New York Times Takes Aim at Treasury Mortgage Mod Program

Are we going to finally start seeing some pointed mainstream media coverage of the Administration’s limp wristed, industry-favoring financial “reform” plans? While it has been woefully slow in coming, the answer appears to be yes. One has to wonder whether the more skeptical coverage follows the increasing evidence that things may not be working out as planned, or simply Obama’s plunging poll numbers. And that isn’t necessarily the fault of the reporters; it may reflect editorial “priorities”.

The object lesson of the day is Peter Goodman’s story at the New York Times on the Treasury’s mortgage mod program (hat tip DoctoRx), which was old Bush/Paulson wine in new bottles. And mirabile dictu, the headline of the article is refreshingly blunt: “U.S. Loan Effort Is Seen as Adding to Housing Woes.” While no one has said as much, Home Affordable Modification Program, like the Paulson Hope Alliance Now, looks designed to work very narrowly within existing securitization rules to so as to minimize the odds that any mortgages modifications under the program could be challenged in court. However, the resulting program is an abortion. It gives little in the way of real benefits to borrowers. So called “permanent mods” are in fact only a five year payment reduction, which makes sense only if the borrower believes both his income will improve markedly between now and then (given stagnant worker incomes since 1973 and deflationary pressures, that is unlikely to apply for most people) and that the value of his house will appreciate considerably over that timeframe as well. Of course, Treasury may harbor fantasies like that, which might explain why they thought this dubious program was viable.

The results to date, in terms of permanent mods, are underwhelming:

As of mid-December, some 759,000 homeowners had received loan modifications on a trial basis typically lasting three to five months. But only about 31,000 had received permanent modifications — a step that requires borrowers to make timely trial payments and submit paperwork verifying their financial situation.

But we need to step back a second. The idea that mods would be a good idea is well founded; it’s just that securitization stands in the way. In the stone ages of banking, banks routinely did mods. Their experience in most cases was if a borrower was remotely viable (as in he had an income), the bank would take lower losses if it kept him in the house than if it foreclosed. With real estate prices down 30-40%, and significant foreclosure costs on top of that, it isn’t hard to see that from an economic standpoint, investors could take a big reduction in principal and still come out ahead. And as we have noted here earlier, Wilbur Ross, hardly a shrinking violet, argued for them in a chat with Housing Wire:

Ross has plenty of skin in the mortgage servicing game, as he owns Irving, Tex.-based American Home Mortgage Servicing, Inc.,….he thinks the best way to motivate lenders, servicers, and homeowners work together on modifications requires far more than what’s been proposed so far. In particular, he believes that what’s needed is aggressive principal modifications for borrowers most in need. He has said that his American Home servicing shop has seen six-month recidivism rates below 20 percent — compared to the 50 or 60 percent standard in the industry — because the servicer has been aggressively looking to cut principal balances.

“The price of housing needs to be cleaned out. The Obama administration could right-size every underwater home and reduce principal to fit the current market value of the home. If they are going to deal with it they have to deal with it in a severe way.”

There are two major obstacles. One is that servicers were never ever set up to do mods, or much of anything on an individual basis. Servicers are factories and pretty much everything customer-facing staff does is routinized (note that this is an impediment separate and apart from the fact that they get paid to do foreclosures, while the fees paid by Treasury to do mods are not only less attractive, but even from the outset appeared too small relative to the changes in procedures required). Note that Ross is probably not doing mods on an individual basis, but likely has some templates and might go as far as allowing for latitude within certain parameters. Any informed reader input would be helpful.

The second obstacle is the securitizations themselves. As I understand it, losses from mods are distributed differently than losses from foreclosures. Crudely speaking losses from foreclosures work up through the capital structure, hitting the equity layer first, then the next highest tranche, and so on. By contrast, mods are distributed across all tranches. That means investor in the top tranches, the AAA and AA layers, would object to mods, since they’d take hits they would not face in the event of foreclosures.

Note that Ross has spent his career in bankruptcy, which is more legally-intensive than other types of deal-making, and he believes the Administration could have cut this Gordian knot. It chose to in the GM and Chrysler bankruptcies; I have to admit I was proven wrong there, since I had doubts that a judge would accede to some of the aggressive measures.

And before I get howls from the “sanctity of contracts” crowd, I must remind readers that contracts are renegotiated ALL THE TIME, particularly when circumstances move outside the parameters envisioned by the parties to an agreement. Did any of the “sanctity of contracts” crowd object to this story in the Wall Street Journal:

Until a little more than a year ago, major airlines were so keen to enlist regional carriers’ smaller planes and cheaper crews to help them expand their footprints that they often guaranteed the regional carriers double-digit profit margins while the majors bought the fuel, set the schedules and sold the tickets. The regionals snapped up new planes—mostly 50-seater jets—to meet the demand.

The major airlines now think those deals too generous, according to people familiar with the carriers’ thinking, and want their regional partners to shoulder more risk or at least share some of the sacrifice as the majors lose money.

Some of the big airlines are risking lawsuits to terminate those contracts or are putting smaller amounts of new work up for bid on tougher terms.

Yves here. To be clear, it’s completely kosher for the big carriers to try to secure better terms when a contract comes up for renewal, quite another to try to screw business partners who made substantial investments based on their partner’s obligations (but as an aside, these were not exactly the most credit worth partners to begin with). Nevertheless, the bigger point is that in the real world, parties to an agreement can and do take extreme measures to force changes in terms. To pretend that this sort of thing does not happen is naive, particularly when the provisions that are causing trouble now were routinely waived in the past. I was at the 2008 Milken Conference, and Lew Ranieri, the father of the mortgage backed securities business, seemed gobsmacked to learn that securitization agreements were seen as a obstacle to mods. In his day, they were done as a matter of course. And here we have a case where badly designed contracts are having widespread adverse consequences.

So let us look at the NYT article. It is striking that the article presents some long-standing objections to both the Obama and Bush mod programs as if they were new: that the programs at most kick the can down the road, when it would be more salutary to take the losses and let housing prices find a bottom; that borrowers themselves are probably ill served by participating:

….desperate homeowners have sent payments to banks in often-futile efforts to keep their homes, which some see as wasting dollars they could have saved in preparation for moving to cheaper rental residences. Some borrowers have seen their credit tarnished while falsely assuming that loan modifications involved no negative reports to credit agencies.

Some experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.

Yves here. None of this is new. But get this presumably unintended confession:

The Treasury Department publicly maintains that its program is on track. “The program is meeting its intended goal of providing immediate relief to homeowners across the country,” a department spokeswoman, Meg Reilly, wrote in an e-mail message.

