Surprise: Lenders not keen on mortgage modification for people who can’t pay
posted at 1:36 pm on July 28, 2009 by Ed Morrissey
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I blame King Banaian. I really do. After all, if our nation’s universities did a better job of educating people on basic economics, the fact that banks don’t want to waste money and time modifying mortgages for people who are bad risks wouldn’t make news at all, let alone front-page news at the Washington Post.
I don’t even want to blame Renae Merle or the Post’s editors for running a “Surprise: Water Often is Wet” story. After all, no one at the White House apparently knew about this, either:
Policymakers often say it’s a good deal for lenders to cut borrowers a break on mortgage payments to keep them in their homes. But, according to researchers and industry experts, foreclosing can be more profitable.
The problem is that modifying mortgages is profitable to banks for only one set of distressed borrowers, while lenders are actually dealing with three very different types. Modification makes economic sense for a bank or other lender only if the borrower can’t sustain payments without it yet will be able to keep up with new, more modest terms.
A second set are those who are likely to fall behind on their payments again even after receiving a modified loan and are likely to lose their homes one way or another. Lenders don’t want to help these borrowers because waiting to foreclose can be costly.
Finally, there are those delinquent borrowers who can somehow, even at great sacrifice, catch up without a modification. Lenders have little financial incentive to help them.
The real issue in the financial crisis is the second set. These are people who bought homes they never could have afforded in any circumstances, but gambled on the continuation of the housing bubble to get them enough equity to refinance under better terms. That worked for several years as the government distorted the lending market with pressure to increase subprime lending, which boosted demand and decoupled housing prices from inflation.
Some people gambled near the end of the bubble and couldn’t refinance fast enough to avoid the collapse. That’s not the fault of the lenders. After all, speculation carries risk, sometimes a great deal of it, which is why people shouldn’t engage in it unless they can afford the loss. Indemnifiying people against the risk means that more people will learn that there is no risk in speculation, which will produce much more irrational behavior in the long run.
Of course, in order to understand that much, one has to understand why lenders aren’t brimming with enthusiasm for delaying inevitable foreclosures for people who have no hope at all in keeping their homes, and why it doesn’t take a government program to motivate lenders to restructure loans with borrowers who can.
And no, I don’t really blame King for that. I blame everyone who didn’t send their children to teachers like King who inculcate some common sense rather than Utopian schemes.
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DO NOT UNDER ANY SERCOMSTANCES, REFINANCE YOUR MORTGAGE!!!
We just re-fi-ed because the rates were so low, never late on any payments, credit score of 819 and for some reason the bank SOLD our mortgage to Fannie Mae! Now Uncle Sam owns our mortgage and we are stuck on the plantation till our home is paid off!!
I’m Pi$$ed!
Bicyea on July 28, 2009 at 3:13 PM
There is a show on HGTV called Real Estate Intervention that makes me laugh and cringe every time I watch it.
The shear number of stupid people out there must be legion based on the idiots who appear on this show.
A disclaimer: I’m one of those dumb people who thought the real estate market would make my choices smart ones. I know that home prices go down. I lost $10,000 on the first house I bought in 1988. But in 2004 I had to move for my job and I paid too much for a dump that I then sunk every penny I had into renovating. I was lucky. When the renovations were done in 2005 I was able to refinance and clear up most of my debt. So I can afford the mortgage I have now.
But when the market tanked I became stuck with a house in an area I have grown to hate and I want to sell it. I want to go home. I can’t. I owe more than it’s worth. But that’s my problem and I’ll get over it. I never planned on moving again, anyway. When I bought The Dump I planned on dying here. Looks like I’ll get my wish and I have nobody to blame but myself. But I have a really nice house and I don’t regret any of the money I spent on it. I just wish it were somewhere else.
The homeowners who appear on Real Estate Intervention are trying to sell their houses, just a couple of years after they bought them, using interest-only, no-downpayment loans. And they’re outraged that they may not make a profit. And heaven forbid they OWE money when they sell.
