Since the publication of an article from Pro Publica’s Jesse Eisinger and NPR’s Chris Arnold about alleged new analyses by Fannie Mae and Freddie Mac finding that principal reductions are good business, the growing community has been on the warpath around demanding that the FHFA, which oversees Fannie and Freddie, allow a principal write-down program to go forward. Organizations like The New Bottom Line and the Campaign for America’s Future have confidently said that the Pro Publica article proves that Ed DeMarco must stop holding up write-downs for delinquent underwater borrowers before they slip into foreclosure. Democrats on the House Oversight Committee Elijah Cummings and John Tierney, who have led the charge in Congress, asked DeMarco in a new letter to deliver the analyses from Fannie and Freddie, “as well as information on a principal reduction pilot program that was cancelled in 2010.”
Indeed there was a pilot principal reduction program at Fannie back in 2010. Fannie alleges that the program was ineffective compared to forbearance, which also lowers the monthly payment without a cut in principal, maintaining the bottom line on the balance sheet. That may have been true in the first month, but the whole point of principal reductions as a superior modification strategy is that they’re built to last – negative equity correlates strongly with foreclosures over time. So Fannie may have pulled the plug too early.
But all of this came before the Treasury Department tripled its financial incentives under HAMP to encourage principal reduction by the GSEs. This is supposed to be what triggered the new analyses at Fannie and Freddie.
Only where are these analyses? Fannie and Freddie did not respond to the Pro Publica piece. There’s no evidence in there other than anonymous sources, and we don’t know if the sources come from the GSEs themselves.
Here’s what we do know. Administration sources, in particular HUD, which has been the public face of housing policy lately, have wanted to channel liberal energy toward demanding principal reductions at Fannie and Freddie, in part to take the pressure off their own policies. You don’t hear about the fact that banks can jack up interest rates on refinancing under the new HARP program. You don’t hear about how banks can get dollar-for-dollar credit for their punishment in the settlement by bulldozing or donating homes or waiving deficiency judgments, all of which they do anyway. No, you just hear that principal reductions by Fannie and Freddie are the key to unlock the housing market. It’s as if Treasury and HUD are driving that conversation themselves. It certainly works out well for them.
Meanwhile, Gretchen Morgenson has an interesting piece where she claims that the only analyses done by Fannie and Freddie on principal reductions are inconclusive, contradicting the Pro Publica report. Privately, I’ve heard that there are no new analyses, just one Power Point presentation from a Freddie Mac official based on his own opinions, which was leaked by someone with an interest in keeping the pressure on DeMarco.
Morgensen also runs through some of the implications of a principal write-down program from the GSEs:
But what the proponents of principal reductions at Fannie and Freddie don’t talk about is what a transfer of wealth from taxpayers (again) to large banks such a program would represent. The fact is, principal reductions by Fannie and Freddie are not the panacea that they may seem [...]
Here’s how: Many banks hold second liens on the same properties for which Fannie and Freddie either own the first mortgage or have guaranteed. If principal amounts on these first mortgages are reduced while leaving the second liens intact, those seconds become much more likely to be paid off over time. With no principal reduction, the banks would have to write off many of those second liens.
As such, principal write-downs are another backdoor bailout for the banks that brought you the mortgage crisis.
Answering his critics, Mr. DeMarco has agreed to approve principal reductions at Fannie and Freddie, but only when Congress passes legislation enabling it. Writing a law to force taxpayers to bail out the banks in this way, however, might anger constituents. So it’s far easier for members of Congress to rail against the one supposedly intransigent man who is preventing the great American housing recovery.
DeMarco putting this back on Congress is funny, because surely he knows that a GOP House will have nothing to do with this.
Additionally, I have some problems with Morgenson’s analysis. I don’t know why she says that “the banks would have to write off many of those second liens” without a principal reduction. They’d be under no obligation, and regulators are in no hurry to force a write-off. And I tend to believe that principal reductions on underwater loans, in the cases where they lead to a prevention of foreclosures, are long-run positive. So I don’t think that taxpayers would be hurt by the principal reductions (unless you’re talking about the HAMP incentives, but they go from one end of the government – Treasury – to the other – Fannie and Freddie – so that doesn’t scan either). But it’s true that banks would be enriched by them if they don’t have to wipe out their second loans. In the settlement, where a first lien with a second is written down, the second only has to be written down on equal terms, which is a violation of standard lien priority and a gift to banks. So this has happened before. If the focus is on writing down firsts at Fannie and nothing gets done to the seconds, it will be an even bigger gift.