Yves here. “Immediate relief”? That sounds like an Alka-Seltzer ad. But these problems are too deep seated to remedied by a little “pop, pop, fizz, fizz”; it is not a boon to underwater borrowers to give them mere palliatives. The story indicates that Treasury is becoming more realistic about the magnitude of the problem, but is not willing to do anything that might inconvenience the banker or investor classes (even if, as we and Ross noted above, they would actually come out better overall if they took a little short-term pain):

But behind the scenes, Treasury officials appear to have concluded that growing numbers of delinquent borrowers simply lack enough income to afford their homes and must be eased out.

In late November, with scant public disclosure, the Treasury Department started the Foreclosure Alternatives Program, through which it will encourage arrangements that result in distressed borrowers surrendering their homes. The program will pay incentives to mortgage companies that allow homeowners to sell properties for less than they owe on their mortgages — short sales, in real estate parlance. The government will also pay incentives to mortgage companies that allow delinquent borrowers to hand over their deeds in lieu of foreclosing.

Yves here. Thus, I wonder if the Times is willing to depict HAMP as a failure because the Treasury is now forced to ‘fess up, even though the piece presents the efforts to pretend otherwise:

Ms. Reilly….said the foreclosure alternatives program did not represent a new policy. “We have said from the start that modifications will not be the solution for all homeowners and will not solve the housing crisis alone,” Ms. Reilly said by e-mail. “This has always been a multi-pronged effort.”

Yves here. Please, this is an insult to the audience’s intelligence. If this new program was part of a “multi-pronged effort”, why is it being introduced now, as opposed to in parallel with HAMP?

Note also that some critics of the initial plan are also leery of letting nature take its course:

Mr. [Mark] Zandi [chief economist of Moody’s] proposes that the Treasury Department push banks to write down some loan balances by reimbursing the companies for their losses. He pointedly rejects the notion that government ought to get out of the way and let foreclosures work their way through the market, saying that course risks a surge of foreclosures and declining house prices that could pull the economy back into recession.

“We want to overwhelm this problem,” he said. “If we do go back into recession, it will be very difficult to get out.”

This exchange gets at the heart of the matter:

“This is a conscious choice we made, not to start with principal reduction,” Mr. Geithner told the Congressional Oversight Panel. “We thought it would be dramatically more expensive for the American taxpayer, harder to justify, create much greater risk of unfairness.”

Mr. Geithner’s explanation did not satisfy the panel’s chairwoman, Elizabeth Warren.

“Are we creating a program in which we’re talking about potentially spending $75 billion to try to modify people into mortgages that will reduce the number of foreclosures in the short term, but just kick the can down the road?” she asked, raising the prospect “that we’ll be looking at an economy with elevated mortgage foreclosures not just for a year or two, but for many years. How do you deal with that problem, Mr. Secretary?”

And the big obstacle is presumably not the servicers, but the Administration’s commitment to “extend and pretend”. In many cases, the bank that is running the servicer holds some of the same paper and would have to mark it down in the event of a deep principal mod. Moreover, if mods like this were to become popular, former AAA paper would have to be written down even further. Quelle horreur!

Approaches that are sensible, likely to work, but possibly damaging to the fragile banking establishment are apparently to be avoided at all costs.

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  1. maynardGkeynes

    Yves, I’m a bit confused. Are you hailing that the MSM is now advocating using taxpayer money to bail out underwater homeowners? What’s the rationale for that? That at least they’re not irresponsible banks? Just irresponsible people? And ultimately, aren’t taxpayer subsidies to banks to reduce principal/payments just another back door bailout to the banks anyway? Sure, if the banks are being bailed out, why not the little guys too. But are any of them really worthy of a bailout to begin with?

    1. Francois T

      “But are any of them really worthy of a bailout to begin with?”

      I couldn’t formulate a more tendentious question even if I tried to. Implicit is the assumption that each and every borrower is a stupid asshole who got in this pickle strictly because they were irresponsible.

      Sheesh! What if all the bailout money that went to the banksters had been given ot homeowners, so they could stay in their home and pay their mortgage? Run a back of the envelope calculation; you may be surprised.

      Of course, it is entirely preferable to sustain the banksters than the people. After all, look at these awesome bonuses, which tax revenues will prop up NY state economy.


      1. liberal

        “Implicit is the assumption that each and every borrower is a stupid asshole who got in this pickle strictly because they were irresponsible.”

        To say they were _all_ irresponsible is of course silly.

        But the fact is that, irresponsible or not, the government has no business making people whole due to asset depreciation, whether those assets are stocks in a retirement home, or a house. While it might be less unfair than handing it to the banksters and their bondholders, it’s still unfair—a transfer of wealth from tenants to homeowners.

        Why people think it’s so much more important to keep homeowners in their homes than tenants in theirs is odd, particularly since the poorest tend to be tenants.

        “Sheesh! What if all the bailout money that went to the banksters had been given ot homeowners, so they could stay in their home and pay their mortgage? Run a back of the envelope calculation; you may be surprised.”

        Hard to say. You have to take into account that a lot of these borrowers are screwed even if home prices remained steady, because the financing could only have worked if prices continued to skyrocket.

      2. Neslo

        A lot of sheeple got caught up in the housing price insanity which was as clear to me as the back of my hand.

        They don’t deserve taking my money for their recklessness.

        And no doubt, the gov, the bankers, the realtors, the appraisers, ALL DID KNOW BETTER, and they are complicit. It is a crime against humanity.

    2. Yves Smith Post author

      Did you read the post, or the article?

      The article says the Obama mortgage mod program, which per Warren, allotted $75 billion to mortgage mod efforts (payments to servicers, have not seen any reports yet on how much actually spent). This blog has never been a fan of that program.

      The post advocates deep principal mods. Wilbur Ross is doing them now with no government assistance. How do you infer we are advocating a bailout in advocating mods? In fact, we point out the obstacle to mods seems to be undue concern about having banks RECOGNIZE losses. If the mortgages are not going to work out, they should be recognized now.

      The Times article is not advocating using taxpayer money to bailout out borrowers. That quote from Zandi is one among several views expressed on the matter (one far more prominent in the piece argues for simply taking the losses).

      1. vvvviking

        Easy for WL Ross to say, he owns a SERVICER, and is not the underlying owner of the mortgages. In fact, his servicing business gets a lot easier, and thus more profitable, with widespread principal reductions.

        Widespread principal reductions is a horrible idea as they will lead to massive intentional defaults.

        Far better would be an aggressive campaign to foster short sales.

  2. Francois T

    “Approaches that are sensible, likely to work, but possibly damaging to the fragile banking establishment are apparently to be avoided at all costs.”

    What is also very fragile is the willingness of the FIRE sector to keep contributing to the Democrats’ coffers if they inconvenience the banksters in any way.

    There has been clear signs of that during the attempt to cramdown mortgages by law: it look like the senators and the big dawgs at the DNC got the message loud and clear.

    The rest is history as they say.

  3. psychohistorian

    One of the questions I get reading pieces like this about the housing industry situation within the current financial context is what information is behind the posturing. I keep wondering what the unknown derivative postures are of the big banks, etc. Would loss of principal across a slew of mortgages force a domino of unknown derivative losses?