Morons. Absolute morons.
Jaynie59 on July 28, 2009 at 3:15 PM
The fact is that the lenders extended the housing boom and boosted the economy along with it, by creating new mortgage products and gradually loosening their lending standards. Is it really “stupid” to take a loan that a national lender with a great reputation is gratefully offering you, in the midst of a boom that appears to have no foreseeable end? Is it “smart” to eschew buying a home and watching prices in your desired area double, thereby precluding you from ever affording it?
People made decisions based on the facts in front of them at the time and the advice of lenders they trusted. I get tired of conservatives blaming “stupid people” as much as I get tired of liberals blaming “greedy lenders and Wall Street fatcats.”
People
rockmom on July 28, 2009 at 3:24 PM
I haven’t seen Real Estate Intervention, but I do watch Propety Ladder. I’ve often wondered how the “flipping” business is going.
But, since that show appears to only have re-runs, now – that’s prolly my answer.
Hope that all turns out OK for you.
OhEssYouCowboys on July 28, 2009 at 3:25 PM
but Obama is the “smart” guy, its Sarah Palin who is an idiot
jp on July 28, 2009 at 3:28 PM
I understand where you are coming from, but anyone getting an ARM with no money down, expecting to refi or sell before the rates reset was playing with fire, if not outright stupid. Most of us watched from the sidelines, or waited until we had enough down payment to get a decent fixed rate. Patience is still a virtue.
Vashta.Nerada on July 28, 2009 at 3:29 PM
It’s simple, rockmom:
1. Don’t buy something you know goddamned well is above your means.
2. Bubbles always burst.
A couple who was making, say, $80,000, knew perfectly well that they couldn’t really afford a million-dollar home.
But they gambled on ever-increasing price appreciation to bail them out.
Now they whine that they didn’t know what they were getting into because the bank made it so easy.
The gambled. The lost. Screw ‘em.
guntotinglibertarian on July 28, 2009 at 3:29 PM
I guess rockmom thinks we should also bail out people who go to Vegas, max out their credit cards to buy chips and lose it all at the tables.
guntotinglibertarian on July 28, 2009 at 3:32 PM
Yep. As earlier noted, when my wife’s financial adviser suggested we should buy a house in 2005, I fired his ass.
guntotinglibertarian on July 28, 2009 at 3:33 PM
Refi through a smaller bank or a credit union. They hold their own paper.
Vashta.Nerada on July 28, 2009 at 3:42 PM
Doesn’t matter who bought your paper. You have contractural right to pay it off early, unless you signed a mortgage with pre-payment penalties.
guntotinglibertarian on July 28, 2009 at 3:48 PM
Your argument is just one more example of stupidity.
If you can’t figure out how much you can comfortably pay for your mortgage every month you are a moron. That’s an editorial “you”. Mortgage brokers having been telling people they can afford more house than they can really pay for forever. That is nothing new. Why? Because mortgage brokers make money on the closing costs. They don’t care if you repay the loan because they sell your mortgage to someone else. Probably before your first payment.
I’ve bought three houses in my life and not one of my mortgage payments went to the mortgage company who wrote my loan. They were all sold before the first payment was due.
Two of them, interestingly enough, ended up with Washington Mutual. Soon to be Chase since WMU got bailed out. Or went belly up, or whatever. My loans were at the top of the bucket.
If you can’t do the math, don’t blame those who profited from your ignorance.
Jaynie59 on July 28, 2009 at 3:52 PM
In many, many cases, it was worse than ignorance, it was greed.
There were scads of “trade-up” buyers during the boom who thought they would profit from leverage on a bigger house.
Their thinking went like this: housing values will continue to rise at 15% or 20% per year. On my current $300,000 house that means I gain $45,000 or $60,000.
