Megan McArdle Uses Straw Men to Argue Against Principal Mods

Megan McArdle has a post up discussing why she thinks the benefits of principal mods would be “at best small and mixed”.

The problem with her lengthy discussion is that it is rife with straw men.

Before we get to the nitty gritty, I want address two bits of framing at the top which I found troubling. The first was the title, “Principal Write-Downs Still Popular With Wonks”. The “still” suggests that wonks like it even though some, presumably most, yet to be named others don’t. And singling out “wonks” further implies that (aside from homeowners) they may be its only fans.

That is very misleading. Who is in favor of mods? The only people who under normal circumstances ought to have a vote on this matter, namely, the borrowers and the lenders. First mortgage lenders overwhelmingly favor mods to borrowers with who still have a viable income. Why? Do the math:

Foreclosures are now running loss severities of 70% or higher. “Loss severity” means “loss as a percent of principal balance”, and it almost always is stated in terms of the original principal balance. So foreclosures result in really big losses. And this is only going to get worse:

–More borrowers are challenging foreclosures based on standing

– More judges are sympathetic to borrower arguments, so cases go more rounds and incur more costs

– Housing values are still falling in most localities; the overhang of foreclosure inventory only makes it worse

– Banks are destroying value of REO with failure to secure and maintain properties (a lot of reports on this, with very large falls in value)

Investors would take 30-50% writedowns for borrowers with adequate income all day. This is a complete no brainer. The only investors who’d be against it are the ones holding tranches that are effectively interest only, the bottom tranche still getting payments. These are generally a small percent of value of the deal and often bought by speculators. The prototype of this sort of investor is Carrington Mortgage. It was affiliated with New Century and is now servicing many of their loans. They have been making out like thieves by as owners of the residual or low rated tranches by buying the for pennies on the dollar, and then delaying foreclosures and the recognition of principal loss, allowing them to collect much more in interest payments.

The reason policy bottom fishers can have undue influence is that mortgage securitizations are what Anna Gelpern and Adam Levitin have called “Frankenstein contracts.” They are effectively “immutable contracts” and the authors make clear why this is a disastrous development. Tom Adams elaborates as to why these rigid contracts aren’t working now:

Regarding securitizations being contractually flawed: one reason this is so, under the current environment: securitization relied in part on issuers having skin in the game either through an investment in the residual (while retaining the servicing rights) or through the desire for continued access to the capital markets. Since most of these issuers/lenders have blown up and the residuals have long since been written down to zero, these incentives no longer work to keep servicers honest. In addition, servicing is now light years more expensive than anyone ever thought it could be, so the servicers now have a huge, new incentive to recoup costs or pass the costs along to another party, such as the investors or homeowners. This is exactly the same set of circumstances that got Fairbanks to engage in widespread abuses that got it into trouble with the FTC – since they were a stand alone servicer of distressed loans and were unable to cover the costs of running their business from their fees.

This takes us to the second bit of framing in the piece, which again occurs at the top. McArdle quotes Tyler Cowen (a designated wonk, we presume) as making the best case for principal mods. Huh? It’s not much of a “pro” case: it starts with a rant about how principal mods are “WRONG” and “terrible for the long run rule of law” and “EVIL” and “UNFAIR” (in fairness, McArdle says she does not think principal mods are “particularly evil”).

Gee, Mrs. Lincoln, and aside from that, how was the play?

Now I must confess I do not read McArdle and Cowen often enough to be certain, so readers should correct me if I am wrong, but I strongly suspect their concerns about the rule of law were and are notably absent when the idea of modifying other types of contracts, like union pension agreements, comes up. Or when banks fabricate documents when they have trouble proving standing (one of numerous examples: a bank produced two different purported “wet ink” signature, meaning original, borrower notes, hat tip Lisa Epstein).

Now if those who raise the rule of law question were consistent about it, they’d also be up in arms about foreclosure fraud, bogus servicer charges (as we’ve indicated repeatedly, a much bigger culprit than is widely acknowledged), the lack of meaningful punishments for Wall Street executives and key profit center managers (or more generally, that banking has now become institutionalized looting as described by Akerlof and Romer). The societal fish tends to rot from the head, and worrying about a prospective breakdown of morality among little people seems awfully misplaced when we have numerous actual and likely examples among their betters.