    The lack of transparency in our current economic system is proof that capitalism, defined as including fair and “perfect” knowledge available to all participants doesn’t exist. The class based exceptions and manipulation used to be less blatant and systemic. The oligarchy is going to have to take the intertubes away from the masses or honest questioners like Yves and her ilk will continue to expose the current American “system” for the unsustainable train wreck it is. When the growing mass of engaged and enraged citizens learns what the MSM won’t tell you, as Bob Dylan sings “There’ll be changes made”.

    It can’t happen soon enough, IMO.

    Thanks Yves for the posting and your ongoing efforts.

  4. superduperdave

    The most striking thing is the apparent belief among large segments of the elite that everything will be okay before long, that housing prices will bounce back “once the recovery takes hold.”

    Lessons from the Japanese experience, the closest modern parallel, unfortunately, are not promising. Real estate prices there fell in 2008 to their lowest since 1984. Wanna bet they fell further in 2009?

  5. attempter

    This still seems more optimistic regarding Treasury’s motives than I’m willing to be.

    It seems clear that the mod program was never meant to solve the problem, namely to keep people in their homes.

    Rather, facing the prospect of more and more people being willing to stand up for themselves and walk away, this program was a scam meant to induce people to keep paying, dangling the fraudulent promise of a permanent mod (which, as this piece demonstrates once again, was always a chimera). Meanwhile Treasury itself wrote into the agreements how once you enter the program you waive all rights to further negotiations or even notifications.

    So once they lured somebody in with these lies, the banks could then keep extracting until they foreclosed at a time of their convenience.

    Once again we see the joint crime of the banksters and this administration.

    In light of that and of everything else, it’s overwhelmingly clear that where it comes to a rogue, criminal system and a rigged, corrupt “legal” system,, there are no longer any “contracts”.

    The banks are not citizens. They’re simply gutter criminals, and no reasonable person thinks a contract with a common criminal is binding, morally or legally.

    So I’d suggest that decent Americans stop trying to rationally argue with the “sanctity of contracts crowd” and instead demonize and villify them as the scum they are. It’s clear by now that such perps are not willing to be part of the solution, but only to be part of the crime.

    1. i on the ball patriot

      Bingo! And worth repeating;

      “Once again we see the joint crime of the banksters and this administration.

      In light of that and of everything else, it’s overwhelmingly clear that where it comes to a rogue, criminal system and a rigged, corrupt “legal” system,, there are no longer any “contracts”.

      The banks are not citizens. They’re simply gutter criminals, and no reasonable person thinks a contract with a common criminal is binding, morally or legally.

      So I’d suggest that decent Americans stop trying to rationally argue with the “sanctity of contracts crowd” and instead demonize and villify them as the scum they are. It’s clear by now that such perps are not willing to be part of the solution, but only to be part of the crime.”

      I would add that this is now clearly a well metered out and intentional destruction of the scamerican (and global) middle class … it is the social contract that needs to be re-negotiated, and not through the scam electoral process, but rather through election boycotts as a; ‘vote of no confidence in government’!

      Deception is the strongest political force on the planet.

  6. RebelEconomist

    I also agree that taxpayer money should not be used to bail out house buyers who cannot pay their mortgage (which seems to be the implication of “The Obama administration could right-size every underwater home and reduce principal”), except particularly deserving cases such as the owner of a modest house hit by unforeseen misfortune like debilitating illness. In fact, I would even go so far as to say that it might be worth a greater public cost to ensure that, as far as possible, stimulus is channelled via the people who did not participate in the boom – eg subsidies for the owners to move out or sell to landlords, and subsidies for the homeless to buy a house. The underlying problem is the moral hazard culture that has developed, and which has spawned reckless bankers and house buyers alike. Perhaps some house buyers did not properly appreciate the risks that they were taking, but if they are unwilling or unable to consider and prepare for such basic contingencies as reduced overtime or rising interest rates in the context of probably their largest-ever purchase, they may well end up losing their wealth anyway.

    1. DownSouth

      Gosh, Revel Economist, I actually find myself at least somewhat sympathetic to your position here. Miracles never cease, no?

      One element screams at us from the Bush/Obama administration: Moral hazard only applies to households and small banks. It does not apply to TBTF banks.

      But since moral hazard has been abolished for TBTF banks, which indeed has created a pernicious double standard, does that justify completely doing away with moral hazard for everyone, as Steve Meacham argues here?:

      If Deutsche Bank forecloses on Joe Schmoe the best they can do is to sell that property at real value. So if Joe Schmoe can afford the property at real value, why not sell it back to him? But the only reason the banks aren’t doing that is because of what they call moral hazard. They say basically that homeowners should be punished because they signed these loan documents.

      These are the same guys who have run our entire economy into the ground and who have been rewarded with billions in taxpayer bailouts and have used billions of that money to give bonuses to the very executives that drove their companies and the whole economy into the ground. And they are citing moral hazard as the reason why they can’t resell that property to the existing homeowners at the real value. That is disgusting and hypocritical and in the extreme.

      Or should we instead try to come up with some universal standard of moral hazard, and apply it to everyone, no exceptions?

      1. Neslo

        It is pretty basic, we have lived far beyond our means for decades and until some serious pain is taken, we cannot rebuild from a solid base.

  7. moneta

    Why should banks offer mods when, if they wait long enough, they’ll be able to exchange all the bad loans for new cash with the Fed?

    Maybe I am wrong but it seems to me that blogs are populated by people in the top 5-10% of the population.

    They are the ones who are getting screwed. They WANT deflation and can’t believe they have been saving and denying themsleves hedonism only to get their savings deflated.

    Well people, wake up and smell the coffee. I think a lot of you people are so angry, that you just can’t come to grips with reality. As long as there is no revolution, bad loans will be replaced with cash and bailouts will continue.

    The US needs inflation and it will get it when the time is right because inflation is a choice.

    1. Yves Smith Post author

      Deflation can favor savers….provided you hold cash or cash equivalents, which is very destructive to economy (it means investors are much less likely to put capital to work in productive assets. Everything else deflates relative to your cash holdings (ie ,your purchasing power goes up).

      Savers are hurt much more by inflation, it’s harder to know where to go to preserve the value of your savings. Look at commodities in the 1970s. They spiked, then plunged. Commodities markets are too small to be an effective place to park money for as much as the world has in the way of investable dollars. Overshoots can be bigger and faster than in securities markets (the oil spike of 2008 was of bigger amplitude than the NASDAQ in the dot com era).

    2. attempter

      They WANT deflation and can’t believe they have been saving and denying themsleves hedonism only to get their savings deflated.

      The US needs inflation and it will get it when the time is right because inflation is a choice.

      It’s REALITY, or if you like the “market”, which wants to deflate an absurdly bloated pseudo-economy.