But, if I take out one of these fancy new mortages, I can buy a million dollar house and then I’ll be racking up profits of $150,000 or $200,000 a year.
They thought they were sophisticated investors.
Screw ‘em.
guntotinglibertarian on July 28, 2009 at 4:03 PM
Exactly
Bought well within means, paid it off. Why should I pay in taxes because someone greedy threw the dice and came up craps.
Jeff from WI on July 28, 2009 at 4:11 PM
Like contracts mean anything with the Obama Clownage in charge?
Just ask GM/Chrysler investors about what contract are worth now.
NoDonkey on July 28, 2009 at 4:17 PM
Would that be 57 state Obama that’s so smart?
Jeff from WI on July 28, 2009 at 4:18 PM
But I want my pony, and I want it NOW!!!!
Too many of our fellow Americans have forgotten/never learned the word “NO”. It is sad, but true.
search4truth on July 28, 2009 at 4:18 PM
But, but, Jeff…they were just pursuing the American Dream!
I remember when my grandma used to tell me about that American Dream:
“Gun,” she said, “when you grow up you’ll be able to buy a huge freakin’ house with a 3-story atrium and a fully-finished basement and leverage that sucker up to the hilt and do 3,4 even 5 cash-out refinances so you and your children can buy lots of flashy consumer crap. And a pony.”
“Remember, Gun,” she said, her eyes going all dreamy, “it’s not shelter. It’s a freaking ATM.”
guntotinglibertarian on July 28, 2009 at 4:19 PM
“Remember, Gun,” she said, her eyes going all dreamy, “it’s not shelter. It’s a freaking ATM.”guntotinglibertarian on July 28, 2009 at 4:19 PM
Jeff from WI on July 28, 2009 at 4:34 PM
Damn..I hit the wrong button
Jeff from WI on July 28, 2009 at 4:34 PM
I hate so many of my useless fellow Americans. I sure as hell don’t want to pay for them.
Jeff from WI on July 28, 2009 at 4:35 PM
I just got off of the phone with a car salesman after he called me two hours after he said he would. He apologized for the lateness and said that the “Cash for Clunkers” really has him hopping. The only problem is that he isn’t selling anything.
If you have a clunker, there is a reason that you haven’t (and can’t) bought a new car yet.
Harpoon on July 28, 2009 at 5:01 PM
How about a new clunker from Chrysler where they offer the Democrat Promise warranty?
seven on July 28, 2009 at 5:15 PM
lol
Jeff from WI on July 28, 2009 at 6:23 PM
Unfortunately, we bought two new Dodge trucks in January. If I could take it back I would, my money would go to Ford.
TXMomof3 on July 28, 2009 at 7:04 PM
Thanks for stealing my line.
corona on July 28, 2009 at 8:29 PM
Haven’t bought a new car since 1980, but just bought one today from a large dealership that (they tell me) normally sells 1,600 cars per month…but not long ago the salesmen were having trouble keeping busy.
They sold 100 cars under the clunkers program the first 2 days (last Fri & Sat). Two different salesmen and the service manager told me that they thought the money might run out by the end of the month, which is this Friday.
The clunker was a 1986 Mercedes 300E I bought in 2002 for $4,000. Got the $4,500 clunker allowance plus $2,000 maanufacturer rebate. Out-the-door price was $13,375 for a car with MSRP just under $18,000.
Nope, didn’t buy an American car.
Owen Glendower on July 29, 2009 at 12:09 AM
This would have been my sentiment exactly, were it not for the UAW.
Owen Glendower on July 29, 2009 at 12:12 AM
It doesn’t really matter if you refinanced or not. My mortgage was sold to Fannie Mae too. My mom’s reverse mortgage was also sold to the the government, last month.
Dasher on July 29, 2009 at 2:20 PM
The Post tries to imply that banks would rather foreclose than do a loan mod, but what the Post fails to mention is that the government requires it:
Paul_in_NJ on July 29, 2009 at 2:49 PM
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