This doesn’t get DeMarco totally off the hook. According to the most recent data from CoreLogic, 6.3 million of the 10.7 million underwater homes in America don’t have second liens, accounting for $329 billion in negative equity. DeMarco could allow principal reductions on just those loans, if this is an obstacle, without the bank-enrichment aspect coming into play.
But there is an argument among regulators and banks about what to do with the seconds, one that doesn’t usually get portrayed in the simplistic arguments about Ed DeMarco holding back the recovery by himself. OCC would surely step in to block any principal reduction program that would force the seconds wiped out, for example (and they may have done this with the pilot program at Fannie). The banks still have the seconds on their balance sheets mostly at par, even if they’re worthless. We’re talking about hundreds of billions of dollars in second liens, more than the banks’ capital reserves. Protecting the banks from accepting such losses has been a dominant policy framework of the Administration.
Morgensen also runs through the numbers showing that Fannie and Freddie have consistently delivered twice as many loan modifications as the banks. Of course, I think they have twice as many loans. What is worth noting is that their modifications perform better than the ones given by banks, with lower re-default rates. Banks have not done their job, certainly not at the level of the GSEs, and yet the new sexy thing to yell is “Why doesn’t DeMarco write down GSE loans?” The rallying cry could just as easily be “Why don’t the banks wipe out their seconds?”
UPDATE: Felix Salmon is right, of course. Writing down firsts while leaving seconds intact would defeat the purpose of principal reduction, because the borrower would still be underwater when you add up the first and second lien. But maybe that’s part of FHFA’s analysis. Maybe they’ve been told by banks they can’t touch the seconds, and maybe OCC backed them up. That’s very plausible. Indeed, seeing what was done in the settlement, where the second liens are not wiped out but only reduced in equal measure to the first, I’d say that’s the furthest the Administration is willing to go, and that’s on a mandatory punishment.
Felix is also right that if Fannie and Freddie are doing non-principal reduction modifications that are producing a low re-default rate, that “enriches the banks” as well on their seconds. And Fannie and Freddie could easily start with the underwater loans on their books without second liens. So Morgenson’s defense falls short. But the issue of the seconds isn’t nothing – at least 40% of the market and almost half the negative equity – and nobody has demanded a solution for that. If Felix’ “oh, just give them $5,000″ solution worked, it would have been done a long time ago. This has been an impediment to the housing market because the banks won’t take losses, and the regulators won’t demand it of them, as they could.




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The interesting thing about second liens is that many of them, perhaps the vast majority, put real improvements back into the property in the form of remodeled kitchens and baths. If the original mortgage holders can hold off writing down their mortgages longer than the banks holding the second liens, then they can reap the benefits to improvements to the property when they foreclose.
This changing the priority of the loans, (as in the Foreclosure Fraud Settlement), has real financial benefits to the big 5 banks. The flip side of this is many of the millions of houses underwater are underwater BECAUSE of the second liens, whereas their first mortgage was purchased before the boom. Therefore it is for many, the second liens which drove homeowners underwater, and also the inflation caused by the banks hyper lending that lead to all those, “reap your equity” related defaults. The lenders on second mortgages should have been well aware of their risks, and lent the money anyway. The holders of the firsts should in no way give up their priority.
But that “property improvement” may have been nothing more than granite counters and swimming pools, and then there are the motorhomes and vacations in Italy. Treating one’s home like a piggy bank that depends upon speculation to obtain frivolities should not be rewarded at the expense of others.
If they do a principal reduction, why cant they just lower the principal and make it a new loan with an 80-20 percent split between the two? They both take a hit and they both get something. I think people keep trying to apply logic based on what used to be a regulated industry with rules to the bs fraud factories known as banks that we have now. We need solutions and changes that can be implemented now, not long drawn out analysis that delay things while they hope for a recovery that’s never going to happen until justice is served.
Neither the morality of the borrowers, not the moralities of the lenders has anything to do with the legal priority of liens. It is precisely this,”let’s blame the bad guys” debate that distracts from the conversation. Let’s call the banks “drug dealers”, and the borrowers “drug addicts”. Now, which group do you despise more? Has nothing to do with the priority of liens.
However, would we argue that the drug dealers (banks) should go to jail, and the drug addicts (home loan borrowers) should still be held liable to pay off their drug debts? Interesting question. I think that the consensus of the current conversation is that the drug dealers (bankers) should go to jail, and that the drug addicts (borrowers), should still owe money to someone. But who? Un-convicted drug dealers? The government? Perhaps they should still owe the money to the “good” citizens that due to circumstance did not over borrow,(for drugs…to keep the analogy going).
The problem with this conversation is that people HATE to think that their friend or neighbor may end up on the better side financially than them. However, people do not seem to mind nearly as much that the super wealthy became even super-er wealthy on their backs. As long as their friend does not come out better, we are all fine with the super wealthy robbing us blind.
