Felix Salmon

Mortgage refinance doesn’t belong in the settlement talks

Felix Salmon
Oct 18, 2011 13:23 UTC

The WSJ has the latest mortgage-settlement trial balloon, and it’s pretty weak tea: under the terms of the deal, if (a) you’re underwater on your mortgage, and (b) you’re current on your mortgage payments, and (c) your mortgage is owned by the bank outright, rather than having been securitized, then you would be given the opportunity to refinance your mortgage at prevailing market rates.

It’s worth remembering, at this point, that mortgages are by their nature prepayable. When you write a fixed-rate mortgage, you make a general assumption that if mortgage rates fall substantially, the borrower is going to pay you off and refinance. The underwater questions we’re talking about here were written during the housing boom, when banks simply assumed that house prices always went up; those banks cared massively about prepayment risk at the time, and spent huge amounts of money and effort trying to hedge it.

As it happened, mortgage rates did fall substantially — with the result that the banks’ hedges paid off. But then the banks realized that they could make money on both legs of the deal — that they could collect on their mortgage-rate hedges, without having to worry about prepayment. Because now the borrowers are underwater, they’re not allowed to refinance. So the banks continue to cash above-market mortgage payments every month — something they never expected that they would be able to do.

Naturally, they’re clinging on to this undeserved income stream for dear life:

The refinance program would be particularly costly for banks because they would be forced to give up expected interest income on loans for which borrowers are current on their loan payments and, given their payment histories, unlikely to default. Banks can’t reduce rates on loans they don’t own because the result would be a net loss to the investor.

“Nine months ago this would have been inconceivable,” said one person familiar with the banks’ thinking.

Well no, it’s not inconceivable at all. In fact, wholesale mortgage refinance for underwater borrowers is a major part of Barack Obama’s jobs bill, and the CBO has been costing it in various ways. At heart, it’s a way of rectifying a market failure, and thus makes perfect sense.

But that’s precisely why I don’t think that this plan deserves a place in the mortgage-settlement talks. For one thing, it’s downright unfair and invidious to allow 20% of underwater homeowners to refinance while ignoring the other 80%. More to the point, giving homeowners the ability to refinance their mortgages is what you do, if you’re a bank. It’s not some kind of gruesome punishment.

So let’s keep mortgage-refinance proposals in the arena of public policy, where they belong, and where they can be implemented universally rather than piecemeal. And let’s keep holding the banks’ feet to the fire in the mortgage-settlement talks, and try to get something much more substantive out of them than this.


we are almost 300% underwater in our mortgage, we are current on our payments and we both work and have no promblem making payments. BUT the city just did reconstruction on the ditches and roads and now our front yard is under water literally! we just bought new windows last year and we are not sure if we can walk away, shortsale???

Posted by sands1998 | Report as abusive

Two mortgage plans

Felix Salmon
Oct 14, 2011 14:51 UTC

With the enormity of the jobs crisis looming over the 2012 presidential election, it’s worth being reminded every so often that there’s a huge housing crisis in this country as well. And so it’s worth keeping an eye on new ideas there.

Martin Feldstein has one, which I don’t much like. He gets one thing right: we need massive principal reductions. But the way he’d like to do them is very flawed.

For one thing, he’s very keen on converting non-recourse mortgages to recourse mortgages: “in exchange for reduction in principal, the borrower would have to accept that the new mortgage had full recourse — in other words, the government could go after the borrower’s other assets if he defaulted on the home”.

In theory, I’m a fan of recourse mortgages, if they’re taken out voluntarily in a healthy housing market, and so long as they can be written down in bankruptcy proceedings. But I don’t like Feldstein’s idea here. It’s a bit like the Brady Plan: in exchange for a reduction of debts, the debtor is forced to switch from an easy-to-default-on instrument (a bank loan, or a non-recourse mortgage) to a harder-to-default-on instrument (a sovereign bond, or a recourse mortgage). That’s the kind of thing which should be done only when (a) the debtor has a seat at the negotiating table; and (b) when the debt reduction is a one-and-done deal which undoubtedly reduces the debt burden to a manageable, sustainable level.

In this case, however, the homeowner is just being given a take-it-or-leave-it choice; and the principal reduction only reduces the value of the mortgage to 110% of the value of the home, even as house prices continue to decline. The homeowner is still underwater — and, of course, is living in a very tough economy. Here’s Dean Baker:

There will be more questionable loans that will go into the program. Some of these people may be able to make their payments after the principle write-down. They will then get to live in their home until they move and in all probability never accumulate a dime in equity (but the bank got half of its loss picked up by the government).