The fact is that modifying contracts is normal. Period. Before the era of securitization, when banks were lenders, they would routinely modify a mortgage if the borrower still had a predictable income that was not insanely below his former income level (or if he’d had a crisis, like a medical emergency, and they needed to figure out how to accommodate a new level of expenses). And they were even modifying them in the era of securitization. At the 2008 Milken conference, Lew Ranieri, the father of mortgage backed securities, was stunned to learn that servicers were not doing mods and using the contracts as excuses. He said they always did mods in his day. When a loan goes bad, the first thing a creditor looks into is a debt restructuring. Half a loan is always better than none.

It’s funny that a non-wonk like Wilbur Ross, who is the antithesis of a charity or a borrower advocate, is a fan of deep principal mods. And we are told that banking turnaround expert and investors Chris Flowers in IndyMac has developed an effective template for principal mods.

Now let us get to the straw men. The first is the argument that the mods in the past haven’t done well. Again, what mods is she looking at? HAMP is not a valid sample, for a whole bunch of reasons: borrowers told they’d were getting a mod, then hit with all sort of late and payment make-up fees; repeated loss of documentation by the bank, which was often instead described as the borrower not meeting program standards; borrowers incorrectly told to default to qualify; bad incentives in program design (the formula favored borrowers who were deeply underwater, yet offered only five year payment reduction mods). You can only look to examples of deep principal mods to reach conclusions about the success of deep principal mods. And the admittedly limited number of current practitioners, plus the historical record, suggest that actually the results ain’t so bad.

The second straw man is the idea that mods will reduce the availability of mortgages. In case she hasn’t noticed, the non-government-guaranteed mortgage market is just about dead. And one big reason in many areas of the country is the overhang of foreclosures, both ones in process but not completed, and anticipated foreclosures. Foreclosures continued to drive prices down, hurting both delinquent and current borrowers. No lender wants to risk catching the safe of falling real estate values. In addition, all sorts of other credit products are routinely written down, from car loans to commercial real estates to credit cards.

Another straw man is her assumed 20% reduction assumption, which she estimates will have too small an impact on household budgets to make a difference. As I indicated earlier, a figure double that level will still leave investors considerably better off than foreclosures. Moreover, the mod levels discussed are usually of first mortgages. A second lien on a deeply underwater house should be written off (they would be wiped out in a foreclosure). But instead, because the second lien holder often blocks a mod on the first. So a regime that forced seconds to recognize economic losses would also result in greater payment reductions for some borrowers than just the level of the mod of the first.

She finally assumes a Chapter 13 bankruptcy regime as the only way to push this sort of program through. Why? Adam Levitin was involved in presenting an idea to the officialdom called Chapter M, which would provide for principal write-downs as part of a streamlined, mortgage-only bankruptcy process. The key points:

Create a special prepackaged, streamlined mortgage bankruptcy chapter that does not affect non-mortgage debt. All foreclosure actions are automatically removed from state court to federal bankruptcy court. The foreclosure is adjudicated in federal bankruptcy court under standardized, streamlined procedures. Homeowner and lender both required to make evidentiary showings: homeowner must document ability to pay; lender must document title to note and mortgage, but with validity of securitization transfers conclusively presumed. Limited rights of appeal.

If homeowner is willing and able to pay, then homeowner keeps the house. Fresh appraisal done by court-appointed appraiser. Lender chooses between an FHA short-refi with principal reduced to [90]% of LTV or a standardized loan modification with principal reduced to 100% LTV and loan restructured to 30-year fixed-rate, full amortization, market interest rate adjusted to ensure maximum [31]% DTI ratio), with 50% risk-weighting for modified loans. Court validates lenders’ title to mortgage. Junior liens exceeding LTV cut-offs are eliminated If the homeowner redefaults, an expedited, standardized federal foreclosure procedure is used ([45] days to sale), with limited defenses and clear title imparted by sale by bankruptcy trustee.

If homeowner does not qualify, lender gets same fast-tracked federal foreclosure and quiet title coming out of the foreclosure sale. If lender cannot show title, homeowner gets quiet title to property. In all situations, the homeowner’s non-mortgage debts “ride-thru” the Chapter M bankruptcy, unaffected, but the homeowner could also file for a traditional Chapter 7 or 13 bankruptcy to address those debts.

The last reason her Chapter 13 issues are a straw man is that the existence of a regime that could impose principal writedowns will force servicers to the negotiating table. You see analogous behavior on credit cards. If a borrower gets an attorney or accountant involved in the conversation with the bank (so that a professional is effectively vouching for the borrower representations regarding his income and assets), the bank gets the message that the customer can and just might file for Chapter 7 or 13; and the bank won’t get much, plus it will be faced with court costs and delays. The thread of bankruptcy makes the bank much more willing to negotiate.