What’s your definition of property improvements? Mine include Kitchen & Bath remodeling, paint & carpets? The bulk of the money going to Kitchen & Bathrooms, as always.
As for vacations in Italy, you are as usual presupposing there is no power in advertising, and people demanded HELOCs, as opposed to the Banks inventing the programs and aggressively marketing the loans.
Similar to children demanding junk food because they are aggressively marketed to on TV, and you blame the children or their parents.
Marketing works. Why do you suppose there is so much of it? Why do you suppose consumer product companies keep spending large sums on marketing? Do you believe they would keep spending these sums if marketing did not work?
What would you do to contain the pernicious advertising of encouraging bad habits?
Let me explain the ridiculous nature of this “but they shouldn’t benefit from their poor borrowing mistakes!” argument.
Say you bought your house in 1995 for 200k. Ten years later the house next door sold for 500k. The guy that bought it lost his job in construction in 2008. He can no longer afford his payments and is about to loose his house. His kids play with yours, and his daughter is dating your son.
The government say’s,”Hey bank, write down that mortgage to the true value of the house, down to 200k, just like his neighbor paid in 1995!” You, the innocent neighbor that did not “over borrow” get red flag furious! “Where is my 300k hand out you wail!”, hatred seeping from your eyes. You demand your son never talk to his girlfriend again, and walk you dog over to his lawn to poop everyday.
In reality, you lost absolutely nothing. Your neighbor’s misfortune effected you NOT AT ALL. The only mistake you made was in not selling when the price was so high, and now your home value is what is was before all this happened. Well, you did not buy your house for 500k. So, shut up!
If they do a principal reduction, why cant they just lower the principal and make it a new loan with an 80-20 percent split between the two? They both take a hit and they both get something.
But that defeats the whole idea of loan priority. The 1st mortgage doesn’t lose a penny until the 2nd mortgage has lost 100%. For the additional risk, the lender with 2nd priority had been promised a higher interest rate.
David,
I got a lot of respect for you as a reporter …. you got a hell of a work rate and the quality of your work has been outstanding.
Z
We have to propose a Fed program to purchase all second liens, and then write them all down to zero.
I just can’t get it out of my thick skull, the fact that the paperwork on all these loans are fraud. All this talk about doing this or that means nothing when no one knows who owns what.
I like the idea of the 80/20 split and if I am going to pretend that the servicers are really the owners of the Notes than this is a possible way to solve this. However, how many of the seconds are with a different (in oldspeak) ‘lender’. Who is going to do the refi and make the adjustments with two different entities.
Every loan is unique.
The title issue must be cleared up and I don’t know who is qualified at this point to do it. All the entities that destroyed our land records know this can’t be fixed. I believe the regulators are just as frustrated as the homeowners, they don’t know what to do. The servicers just want free houses and have nothing to loose and everything to gain from foreclosure with their fraudulent docs.
The only way out of this mess is a start over. Back to the beginning when the property was purchased and the Deed was recorded from the seller to buyer. Every document examined on every loan in the last decade. The banks want those 65 million houses in the MERS system and will do everything in the power to get them. The regulators can’t do anything at this point. There is no fix.
There will never again in our history be a ponzi scheme on the scale perpetrated by MERS.
We do not need to pay the banks back for their second liens. These loans are valueless. The banks are only keeping them on their sheets so that they can continue to get 0% interest loans from the US government. They should be evaluated based upon the actual value of their portfolios, the same as the rest of us. However if they write down these loans, they will be judged insolvent, and ineligible for priority lending from the US government. This 0% interest lending from the US government is already a huge moneymaker for these banks, such that they do not to be compensated for writing down worthless loans. Especially when the US then borrows money back from them at 3%!
(I suppose the government could just require these banks write down their seconds as a criteria for the 0% US government lending rate, (and ignore their insolvency, which is what they are doing right now anyway).
Meanwhile, the lucrative spin-offs from this crisis continue:
Insight:The Wall Street gold rush in foreclosed homes
“He’s joining a growing list of big and small investors who see fat profits to be made in renting out foreclosed homes, especially now the U.S. government is moving ahead with a trial project to sell big pools of single-family homes that Fannie Mae currently owns in some of the hardest-hit housing markets.”
LINK.
I am working on a very interesting file. Two loans, first lien and heloc. The heloc is not a second lien as the deed of trust was not “subject to” the first lien. This is rather funny to me and I have looked another loan with the same thing. The blank with the “subject to” line was left blank. Whoever did the paperwork really messed up. So, what this means of course is that in ‘newspeak’ the heloc or second (if that be the case) could actually foreclose on it’s much smaller loan and leave the major or first lien holder out completely. I wonder how many loans have been closed like this in the rush to make these loans. Guess it was “TIME IS OF THE ESSENCE”! These second lien holders really need to start examining their docs since this all about grabbing land.
