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Moratorium for What?

posted by Alan White

There is little to be accomplished by halting foreclosures and sales in process without some plan resolve the 5 million seriously delinquent mortgages other than by foreclosure sale.  While something can be said for delays that stretch out the process of dumping more unsold homes into a saturated existing homes inventory, we are only about one-third of the way through the crisis at present (having foreclosed or forced the sale about two to three million homes since 2007).  If a moratorium is to do some good, it has to result in diverting some foreclosures to better resolutions. 

The two most attractive alternatives, refinancing and modification, seem to have failed already.  The Administration’s HARP and HAMP programs continue to post disappointing numbers.  In light of HAMP’s failure, I am asked frequently, what should we replace it with?  Unfortunately there really are no other, better solutions.  We can either dump another 12 to 24 months’ supply of homes on the resale market, or modify enough mortgages to make a difference.  Treasury must either enforce its HAMP contracts with the banks, or fire the current servicers and transfer distressed mortgages to servicers who can do the job properly. 

Modifications have not succeeded in bringing down the 5 million distressed mortgages number in part because of the massive failure of the big banks to do their jobs.  In the present context, their job is to rework existing mortgages so homeowners can repay them.  Modified mortgages that reduce payments are now succeeding at a rate of 65% to 75%, compared with 40% for 2007 and 2008 modifications, which typically increased or deferred payments.   We know from Treasury’s monthly reports that a homeowner’s chances of getting a temporary modification, converting to a permanent modification, and getting timely action at those two stages depends hugely on which bank or servicer handles their mortgage.  The variances in HAMP performance are appalling, and are clear proof that far more could be done than is being done to divert distressed mortgages out of foreclosure.  

The case for modifications gets stronger every month, not only because redefault rates are declining, but because the two other key variables in the economics of foreclosure vs. modification are steadily worsening.   The rate at which unmodified defaulted mortgages fix themselves, the self-cure rate, has declined from 5% or more per month to less than 1% per month (foreclosure roll rate Charts tab).   Loss severities, the percentage of mortgage balances not recovered at foreclosure sales, continue to rise, and are now in the 60% range.   What this all means is that even a mortgage modification that was uneconomical a year ago might be net present value positive today.

Proposals to refinance all existing Fannie and Freddie mortgages to take advantage of low interest rates and reduce payment burdens are fundamentally equivalent to across-the-board modification of those mortgages.  From the homeowner’s perspective, it makes no difference whether her existing mortgage is converted to a 4% fixed rate and stretched out to 30 more years, or it is refinanced with a new, 4% fixed rate 30-year mortgage.  For the economy, the refinancing program produces a few more transaction costs that will create a few jobs for title clerks and document processors, but that hardly justifies the additional debt that refinancing necessarily creates.  The point is to reduce America’s home debt, not to keep postponing it. 


I suspect one reason for halting foreclosures is the fear that, once foreclosed, the lender, who is almost always the buyer at the foreclosure sale, can't give good title to resell the property later. That's because the mortgage and the note have become separated in the process of collaterizing and selling and reselling the mortgages, again and again. The loan servicers don't really have a good idea who owns what anymore, with those things having been sold and resold so many times. While the notes are, prsumptively, negotiable without the mortgages, the mortgage is generally no better than the debt it secures. Once the note and the mortgage became separated, problems started arising. Had each sale or assignment of the mortgage been noted in the land records office where the land was located, the local governments would not have been done out of millions of dollars of fees over the last 20 years or so, and there would be a record of what had happened, when it had happened, and these would show, presumably, who held the mortgages, for the borrowers to negotiate with, and who holds, presumably, the notes. I've had one case where the institution that was presumably the holder of the first mortgage foreclosed, only to find out thereafter that the discharge of the previous mortgage had been forged, meaning that the title was heavily clouded, to say the least. While don't suspect tons of outright forgeries in the present situation, with people signing 8,000 or so foreclosure documents each month, the lenders are finally starting to realize that they cannot rely on any presumption of regularity anymore.

"Unfortunately there really are no other, better solutions."

How about John Hussman's idea here, starting under "Foreclosure Abatement" about halfway down at this URL: http://www.hussmanfunds.com/wmc/wmc090330.htm

(Sorry for any duplication. Brand new to this blog and haven't read the archives, so don't know what's already been addressed here.)

Best regards (and thanks for the blog),

Modifications will only be possible when it's known who actually owns the mortgages. The foreclosure frauds are preventing that, and are also the cause of the moratorium.

It is not only the banks that have sold their mortgages which are failing to do mods or foreclose. I haven't paid my mortgage in ten months because I can't. My small business is suffering very badly and I simply can't make the payments that seemed very reasonable (I did NOT bite off more than I could chew!) in 2006...