In the HAMP program, the Treasury tried to promote mods by offering carrots to the banks; the result was horseshit. It seems clear that a few sticks are now required.

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  1. Mark P.

    The banks as servicers make too much money foreclosing, which was how it was set up to be. As you well know, Geithner/Treasury are first and last about feeding the TBTF banks’ balance sheets, and the Obama administration as a whole somehow hopes that that will sufficiently prettify the economy as a whole by 2012.

    Of course, it will not and it’s self-defeating. Nevertheless, expect only token sticks raised against the servicers. The foreclosures — and housing price declines — will continue into 2012.

    This is not all bad.

  2. Tao Jonesing

    “The problem with her lengthy discussion is that it is rife with straw men.”

    That can be said of Megan McArdle’s entire body of work. She’s a mouthpiece for Wall Street and a rather transparent one at that. Dishonesty pervades everything she writes.

  3. Hugh

    As far as I am concerned McArdle is just another soldier of kleptocracy doing the banks’ bidding, coming up with defenses of their activities.

    The “principal” reason banks don’t want principal mods, i.e. cramdowns is the same reason they have never wanted them. They would have to revalue their other assets accordingly and this would show their deep insolvency. So unsurprisingly we get this corporate mouthpiece McArdle writing how principal mods wouldn’t be effective anyway, blah, blah, blah.

  4. steelhead23

    Yves, I did not read the underlying piece by McCardle, but I think Mark P. above pretty well hits the nail on the head. I believe the entities that lose through foreclosure are not the same entities that would lose through principal mods, or the beneficiaries are different. That is, if a servicer forecloses, given arrears payments and fees, the servicer does quite well. Of course the bondholders get hurt, but why should the servicer care? In a principal mod, the servicer would have to disclose all of its fees – and those fees would be paid by the somewhat more savvy bondholders, rather than the mortgagee. I have read that in a distressed mortgage pool, the servicer often pays the bondholders as if the pool is performing and then recoups its losses through foreclosure. In that way, underperforming pools can actually be revenue enhancing for the servicers. McCardle is simply singing the servicer’s song. They want the bondholders to be patsies.

    What’s your take on Geithner’s enthusiasm for unwinding fanny and freddie?

  5. mark

    Servicing contracts are not immutable. Congress could pass a law changing the voting thresholds and then compensate investors for their losses. Given the loss severity as you state it, the compensation should be negligible. But most people don’t understand how the Constitution works.

    1. engineer27

      Issue: The amount servicers would have to charge to merely break even (particularly given how sloppy the creation of the trusts was) would drain remaining resources from the trusts. So new contracts are not really an option (even if someone could be found to to take them on).

  6. Megan McArdle

    I didn’t say I was against mods; I said I was ambivalent. What I said was that people are way more enthusiastic than I am about the potential to fix the problems, which I agree are real–the process is going to be cumbersome, and have more considerable costs than most people think. Chapter 13 has high administrative costs, and Chapter M, while intriguing, raises (at least for me), some economic questions about equal treatment of creditors and doing strip-downs in what is functionally a modified Chapter 7, when they are traditionally, and I think for good reason, usually handled in Chapter 13.

    1. knighttwice

      “…A second lien on a deeply underwater house should be written off (they would be wiped out in a foreclosure). But instead, because the second lien holder often blocks a mod on the first. So a regime that forced seconds to recognize economic losses would also result in greater payment reductions for some borrowers than just the level of the mod of the first.”

      The second lien holder blocking the mod is BOTH the top 4 banks AND the Obama Administration. The top 4 banks have $400 BILLION in second liens…any widespread mod program and it’s bye-bye TBTF banks…except it’s not.

    2. ScottS

      Okay, a mod isn’t cheap.

      But it’s still better than a 70% loss to the investor, the hit to property values, the intangible destruction of being forced to relocate. etc etc.

      Sorry, not buying the “but it’s too haaaard” argument. The process is simple if not cheap. The result is easily worth the cost.

      I won’t see the whole country go to hell in a handbasket because mortgage servicers are too greedy. That is misprioritization of epic proportions.

    3. jedimom

      Megan, you called Hillary to the carpet when she proposed HOLC in 2007. If we had done HOLC, these loans would now be recourse and walkaways would not be continuing to spiral.