I read about this a few days ago. I can’t believe the Investors are really going to fall for this. They invested in worthless MBS and now they are going to invest again and get ripped off. The money managers of the investment funds should all be fired.
When people borrow money they are legally obligated to pay it back, and they shouldn’t go running to the government to rescue them from their bad judgments. The US was never intended to be a nanny state in regards to the sanctity of contracts.
You are absolutely correct donbacon, I don’t understand why those bankers went running to the government for that big bailout in 2008.
That’s an entirely different subject and you know it.
Agreed. And, furthermore, I can’t understand how the banks would even think of doing things such as the following–unless of course we have a nanny state protecting and even rescuing them when they stumble and scrape their knee.
The shadow bailout: How big banks bilk US towns and taxpayers
(Ellen Brown)
LINK.
No, it is exactly the same subject and you know it.
Second liens on any MBSs that the GSEs were “forced” to buy should be wiped out.
And I am angry about is all the recording fees and excises taxes my little country didn’t get from the fraudsters. I talked years ago about states seceding from the Union and I still like that idea. Break it up, break it all up.
When banks make bad loans they are responsible to bear the loss, and they shouldn’t go running to the government to rescue them from their bad judgments. The US was never intended to be a nanny state in regards to bailing out banks that screw up.
“County” my County.
And they were bad loans by design. The banks made them on purpose to satisfy the appetite of Investors but failed to explain to the Investors that it was all a game. The loans were designed to fail to enable the biggest land grab in our history. The homeowners and investors were used.
No argument, but others seem to think that both banks and borrowers should be bailed out, or at least that because the banks were compensated then borrowers should be too. That’s what I argue against, because the borrowers initiated a transaction with poor judgment, that the value of what they were buying with borrowed money — up to 100% — would increase, that they could borrow on that property up to the current market value, that their incomes would rise, that they would never get sick or lose their jobs, and they should have known that none of this had any basis in reality. Why should I bail them out?
It is quite the scam. I love the part where they made the loans, packaged them into MBSs, sold them, and them bet against them on the derivatives market.
And let’s not forget illegal title transfer via MERS and zombie NY trusts with no notes.
And no one goes to jail.
Priceless, as they say.
There has been no significant investigation of loan origination fraud, but in some instances, the altered documents were mostly done by the load originators without even having the people applying for the loan aware of the alterations. (I think the actual numbers were 90% of the fudged numbers were done by loan originators after signing.) The loan originators got the fees and were not responsible to see that the loan was ever paid back.
Not that the people getting the loans will get off the hook, many will go through BK or have their credit wrecked. You can be sure that unless they were dedicated scamsters, they will be paying the price for the rest of their lives.
But the epicenters of this crisis were the banks. We could not have all the toxic waste without the banks creating it, yet these same banks are now larger, more powerful, and more prone to failure than ever.
I don’t think the banks should get bailed out, I don’t think the people who defaulted on loans should get bailed out, but the financial SYSTEM needed to be saved, and the cost of THAT should have been taken out of the TBTF banks. But none of this happened.
So assuming that’s all water under the bridge – what should happen?
Break up the TBTF banks. This is just common sense, too big to fail is too big to exist. These are also blood suckers leaching the real economy.
Reenact Glass-Steagall, it’s like 35 pages of law instead of over 1000 pages of lobbyist written gobbledygook called Dodd-Frank. And regulate derivatives like we should have in the 90′s.
Bail out the savers who are getting screwed by the Fed – raise interest rates.
I would expect all of the above to initially put the economy on it’s lips, but that’s the bullet we thought to dodge in 2008. It cannot be dodged, but if we do all the right things, we will have a health economy much quicker than if we keep kicking the can down the road.
Sorry to get so wordy and all. Bottom line, we do need to figure out how to “bail out” the real economy because what we’ve been doing since 2008, bailing out the banks at every turn without real change obviously isn’t working. I would hesitate to call this bailing out the homeowners, but how about bailing out everybody that wasn’t a bank or a home buyer?
Thank you. I am just on a roll today. This subject makes my blood boil. The mortgage business is in my blood, it was my career and I am so disgusted. I was not a commissioned employee, making my money off the backs of innocent homebuyers. I did not forge documents and bait and switch loan programs. The file I am working on right now is so full of forgery and fraud it makes me sick. The fact that no one is being held accontable is a travesty. I just pray everyday the fraudsters get what they deserve. End rant.