Housing Disaster 2.0

If you thought the housing debacle was bad, wait till you see what 2.0 has in store!

The intransigence of Wall st to help homeowners resolve their problems is now coming back to bite them, HARD!

The mortgage backed securities that are the touchstone of the Trillion dollar securitization scam are mainly worthless, despite the industry's obfuscation. The reason is that most of the mortgages underlying the securities are underwater, worth less than the housing backing them up.

No one is willing to acknowledge this devastating fact. But remember the real estate boom? Property values were rising at 10-20% annually, but all the while, home equity was actually falling. Historically, the average home had 50% equity, but during the boom, because of the low-no down payment purchases and the cash out refi frenzy, the average home had only 25% equity by the peak of the boom in 2005-6.

Up to now, home prices have fallen 25-30%, with no end in sight, which means that the average home at this point has negative equity!

Home prices will continue to fall for the foreseeable future because of the humongous number of homes in the foreclosure pipeline. Unemployment is now driving even good credit, 30 year fixed mortgage holders to default on their mortgage payments. Experience has shown that anyone who is 3 months or more behind in their mortgage payments, will never catch up and will become a foreclosure statistic.

To that number you have to add a substantial number of people who are current on their payments, but are significantly underwater. If you paid $425,000 for your home 4 years ago, with 10% down, meaning you have a $383,500 mortgage, but the value of your home is now only $295,000, you, like many similarly situated homeowners, will seriously consider walking away, or "Strategically Default" on your mortgage. Others would not consider it on moral grounds.

Think about it. Could you buy a similar home or even a better one for the same or smaller mortgage payment? How much would it cost to rent a similar or better home? Do you really want to throw good money, your retirement, your child's educational account, into a home that may not recover its value for years and years?

As of this writing, up to 40% of foreclosure sales are the result of home owners walking away from their mortgages.

Finally, the pool of potential home buyers shrinks by the day. Unemployed people are automatically excluded from the ranks of home buyers. More and more people's credit scores are dropping because of financial hardship, while at the same time banks are demanding higher and higher credit scores, with 750-780 not uncommon. Another thing the banks are demanding are bigger down payments, with many demanding 20% down, which with total acquisition costs bring the required cash to buy a house up to 25% or more. Not many first time buyers have that and trade up buyers are few because either they cannot sell their homes because they are under water or their credit has been dinged because of missed mortgage payments.

And, of course just over the horizon are higher interest rates as the Fed QE2's inflationary impact spreads from stocks and commodities to the broader economy. Higher mortgage interest rates will be just another nail in the housing market's coffin.

Obama Blinked!

Although the so called Bankruptcy Cramdown provision; the ability of BK judges to reduce the amount of loans on property in the course of the BK, is extended for the first time to first mortgages on principal residences; the fact that there is no general across the board principal reduction for home owners will keep the bill from solving the housing crisis.

Giving "Incentives" to unscrupulous lenders to cooperate and lower mortgage payments will not work. It hasn't worked in Hope or Hope for homeowner plans as we have seen.

There are simply too many considerations and limitations; who owns the mortgage or part of the mortgage? Who is servicing it? Do you know that some well known mortgage services eagerly purchase defaulting loans and make huge profits by adding fees and foreclosing on them? What are the mortgage owners or their investors contractual obligations toward modification or principal reduction, etc.

Only a Federal Law could cut through those considerations and force action by the lenders.

I believe Obama knows the answer is principal reductions on home mortgages down to 80-90% of CURRENT market value is the most powerful answer to the foreclosure crisis.

This would allow the 20% or so of all mortgage holders who are underwater, whose mortgage is more than the house is worth, to reset to payments they can afford. If these people are not relieved, they have ZERO incentive to sacrifice their life savings or retirement savings to keep paying their mortgage.

Perhaps in a few months Obama can say, we tried everything else and it did not work, so we are now going to force lenders to reduce principal on all loans to affordable levels. He probably felt it would be too radical and face too much opposition from the Know-Nothings, like Eric Cantor; and getting something passed now was better than getting nothing passed.

However, the hour is late, perhaps too late to put the housing monster back in its cage. It is already sucking up the scarce money homeowners need to service not only their mortgage but their credit cards, auto and student loans, which will cause massive defaults in those areas, hurting the banks even more.

There is even more carnage just over the horizon as I point out in an earlier posting.

There is already baked-in to the forecasts by Credit Suisse about 6 Million more foreclosure over the coming two years because of massive, Trillion dollar defaults in Alt-A and Option Arm loans.

Already 60% of Option Arms are underwater and more than 80% of borrowers are paying less than the interest owed on each payment, thereby Increasing the amount of principal owed with every payment!

Also, something I have not seen discussed is that even Prime loan defaults will probably skyrocket in the next 2-3 years. Historically their defaults peak 3-5 years after they are issued.

That means that the Trillions of dollars in prime loans written at the peak of the boom, 2005 and 2006 and therefore have suffered the sharpest home value drops,will enter peak default periods in 2008-2011. Already, Prime loans are entering default stage at a higher rate than sub prime in some areas!

Finally, the Know Nothings are crazy if they feel that an overall mortgage default rate of 10% is acceptable!

This is fully 10 Times the normal mortgage default rate! Many banks have about 50% of their capital in residential mortgages. A 10% default rate on their assets would reduce their lending capacity by 10-20x that amount. Such a blow to their lending and therefore earning ability would cripple them.

The Know Nothings are now, predictably, so consumed with the fear (they love to spread fear, remember the Yellow and Orange Alerts during the 2004 campaign?) that a homeowner who cheats, obviously a minority of all borrowers gets bailed out?