Others will take the deal and then find themselves still unable to pay their mortgage — remember we still have 9.1 percent unemployment and most people in Washington don’t seem to give a damn. Under the Feldstein plan the debt will now become a recourse loan, which means that the bank can hound foreclosed homeowners until the day they die for any portion of the mortgage that is not repaid by the sale of the house.

The other big problem with the Feldstein plan is that if it works, it will involve the government writing hundreds of billions of dollars in checks to the banks. This is dreadful politics, and it’s not much better as policy. If there’s going to be a huge subsidy being paid into the housing market, better it go to homeowners — who can then use the money to pay down their mortgage — than that it go to the banks.

How about this, then: if the bank does a principal reduction so as to increase its chances of being repaid, the government will pay the homeowner 25% of that principal reduction, on condition that the money is used to pay down the new mortgage.

That would be cheaper for the government (depending on how transfers to Frannie are counted), and would also bring a significant number of homeowners back into positive-equity territory, which has to be a good thing.

Meanwhile, Alan Zibel has a trial balloon from the Obama administration which is reasonably smart but which is unlikely to make much substantive difference. Basically, Frannie should sell off an equity tranche of its mortgages, which is explicitly and credibly not guaranteed by the government.

Investors in this “first loss” position would take on an additional risk of absorbing losses, but would receive a higher interest rate. While investors would be taking on some risks because home prices are still falling in many areas, mortgage lenders have significantly tightened their standards in the aftermath of the housing bust.

Andrew Davidson, a mortgage-industry consultant in New York, said there is likely to be enough interest from investors to buy around $10 billion in securities issued as part of a pilot program.

The idea here is to bring private money back into the MBS market slowly — by having Frannie sell off more and more of its bonds in the form of these first-loss bonds. They would reduce the amount that the government is on the hook for housing-market losses, and they would also insulate the government from some of those losses.

But the market in these new securities would only evolve slowly, and it would have very little effect on the housing market.

If Feldstein’s plan is too generous to banks, then, the Obama administration’s plan is just too ineffective. But maybe something small and ineffective is the best we can hope for right now, given political realities. Certainly Feldstein’s plan, even if it were any good, is a political non-starter.

Housing debt is going to come down, somehow, over time. That can happen with government help, or it can happen messily, through continued foreclosures for years to come. The former would be better. But the latter is what we’re going to get.


“How would you describe the current situation”

Also with inhibited economic mobility, but at least that will repair itself within 10-25 years. I expect that most of the loans will have either defaulted or will be above water a decade from now. In 25 years, they will ALL have either defaulted or been paid off. Under your proposal, the mobility would be inhibited indefinitely.

“People who own their homes outright sell them often”

There is a huge difference you are failing to recognize. If you own the equity in your home, then you get a large check when you sell. This check can be used to purchase another home of comparable value. You can afford to move. If the Fed owns the equity in your home, then you get NO check when you sell. You either have to rent (in which case your expenses go up) or take out a mortgage on a new home (in which case your expenses go up). You are granting people the right to use the Fed’s capital — interest free — as long as they stay put.

You are right that it isn’t exactly rent control, but it is a very strong incentive to stay put, worth easily a thousand dollars a month on an average home.

“allowing homeowners to give up an equity stake in housing”

It isn’t truly an “equity stake” if they have negative equity in the home. And that is the rub.

Run the calculations some time (I presume you are familiar with the discounting of cash flows)? A homeowner with 20% equity in their home might gladly trade that for the right to stay in the home mortgage-free for as long as they wish. It would be the difference between paying that monthly mortgage and not. Sure, they “lose” that 20% equity, but that only represents ~2 years of fair rent anyways. They might then stay in the home for decades. A homeowner with negative equity would be getting an even greater gift.

Seriously, try running the numbers. Or give me specifics and I’ll do it for you. I’m not opposed to a solution, I simply don’t think you’ve hit on the right one.

(1) Mobility would be inhibited for decades, not merely 5-10 years. If it doesn’t cost you anything to “own” the property, there is no reason to ever sell. Even if you move out, you would rent rather than giving up that free capital.

(2) There would be no possibility of reversing the money-drop until people tire of using the Fed’s free capital. (Unless you permit the Fed to dictate when the house is sold?)

(3) Assuming it costs you $300,000 per mortgage, the $3T of new money that you seem to be talking would cover just 10 million households. Nice for them, but what about the other 90% of the country? The solution to existing inequities is not to perpetuate new ones.

One of the basic principles of capitalism is that capital has value. If you give people the free use of capital, it is a perpetual gift. Why would anybody ever give that up?

Posted by TFF | Report as abusive

Why won’t Frannie do principal reductions?