      They’re certainly going to try to keep the bubbles bloated through their regular inflation agenda, but they won’t be able to. The bubble economy can never be sustained atop an absolutely gutted real economy, and with Peak Oil setting in no less.

      Nope, it’s terminal deflation, or what’s the same thing, hyperinflation.

      As long as there is no revolution, bad loans will be replaced with cash and bailouts will continue.

      You have that backwards. There can be no revolution so long as the zombie can still be propped up.

      But when it finally collapses, then power will fall on its own back into the hands of the people.

  8. moneta

    A scenario that I see coming out of this is that, firstly homeowners who can afford their homes get to finance at all time lows in interest rates.

    Those who can’t afford their homes are foreclosing or will foreclose in the next year or two. This will drive down prices and millions will be able to purchase a home for much cheater at affordable rates.

    In the meantime, the fed will have picked up a huge percentage of bad loans and injected capital into the system.

    By the time homeowners are all set up at fixed rates, inflation will take off and will make the debt look cheaper.

    This scenario would mean that foreign holders of US debt would end up paying for America’s excesses.

    1. Sam in NY

      Exactly, and even though it isn’t 100% perfect or 100% fair, it’s better than most alternatives proposed by the doomer bloggers.

      Inflation or jubilee (and I mean jubilee, not “strategic default” where you don’t keep the house, or “partial principal reductions” that leave the occupant as far as possible in debt such that he doesn’t walk away.) One or the other, the people are entitled to no less. Jubilee would be better, so I’m interested in ideas on how to make it happen.

      1. Yves Smith Post author


        It’s easy to recommend this when you are not the person who is suffering from cash flow panic. In the long term this is the best move for most, but there are reasons people hold off as long as they can: hard costs of moving (if you are broke, can be hard to come up with the cash), possibly kids having to go to new schools, trashed credit, etc.

        This is not a good choice. It’s a bad choice versus an even worse option.

  9. DownSouth

    Is there a one-size-fits-all solution? Isn’t the devil in the details? Consider the following scenarios, which certainly don’t capture all the nuances, but nevertheless do hint at how complex the issues are:

    The Households:

    Household A: Bought house Jan. 2 2000 for $100,000. Current mortgage balance $75,000. Current value of house $100,000.

    Household B: Bought house Jan. 2, 2000 for $100,000. Refinanced Jan. 2, 2000 to buy new cars and boat and take vacation in Hawaii. Current mortgage balance $210,000. Current value of house $100,000.

    Household C: Bought house Jan. 2, 2007 for $200,000. Paid $40,000 down. Current mortgage balance $155,000. Current value of house $100,000.

    Household D: Bought house Jan. 2, 2007 for $200,000. Paid $0 down. Current mortgage balance $210,000.

    The Banks:

    Bank A: Saw there was a bubble and refused to loan in an overheated market. Owns mortgage to Household A.

    Bank B: Saw there was a bubble but nevertheless generated vast quantities of MBS which it sold to its clients. It then turned around and shorted the MBS it sold to its clients by buying CDS protection on those MBS it no longer owned. Its counterparty on the CDS was not able to pay, so the federal government stepped in and paid off on the CDS contracts. Its clients, via MBS, now own the mortgage to Household B.

    Bank C: Did not see there was a bubble, but nevertheless maintained good lending standards. It refused to make loans to Household B and Household D, but owns the mortgage to Household C.

    Bank D: Did not see there was a bubble and extended credit to all comers. It owns mortgage to Household D.

    I say judges are the only ones who can sort through all this, case by case. Change the bankrupcy laws to allow judges to do mortgage writedowns. This painting with a big brush, trying to make blanket judgments, treating all these households and banks as if their sitations were the same, is pure insanity.

    1. i on the ball patriot

      “I say judges are the only ones who can sort through all this, case by case. Change the bankrupcy laws to allow judges to do mortgage writedowns. This painting with a big brush, trying to make blanket judgments, treating all these households and banks as if their sitations were the same, is pure insanity.”

      It would be pure insanity to think that the scum bags who blew this intentional bubble and allowed all of the complicating counterfeit derivative products to be created would favorably change the bankruptcy laws, or that their lackey judges would sort through it.

      You have been conned into participating in the intentionally created and very divisive prudent against the not so prudent conflict, just another one of many intentionally created conflicts going on in scamerica.

      The only people who can sort this out are citizens who do not take the perpetual conflict bait and work to unify all citizens in getting rid of this gangster government. Peaceful election boycotts are in order as a ‘vote of no confidence in government’. Its the one size fits all solution you ask for!

      Deception is the strongest political force on the planet.

      1. DownSouth

        The problem with painting with such a broad brush is that if everyone is guilty, then no one is guilty.

        This is not some Chiliastic battle between the forces of good (the citizens) and the forces of evil (the bankers). Reality presents itself in shades of grey, not black and white. The need for absolute goodies and absolute baddies runs deep in us, but it drags us into propaganda and causes us to deny people their humanity: their sins, their virtues, their efforts, their failures.

        1. i on the ball patriot

          “The problem with painting with such a broad brush is that if everyone is guilty, then no one is guilty.”

          Not a problem at all, some pigs are more ‘equal’ and therefore more guilty than others.

          “This is not some Chiliastic battle between the forces of good (the citizens) and the forces of evil (the bankers). Reality presents itself in shades of grey, not black and white. The need for absolute goodies and absolute baddies runs deep in us, but it drags us into propaganda and causes us to deny people their humanity: their sins, their virtues, their efforts, their failures.”

          No it is not a “Chiliastic battle between the forces of good (the citizens) and the forces of evil (the bankers)”, it is a battle between deception and perception. I see clearly the shades of gray and recognize that we are all human with varying abilities to deceive and perceive. I also see that the unequal pigs have created the present global environment through propaganda, an epigenetic force in the broadest sense, that shapes humanity and now turns humanity into fearful squabbling automatons.

          Job one is to show that the perpetual conflict is intentionally instilled through propaganda at all levels, and, rather than to engage in that purposefully contrived conflict, rise above it to reclaim all of the co-opted social entities that have been deceptively used to create it.

          That would best be done peacefully by massive election boycotts as a ‘vote of no confidence’ in this government. Unfortunately the longer the few unequal pigs — the wealthy ruling elite — are allowed to control and create the environment through propaganda, the more firm the marks will become in their divisive beliefs. The window of opportunity for change is rapidly closing. Relying on the hijacked system that prevents that change, and wasting energy and resources in the perpetual conflict bait that it sets out, will only ensure that the window of opportunity for change closes more rapidly.

          Deception is the strongest political force on the planet.

          1. DownSouth

            ►”Job one is to show that the perpetual conflict is intentionally instilled through propaganda at all levels, and, rather than to engage in that purposefully contrived conflict, rise above it to reclaim all of the co-opted social entities that have been deceptively used to create it.”

            I don’t believe the conflict is contrived at all. I believe it is part of the human condition.