      The entire economies of FL NV AZ are destroyed and sdtill falling, now that the UE and drop in consumer spending correlated to our ‘feeling of wealth by our home value’ see Bernanke who believes in Wealth Effect, now it has spread across the country, but the initial sunbelt areas are STILL DROPPING.

      The TBTF need to take the losses on the HELOCS, period. and let their servicing arms stop blocking meaningful mods.

      Or we could have done HOLC and the entire economy would not have collapsed but people like you and Dick Armey bashed HRC for the proposal. And here we are, the same root problem unaddressed as trillions go to prop up the GSEs to cover up the TBTF losses and millions are out of these homes which rot.

      it is disgusting and all so easily avoided.

      1. Lou

        “jedimom says: The TBTF need to take the losses on the HELOCS, period. and let their servicing arms stop blocking meaningful mods.”

        While the banks are taking losses on HELOCS it is only fair the folks who have been abused by the TBTF Usury rates be given the same treatment.

        I don’t see much difference between the folks who paid off their credit cards with their HELOCS and the folks who did not. Same Debt in my eyes and should be treated equally.

    4. Daniel Pennell

      I question the whole idea that principle reductions are morally wrong.

      We modify contracts all the time and we restructure debt all the time for businesses that get into trouble. The only difference here is that we are not doing it with a corporate or government contract and the debt being restructured is personal and not corporate.

      Heck, we have the entire business lobby arguing that we should retroactively change the contracts of teachers and cops. We have the US Chamber threatening to walk on a lease in order to get a better rate on the rent. Have you seen the cost to the PBGC from companies behaving in the same way? Have you seen the employees who had contract that got wiped out and had their pensions cut to 1/3. Somehow these always are deemed OK or acceptable. WHY?

      WHY are individuals held to a different standard?

      1. chris

        I agree that there is nothing morally wrong with modifying loans. It is ridiculous for the banks to be holding out for 100 cents on the dollar when most of the mortgages have been purchased for Pennies on the dollar with full government backing….example. Bank of america buying country wide. …BAC did not pay top dollar for those mortgages but they still refuse to modify the loans when the collateral is 50% lower in some cases. This is where we should be asking the morality question.

        Goverment funds banks with tax payer help
        Banks suck up other failing institutions for bargain prices and could easily reduce principal on mortgages and still make huge proifts
        Banks refuse to to anything except try and collect through servicers as they hold country hostage and drive down home prices.
        What can you say about the banks buying at a fire sale and expecting to collect full value later. It is a total scam.

        Consider other investors buying loans for 30 cents on the dollar with assurances from the government that they would be made whole if there were issues. Do you think they would not gladly take a 20% return on their investment and be willing to restructure a mortgage and reduce principal????

        The TBTF banks and servicers are unwilling to do any principal reduction even if they are getting paid by the government to do so. BAC refuses principal write downs even when using the HAMP Program.

        It is ridiculous.

  7. Lil'D

    It’s good to read Tyler – though you may not agree with him, he’s thoughtful and smart and very eclectic.
    McArdle, not so much.

  8. Francois T

    “That is very misleading.”

    You just defined Megan McArdle right there.

    No need for further argument AFAIAC.

    That said, I like the way you demolish her rag.

    Nice work!

  9. F. Beard

    Principal mods are fine but savers were cheated by artificially suppressed interest rates too.

    A solution?

    Bailout the entire US population equally with new, debt and interest free United States Notes. That should fix the entire system from the bottom up.

    I suppose foreign holders of dollars might complain but on the other hand it would restore quite a bit of US demand for imports.

    And yes, this should only be a one time thing (or at most once every 7 years) combined with fundamental money reform.

    ref: Deuteronomy 15

  10. sherparick

    Apparently, as I understand it the shift McMegan went from Upper West Side liberal to neocon/pro-business blogger was the result of having her bicycle stolen in college (she apparently assumes it was a little person, although when I was groing up in my upper middle class suburb the biggest bicycle theives were the rich men sons who did it for sport and the torment it caused the poorer kids to lose a bicycle they could not replace). It is a problem she still has apparently. She is very worried about the moral rot among the little people, not so much among her Galtian peers. 10 years of living with boyfriend, now husband, without benefit of clergy is okay for her and her peers. But for middle class and working class women, it is sign of their moral bankruptcy and unfitness. Like most conservatives, she is constantly uses a strawman for the opposition, a strawman where always a Liberal = Democratic Socialist = Socialist = Communist = Stalin for all public policy questions. Balloon Juice does almost works full time in keeping track of mouth agaping whoppers, but I will reference this one in the archives of the TNR as an example of her work.