Felix Salmon
Oct 6, 2011 20:05 UTC

Negative equity has reached epidemic status across the united states — and especially in the sand states of Arizona and Nevada, where more than half of all homes with mortgages are  underwater. But give the state of Arizona, at least, a lot of credit for biting the bullet and trying to do what needs to be done:

If banks would forgive some of a homeowners’ mortgage debt, the state said it would pay half, up to $50,000 of a $100,000 loan reduction.

But you know where this story is going to go, don’t you. Since the program was launched in September 2010, it has helped three homeowners. Three. And a big reason is Frannie’s blanket refusal to even think about participating.

The two largest mortgage guarantors, Fannie Mae and Freddie Mac, will not participate — in Arizona or elsewhere. No loans are eligible for the state’s program if they were bought and held or securitized by the two companies, which are now under government control and guarantee more than 70 percent of the country’s home loans.

Seems to me like it’s time for Frannie’s regulator, the Federal Housing Finance Agency, to step in and bash a few heads together. Or, not so much:

Edward J. DeMarco, as acting director of the Federal Housing Finance Agency, oversees Fannie and Freddie. Even though he recently signaled that he might make it easier for homeowners to refinance into more favorable loans, he has held his ground on debt relief. Fannie and Freddie say reducing the principal is bad for business, and as a result bad for taxpayers.

OK, if the FHFA doesn’t want to cooperate, let’s make them cooperate! Principal reduction is part of the US government’s stated policy tools, after all. Let’s just tell DeMarco that he has to play ball! No? No.

White House officials say that although taxpayers essentially own Fannie and Freddie, the administration lacks authority to require Mr. DeMarco to comply with its policies, which encourage principal reduction through a handful of programs. The Federal Housing Administration and the Veterans Administration do not allow principal reduction on their loans either.

This despite the fact that the private sector, which has no control over Frannie at all, has managed to implement de facto principal reductions on Frannie-backed loans:

In the latest sign that debt forgiveness might make financial sense to some on the lender side, the nation’s second-largest mortgage insurance company, PMI Group, has found a way around Fannie and Freddie’s policy. PMI, which shares the credit risk in many Fannie and Freddie loans, will pay some underwater homeowners, those who owe more than their home is worth, if they make prompt payments for several years, a de facto principal reduction.

While the company would not disclose what percentage of the principal was covered, a spokesman for the Loan Value Group, which administers the program for PMI, said that on average it was 5 to 7 percent of the loan amount but could be as much as 30 percent.

Does it matter whether you get your principal reduction up-front, or whether you get it five years down the line, in the form of  a check from PMI? Yes, at the margin — but the principle is the same, that people are much more likely to continue to make payments on their mortgage if they have a good chance of owning equity in their homes at the end of it. And if Frannie is OK with the PMI program, then it should be fine with Arizona’s program too.

Of course the big difference between the PMI program and the Arizona program is that the PMI program is paid for by PMI: Frannie needs to take no write-down. While the Arizona program involves Frannie taking pain now to avoid bigger pain further down the road.

It’s worth remembering that it’s not just insurers like PMI — even banks like Chase are doing principal reductions. But they only ever do so when they don’t need to take any up-front charges. If you bought the mortgage at a discount, then it’s fine to do a principal reduction, since it doesn’t reduce the value of the mortgage on your books. Accounting is destiny.

Maybe the thing for the US government to do, then, is not to force Frannie to accept principal reductions outright — but rather just to force Frannie to mark their current underwater mortgages to some semblance of sanity, rather than doing their see-no-evil act and insisting on holding them at par. If Frannie has to take writedowns anyway, then maybe they’ll do so in a homeowner-friendly way.


Felix- this is totally wrong. Our principle is no principal reduction- it punishes the responsible (and the lucky, but mostly the responsible). Just because you signed a contract saying you would pay for the house someday gives you no special rights.

Some other ideas:
Payback the loan or become a renter. What about a plan to just give the house back to the bank and have the current resident pay rent? This could create a lot of jobs in property management companies.

Reduce the credit score impact of foreclosure. It was a one time national condition and a lot of people got caught out cold.

Ultimately, the banks are going to recognize the loss, why provide unfair benefits to housing gamblers?

Posted by mattmc | Report as abusive

Annals of government toothlessness, HAMP edition

Felix Salmon
Oct 4, 2011 17:18 UTC

ProPublica’s Paul Kiel has a fantastic story today about the way in which the government has proved utterly toothless with regard to auditing its mortgage-modification programs, never mind publicizing or enforcing whatever violations it did manage to find. HAMP, it turns out, is a perfect example of what happens when the government mandates change without enforcing it: huge amounts of money get spent, to little or no lasting effect. Neil Barofsky provides the nut quote:

“If you have a set of rules for which compliance is completely voluntary and no meaningful consequences for those who violate them, having all the audits and reviews in the world are not going to make a bit of difference,” he said. “It’s why the program has been a colossal failure.”