            The great promise of the Enlightenment was that somehow, with enough knowledge or education on the part of man, that the age-old conflicts that have plagued mankind since eternity could be overcome. But it hasn’t worked out so well, has it? Those who promised us strife-free utopia—the national socialists, the communists, the classical and neoclassical economists, for instance—have instead given us the Final Solution, the Gulag and the sweat shop.

            No one that I greatly admire—Gandhi, Martin Luther King, Reinhold Niebuhr, Hannah Arendt, Robert Heilbroner—believed that conflict could be eliminated.

            I’ve also been reading quite a bit about Nietzsche lately:

            He (Nietzsche) insists that a legal order is not an end but a means in the service of life’s will to power—creating larger power-units and sparing fruitless strife. Outside such a contractual order, the aggression of the strong and the self-defense of the weak are neither rights nor wrongs but simply facts; and the dream of a universal order which shall abolish all conflict is hostile to life, “a sign of weariness, a hidden path to nothingness.”
            –George A. Morgan, What Nietzsche Means

          2. i on the ball patriot

            “I don’t believe the conflict is contrived at all. I believe it is part of the human condition.”

            Yes, conflict is part of the human condition. But some humans are more adept at contriving and creating deflective, diversionary, and controlling conflict than others, strange that you do not seem to recognize the ‘shades of gray’ in that, and pass over it all with your dismissive blanket comment that; “it is part of the human condition.”

            You then put words in my mouth and imply that I seek a strife-free utopia. I don’t. I am well aware that it is a dog eat dog world that we are all thrust into, and the best we can hope for is to use our own sphere of influence to moderate the pains of that life imposed conflict.

            What I am very directly saying is that one’s strife and conflict energy should be focused on those unequal pigs, the wealthy ruling elite, who cause the greater pain — those who create the deflective contrived conflict which you are unable to see, and which you waste and dissipate your energies on, as you, with your hat in hand, call for the crooks who enslave and deceive you to create another scam law that will let their crooked judges mediate bankruptcies, and in so doing, further deflect from the intentionally contrived cheap credit bubble and dismantling of regulations that allowed the exacerbating counterfeit derivative products to be created and cause this ‘crisis’ in the first place.

            Good luck with that silly ass quest.

            Deception is the strongest political force on the planet.

        2. Neslo

          I don’t want to deny anyone their humanity, but I’ll be gosh darn flabbergasted before I will willingly let someone else just take my money. Bailouts of any sort = taking my money

      2. Sam in NY

        As someone who cannot remember the last time I voted, I am entitled to ask this question:

        What if they gave an election and nobody came? The turnout was 10%, and the Democrat beat the Republican with astonishingly small vote totals?

        Well I think the Democrat would take office with full legal powers, and those boycotting the election would have expressed themselves but achieved no more than those who voted.

        Boycotting elections won’t be enough. What do you think?

        1. i on the ball patriot

          Sam in NY, good question …

          With a vigorous boycott taking place in tandem with the scenario you paint (10% voting and 90% abstaining) I do not believe that the election would even be held, and if it were held, the ‘winning’ party would have a massive civil unrest problem that military and police forces would be very reluctant to contain.

          The key is to just not vote, as you do, but to also write a letter to your supervisor of elections explaining that you want your vote registered, counted, and published, as a ‘vote of no confidence’ in the electoral process and the scam government it has presently produced. And then, as further pressure, post those letters, state by state, in a public fashion. If enough non voters, those who presently opt out now in frustration, would do that, the entire block of non voters could be claimed as a part of the ‘no confidence in government’ block. With a dedicated effort I believe it would be possible to also get an additional 10 to 20% more of those who do vote, also very frustrated, to opt out and join the boycott. It is easy to do, and many who are reluctant to protest in the streets, would feel comfortable justifiably chastising their non responsive government from the comfort of their own homes.

          Given that only half of the electorate, on average, go to the polls, that could be up to an amazing 70% ‘vote of no confidence’ in government.

          Consider that as the boycott pressure mounts, the existing government will become more responsive to the will of the people. They will have to.

    2. attempter

      Sorry DS, that’s a well-reasoned thought, but we’re never again going to have the luxury of such policy (if America ever did).

      The political climate which would allow your kind of proposal is probably less possible than the climate which would allow revolution.

      As long as the system’s intact, they simply will not do such things.

      (That’s the point I’ve been trying to get through for years regarding things like carbon mitigation and health care. We are never going to get actual reform out of such an irredeemably corrupted, poisoned system. We can only resist in any way we can, mostly through non-participation and passive non-compliance, and wait for the rotten pillar to collapse.)

  10. moneta


    I don’t think there are many bank “A”s because had they not played the game, their EPS would have not grown, their multiple would have lagged and they would have been bought up by a bank that played the game.

    If a bank is letting people live for free in their homes because it does not have to write the loan down and is waiting for the Fed to pick up the tab, how will changing the bankruptcy laws help?

    People have to prefer the bankruptcy option and right now, it’s not the preferred choice. Why go bankrupt if you can just give your keys back to the bank? But of course the banks right now don’t want the keys because they don’t have an incentive since they’re waiting for more bailouts.

    And I think more bailouts, in all shapes or forms, will come before we see a change in bankruptcy laws. The last thing the leaders want is millions flooding the courts… not enough manpower!

    I don’t think the resolution will be done case by case, I think it will be lumpy.

    1. DownSouth


      All excellent points, to which I don’t have any answers.

      But it doesn’t seem right to me for the goverment to step in, for instance, and pony up $135,000 to put Household D in the same shape as Household A.

      And it also needs to be pointed out that, if the federal government does this, that it is not only bailing out Household D, but Bank D as well.

      1. moneta

        I agree with all your points but I think we have to be pragmatic and I don’t think justice and fairness will be key variables in the decision making.

        If you look at the last 50 years, nothing has been fair and just. All the wrong people have been making money. But only now that living standards are being threatened are we truly realizing it.

        This mess is too complicated to expect fairness in its resolution. Our leaders are going to keep on throwing money at it and the only thing that will stop them is a revolution or systemic failure.

        1. DownSouth

          ►” I don’t think justice and fairness will be key variables in the decision making.”

          If that is true, then I believe “revolution or systemic failure” is inevitable:

          Yank a group of people off the street, give them a task that requires cooperation, and most of them will play along as solid citizens. Unfortunately, a few will game the system if there is any way to cheat. Once the solid citizens realize that they’re being ripped off, they withdraw their cooperation as their only defense. Provide them with an opportunity to punish the cheaters, and some (but not all) punish with zeal. Even the cheaters punish other cheaters with zeal! Once the capacity for regulation is provided in the form of rewards and punishments that can be implemented at low cost, cooperation rises to high levels. Regulation is required or cooperation will disappear, like water draining from a bathtub.

  11. moneta

    continue to believe that stockholders and bondholders of the financial companies should take the first hits, not taxpayers
    A large % of stockholders and bondholders are probably retirees or soon to be.

