Mortgage Relief for All; But Who’s Paying??

Glenn Hubbard is the dean of the Columbia Business School as well as the former chairman of the Council of Economic Advisors under President George W. Bush. That resume is what makes so puzzling his op ed (with a Columbia colleague, Chris Mayer) in yesterday’s Sunday NY Times: Op-Ed Contributors:  How Underwater Mortgages Can Float the Economy. Maybe I shouldn’t be surprised that their proposal seems unhinged from reality.

Who wouldn’t love to solve the mortgage crisis? But Hubbard and Mayer’s "plan" seems to be missing a few key links. They envision mortgage refinancings being made available to millions of underwater borrowers at prevailing rates (4.3 % is mentioned), seemingly regardless of their credit scores, an issue not raised in the piece. Hubbard and Mayer further contemplate Fannie Mae and Freddie Mac getting involved in arranging mortgage-backed securities to raise capital to deliver refinancings to the masses currently denied them. They add: Not only would foreclosures be avoided, but stimulus of massive proportions would be achieved as mortgage payments are brought down by lower interest rates!

But who is going to buy shares in securitized, refinanced mortgage loans in which collateral value does not equal the amount of the debt and the interest rates are low? Underwater loans are higher risk. For example, if the borrower loses her job, she can't sell her home and pay off the loan because she owes more than the home is worth. And let’s not mention that if somehow the government is going to subsidize these refinancings and pay off investors in the original loans, even underwater ones, at 100 cents on the dollar, it would be a huge bailout to those who invested to create the bubble.If that happens, I am predicting 100 percent membership in the Tea Party Movement.  Into the harbor with the booty, mateys!

What am I missing here?

Even assuming some answers to these rather gapping problems with the Hubbard-Mayer concept, their vehicle for all this to happen is: Can you guess? Servicers! Hubbard and Mayer envision that servicers will get unspecified incentive payments to initiate these refinancings, with the incentives folded into the refinanced mortgages. No problem there, right? Servicers will be eager to participate (and only charge reasonable rates).That’s why the HAMP program has been such a raging success, because servicers are so interested in doing all they can to stem investor losses and allow borrowers to avoid foreclosure, regardless of servicers' own self-interest.

Now a word from our official wet blanket. Let’s listen to Treasury Secretary Timothy Geithner:  “I think it is very important to say that servicers have done a terrible job . . . .”  See minute 77 of the following:  http://cop.senate.gov/hearings/library/hearing-062210-geithner.cfm (hearing before the Congressional Oversight Panel on June 22, 2010, concerning lack of performance in the administration’s mortgage modification program, which involves subsidized lower interest rates and no required write-down of underwater loans). See also (self-promotion alert) my forthcoming piece about the disappointing first year of the Home Affordable Modification Program (HAMP), significantly due to servicer resistance.  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1518098  Do not expect that a new government-sponsored  mortgage relief program, to be implemented by mortgage servicers, can lumber into operation quickly (or ever).

The mortgage crisis continues. It appears likely to take years to resolve itself, and at this point, market self-correction—no matter how long it takes—seems to be the only plan the administration is willing to consider.But investors are going to have to take more losses for this mess to be cleaned up sooner rather than later. Absent bankruptcy modification at a bare minimum, it is going to be a tortuously slow process, continuing to put a drag on economic recovery.

That a leading figure from the Bush administration's economic team seems to think capital markets will step up to buy underwater loans at low interest rates can only depress us all about prospects for an early end to our current troubles. Yes, it would be grand to provide a stimulus for the economy and solve the mortgage crisis, all in one fell swoop, but who's paying?

Comments

[bankruptcy]

We should find all those people who have profited handsomely over the real estate bubble years and make them cough up the money and pay for this mortgage relief. Aren't they the ones who had caused this real estate market to collapse in the first place. It is only right that they pay for it with their ill-gotten gains.

[rjs]

Who's paying?? What am I missing here?

this is all you have to know:

the former chairman of the Council of Economic Advisors under President George W. Bush.

[Mike Dillon]

Fannie and Freddie are really getting scary around here in NH. Fannie is sucking up anything and everything that appears to be a non-performing loan and foreclosing on it - many times only recording the assignment on the first day that the public notice begins to run. Many of these loans being potential class members of the FTC $108M C-wide/BACHLS enforcement action. Just as many involving MERS. If/when the homeowners wake up and catch on - which may be coming sooner than Fannie thinks - these things are going to potentially bite Fannie hard. Umm... no pun intended...

Freddie appears to be out of control, frankly. Just watched them involve themselves and a second FC mill (Harmon) in an FC action currently being litigated AND under a TRO. This after the first FC mill swore that the property hadn't been FC'd.

Freddie, through Harmon Law Offices, apparently ignored the TRO, went ahead with an unannounced auction on a property to which they have no clear or obvious title according to the registry chain of title, sent their RE agent to notify the homeowner of the sale and then waited two weeks to notify the homeowner of the sale by letter - only to then offer a CFK.

That's almost - but not quite - as bad as BACHLS continuing to FC properties on which it doesn't even have a mortgage.

[mt]

Professor, you're starting to sound like me!

I agree with you re the servicers and the general assessment, although I don't think an idea's sponsors' prior jobs are relevant to its merit.

