recession, the 2008 Great Recession and all prior recessions back to World War II.

Why does the Fed “create” a recession?

The Fed decides to raise short-term interest rates when certain red-flag conditions indicate the economy must be slowed. An excess demand for labor indicates business is booming, prices are up and job salaries are increasing too quickly for the market to remain stable. If consumer price inflation climbs beyond 2%, the Fed considers action to correct it.

In 2004, at the height of the Millennium Boom, the Fed began to raise short-term interest rates in an effort to slow the economy and thus tame price inflation and an overheated job market. Eventually, the yield curve inverted in mid-2006 as short-term rates exceeded the long-term rates. Just over one year later, in December of 2007, an official recession was declared after the NBER recorded three consecutive quarters of economic downturn. By then the Fed had already begun dropping the short-term rates, as the correction they sought was underway.

Who decides when a recession begins or ends?

June 2009 marked the third consecutive quarter of economic upturn, making it the officially end of the Great Recession.

The everyday homeowner reads the NBER’s declaration and looks for a fully stabilized housing market and employment rate. Those conditions were certainly not marked by that date. The NBER merely recorded June 2009 as the official moment in which their definition of a recession no longer applied to the current economy. They did not intend to imply the economy had fully recovered, but rather that the economy was not getting worse.

The NBER did not intend to imply the economy had fully recovered, but rather it was not getting worse.

As the creation of jobs continues to push California toward eventual upturn, agents and brokers can expect the momentum of sales to experience a slight deceleration around 2013-2014. By then, the Fed will likely need to raise interest rates to stabilize the recovery so it doesn’t expand too quickly. Employment levels will return to prior 2007 peak levels by 2016 if all goes according to the Fed’s plan.
Congress and the Administration also have a hand in the performance of the economy, and their agenda continues to influence market growth.

Delusions of grandeur

Common misconceptions about recessions only serve to make them more mysterious. The media’s coverage of the burst housing bubble and economic crash is largely responsible for the delusions of uncontrollable, unpredictable economic chaos which have inculcated the minds of the masses who know little about the science of economics or the operations of the Fed. Likewise, whispers of the dollar failing and noise about the return of a gold standard have no basis in reality.

In the spirit of spreading rational truth, first tuesday would like to address and refute some commonly misguided assumptions regarding this Great Recession.

Myth #1: Recessions are random.
The current economic cycle is a product of the difficult but necessary decisions made by the Fed in order to keep inflation at bay and quell the overindulgence of the Millennium Boom. A recession cannot strike at any time, but in fact follows a pattern we have seen throughout history time and time again. It is because of the consistent historical precedent of past recessions that first tuesday can confidently predict when employment rates and housing prices will return to prior levels.

Myth #2: The end of a recession means the economy has recovered.
Three quarters is not enough time to distinguish whether an actual real estate recovery is underway, or if we are just experiencing a “dead cat bounce” followed by a double-dip recession. Optimists, proceed with caution.

Myth #3: Recessions cannot be anticipated.
Use of the yield spread to predict what the economy will look like one year forward is an excellent tool for agents to use when discussing the likelihood of a recession with their buyers or sellers. You can assure them the coming year will foster recovery by explaining how to read and apply the wisdom built into the yield spread.

Copyright © 2011 by first tuesday Realty Publications, Inc. Readers are encouraged to reprint or distribute this information with credit given to the first tuesday Journal Online — P.O. Box 20069, Riverside, CA 92516.

The New York Times recently reported that “high value” homes are going to lose government support in the secondary mortgage market – and that that loss will likely further deteriorate the real estate recovery. It was right.

“By summer’s end,” it reported “buyers and sellers in some of the country’s most upscale housing markets are slated to lose their biggest benefactor of the economic downturn: the deep pockets of the federal government. In [Monterrey, CA, a] seaside community of pricey homes, the dread of yet another housing shock is already spreading.

‘We’re looking at more price drops, more foreclosures,’ said Rick Del Pozzo, a loan broker. ‘This snowball that’s been rolling downhill is going to pick up some speed.’

For the past three years, federal agencies have backed new mortgages as large as $729,750 in desirable neighborhoods in high-cost states like California, New York, New Jersey, Connecticut and Massachusetts. Without the government covering the risk of default, many lenders would have refused to make the loans. With the economy in free fall, Congress broadened its traditionally generous support of housing to an unprecedented degree.

But Democrats and Republicans agree that the taxpayer should no longer be responsible for homes valued well above the national average and are about to turn a top slice of the housing market into a testing ground for whether the private mortgage market can once again go it alone. Michael Barr, a former assistant Treasury secretary, said the federal government’s retrenchment would be painful for many communities.

‘There’s always going to be a line, and for the person just over it, it’s always going to be an arbitrary line,’ said Barr, who teaches at the University of Michigan Law School. ‘But there is no entitlement to living in a home that costs $750,000.’

As the housing market braces for the trouble, homeowners everywhere have been reduced to hoping things will some day stop getting worse. In some areas, foreclosures are the only thing selling. New-home construction is nearly nonexistent. And CoreLogic, a data company, said Tuesday that house prices fell 7.5 percent over the past year. Each month, the number of faltering cities rises.