What about the banks and Wall St where All of the big banks and brokerage houses, rating agencies and others who created this mess in the first place? Aren't they being bailed out regardless? Oh, I forgot, the banks are too big to fail, but the homeowner is too small to bail.

In summation, I believe Obama's Home Rescue Plan is too little, too late, especially after the Know Nothings get finished savaging it. Will he get a second chance to make it better? Will it matter?

"Bank opposition to helping homeowners, Senator Durbin says, "was (is) very shortsighted in light of the mess they have created in our economy."

Banks Are Not Serious About Helping to Keep People in Their Homes!

You have heard that "banks want you to be able to pay your mortgage, they don't want your house." I have even said that in the past. While true on an individual level, today, bankers are taking a short term view to first to protect themselves, (and their jobs) then deal with the devil later on.

Look at These Excerpts from Yahoo News, Friday, Feb 13, 2009

The (housing) industry strategy all along has been to buy time and thwart regulation, financial-services lobbyists tell BusinessWeek . "We were like the Dutch boy with his finger in the dike," says one business advocate who, like several colleagues, insists on anonymity, fearing career damage. Some admit that, in retrospect, their clients, which include Bank of America (NYSE:BAC - News), Citigroup (NYSE:C - News), and JPMorgan Chase (NYSE:JPM - News), would have been better off had they agreed two years ago to address foreclosures systematically rather than pin their hopes on an unlikely housing rebound.

A major reason financial institutions and investors are so determined to avoid modifying loan terms more aggressively has to do with accounting nuances, say industry lobbyists. If, for example, a bank lowered the balance of a certain mortgage, there would be a strong argument that it would have to reduce the value on its balance sheet of all similar mortgages in the same geographic area to reflect the danger that the region had hit an economic slump. Under this stringent approach, financial industry mortgage-related losses could far surpass even the grim $1.1 trillion estimated by Goldman Sachs (NYSE:GS - News) in January. A desire to postpone this devastating situation helps explain lenders' intransigence, says Rick Sharga, vice-president of marketing at RealtyTrac, an Irvine (Calif.) firm that analyzes foreclosure patterns.


What About the Plans Already Announced to Help Homeowners?

Hope Now Alliance, a government-endorsed private sector organization announced by Paulson on Oct. 10, 2007. Lenders promised to cooperate with nonprofit credit counselors who would help borrowers prevent defaults. Faith Schwartz, a former subprime mortgage executive, was put in charge.

An analysis White did of a sample of 21,219 largely subprime mortgages modified in November under Hope Now in 2008 found that only 35% of the cases resulted in lower payments. In 18%, payments stayed the same; in the remaining 47%, they rose. The reason for this strange result: Lenders and loan servicers are tacking on missed payments, taxes, and big fees to borrowers' monthly bills.

Then there was Hope for Homeowners. It was already anticipated that its fine print would discourage all but a few borrowers. "We knew it was likely to have limited appeal," says Preston, the former secretary of HUD, which oversees the FHA. George Miller, executive director of the American Securitization Forum, a Wall Street trade group, calls the program and its 25 refinanced loans "useless" because of the onerous details.

The banks clearly are looking out for themselves first and foremost. As one banker put it, "Banks are too big to fail and homeowners are too small to bail!"

So, that is their attitude. They foisted fraudulent financial products onto homeowners and are now refusing to take responsibility and help their victims.

Here is a Typical Story of Homeowners Hoodwinked by the Banks!

Stefanie and James Smith of Santa Clarita, Calif., fear they may need the help of a bankruptcy court if they are to keep the subdivision home they bought for $579,000 in November 2005. Stefanie, 37, a university human resources coordinator, and James, 40, a federal law enforcement agent, borrowed the entire amount in two subprime loans that required a total monthly payment of $3,000. A representative of their lender, Countrywide, told them not to worry, says Stefanie: They would be able to refinance in a year.

By mid-2007 they were running late on payments, and refinancing options had dried up. With their monthly bill scheduled to jump to more than $4,000 this January due to a rising mortgage rate, Stefanie contacted Countrywide last summer. She asked for a loan modification so they could avoid default. In December the lender said it would be willing to increase their payment by $600. That was better than the scheduled rise of $1,100, so the Smiths agreed.

But now they are struggling to pay the higher amount. Countrywide's parent, BofA, declined to comment, citing the Smiths' privacy. After BusinessWeek's questions, though, Countrywide called them to discuss cutting their payments.

"We knew when we bought that the payments would be a stretch," says Stefanie. She regrets assuming they would be able to refinance at a lower rate. "We are not deadbeats," she adds. "All we want is a mortgage we can afford."

Our Advice to Homeowners Facing Foreclosure!

If you are now losing your home because you cannot pay your mortgage, don't rape your 401(k) or your children's college fund, you will Never be able to replace those funds in the economy we are entering.

Accept the possibility that you have already lost your house, you did sign the mortgage, probably without being represented by a lawyer, that is your responsibilty.

Now, you can either be put out of the house with No money left to your name, a bad thing, having raided your savings, retirement and children's funds, or you can stop paying now and be put out later with your savings intact to finance a new start, a better outcome.

With more and more people underwater, making payments on homes worth less than their mortgage, this will become a popular tactic and will eventually force the banks to help.

In fact, we are seeing an increasing number of people who stop making their payments and challenge the banks in court. If the bank cannot produce your original mortgage and note, they cannot proceed with the foreclosure! It is estimated that fully 40% of banks cannot produce this documentation, so it is well worth the risk.

Contact me directly if you would like more information on this subject or assitance in implementing it. I can be reached at 646-961-3818

Oh, what about the Moral Hazzard such a brazzen act of self help would produce? I think the danger of producing Moron Hazzards are much greater; people exhausting their money to make payments on homes that are underwater!