    Tyler Cowen is a more honest, but still ideologically driven, free market economists of the type Yves took down in “Econned.” His blog is regularly cited by Mark Thoma, which to me gives him some credence for his point of view. But invariably he defaults to “its okay if you are rich and a corporation.” But of the neo-classical neocons, Marginal Revolution is far less doctrinaire then John Taylor or Arnold Kling.

  11. sglasheen

    “Now if those who raise the rule of law question were consistent about it, they’d also be up in arms about foreclosure fraud…”

    In quasi-defense of the honesty of the motives behind this belief (not its substance), it is driven in part by a visceral reaction against the idea of people getting things for nothing. Because getting something for nothing feels like stealing to them, they see it as a rule of law issue. The rot in the head of the fish is seen either 1) as an acceptable compromise to prevent the greater of two evils (money for nothing) in the case of foreclosure fraud or 2) a horrific overvaluation of what, exactly, upper managemant brings to the company in the case of control fraud – the looting behavior appears to be looting only if you realize that these executives are not generating value for the company.

  12. smells like chapter 11

    Principal mods have been with us for years until 2005 when the moralistic windbags at the banks convinced Congress to modify the bankruptcy code to eliminate them on family residences. Just change the bankruptcy to allow them on family residences and the servicers and the banks will get in line, just as they done with commercial properties where this has not changed.

  13. Kathleen4

    Ms. Smith,

    I am astonished at your proposition that Trickle-Down Economics works:
    “The societal fish tends to rot from the head, and worrying about a prospective breakdown of morality among little people seems awfully misplaced when we have numerous actual and likely examples among their betters.”

    The worm is found in the core of the apple.

    1. Max424

      Good one.

      “Bottom Up Economy” Obama promised us change, and he has provided it.

      Instead of Trickle-Down Economics, he’s giving us Trickle-Down Rot.

      YS: “..the result was horsesh+t.”

      You make me blush, girl.

  14. F. Beard

    Yes, the emphasis on morality for the “little” people is extreme hypocrisy considering the business model of fractional reserve banking is theft of purchasing power from all money holders including and especially the poor. That iniquity is in addition to its practice of usury ( forbidden between fellow countrymen by Deuteronomy 23:19-20).

    There is one form of private money, common stock, which is completely ethical in theory. But that would mean sharing power and wealth rather than looting it via the counterfeiting cartel.

  15. Bravo

    Forgive me, but perhaps a layman’s analogy would help Megan McArdle and others to see the case for deep principal modifications:

    • GM designs a sporty, but faulty vehicle in which the wheels come off its axles after but a few years use.
    • Drivers buy the vehicle in mass from the dealers with blind faith that neither GM nor the government would allow such defective vehicles be sold to the general public in the first place.
    • GM arranges for the government to provide insurance on a hefty portion of the vehicles.
    • GM helps the driver buy the vehicle by arranging a loan that then gets packaged and sold to investors who are told they will have the vehicles as collateral.
    • In its rush to sell more vehicles, GM fails to ensure that the necessary legal documentation is put in place to collateralize the vehicles for its investors.
    • A few years later, the wheels start coming off the vehicles. Some drivers are killed, many more are injured and incur a lot of damage when their vehicles suddenly careen out of control.
    • The GM body shop comes to the rescue and tows the vehicle in for repair and to be safely put back on the road. The tab comes to between 30 and 40% of the vehicle’s original sticker.
    • For the drivers who were killed, the government insurance pays off the investors loans in full when the GM body shop reposseses and repairs the vehicles that it illegally repossesses on behalf of investors in the loans.
    • For the driver’s who are still alive but have suffered a large loss on their vehicle in the collisions, the government and GM jointly take the position that the only recourse the driver has is to keep making payments on their damaged vehicles. The investors in turn pray that the drivers continue to do so, because they rightly fear that in reality they have a faulty collateral position.
    • The GM body shop refuses to proceed to fix the vehicles and so get the country moving again until a settlement is reached between the drivers, GM, and the government. GM takes the position that it has limited, if any liability for what has happened. The government takes the position that it has no money and in fact gave away any leverage it had on GM when it let GM pay off the money it lent them to survive, with no strings attached. All the while, the investors pray that the increasingly angry and desperate drivers will fail to recover from their injuries, will die quietly, and thereby allow the government to pay those insured investor loans off as well.
    • Some of the surviving drivers continue making payments on their damaged vehicles, much to the delight of the investors. But other drivers, increasingly look at how many years of making payments it will take them to save the monies needed to repair their vehicles and realize that is a increasingly dubious proposition. They then suddenly seize upon the fact that they have leverage in the matter, since GM failed to properly collateralize the vehicle loans for the investors in the first place.
    • The drivers become outraged at the unwillingness of the government and investors to pressure GM to meaningfully participate in their losses. Strategically defaulting becomes their only recourse, which has limited downside, since the GM body shop won’t be able to repossess the vehicle on behalf of the investors in GM loans anyway. The attorneys get particularly excited.
    • The government and investors finally take note that the drivers are really mad. They begin putting pressure on GM to do the right thing, particularly since many of those same drivers are the very taxpayers who bailed GM out of insolvency in the first place. The drivers consider strategic default in droves. But as an alternative, the government crafts a solution where GM is required to write the loan down to the vehicle’s current market value, sharing any prospective subsequent equity buildup with the borrower on a 50/50 basis. The government keeps GM alive by allowing it to write its losses off over say 10 years. There is no more incentive for the banks to continue hiding losses on their books. The government requires that 1st and 2nd lien holders share losses on an inversely proportionate basis. And finally, the market begins the healing processs by not to absorb an increasingly large inventory of damaged vehicles, many of which would be legitimately subject to major title disputes if repossessions were to proceed unabated.