    An entire generatio has been brainwashed into planning their retirement using the markets. The pension system is already under strain. Imagine further drops.

    If their investments tank, don’t you think government won’t somehow replace their losses with some other transfer? Governements will just start bailing out pension and offering benefits.

    No matter what choices the leaders make, they’ll be cutting a cheque at the expense of someone else.

    The Western world lived above its means and it now has to pay the piper. There is no clean cut.

    1. DownSouth


      Again, excellent points that just go to show what a tangled web we’ve woven.

      I do want to reiterate, however, that I believe morality will play just as big, if not bigger, a role than the practical aspects you highlight. Morality is, after all, the glue that holds society together.

      Classical and neoclassical–orthodox–economists spent centuries arguing that morality plays no role in economic affairs. Those same economists have had an epiphany, however, and are now asserting that, at least where households are concerned, that morality is of utmost importance. So clearly for the orthodox economist, morality is something that can be switched off or switched on, depending on the times, or applied to one party but not another party all at the same time. The guiding factor is what best serves the interests of the plutocrats.

      But one thing is for sure, as you say: “There is no clean cut.”

      1. Doug Terpstra

        DS, you drill right to the heart of it—your philisophical light is spot on brilliant as always, a great complement to Ives’ highbrow oevres. I-on-the-ball and Attemptor too are always a pleasure.

        Indeed, morality, truth, fairness, trust, and accountability are all of those most elemental principles are the glue that connect us. For decades now the elite have deceived us and twisted those core values into a horribly perverse double standard, a glaring chasm of hypocrisy between sermons and practices. But as this crisis deepens that deception is gradually unraveling, thatnks to sites like NC.

        The irony of righteous “moral hazard” argument is just too rich to keep down when preached by the banksters themselves, who torpedoed Senator Dick Durbin’s amendment to allow judicial write-downs.

        Durbin’s retort to banksters:

        “Senator, you understand the moral hazard here. People have to be held responsible for their wrongdoing. If you make a mistake, darn it, you’ve gotta pay the price. That’s what America is all about.” Really, Mr. Banker on Wall Street? That’s what America is all about? What price did Wall Street pay for their miserable decisions creating rotten portfolios, destroying the credit of America and its businesses? Oh, they paid a pretty heavy price. Hundreds of billions of dollars of taxpayer’s money sent to them to bail them out, to put them back in business, even to fund executive bonuses for those guilty of mismanaging. Moral hazard, huh? How can they argue that with a straight face? […]”

        Holy Sh—!!! Picture Jon Stewart, speechless and dumbfounded.

    2. liberal

      “A large % of stockholders and bondholders are probably retirees or soon to be.”

      Some are, yes, but
      (1) it’s irrelevant to the issue of fairness—there’s no sovereign guarantee, so government shouldn’t be bailing them out;
      (2) old/aging people who have any retirement income other than social security are _not_ among the poorest, so are less deserving
      (3) there are other investors besides pension funds, such as citizens and institutions of other countries.

      The government should not backstop people from declining asset values. It should provide a minimal income and do things like subsidize education (which there are reasons to think would be underfunded in a purely free market).

  12. Don Loritz

    Are we going to finally start seeing some pointed mainstream media coverage of the Administration’s limp wristed, industry-favoring financial “reform” plans?

    Yes, in the dead of night on Jan. 1 and on Apr. 1.

    That way, when the journalism scholars run their statistics on column inches pro-and-con, the NYT won’t have an embarrassing zero in the “truth” column.

  13. moneta

    Retirement for the masses worked when the number of workers per dependant was increasing and people did not live long past their retirement.

    We’re going towards 2.5 workers per dependant vs. 5 today and life expentancy is now above 80 while the average retirement age is somwhere between 55-60.

    We should have been warning boomers that they would never retire unless they were saving at least 20K per year and living in 1400 quare foot houses but reality does not sell very well.

  14. jim smith

    I wouldn’t be suprised if all the defaulted housing gets transferred to bankers, at rock bottom valuations, thru some government program (could PPIP do this?).

    WOuldn’t that be perfect, the bankers create the mess, the working class/taxpaying homeowners lose their houses, the taxpayers take on all the defaulted debt thru the FED and other government programs, and all the reduced price housing gets sold in bulk back to finanicers(with cheap government money). Only to end the whole ponzi sceme with the now poor working class taxing paying stiff with no hope of ever retiring (and being a terminal renter). OUCH

    1. Neslo

      I have had a theory for a few years that a series of implosions has been planned by HBB, allowing the banksters to buy up all the companies and assets of all sorts on the cheap.

      18 months ago big brokers started hiring bankruptcy restructuring experts by the hundreds. They loaded up leveraged buyouts with debts, and now the vultures stay perched.

  15. ronald

    The idea of a national MOD program that cuts mortgage balances is more wishful thinking. It is part of the fantasy that homeownership is the proven path to financial security and if we only pull the correct MOD lever then homeownership can return to its rightful place and this current crisis will be behind us. Yves points too Wilbur Ross program as an example of what might be possible but the actual program structure ,current population of borrowers assisted and results to date are not provided.

    There is no magic political lever that somehow puts the genie of housing appreciation back in the bottle that will save the American middle class dream of wealth creation through homeownership nor come to the rescue of our banking system which has based its ability to lend on the collateral value of both residential and commercial RE.

    superduperdave noted in an earlier post the importance of understanding the Japanese experience with their RE lending bubble but Americans prefer the Disney experience of fantasy and keep looking for the magic lever to make it all better.

  16. RueTheDay

    Any rescue plan has to be based on a triage-like approach that categorizes borrowers into roughly two groups. The first group has had some sort of misfortune – job loss, medical problem, business failure, etc. that has temporarily impaired their cash flow. A mortgage mod will have a relatively high chance of success here. The second category consists of people who bought way more house than they could ever hope to afford, using a variety of financial tricks (Option-ARMs, negative amortization mortgages, I/O mortgages, subprime ARM with a teaser rate, etc.) . These tricks depended upon 1) being able to constantly refi from one not-fully-amortized mortgage at a below-market rate to another not-fully-amortized mortgage at a below-market rate and 2) constantly increasing home prices. Both dependencies are no longer present. You can try deferring payments, principal cramdowns, and all sorts of other mortgage mods, and most of these people simply do not have and will not have the cash flow required to service even the modded mortgages. They’re going to lose their houses eventually. There are also border cases that show characteristics of both categories, that need to be handled in a discretionary manner, but most borrowers fall into one of the two basic categories.

    1. Neslo

      Very realistic. How about Gov (Fannie) takes over houses that are too huge…must fail….CPR’s them, rebuilds into multi family dwellings, and then rents out–to 2 or 3 families.

      Bottom line is many people got too much Square Footage.

  17. Blurtman

    And let’s not forget the modification program for folks who are underwater on their margin loans.