I applied for a mod in March. When six months passed without hearing a word, I called up my lender. Had a very polite, I would say even FRIENDLY conversation, in which I was informed that I was, after ten months of non-payment, "not in any stage of foreclosure."

I have ONE lender who has NOT sold my mortgage and who does their own servicing. So this delay isn't about securitization and slicing-and-dicing and no paper trail...this is about my lender not wanting to take the loss on my house, and instead wanting to keep my loan on the books so it looks like a performing asset.

My house is particularly problematic to foreclose on, as it is a legal multifamily and I have a tenant on a lease in the carved-out apartment. It's also worth at least 10% less than I paid for it, it's 140 years old and in need of some serious repairs, it's on oil heat, and it's in a more or less distressed area (hey, I bought what I could afford, it's no McMansion!)

My lender no longer sends me invoices each month. They have even advanced almost $4,000 toward my property taxes for me (I realize that amount is just added to what I owe). I actually want to keep my house and can make a good case for a principal mod based on current market prices. But they don't even wanna talk about options, they just wanna wish me a nice day! It's so weird...

There is no doubt the current "who owns the mortgage" or "robo review signiture and foreclose" are very serious problems. However, there could be an unforseen trigger that will add to the problem: If an unsecured creditor filed an adversary proceeding, assuming their documents were correct, and after judgement award placed a lien on the property, decided to initiate a forclosure action then more fuel is added to the fire. If there is a question as to the validity of the first mortgage, it is likely the court cannot require the judgement lien holder to hold off until the first mortgage documents are validated. Now what?

I believe the industry, state and national entities, consumers, and even lawyers were not prepared, maybe still are not because of the complexity of "who owns the mortgage" that has been going on for many, many years. Seems to me all were dancing but to different music and now the dance partners are elephants.

Not an easy task and not an easy answer, but holding up forclosures isn't the solution.

I think you've really nailed it. There have been no fresh ideas for digging ourselves out of this hole. But I no longer think it's enough to say "let everyone go to the wall." There could be millions of new defaulters reading the news and deciding to stop making payments. We just won't know for a few months, and by then it will be too late.

I am not a specialist in this area, except insofar as my husband and I recently did a Deed-in-lieu of foreclosure on our underwater home (I wondered why they were letting us walk...).

But it occurred to me that the only way to end this crisis is to ensure that all parties (homeowners, lenders, investors, govt entities) agree upon a path that gives all a haircut but saves the system from collapse. So I came up with an idea for an "Underwater Home Exchange" that would essentially create a parallel marketplace for foreclosed, distressed and shadow properties.

Here's how it would work. Homeowner gets lender's permission to put their home on the market for the current mortgage (or less, if the house is in deepwater). Lenders put shadow inventory and bank-owned homes on the market too. Assume participants have zero equity (that's about 11 million households right now and climbing). How will they qualify for a home? Well, just as happens in a regular sale, their income determines what level of monthly payments they can afford. And the equity comes in the form of a "virtual" equity determined by a mutually agreed upon formula based on how much skin they had in the old place (down payment plus principal).

So, if our homeowner bought a $400,000 house five years ago with $80k down, and paid about $10k more in principal, we start with a figure of $90k. THey are not going to get all of this back (it's not "who wants to be a millionaire"). Here's my suggestion: divide this number by 2 and subtract any missing payments or property tax. So this family (assuming no missed payments) has $45k in virtual equity. That should be sufficient (assuming someone is still employed) to shift to a new, cheaper house. It can be in the same neighborhood or across the country.

Let's go a bit further: the virtual equity can be no more than 20% of the purchase price (again, no free houses) and you need to live in the house at least 2 years or it has to be repaid. No one can buy more than one house on the exchange (no flippers). And first time buyers can use real cash.

What are the advantages of this scheme? First off, it immediately restores hope (and a floor) to the national real estate market. It keeps millions of homeowners in the market (without whom there will be no recovery) but does not keep people in houses they should not occupy. It rewards good behavior and punishes bad (no down payment and interest only loan? you get nada). It keeps people making their payments and paying their taxes. It allows for price discovery and quick market clearing.

I would love to hear some critiques or suggestions from people in the field. As I say, I have no training in this field, but maybe it's time to let the peanut gallery step up. For the most part, the experts have made a hash of the situation.


Wish you had been on the financial services committee way back when "get people in homes" and worry about them paying later contributed to the current mess. Your idea certainly has merit but the obstacle may be interrupted by the bond holder(s) of the mortgage. However,I believe your concept has interest to gain input from more scholars in this field. If we would stop trying to fix and focus on one solution fits all and part and parcel remedies such as yours maybe the half empty glass would become the half full glass.

This is an exceptional content, and I can agree with what was written here. I will be back to check out more of your articles soon. Thanks

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