Kiel’s story is based on the government audits of just one mortgage servicer — GMAC — since Treasury refuses to release the audits of anybody else. (It only released GMAC’s after GMAC itself, to its credit, consented to the release.) Treasury has paid servicers some $471 million in cash incentives — but taxpayers aren’t allowed to audit where that cash has gone, or whether it has been effective. It’s a fiasco.

HAMP was envisioned as a huge, $50 billion program; in the event, it never really took off, and only $1.6 billion has been spent so far, including $116 million paid to Freddie Mac for its ineffective auditing services:

It took several months for the unit to even get off the ground. In August of 2009, Treasury rejected Freddie Mac’s first reviews of servicers as inadequate, because they were “inconsistent and incomplete” and its staff was “unqualified,” according to a report by the TARP’s special inspector general. Freddie Mac promised to improve. That process took several more months.

As a result, for the program’s crucial first eight months there effectively was no watchdog. Nationwide, servicers filed to pursue foreclosure on about two million loans during that time.

When there was an audit, the auditors seem to have been just as incompetent as the servicers:

The December 2009 review says that 35 of the 247 loans auditors reviewed were denied because the homeowner was “less than 60 days delinquent.” In the report, auditors said that was the right decision in all but one case. But being less than 60 days delinquent is never on its own a legitimate reason for a servicer to deny a modification, according to the program rules. Homeowners are eligible for a modification even if they’re current on their loans, as long as they can show they’re in imminent danger of defaulting.

Another example: Auditors agreed that GMAC had correctly denied a homeowner because of a failure to sign a trial modification offer by Dec. 31, 2012, HAMP’s end date. That makes no sense, because the review took place in 2009. Treasury’s spokeswoman said this was a typo and that the homeowner was denied for a completely different reason.

There are several other examples in later reports of auditors signing off on denial reasons that have no apparent basis in the program’s rules. For instance, auditors cited “grandfathered foreclosure” as a legitimate reason for some denials. The spokeswoman said such loans had been in the foreclosure process before GMAC signed up for the program, but the program rules explicitly stated at the time that such loans were eligible.

I believe GMAC, here, that it’s the auditors who are at fault, rather than GMAC — that in many of these cases, the auditors’ stated reasons were generated by the auditors themselves, and often bore no relation to GMAC’s reasons. The fact is that ProPublica’s Kiel seems to be much better versed on HAMP than anybody tasked with enforcing the program:

Treasury defended the questionable denials, and in so doing raised even more questions. For instance, the spokeswoman said HAMP “does not specifically require servicers to evaluate loans that are less than 60 days delinquent.” But Treasury’s official guidance to servicers said such borrowers “must be screened.”

“It makes you wonder if the Treasury even knows the rules for their own program,” said National Consumer Law Center’s Thompson.

Well done to ProPublica, and Kiel, for getting this information and for making it public in a fully transparent and interactive way. There’s nothing in this story to make it seem that Treasury is anything other than fully captured by the big banks. Its reaction to ProPublica’s FOIA requests, in particular, seems unjustifiable. There’s nothing commercially sensitive in these documents: Treasury is just trying to protect the banks from fully-deserved bad press.

And while the state attorneys general — at least in states like New York and California — might have a more aggressive stance towards the big banks than Treasury does, the fact is that they, too, are simply not set up to implement real enforcement. Which is the main reason why the banks have de facto impunity in this country. Even when the government tells them to do something, they face no real negative consequences from failing to do it.


“…unfortunately, law by no means confines itself to its proper functions. And when it has exceeded its proper functions, it has not done so merely in some inconsequential and debatable matters. The law has gone further than this; it has acted in direct opposition to its own purpose. The law has been used to destroy its own objective: it has been applied to annihilating the justice that it was supposed to maintain; to limiting and destroying rights which its real purpose was to respect. The law has placed the collective force at the disposal of the unscrupulous who wish, without risk, to exploit the person, liberty, and property of others. It has converted plunder into a right, in order to protect plunder. And it has converted lawful defense into a crime, in order to punish lawful defense. How has this perversion of the law been accomplished? And what have been the results? The law has been perverted by the influence of two entirely different causes: stupid greed and false philanthropy.” Frederic Bastiat
Will we, the plundered, ever have the courage of someone like Nathan Hale and be willing to give our very lives to stop the evil of the few elite who own our economy and legally plunder us? Oh yeh, I forgot, no one knows who Nathan Hale is anymore; studying history is nearly obsolete. Well now, that sure worked in the favor of the banks!