I think the best light to shed on their idea is that, if you for macroeconomic reasons posit the following constraints: (x) the government is going to throw money at the housing problem and do inequitably by thrifty homeowners, (y) the housing picture needs to turn around dramatically, and (z) you can't whack the asset side of financial institutions too hard, you might find yourself asking, what is the most efficient instrument for throwing money at the problem. Not necessarily a perfectly efficient instrument but a relatively better one and all within those constraints.

I am not defending it as I tend to disfavor ex post facto intervention in what are simply bad decisions by adults, but I thought I'd try to give the best explanation I can find for it.

[Chris Mayer]

We wanted to respond to the helpful comments on our proposal with a couple of clarifications.

First, the proposal would not cost taxpayers any money and does not involve a bailout of any kind. This program would apply only to GOVERNMENT GUARANTEED mortgages, for which we, as taxpayers, are already bearing all of the costs for poorly underwritten mortgages. (Think of the multi-billion dollar requests every quarter from Fannie Mae and Freddie Mac from the taxpayer.) Allowing homeowners to refinance would lower mortgage payments for 37 million households, with the benefits going to conforming mortgage borrowers--relatively responsible borrowers.

Second, our proposal would limit the discretion of servicers. Servicers must run any program, but ours would be directed by the Treasury Department and would require compliance. Having the program be comprehensive helps ensure that the bulk of borrowers are able to take advantage of it.

We appreciate your feedback and are happy to learn more about ideas or objections.

[Catherine Isobe]

Aren't the originators of POORLY underwritten mortgages obligated to make the GSEs whole?

Second, HAMP is directed by the Treasury Department and it supposedly limits the discretion of servicers. We all know how that worked out.

[Mike Dillon]

"Servicers must run any program, but ours would be directed by the Treasury Department and would require compliance."

Mr. Mayer, have I - and apparently millions of other homeowners - been under the tragic misconception that HAMP has NOT been run by Treasury and/or has NOT required compliance from mortgage servicers? Obviously, there has been little to no ENFORCEMENT against mortgage servicers but if compliance wasn't required to begin with that would explain a lot.

And hang on one more minute. "First, the proposal would not cost taxpayers any money and does not involve a bailout of any kind. This program would apply only to GOVERNMENT GUARANTEED mortgages, for which we, as taxpayers, are already bearing all of the costs for poorly underwritten mortgages." Is it me or is this statement at least slightly oxymoronic?

This is where the entire plan - any similar plan actually - falls on it's face. Look at the sheer volume of litigation against servicers. "But we have litigation in the industry. It's just part of the business." BOVINE SCATOLOGY. It they were performing their function correctly - strike that - if they were performing their function LEGALLY there would be far less litigation involved. USA/Curry v. Fairbanks(Select Portfolio) - 281,100 victims. FTC v. EMC Mortgage - 85,000 victims. FTC v. Countrywide was settled early June. I STILL have not seen numbers on just how big that class is but if I had an extra dollar I'd bet that it's going to be at least as big as USA/Curry - and quite possibly double the size.

When will the federal and state governments stop feeding the hand that bites the homeowners? Ever time I see someone say "Servicers are going to do this or that." I immediately start hearing Robin Williams Live at the MET with his famous "Stop or I'll say stop again." http://www.youtube.com/watch?v=LX3w8xMI6-8&feature=related @3:22 and his commentary on Gaddafi "Cross this line - you die." http://www.youtube.com/watch?v=RcdRPfdmLLY&NR=1 @ 1:05.

"Allowing homeowners to refinance" without any kind of forensic review of each individual loan before the refinance would potentially cost individual homeowners thousands of dollars in fraudulent fees piled on by the very servicers that you want to put in control of your program. Feel free to toss the phrase "ill-gotten gains" anywhere in that sentence as well.

How does a homeowner benefit by potentially damaging themselves further if, or more likely WHEN, they refinance away from an entity that never had legal title, interest or standing to enter into any kind of legal/financial agreement with them in the first place? I believe MERS is now purporting sixty FIVE million mortgages in it's portfolio, by the way....

Continuing to put "non-nationalized" mortgage servicers in charge of anything, or expecting them to do anything other than pad their own bottom lines to the fullest extent possible, lives up to AA's (or Einstein's) definition of insanity. How has that been working out for us so far?

[Ken]

This is my take: as Professor Nouriel Roubini has been stating for years we (society) need to reduce the value of homes to current market levels, restructure the loan to conform to the ‘new normal’ market value and forgive the difference. This is not a new idea. It was done during the Great Depression. All of the overly complex legislation surrounding who can do what, who gets paid etc., needs to be voided. There are so many ‘hooks’ into everything, nothing can get done without endless debate, controversy, legal briefs, opinions, and etc. (Nero fiddles, while Rome burns). Meanwhile, the economy is not getting better, even though there are plenty of opinions as what needs to or should be done, as Prof. Roubini has stated many times ‘just kicking the can down the road’.

[mark]

Investors are finding themselves in dim light when it comes to countrywide property. If you’re in the same situation, learn from the experts and become a better investor.

[mark]

The reason why a lot of investors evade countrywide property is because of lack of funding. Some lenders are still skeptical in providing the needed capital.