Even better, you get to keep the boat.

Ain’t America grand? (unless you are fiscally responsible)

That is, if I am delinquent — perhaps in part because I borrowed to fund a cruise, a new 4×4, and a boat — and am therefore entitled(?) to a “mod”, then what of my neighbor, who is able to make his payments because he drives a ten-year-old Toyota and vacations at the state park? Presumably he has suffered the same 30% (or whatever) paper “loss” on his house as I; is he also entitled to relief?

If not, then there is a danger of rewarding the reckless while punishing the careful.

If you had $1M in an IMB account (10,000 folks had above the $100k insured limit), the FDIC does not have enough to make you whole ($1B total uninsured deposits).

So the FDIC has $6.6B to give to slackers, but does not have $1B to return the money to their rightful owners.

Am I the only one to see the lunacy here?

The reason? In 2002, Bush wanted to win the 2004 election. He knew he needed to get out of that recession quickly. Wall St and the NAR wanted their cut too, so they hatched a plan to get lots of money into the hands of unsophisticated borrowers. Why? THEY ARE FEE-INSENSITIVE. Great for realtors, great for Wall St.

Now that this lunacy comes home to roost, they are stealing from the accounts of the fiscally responsible to give to the delinquents. Why? THEY ARE FEE-INSENSITIVE. More fees for the reworked mortgage.

Everyone wins. Almost.

There are some agency issues, of course.

This is just speculation, but if this is anything like what FDIC thinks, it would imply they have a very negative view of the coming months.

I probably should have used the term “loss severity” which is more encompassing, rather than disaggregating it in a crude fashion.

I am hearing anecdotally that loss severities of a mere 40% is a good number these days (any reader input here very much appreciated).

At the Milken Institute Global Conference, Lew Ranieri was appalled and saddened that mods weren’t being made, and he maintained that they were in almost all cases better than foreclosing. He also said that in his day, servicers did mods and investors never complained.

Conditions are different now, but all things being equal, bigger loss severities means more mods might make sense. Ranieri was keen on mods, and his experience was a foreclosure led to a 30% loss (and remember in his days, you didn’t have a lot of no equity purchases or cash-out refis getting you to the same place).

But I am also hearing from borrower counselors that mortgage fraud by the brokers was common, which raises a whole ‘nother set of questions. One (who runs a 100 counselor operation and has extensive national contacts) believes it runs in the 70-80% range. The typical pattern is the broker quotes terms but the documents at closing are for a completely different deal. She even knows of PhDs who thought they were getting 30 year fixed and found out when their statement arrived that they had signed on for an Option ARM.

One slight quibble with your analysis. While prices might be down as much as you suggest that does not necessarily imply that a loan mod is in the best interest of the lender. The presence of mortgage insurance or other areas of potential recovery may often suggest that foreclosure is the path of least loss.

Very good write-up. The banking lobby will be up in arms (since banks don’t pay deposit insurance premia to provide housing subsidies), and it will be interesting to see who has more clout in Congress—the deposit insurance premium is more of a hot potato than outsiders might suspect. I do hope that Bair realizes the mortgage servicing operation is separately rated, and that pool trustees can pull servicing (or litigate), leaving much less value in the business. If anything, FDIC should be looking to sell the servicer in the very near term. I also hope she’s not indirectly encouraging Indymac mortgagors to skip a payment or two. Overall, Bair is significantly overstepping her mandate here.

There is a, um, feature of the deposit insurance law that comes into play here in terms of the scope of her prerogatives. During the last banking crisis, FDIC and all others creditors shared pari passu in Receivership recoveries. So basically there were no agency problems. The law was changed in the early nineties to give FDIC absolute priority in monies recovered: no one else gets paid until FDIC is made whole. So now there’s an agency problem: Bair may think the Receivership assets belong exclusively to FDIC, so she can do as she pleases. The agency problem is with the banks that must pay the insurance premia, and with the Treasury, which backstops FDIC.