Posted by skburns28 | Report as abusive

How to lose your debt without losing your health

Felix Salmon
Oct 3, 2011 15:51 UTC

Deleveraging is painful. It’s so painful, indeed, that it can actually be lethal:

Foreclosure is not just a metaphorical epidemic, but a bona fide public health crisis…

The N.B.E.R. study found significantly more suicide attempts in high-foreclosure neighborhoods. For every 100 foreclosures, it found a 12 percent increase in anxiety-related emergency-room visits and hospitalizations by adults under 50. Losing a home disrupts social ties to neighbors, schools, jobs and health care providers — ties that under better circumstances promote good health. Neighborhoods suffer, not just homeowners.

This is a problem that’s going to get worse before it gets better. No matter how many refinancings and principal writedowns we get, the number of foreclosures is bound to rise sooner or later. There are 11 million homeowners underwater; those people have to deleverage somehow, and foreclosure is, sadly, top of the list of ways for them to do so. The only other way of getting a principal writedown, these days, is a short sale — but given how long it’s taking banks to foreclose, it makes sense to just sit in your house and wait for the bank to kick you out, rather than going to all the effort of trying to find a buyer just so that you can be forced to live elsewhere that much sooner.

I worry too about Ireland, in particular, where foreclosures haven’t even started yet, mainly because underwater homeowners there have been surprisingly diligent about making their mortgage payments. That’s partly a cultural thing, and partly a function of the fact that Irish mortgages are all recourse: if you default on your mortgage, the bank will seize essentially everything you own. But develeraging is even more necessary in Ireland than it is in the US, and again it’s hard to see how it’s going to happen without defaults and foreclosures.

The “great haircut” idea where everybody sees their debts written off simply isn’t going to happen: there’s not enough capital in the banking system, for starters. And for as long as Ireland remains in the euro, it’s hard to see how the country can deleverage through inflation. But that’s more of an option in the US — the more we inflate our way out of our excessive debt burden, the healthier we’ll all be. Literally.


“How does Felix feel about someone who was hardworking and carefully practiced self-denial, lived on a written budget every month for years on end and NEVER went out to restaurants or the theatre, took public transit everywhere so they could direct the money that they’d usually have to pay for auto insurance or an auto loan to savings towards their eventual down payment, and in all other respects lived frugally and saved up an amount that would normally constitute a solid 20% down payment on an affordable home during non-bubble years, but happened to be attempting to make their purchase during a bubble and was priced out of the market at the bubble housing era price levels?”

I don’t understand the point here. The frugal miser bought in the bubble years and all his hard work to save a solid 20% has been wiped out by the collapse of the bubble – so he is now 10% underwater. Without either a restructuring or inflation, he remains underwater for the next 15-20 years (the average 30 year loan doesn’t see significant principle paydowns till fairly late in the amortization curve). Keeping his zero-down neighbors out of foreclosure will prevent his property value from further eroding, leaving him deeper underwater.

Actually, inflation would be the better option for him – his home value would increase and equity would build while the over-leveraged would just break-even.

Plus I am not sure that a miserly existance, which reduces economic activity for the resteraunts, theaters and auto makers would really be that beneficial. Where does Mr Frugal Miser work? If it is in any business with actual customers, he can credit much of that 20% down to the spending of his less frugal neighbors.

Posted by Ragweed | Report as abusive

The negative correlation between obesity and indebtedness

Felix Salmon
Oct 2, 2011 17:34 UTC

Michael Lewis says something very odd in his big piece on California and the phenomenon of overconsumption:

The succession of financial bubbles, and the amassing of personal and public debt, Whybrow views as simply an expression of the lizard-brained way of life. A color-coded map of American personal indebtedness could be laid on top of the Centers for Disease Control’s color-coded map that illustrates the fantastic rise in rates of obesity across the United States since 1985 without disturbing the general pattern.


Here is the map in question; if you go to the site and see it animated over time, it is indeed quite scary. But it doesn’t look remotely like a map of American personal indebtedness.

Indeed, if you download the Fed’s list of total debt balance per capita, by state, it looks nothing like this map at all. The Fed only lists the ten biggest states, and the overall average, which is is a per capita indebtedness of $47,260.

At the bottom of the personal-indebtedness league table are Texas ($34,640 of debt, 31% obesity) and Ohio ($34,090 of debt, 29.2% obesity).

