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Foreclosures = Affordability Problem?

posted by Alan White

Critics of HAMP and other efforts to increase mortgage workouts often assert that there are too many homeowners in mortgages they simply cannot afford; due to unemployment and other causes, there is just not enough income to work with.  The dScreen shot 2011-03-09 at 11.38.08 AMata realeased by Treasury on more than one million applicants for HAMP assistance provide some insight into the question: how many foreclosures could actually be prevented? 

As a starting point, we can look at the incomes reported by HAMP applicants, the amount of their mortgage debt, and the value of their homes.  The median income of applicants is around $4,000 monthly, i.e. not much below the national median annual income of $50,000.   Only 11% of applicants have incomes below $2,000 per month, in poverty-level range.

The median mortgage balance owed is between $200,000 and $250,000, also within national norms.  The median property value is between $150,00 Screen shot 2011-03-09 at 11.47.16 AM 0 and $200,000.  Comparing current home values to income, the median ratio is about 4:1.  Thus a typical HAMP applicant might have a $50,000 income, and owe about $250,000 on a house now worth $200,000.  In fact, 86% of HAMP applicants had a home value-to-income ratio of 6:1 or less.  Putting aside excessive unsecured debts for a moment, this hardly sounds like an insoluble problem. 

Of course, looking at home values rather than mortgage balances means acknowledging the need to realign mortgage debt with market values, something the banks loudly proclaim they refuse to do.

Screen shot 2011-03-09 at 11.51.21 AM The real moral hazard lies in doing nothing about mortgage principal.  Research shows that homeowners will start to walk away when mortgage debt exceeds home values by 50% to 60% or more.  The grim numbers from HAMP are that 65% are underwater, and more than 40% are seriously underwater.  As Congressman Brad Miller is fond of saying, Americans can afford their homes, they just can't afford their mortgages.


Mortgage Debt and a 31% Housing DTI means nothing. You ignore that fact that the Mean Ratio for DTI is 65% of Gross Income. This means that the borrower will end up defaulting anyway?

Moral Hazard? The Hazard is that most of these people knew well what they were doing. And they chose to do it anyway. At best, they were "willing victims".

When does Personal Responsibility come into play? When do they take responsibility for their own actions, instead of blaming everyone else for their own errors. Of course, it is easy to play the victim card, instead of accepting responsibility.

For anyone who thinks that I do not know what I am speaking about, I have examined over 4000 sets of loan documents, talked with thousands of homeowners, hundreds of attorneys, and even banks.

I originally was one of the "leaders" in homeowner defense, but I ceased representing them because most had committed their own fraud. As well, their attorneys were misrepresenting what could be accomplished, and I would not partake in that just to make money.


Did you read the LTV chart at all? Fraud or stupid, the fact that almost 43% of the homes have LTV's of 120% or greater should be the only metric that matters.

With your neighbor's home at 120% LTV - what chance do you think YOU have that your home will appreciate? I'm not talking about unique instances, but as an average/aggregate view? None is the answer.

And if you take all the negtive equity homes and just simply say "walk away" as opposed to modify the principal, you will end up with an inventory that greatly exceeds the ability of demand to absorb. Yes, people need to live somewhere - but really - you think that after walking away from one home, someone will get a mortgage? So you will have unsold inventory that drives YOUR home (and therefore your net worth) down for years to come.

C + I + G + (X − M) - you know the formula.

Right or wrong, housing has been a key driver for consumption (home depot and also equity as a means to buy cars, boats, etc).

For C to grow, we need housing to stabilize. And as long as there are people out there who simply see this as a "blame the borrower", it won't happen. I am 160% LTV. And I can afford it. And it's STUPID for me to keep paying on a Note that is 6.75% on a balance that will never be the value of the house again (or 10+ years to even get to 100% LTV). Makes NO SENSE, and I am not unique.

And in the corporate world, collateralized obligations are routinely modified. Why not do it here?

#1 component is conspumption. Until people's homes stop loosing value (and by th

I reviewed the charts. They are statistics only.

The problem with housing is that by artificially low interest rates being provided by the FED, there was a massive mis-allocation of resources to housing. Add in all the government guarantees and the push for homeownership to people who should never have had homes, then the end result is evident.

With HAMP, the MEAN Total Debt Ratio is 64.3%. That means that 64.3% of all income is Debt Service. That is after getting the homeowner down to a 31% Debt Ratio.

Sounds good? No way. That is Pre-Deduction dollars. If Take Home pay is considered the Ratio is about 90%. No one can live on that and meet Debt Service. Hence, HAMP is a failure.