  16. Conscience of a conservative

    This is where you lose me Yves.
    I’m with you 100% on the rule of law issue. Foreclosures need to follow the letter of the law. I’m also with you on the legality of MERS. Where you lose me is on forced loan mods. Putting aside issues of outright fraud on the part of borrower or lender, the fact is that many of the foreclosures are due to repeat cash-out refis and/or home buyers knowing deep down they can’t afford the home they are purchasing. Fact is we see a high degree of recidivism on loan mods and the flip side is that pensions, insurance companies and municipalities are on the other side being long the mortgage loan.

    It’s one thing for the actual lender, a bank, to take part in loss mitigation techniques, forebearance, loan mods, etc and quite another to impose them on investors who have obligations to retirees, pensions and tax-payers.

    1. bob

      I believe Yves is in favor of letting the investors have the choice, not forcing it on them.

      The fact is that most of the investors do want the mod, the only people being “forced” into the mod are the people in the middle, the servicers, who make MORE money when they foreclose, at the expense of retirees, pensions and tax-payers.

      This is the result of a bad securitization scheme designed and built by the people that now “own” the cash flow from the servicers.

      The banks, as usual are on two sides. As of now they are granted “mark to fantasy” rules for mortgage securities, and they get the cash flow from the servicers that they own.

      There are more than two parties involved.

    2. skippy

      Where did this epic fail start…at the top or the bottom…eh…and all that just got sucked up in the excitement (lack of due diligence $$$eye blind), well that’s capitalism isn’t it.

      CofC said…”investors who have obligations to retirees, pensions and tax-payers.”…

      Skippy here…if this was the case, me personally finds them the most ēgregius of the lot. It was their duty (the reason they get paid) to safe guard peoples earnings for a later date (instead of using public measures).

      Obligation[s to line their own pockets methinks! Yet some bandy about DUTY TO THE FUTURE, let them eat cake!

      Skippy…funny thing about societal collapse, its the priests and their functionary, by the time thing get really bad (hunger), they that fill the pots first.

    3. Daniel Pennell

      I agree with you in principle that under normal circumstances no entity should be “forced” to engage in renegotiating an existing business arangement. However, in this circumstance, where the two entities with real economic interest in the note and the property are seperated by the trustees and the servicers and where the servicers and trustees are able to serve only their own interests above those with the real economic interest, then I think forcing the trustees and servicers to work in the best interests of the borrower and the investor is not out of line.

    4. chris

      The majority of loans have been picked up for pennies on the dollar with government and tax payer funds being used….the funds that were to remove toxic assets from balance sheets so we could avoid the addtional drop in real estate.
      IF you want free market then take back all the bailout money and then talk about not forcing banks to do anything. When taxpayers rescue the banks the banks should be given a few guidelines and requirements. I am sick of the free market bs that also is for the banks and traders to pilage every part of the eoncomy with no recourse. We don’t have a free market and the government has failed us in its duty to at least protect the citizens against repeated rape by the financial institutions.