Meanwhile, the states at the top of the personal-indebtedness league table are California ($73,300 of debt, 24% obesity), New Jersey ($60,560 of debt, 23.8% obesity), and Nevada ($60,190 of debt, 22.4% obesity).

In fact, indebtedness and obesity have a strong negative correlation. If I plug the obesity rates for the ten largest states into an online correlation calculator, I get an amazing -0.843 correlation between obesity rates and personal indebtedness. What Lewis wrote is so false that the opposite of it is actually true.

Now there are strong connections between debt and obesity. For one thing, both have been increasing steadily over time. And a German study last year showed that over-indebted Germans were more than twice as likely to be obese as their financially-successful counterparts. But here in the US, Texas, with its responsible lenders and no housing bubble, is much fatter than places like California and Nevada, which went on bubble-fueled binges of borrowing and irresponsible lending.


One must be careful in using correlation statistics. There is a well known statistically significant correlation between ice cream sales in London and deaths in Bombay India. Interesting and strange, it does not mean that Londoners should eat less ice cream to save those in Bombay.

Posted by zotdoc | Report as abusive

Why mortgage servicing won’t get fixed

Felix Salmon
Sep 21, 2011 12:50 UTC

Back in November, Treasury’s Michael Barr set a clock ticking, with respect to mortgage-servicing reform.

“Institutions are resistant to change and have difficulty implementing,” said Barr, but “you’ll see flow improvement over the course of the next year.”

Could I hold Treasury to that? Sort of: “You should hold us to whether things get better or worse. If a year from now nothing has changed, that would be a reasonable criticism.”

I was skeptical — and in March, when reform guidelines were leaked, I retained my belief that mortgage servicers simply aren’t capable of reforming themselves.

Now, we’re only a couple of months away from Barr’s self-imposed deadline, and the chances of anything substantive having happened by year-end have never looked more remote. Instead, we’re just getting more talk from the official sector that things aren’t good enough. Here’s Raj Date, who’s running the Consumer Financial Protection Bureau, addressing the American Banker Regulatory Symposium:

Date said servicing is marked by two features – the structure of servicing fees, and the consumer-servicer relationship – that make it especially prone to consumer harm.

Mortgage-servicing rights, for example, are often bought and sold among servicers.

“So a servicer can, in a sense, ‘fire’ a borrower; but a borrower can’t fire a servicer,” he said. “That reduces the incentive for servicers to treat borrowers properly.”

He said the servicing fee structure has also encouraged servicers to spend less than they might need to handle a spike in foreclosures.

Essentially, we’re still in the same place that we were a year ago: the government is wholly cognizant of the problems, but is having enormous difficulty implementing solutions.

Date’s point here is very important: the whole structure of the mortgage-servicing industry mitigates against reform. Servicers are like shareholders: if they don’t like something in their portfolio, they can just sell it. That’s a lot easier than trying to change things themselves. And the secondary market in mortgage-servicing rights also means, inevitably, that mortgages will, in general, end up being serviced by the institutions best capable of extracting the maximum amount of money from any given borrower. Their responsibilities are first and foremost to their own shareholders; any responsibilities to borrowers are far down the list.

A great example of this has been uncovered by American Banker’s Jeff Horwitz, who has a two-part article (part one, part two) on the fiasco that is captive mortgage reinsurance.

Mortgage insurance started out as something very sensible: if there were doubts about a borrower’s creditworthiness, that borrower was required to buy mortgage insurance. But then the banks decided they wanted in on that income stream, and things started getting very skeevy. Essentially, they asked for 40% of the insurance premiums to be returned to them as kickbacks, disguised as “reinsurance” — a product carefully designed so that the banks would never have to pay any claims. It was $6 billion of free money for the banks, and of course it all ended in tears when the mortgage insurers went bust.

According to Horwitz, the Department of Justice has been sitting on a massive dossier explaining all this activity in great detail, and has the ability to bring a big case against the banks in question. But no case has been brought, maybe because Justice doesn’t have the financial expertise to have confidence in their ability to prosecute a case.

Will the CFPB step up and enforce mortgage-reinsurance cases against the banks? Maybe — although I’m not holding my breath. But conceptually speaking, I’m still very skeptical about the idea that the mortgage-servicing industry can be fixed with a combination of regulations and enforcement. Even if you get tough regulation, the enforcement never seems to happen. That’s why we won’t have seen any serious change to mortgage servicing by the time Barr’s deadline has been reached. Or thereafter, either, for that matter.


tmc, why wait? You can move today to a bankster free society in North Korea.

Posted by Danny_Black | Report as abusive

Why we’re in the dark about the mortgage market

Sep 19, 2011 21:01 UTC

By Ryan McCarthy

We have a severe shortage of information about a $10.5 trillion market.