  18. rickstersherpa

    Business Week has an article on the problems of reform. The one criticism I have of Yves is that she focuses on the pro-bank ideology of the Administration, an ideology that is a reflex for Rubin’s two proteges, Geithner and Summers, who Obama appointed to run his economic policies. But even if Elisabdbeth Warren was Treasury Secretary, it is unlikely that the banker controlled Congress would pass anything in the nature of real reform. See

    This is one of the three major differences that I see between now and the early 1930s. The other two is that one FDR, as a Wall Street lawyer whose family had worked on the street for four generations knew what frauds they were, something Obama, a child of the eighties and nineties and all the memes spun during those time about the virtue of deregulation and Bob Rubn as a master of the universe, does not. The other additional difference is that the initial rescue and timing (late of the collapse (late in George Bush’s second term and not at the beginning of Herbert Hoover’s first (and only) term, prevented the demoralization of the elite, and the real fear they felt about revolution by the end of 1932 and early 1933, which left them unable to oppose FDR’s measures for almost 4 years. America was lucky and still loved by Providence in 1933, so that a “Christian” and a “Democrat,” (FDR’s self-description) was elected in 1932 and not someone like Huey Long or Father Coughlin on a fascist platform. In 2012 the country might not be so lucky (Sarah Palin and Lynn Cheny anyone). It certainly does not deserve Providence’s protection any more after all the blood and ruin of the last 20 years.

  19. TJ

    It seems that many folks leaving responses to the ongoing housing saga either don’t understand it or aren’t affected directly.

    The government already reduces principle values for investors via the bankruptcy laws and they are the least deserving of HELP!

    Principle reduction is critically required in order to resolve the issue correctlly regardless of how fair some folks think it is.

    We live amongst those undeserving investors who worked in concert with the bankers, builders, appraisers and investors and as a result of the housing market crash, now live in an unstable community watching investors and folks by these properties for 40-50 cents on the dollar even with our tax dollars, while our lifestyle and property value continues to decline.

    Quite frankly the banks still make a ton of money on a loan even if the principle were to be reduced, so lets get the solution correct and FORCE principle reduction on all upside down primary owners affected during the boom years 2003-2007 and solve this issue.

    Keep in mind that the securitized mortages received monies from the credit swaps; hence AIG and the servicers keep getting monies for nothing.

    The investor owned homes should be foreclosed and sold to the highest bidder! As for the primary owners stuck in this nightmare they should receive true aid (principle reduction) to market value.

    I’ve sat by for three years now to learn that out of 38 homes on our block, only 10 were sold to primaries and the rest were obviously investors (rentors). Currently as of Jan, 2010, 12 properties are still abandoned, 14 are primaries (includes 4 short sales) and 12 are rented.

    It seems that the folks who caused this mess are already leaving the rest holding the bag, therefore we have to join them while our communities continue to be rental communities and plagued by distress.

    To pt salt on the wound, I’ve learned that many of the primaries also own several other properties and in one case the guy’s moving back into is home locally because the bank is going to principle reduce the mortgage on his investment property due to his active bankruptcy, while he owns another property and has had others in the foreclosure process.

    Quit judging the primary resident who bought at the wrong time amongst the legal theft that happened by the Bankers, Appraisers and investors.

    It’s now time to target the boom period for principle reduction on mortgages and eliminate any investor from the assistance. As for the extremely unfortunate folks, let the buy the foreclosed investor homes at market value and lets all get on with our stable economy!

    I don’t think there’s any fair representation of the troubled homeowner who’s the primary (excluding speculators and investors), whom along with the banks will more than likely receive the most help.

  20. Blurtman

    The alternative to not being able to or not wanting to make mortgage payments on an underwater home is not homelessness, it is renting.

    Learning can be a painful exercise, no question. But to expect Uncle Sam to bail you out when you make a decision that did not go your way is childish thinking.

    It is entirely consistent to urge that criminal bankers be jailed and that bailing out homeowners is wrong.

    1. Yves Smith Post author


      If you have trashed credit, no cash to make a deposit, pray tell how easy is it to rent? I think it is easier to assert solutions are easy when you are not the one facing them. I’m not disputing that renting is the end-game, but actually making the transition is not all that easy in a lot of cases.

      More broadly, I do not understand your characterizing deep mortgage mods, as Wilbur Ross is doing, as “bailing out borrowers”. He is making a pragmatic business decision. We don’t decry Ch. 11 as “bailing out companies”; most people recognize that a half a loaf is much better than none. And per one of the long comments above, foreclosures create collateral damage: they depress home values in the ‘hood, particularly if there is more than one and they become visible (unmowed lawns). They create overshoot on the downside for housing prices. They can become safety risks (squatters, vandalism).

      1. RebelEconomist

        I agree that houses should not be allowed to stand empty and deteriorate, especially when their are homeless people. But tackle that problem directly, by incentivising the owner (eg bank) to sell or rent, if necessary to the public sector.

        I have more sympathy for owner-occupiers who over-paid for a house than speculators, especially if the owner-occupier’s house is not luxurious, but remember that, when any buyer took a chance on being able to sustain ownership, they paid up and raised house prices out of reach of those who felt that they could not afford it. That is what sustains a bubble. We read endlessly about house owners vs banks, but less about the deserving homeless. Let them have their chance.

        1. Yves Smith Post author


          I agree with the homeless, the current situation is scandalous. And think we don’t pay for them in other ways? If you are on the street, odds are higher you get sick, wind up in emergency room….the costs of getting these people in homes would be partially offset by reductions in other costs borne by society. But the cost of a program like that would be visible, while the other costs are diffuse.

          Re the speculators, the lack of action on that front is frustrating and revealing. It is a given that they represented that their mortgage was for a primary residence, so otherwise, it could not have been sold into a securitization pool. So why have banks not done a thing (from what I can tell) to pursue this angle, save for a few extreme cases (fraud ring targeted by the FBI?) I imagine that a lawsuit would reveal that the bank was also guilty of fraud, that in many cases it could be argued it knew or could easily have inferred that the borrower made significant misrepresentations on its mortgage application. That in turn means investors could sue the originating bank (assuming it is still around, of course…)

          1. RebelEconomist

            Good point that speculative mortgages should not be in the same pool Yves. That is fraud, and I think that we can all agree that fraud should certainly be pursued, partly to recover as much money as possible, and partly to provide a disincentive to others inclined to follow.

      2. Blurtman

        “If you have trashed credit, no cash to make a deposit, pray tell how easy is it to rent?” Americans are not helpless boob victims, Yves. It seems that these days it is possible to not pay your mortgage and live in the home for many months, during which you can save the unpaid payments as a rental unit deposit. Further, downsizing to a rental unit will allow one to save even more money. Lastly, there are rental units that rent to folks with less than optimal credit. You may not like the class of folks who are your neighbors, but hey, you are them.