      The banks are above the law and until someone lays down the law on them they will forever be taking our money whenever they create some new crap system that makes them billions arne ruins the economy for 10 years. ONce again congress will cave and the banks will laugh all the way to vault. So the banks need direction and if you want to see it as forced so be it but they have ruined many a retirement fund and college funds while making obscene profits.

  17. francis

    Megan McArdle is an irrelevant idiot, and has been forever. Check out the oeuvre monstrosity. How it flops around like a half dead pig.

    “It’s easy to see the appeal of cram-downs–they seem like a relatively simple solution that instantly sweeps away a lot of the problems we’ve had. But when you start considering the actual problems of execution, they start looking–to me, at least–considerably less appealing. I’m not saying we shouldn’t do them–as I say, I can see the arguments on both sides. But even if we did go this route, the benefits would be at best small and mixed.”

    It’s stupid horseshit, but that’s how she pays the rent.

    1. Phil Perspective

      The best phrase I ever heard to describe McArdle is thus: “She afflicts the afflicted, and comforts the comfortable.” I wish I could remember who coined the term.

      1. PeonInChief

        it’s actually a reversal of part of a line by Finley Peter Dunne, a 19th century muckraker. Mother Jones noted that her role was to “comfort the afflicted and afflict the comfortable.” In the 1970s it was common to note that the role of the press had become that of comforting the comfortable and afflicting the afflicted. It has lately been used to describe the policies of various Republican lawmakers, although it could be used to describe the policies of many Democrats too.

  18. Yevgraf

    Princess Sparklehooters never did have any kind of actual qualifications to talk about economics or business, yet manages to get paid to do it.

    She’s afflicted with delusions of adequacy.

  19. mikey

    Hey peckerheads, what about those of us that purchased homes in the 80’s ? 20 % down and 12-14 % 30 yr FR. Mine’s pay off now bc I re-fied at a lower rate. Did without stuff to make payments. Stick your loan mods and principal reductions up your ass and grow up!!!

    1. skippy

      Hay you bought a consumable, not an investment…grow up..financially!

      Look what you have to realize is most say 90+% of the world population is nothing but_clueless individuals_competing in games of chance, all to the snickers of the other 10% that set the playing field. What you want to do about that state of affairs is your own decision, just remember there are a lot of other people in this world feeling the same way you do.

      Skippy…we come together or repeat history yet again.

    2. Ray L Phenicie

      Your complete and total incoherence leaves me wondering what your point is. I’m not sure where the connection lies between an overpriced mortgage done in 1980 and our current situation of mortgage fraud where securitization rules were not and are not being followed and we have potentially $1 trillion or $2 trillion or $3 trillion or $4 trillion or $5 trillion of false securities posing as real investment products.

  20. Ray L Phenicie

    This is the line from the McArdle post that had me racing to the medicine cabinet and reaching for the antacid:
    —–We don’t have the mortgage problem that we initially thought. We expected that foreclosures would be driven by resetting adjustable rate mortgages, i.e. higher payments. ——

    The reports I have looked at mainly show a huge mortgage problem,on the foreclosure front in other ways as Yves has shown. Foreclosures are still occurring in huge numbers; all forecasters are saying there is no reason for this to change significantly in the near future. The adjustable rate mortgage, like so many things that go bump in the night was scary at first but when the lights went up it turned out to be a loose hinge allowing a back door to swing in the wind, not the case of the whole house being blown off to Kansas.

    —-Moving along with our Reporter Go Lightly:
    But with interest rates so low, the problems are on the income side. Either people took on more mortgage than they could afford, or their income has fallen, so they can’t afford the mortgage they have. This is why most modifications are failing.—–

    Now that we are purged of those nasty pieces of shit who dared to allow their income to be pared back or were silly enough to believe they had a future in hard work,
    Now that the whisking of Bernanke kool aid in the financial bowl has cleansed the situation of ignorant slobs who did not hire an accountant and a lawyer to study the horrible ARM that was before them on that dark and stormy night of yore,
    Now that the whole of our mortgage mess can be chalked up to folks who mistook snake oil for Cod Liver oil,
    Now that those poor wretches, who once were saved but are now beyond redemption,
    No that they can be tied up to the post and whipped mercilessly, as the proverbial goat and then cast into the desert and thereby saving our whole screwed up, sick, virus infected mortgage system, we can move on the cure-Chapter 13.