Jesse Eisinger has a great column at ProPublica about just how inscrutable bank data is — if you haven’t read it, you should. A short summary: even the simplest of big bank statements amount to “guesswork,” Eisinger writes.

Eisinger’s one of a precious few writers who’ve been frank about the banking industry’s black box of data. Read enough of Eisinger or Bloomberg’s Jonathan Weil, you begin to suspect that if analysts, reporters and executives were to be honest, they’d admit there is no reasonable way for even trained investors to make an accurate judgement on the health of a large bank. Here’s Eisinger (and you can almost feel the strain from reading SEC documents):

Day after day, [banks] push out news releases that run to dozens of pages. They prepare reams of special presentations for investors, the most recent of which from Wells ran to 51 pages, on top of a 41-page news release. The SEC filing from the quarter was 162 pages.

The numbers and presentation differ slightly in all of them and often differ from other banks’ presentations, stirring a struggle among outsiders to compare apples and bananas. No professional admits this publicly, but many investors and analysts privately acknowledge that they can’t fully track the data gushing each quarter from the nation’s banks.

And while bank disclosures are intelligible only for those versed in financial arcana, there’s one indicator of banking system’s health that may be even more inscrutable: mortgage servicing.

Bad mortgages and shoddy foreclosures have cost America’s five biggest banks as much as $66 billion, according to a recent estimate by Bloomberg. Assuming we’d be able to put aside concerns about the legality of foreclosures — and that’s a big if — you’d be hard pressed to find recent and reliable specifics about how our banks are actually dealing with bad loans.

Whether you’re a prospective home buyer, a struggling mortgage borrower, or an investor, good luck finding any useful information about whether banks are changing mortgage terms, kicking homeowners out or stalling for time.

Take Fannie Mae, for example, which last week released the results of its “Servicer Total Achievement and Rewards” (STAR) program for the first half of the year. The program is designed to provide “clear expectations and specific, consistent measurements to help Fannie Mae servicers increase their focus on areas of critical importance to Fannie Mae,” according to a release.

Fannie Mae, which has not made data behind its criteria STAR criteria public, has an odd way of describing banks’ mortgage servicing performance. There are 11 big banks in “Peer Group 1,” but Fannie Mae names only five — the ones that are performing at least at the median level. It doesn’t tell you whether any of those banks are particularly good, and it doesn’t even name the six banks which are below the median.

(Bloomberg, in this piece, did the easy deduction work that Bank of America and JPMorgan, America’s two largest banks by assets, are on pace to flunk Fannie’s test.)

More helpful are Fannie and Freddie’s new mortgage servicing standards, which are set to go into effect on October 1 and were devised in coordination with FHFA. The agreements fine or reward servicers, according to how they perform. But again, Fannie Mae has no plans to release the names of banks that are being fined or rewarded.

And then newly-launched, Consumer Financial Protection Bureau is reportedly hoping to introduce its own mortgage servcing standards; how those might work is anybody’s guess.

Confused yet?

Well, we haven’t even gotten to the various state foreclosure rules or the Obama administration’s Home Affordable Mortgage Program (HAMP), which was intended to help 3-4 millon homeowners by 2012. To date approximately 800,000 homeowners have received permanent help from HAMP, and the program has been widely declared a failure.

In the Treasury Department’s HAMP reports, you can see for example, that Bank of America only has 132,000 mortgages in that have received “Active Permanent Modifications” through July. And you can see that Bank of America has historically some of the lowest conversion rates among major banks.

This could give us some useful information — but HAMP only accounts for only a fraction of bad mortgages. For context, there are some 4.38 million delinquent home loans in America and another 2 million or so in foreclosure process, according to Lender Processing Services.

There are other places to look for mortgage servicing data. The OCC releases a quarterly mortgage metrics report, which doesn’t break down performance by servicer. The credit rating agencies have their own reports. Or, if you’ve got some cash on hand you can pay for reports from Lender Processing Services or other data providers. (A variety of state agencies and consumer groups also provide some of this data.)

What we need is a centralized repository for all mortgage servicing data — if we can’t see what the problem is, we’ll never find a solution. But as reports pile up that banks are still rubber-stamping possibly illegal foreclosures, if you want to get a sense of how the housing market is doing, you’re probably better off asking your neighbor than consulting the public record.


“Are banks hard to analyse? Yes because they are large complicated multinationals. Are they harder than say GE or Oracle? No.”

Danny_Black, I would disagree…

* Banks are opaque to the common investor. The numbers that really matter for their financial health are deeply subjective and frequently mis-represented by management. Other businesses are driven by a combination of revenues and profitability, both of which are pretty straightforward to assess.