        “I think it is easier to assert solutions are easy when you are not the one facing them.” Actually, I said it would be painful. And those seeking mods are likely to be more biased than those who are not.

        “We don’t decry Ch. 11 as “bailing out companies”…” I am all for allowing individuals the same abilities and rights that corporations are allowed. And versa vicea, especially regarding credit ratings. While I am no bankruptcy law expert, how is a bank/servicer that rejects a loan mod for a mortgage holder any different than creditors that reject a corporation’s Chapter 11 reorg plan?

        1. Yves Smith Post author

          Did you forget the Wilbur Ross experience, that deep principal mods have a low recidivism rate? That suggests the failure to do mods has much more to do with servicer incentives (all bad) and nothing to do with credit.

          In fact, servicers were never expected to make credit decisions. They don’t have the expertise. The loan files (records on the borrower) are non-existent or a mess. So we have a lot of structural issues (ill thought out design of securitization process; the president of the FASB has argued that subprime loans were never suitable to go into “qualified special purpose entities” because some would inevitably need to be modified, while the QSPE rules require an arm’s length relationship) getting in the way of solutions.

          1. Blurtman

            So if remod’ing loans so the principle adjusted to significantly less than market value kept a significant number of folks in the homes, would that be desirable? What about 90 year mortgages? Can folks who are able to afford their mortgages on homes that are under water re-mod? And why not underwater margin loans, bad gambling debts, and other negative investments. Where do you draw the line?

            Barring declines in income due to the lousy economy, why cannot folks pay their mortgages? If they choose not to because it no longer meets their investment expectations, screw ’em. Walk away then. If they never were able to from day one, what more needs to be said? It is a grown up world, and we cannot paper over the results of bad decisions or bad luck because we would like to. If home buyers were expecting to refi based upon ever increasing home prices, consider the current realities to be an education.

            Unintended consequences keep multiplying, the more we stray from the tenants of the free market. And yes, that is especially true for Obama’s coddling of the banksters. Where the F is the FBI?

      3. Neslo

        We may overshoot to the downside, we should, it’s normal part of the business cycle.

        Every Government that tries to “beat” the business cycle fails in a miserable way.

        Give these houses to Fannie, CPR them, make them into duplex’s and rent them for a while – 5 years. Tent cities are stupid while good asset stand unused, or worse, abused.

  21. Hugh

    Of course, this is about extend and pretend. Look if you fix an $8 trillion housing bubble with some pissant $75 billion quack mod program that didn’t reduce principal, it would have been the first thing done, the housing bubble would never have burst, and the meltdown would never have happened.

    As it was, it was one of the last and smallest things done. And it wasn’t done to help homeowners at all but to close off the possibility of cramdowns and protect mark to model accounting.

    I still don’t think that Geithner and Summers have given even a single thought to the fraud, loss of paper, and MERS debacle which, at a minimum, convert most mortgages into unsecured loans.

    I have really come around to the view that looting has become the sole function of our government and that programs like this one are meant only as distractions to allow the background looting to continue. I mean have any of us seen, two years into this mess, a single instance where Wall Street or Washington has actually fixed anything in the financial industry? I can’t.

  22. ronald

    Posting from a RE blog in San Diego. This realtor has an excellent site covering the SD market which has been the trend setter in Calif RE foreclosure. The blog is called California Housing forecast

    “Why San Diego short sales keep declining”

    “Why are short sales listings declining at the same time that delinquencies are rising? Either the borrower is trying to get a HAMP modification (doubtful – how many San Diegans qualify, since the loan cannot be more than 25% more than the value of the house?), or they are choosing to just stay in their homes and live mortgage free for years. I think more people are choosing the latter.

    Short sale listings are declining because homeowners in trouble have a better option: voluntary default. In other words, they choose to stop paying the mortgage and live mortgage-free in their house for years. Only some of the delinquent homeowners get a foreclosure notice, so who knows – they could be the lucky ones to get free shelter.

    The temporary tax law that favored California short selling expired at the end of 2008, so there is no reason to do a short sale. A foreclosure is better for the seller, because in a short sale the seller will:

    probably owe California income tax on the forgiven debt (federal income tax is temporarily forgiven under a temporary bailout program)
    have to move out, instead of living mortgage free for several years
    gets his credit score lowered just as much as if he’d gone into foreclosure
    The only advantage to a short sale is that you can buy another house 2 or 3 years sooner than if you’d filed for foreclosure.

    Why would anybody list their home as a short sale? The best solution for homeowners in trouble is to stop paying the mortgage and keep living in the home as long as they can.

    I expect the number of short sale listings to keep

  23. moneta

    Forget ethics, fairness, justice, morality.

    The situation is too messy for the leaders to sit around a table and discuss what is fair for whom. It will be what is good for them personally.

    So now is time to develop empathy. Empathy is not seeing from your perspective but from the other person’s perspective. The Golden Rule at a superior level.

    Cling to your ideals at your own peril, this mess will get papered over.

  24. Michaelc

    Two observations about the article.

    1. The elephant in the room, the GSEs, are not even alluded to in the article. All the suggestions about what the Banks need to do are relevant, but since the GSEs packaged so much underwater paper themselves, the gov’t solutions need to deflect attention from their own role, which is impossible, hence all gov’t proposals will be non starters. Private mortgage lenders have a disincentive to modify if the GSEs don’t do the same. The resulting private losses would remain private, and accelarate the housing market collapse while the GSE losses would become public. Does that seem fair to an investor in privately issued RMBS? They’re holding out for their inevitable bailout scaled to whatever losses the GSEs pass on to the gov’t, I think while keeping the public focus on those ruthless suckers who bought overpriced real estate.

    The second thing that caught my attention in the article (was it a misprint?) was in the anecdote about the unfortunate homeowner featured in the article.

    After making her trial modification payments, Chase forclosed on her anyway and bought the loan for ONE HUNDRED dollars?

    What’s up with that? There’s got to be a second story about that little tidbit.

    and may go aare also focused on managing responses need to be more deftly handled than if the paper was held by private, else

  25. Cindy in Orange, MA


    I got my mortgage from NEW CENTURY, they implied the taxes and insurance would be PART of the mortgage payments, they weren’t. They failed to give me documents at the signing. Fast forward a few months, they sell the loan and Litton Loan servicing enters life. I have not been able to manage these payments, these taxes and the insurance, for a long time. One big bill, creates a disaster, I have to crawl out of, slowly, robbing Peter to pay Paul. Seemed like this program would help. AND IT DID, FOR EXACTLY TWO MONTHS. Got the coveted PERM MODIFICATION in November, and then on NOVEMBER 30th, Litton redid the math. Instead of an 800, or so escrow shortage, they waiten until the MOD was done, to reveal, well ACTUALLY IT IS EIGHT THOUSAND!

    They were sent the OVERDUE TAXES, during the trial period. Now the payment JACKS UP over a hundred a month. HELLO, do you suppose that is why people are defaulting STILL?

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