    Nouriel Roubini and Stephen Mihm in Crisis Economics, A Crash Course in The Future of Finance lay to rest the idea that subprime mortgages were of any significance if one is to look for causes of the mess we are now in and most likely to remain in as long as the government remains a bystander. In a chapter entitled ‘Plate Tectonics’, the authors point out the common practice of absolving Wall Street and the Government of collusion by blaming the subprime game scheme for the catastrophe we all continue to live with. Rather, they point to the shadow banking system that:

    “made the entire financial system dangerously fragile and prone to collapse. These new financial institutions battened on the easy money and easy credit made available not only by the Federal Reserve but by emerging economies like China. . . .Subprime mortgages were but the most obvious sign of a deep and systemic rot. This fact underscores a cardinal principle of crisis economics: the biggest and most destructive financial disasters are not produced by something so inconsequential as subprime mortgages or a few reckless risk takers. Nor are they merely produced by the euphoria of a speculative bubble.

    Rather, much as with earthquakes, the pressures build for many years, and when the shock finally comes, it can be staggering. In 2006-8 it was not simply the subprime securities that collapsed in value; the entire edifice of the world’s financial system was shaken. The collapse revealed a frightening if familiar truth: the homes of subprime borrowers ere not the only structures standing on the proverbial fault line; countless towers of leverage and debt had been built there too.”

    I guess my issue with Go-lightly reporting that exists around, and the Atlantic is usually much better than the general caliber of Megan’s I-don’t-want-to-go-to-deep-here (besides her editor seemingly has her on a tight leash as well), my contention is that we are all poorly served by an approach that obviously wants to sidle up to the Toads on Wall Street and turn the back of the hand to the faces of the blokes on Main Street who were naive enough to believe that the folks in charge of this country are honest, sincere and care about the average homeowner.

    1. Mark P.

      Actually, McArdle is probably slightly better than the other guy, Daniel Invoglio, that THE ATLANTIC now has doing Business/Economics. Invoglio is really ignorant, shallow and a mouthpiece for the status quo.

      The magazine as a whole is seriously losing money; the owner is flushing millions down the toilet every month keeping it going, I believe. Kudos to him because it’s been a cultural institution on a par with the NEW YORKER.

      That said, the quality has slumped — of the talent that used to be published there, I see only Jim Fallows still around. Thus, the descent to articles like last month’s terrible hagiographic cover story about the mega-rich and another pathetic piece that was inside about anal sex.

  21. wunsacon

    Someone once passed me a McArdle article wherein she argued that eliminating Glass-Steagall was good in part because it *helped* the federal government find big suitors for failed banks — who otherwise would’ve been restrained by their size from participating in these deals.

    I wonder if she thinks “TBTF” is a problem, because what she claimed as a “benefit” of repealing GS (allowing TBTF banks to acquire more assets) exacerbates it. So, it seems: either (a) she doesn’t think “TBTF” is a problem at all or (b) she suspended her belief that it’s a problem for the duration of her argument.

  22. Diogenes

    Well, I can tell you that here in AZ, principal mods would be the ONLY reason for someone not to walk.

    This is an anti-deficiency state for purchase money mortgages (this includes refi $ but not HELOCs).

    AND, credit card companies don’t cut you off anymore when you walk, if you are a strategic defaulter. And you can still get car loans and still rent, and I’ve heard of a few cases where someone bought another home while in a short sale. SO, the punishments are few for strategic defaulters.

    By the way, I’m curious about the MERS situation. Everyone I know paid recording fees at closing, which I assume included proper county mortgage recording fees. If the “recording” was instead done on a discount basis at MERS, could there be grounds for a class action suit?

  23. chris

    Haven’t the banks gotten enough money yet? Now we are to condone more short term business models of the servicers at the peril of the entire housing market?

    The banks have gotten over on everyone, including congress and the mainstream media.

  24. Eric Jackson

    The banks need to create another form of financial instrument, where the current owners of the home can continue to pay the current mortgage, or else exchange their mortgage for something where they can get their principal modded to current values, but then the bank gets all the profits of any sales from the current price up to the amount of the mortgage.

    So for example, if the house was bought for $300k and there is $200k mortgage on the house, and the current price is $100k. The home could get modded down to $100k for the purposes of paying the mortgage, but then when the bank would get any profits from the sale from 100 to 200k. If the current owner tries to sell the house, this “lien” would stay with the home until the price goes above $200k and the bank gets their money and gets out.

    The banks would lose interest on the mortgage, but they would get back their principal eventually, since they have an ownership stake in the house.

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