* Banks are highly leveraged. Always makes a business trickier to analyze, since errors in estimation are magnified.

* Banks are significantly impacted by regulatory policy, more so than most businesses. Again, hard to determine what the Fed will decide to do to your investment.

While GE includes a pretty large bank, it at least has significant other operations that are easier to figure out.

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How to play the eurozone break-up, second-home edition

Felix Salmon
Sep 19, 2011 13:12 UTC

The lengths to which I’ll go for my readers: I’m currently sitting poolside in an Algarve villa, enjoying a perfect climate and gorgeous view of the Atlantic, and wondering if this could be one of the best ways for investors to play a possible eurozone collapse.

The WSJ recently ran a big article on the way that second-home prices in the eurozone periphery have been falling dramatically of late, especially in Greece and Portugal. And in Portugal, especially, they’re coming down from pretty low levels, since the country never had a property bubble to begin with. On top of that, the weakening euro is making prices even more attractive for dollar investors.

But wouldn’t a eurozone breakup be very bad news for second-home buyers? Here’s the WSJ:

Fear of a revalued euro, or even the extremely unlikely possibility of some countries losing their membership in the euro zone, continues—either of which could dramatically devalue any current purchase.

I’m not at all sure. Property is a real asset, which tends to hold its value reasonably well over time — even during devaluations. Look at home prices in Buenos Aires after Argentina’s devaluation — they didn’t fall much in dollar terms.

But the situation for investors could be much better than a modest decline. Here’s Nouriel Roubini, talking about how to structure a Greek exit from the eurozone:

This process will be traumatic. The most significant problem would be capital losses for core eurozone financial institutions. Overnight, the foreign euro liabilities of Greece’s government, banks and firms would surge. Yet these problems can be overcome. Argentina did so in 2001, when it “pesified” its dollar debts. America actually did something similar too, in 1933* when it depreciated the dollar by 69 per cent and repealed the gold clause. A similar unilateral “drachmatization” of euro debts would be necessary and unavoidable.

Major eurozone banks and investors would also suffer large loses in this process, but they would be manageable too – if these institutions are properly and aggressively recapitalised.

Nouriel’s point is well taken: there’s a long history of countries successfully devaluing their way to economic recovery, with Iceland being only the latest example. When that happens, lenders take losses. And when lenders take losses, borrowers gain.

Here’s my point: in the event of a Greek devaluation, Greek mortgages would be drachmatized. And similarly, if Portugal were to leave the euro, Portuguese mortgages would be escudified. Second-home owners, instead of paying interest on their mortgages in euros, would switch to paying in devalued drachmas or escudos — an enormous overnight savings, which would continue for the duration of the mortgage.

A devaluation by Greece or Portugal would involve a big one-off write-down by lenders to Greek and Portuguese borrowers, and a concomitant one-off gain by those borrowers. If you have a mortgage in Greece or Portugal, that’s a great way of becoming a borrower in that country. Yes, getting a mortgage is non-trivial, but it might well be worth it.

*The FT actually printed 1993, here, not 1933, but it’s clear what Nouriel meant.


I think I follow:

So imagine we want to buy a house in Greece.

Ok so our funding currency is USD and the Liability currency is Euros (that eventually converts to Drachmas).

So imagine that the value of the house we want to buy is worth $500,000. We put a 20% down payment of $100,000 and take an 80% mortgage of $400,000. So we have a 20% equity stake in the value of the house.

Now imagine a redenomination happens so that all Euro liabilities are converted into Drachmas.

The Drachmas then depreciate by about 40% against a broad basket of currencies. (probably more against the US Dollar because there would be a flight to safety in a crisis, but for the sake of conservatism lets assume its 40%).

Our mortgage then becomes redenominated into drachmas and in dollar terms is worth (400,000*0.6)= $240,000.

Now since housing is a real asset and prices in Greece are already at rock bottom, the value of the house should stay more or less constant in dollar terms.

Our property is still worth more or less $500k in dollar terms (and by implication our equity stake is still worth $100k).

What in effect happens is a massive mortgage write down that is financed by Greek Banks. The net gain of $160,000 (160% of our initial investment) is substantial.

The gain would be even greater if:

Our funding currency appreciated in relation to a broad-basket of other currencies.
We are more leveraged. In other words, we put a smaller down payment and a larger mortgage.
A devaluation spurs growth in Greece and property values rise from their rock-bottom lows.

Reasons to worry

The Greek government might not re-denominate foreigner’s loans.
Political and Social unrest following an exist from the euro
Greece might be forced out of the E.U. (unlikely).

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