Federal agencies last year backed nine out of 10 new mortgages nationwide, and losses from soured loans are still mounting. Fannie Mae, which buys mortgages from lenders and packages them for investors, said last week that it needed an additional $6.2 billion in aid, bringing the cost of its rescue to nearly $100 billion.

Getting the government out of the mortgage business, however, is proving much more difficult than doling out new benefits. As regulators prepare to drop the level at which they will guarantee loans — here in Monterey County, the level will drop by a third, to $483,000 — buyers and sellers are wondering why they should be punished simply for living in an expensive region. Sellers worry that the pool of potential buyers will shrink. ‘I’m glad to see they’re trying to rein in Fannie Mae, but I think I’m being disproportionately penalized,’ said Rayn Random, who is trying to sell her house in the hills for $849,000 so she can move to Florida.

The National Association of Realtors is making an extension of the loan guarantees a top lobbying priority.

‘Reducing the limits will put more downward pressure on prices,’ said president Ron Phipps. ‘I just don’t think it makes a lot of sense.’ But he said that in contrast to last year, when a one-year extension of the higher limits sailed through Congress, ‘there’s more resistance.’
Federal regulators acknowledge that mortgages will get more expensive in upscale neighborhoods but say the effect of the smaller guarantees on the overall housing market will be muted.”

Really? No “entitlement” to live in an expensive house? Let Wall Street come up with a private secondary market for expensive (i.e. anything over $500,000?) homes? Who are they kidding? Especially in CA, CT, NT, VT.

This “sock it to the ‘rich’” business is a bunch of baloney.

Oh how I do LOVE first tuesday. Here’s their latest take on Bank of America’s “new and improved” loan modification centers. (And, while they don’t use the word ‘bullshit’ – which I would – they come pretty darn close!)

“Six new Bank of America (BofA) mortgage help centers will be opened in Los Angeles, San Diego, Riverside/San Bernardino, Antelope Valley, Modesto and Bakersfield by early summer. These new mortgage help centers will provide homeowners in danger of foreclosure on a BofA loan the ability to discuss their individual loan situations with BofA staff in hopes of obtaining the near-mythical permanent loan modification.

This newly-announced move comes in response to a scathing critique (full of bark, but oddly bite-less) of the Big Banks’ loose lending and servicing procedures which precipitated the Great Recession.

The housing counselors staffing these new mortgage help centers will be comprised largely of existing BofA employees the Big Bank is looking to redistribute during the current slowdown in loan originations.

But will these six new mortgage help centers actually help? The critics are skeptical. Like many Americans, the pundits have taken a “we’ll-believe-it-when-we-see-it” attitude to the multitude of reform promises made by the Big Banks. These centers, after all, aren’t changing BofA’s modus operandi; they merely provide friendlier faces for their refusals.

first tuesday Take: Count us as one of the critics, but don’t believe the modifications will somehow magically flow forth. Viewed in the best light, BofA is 1) providing its homeowners with a more reliable way of reaching someone who will deny their loan modification requests, and 2) giving its under-employed employees something to do. But we are talking about a bank here, so the likelihood that this move will live up to the best possible interpretation is pretty darned miniscule.

It’s been clear for awhile that marking all these loans to market will hugely undermine (and that’s a nice way of saying “topple”) BofA’s claim to solvency. And even if you believe BofA cares for its customers, it doesn’t care enough for them to go out of business. [For more on mark-to-market vs. mark-to-management accounting, see the October 2010 first tuesday article, Deflation’s push on the real estate recovery.]

So, we’ll say this for BofA: they can be congratulated on their ability to get press coverage on their staffing acuity while they avoid increasing the swollen ranks of California’s unemployed. But mortgage assistance? Don’t count on it.”

From first tuesday Journal Online — P.O. Box 20069, Riverside, CA 92516

The Ney Work Times reported on teh story May 5. Some of its commentary:

“Just over two million homes are in foreclosure nationwide, according to LPS Mortgage Monitor, and another two million borrowers are severely delinquent.

Additional centers may open later this year, the bank said. Counselors fluent in languages including Spanish, Korean, Vietnamese and Russian will be available for non-English speaking customers.

‘There are some people that prefer a face-to-face experience,’ said Rebecca Mairone, national mortgage outreach executive for Bank of America. ‘They prefer telling their story face to face or need additional information about documents or other counseling. We’re committed to helping distressed customers.’

Most of the counselors in the new centers will be transferred from other areas of the mortgage business, like sales and originations, which have slowed with the decline in mortgage demand.

Bank of America officials said their internal foreclosure procedures had changed in the wake of public criticism, and that the centers were being opened partly in response to customer feedback.”

“THERE ARE SOME PEOPLE THAT PREFER THE FACE TO FACE EXPERIENCE”?

“WE’RE COMMITTED TO HELPING DISTRESSED CUSTOMERS”

“MOST OF THE COUNSELORS WILL BE TRANSFERRED FROM OTHER AREAS OF THE MORTGAGE BUSINESS”

What a crock.

It would have been more honest to say: “We don’t want any more bad press so we’re not going to announce layoffs of our mortgage staff, and it’s better public relations to give our customers a face to face denial.”