You want principal reductions. Here is the fact. Most people were more than willing to pay the price for the home they bought. In fact, they usually engaged in multiple bids. So they must have thought value was there. If a homeowner had been turned down for a loan, would they have gone for another loan? No way. They would shop until they found a loan, no matter what. But now, they complain because the values fell, and where if they had done their own due diligence, they would have known that the homes were over valued.

And, what happened when a home sold down the street from them for $30k or greater than what the previous home sold for? Did any of them complain about the high prices? Hell no!!!! In fact, they all bragged about how much money that they had just made. And, many would race to the local broker to refinance out and pull out cash for their toys. And you want to REWARD that behavior?

You want to solve the housing crisis? Here is how:

Get Fannie and Freddie out. Either privatize or close. No more government guarantees. F & F warps the market.

Without F & F, interest rates would rise, which would drop home values to more realistic prices. Initially it would decrease buyers, but in time, as values fell, buyers would be priced back into the market.

Focus on Private Securitization efforts. 85% of all loans prior to the Crash were securitized by either private efforts, or F & F. Determine how to restart Private Securitization, which incidently, I have been working on with a major investor.

You mention modifying CDO's and principal reductions. The PSA's have specific language that restricts what can and can't be done. Furthermore, any such modifications would not be of benefit to most Investors, because if the NPV test considered the likelihood of re-default, then the NPV test is failed. I have the algorithm to show the proof.

Banks cannot offer principal reductions. Any reduction goes against liquidity reserves. Offer the reductions, and the FDIC comes in and shuts them down.

You reveal yourself when you say that you are at 160% LTV. That is why you want a reduction. But here is a simple question. Why are you sticking it out. It makes a very poor financial decision. This is especially so since values will drop another 20-30% over the next few years.

Please don't give me the garbage of never being able to buy again. After 4 years from a foreclosure, you can buy again under F & F regulations. All you need to do is to reestablish credit if the rest of the credit is bad. Keep clean, save your money, and buy again. The truth is that you could buy a better home and at a much less price.

Now, claim emotion attachment. That's right. But, do you not sell stocks because you are emotionally attached?

The homeowners who file lawsuits to stop foreclosures are generally frauds themselves. They want to cancel the debt, and think that they can do so by claiming TILA violations. I just "love" those bs claims. "The finance charge was understated by $100, so I rescind the loan." And they want the home for free.

Same with the MERS and Securitization arguments.

The bottom line is that it is time for people to take responsibility for their own actions. Live up to their obligations. And if they don't want to do that, then be foreclosed upon and start over.

I struggle in debates when people want the rope from all sides, not just their own.

Based on your arguement, we should never have done the bailout.

AIG was more than willing to take the premiums for credit default swaps (as were many others). Banks were more than willing to write MBS's against homes they knew were over appraised (SEC claims against Mizilo/CHL).

If you reply and say - you would have let AIG and the banks fail over their own poor choices (as was my choice to spend the money I did on my home) - then we can debate the right path forward at least from a place of honesty.

So before I reply to the rest (which BTW I find a healthy debate and enjoy even if we do not agree) - where do you stand?

Should AIG have been bailed out?

BTW Patrick - I've read your myths page, I generally agree with you there. The discussion about CDS's is not about did it void the Note, it did not/does not, that is a fantasy.

It is about poor choices and what should be done to help the entity who made them.

The attachment people have to their homes, to the point they'll fight a hopeless battle to get their mortgages renegotiated, is strong evidence that Homo sapiens is indeed a territorial animal. Being forced to give up your home is being forced out of your territory and being left bereft of territory, which hits at a visceral level which isn't rational.

When we think of territorial behavior, most of us think in terms of dogs peeing on fences or cats spraying and thinking humans don't do that. Of course not, we're primates and therefore sight-oriented rather than scent-oriented. So our territorial markings are visual, like painting the walls a color we like rather than a neutral color, or hanging family portraits on the walls. Just think of all the things you can't do to personalize your space when you're renting, or you have to efface when you're prepping a house to sell, and there you've got human territorial markings.

This is why the mortgage mess is a lot more complicated than the rest of the economic mess we're in -- because it hits at emotional levels which are irrational, subconscious, and probably far more ancient than human consciousness.

I have to say, Mr. Pulatie, that I honestly find it incredibly interesting that you now trash a fair portion of the very arguments upon which you used to base your own analyses.

As the "Predatory Lending-Forensic Loan Analysis Report" that I've looked at has a January 2010 date on it, and that the Letter to Attorneys on the LFI site is dated November 2010, is it safe to assume that your current line of thinking has suddenly developed only within a few months of the previous year?

You disclosed that, at least in the audit that I have read, that it is a "Predatory Lending Audit" and not a "TILA/RESPA audit" because a TILA/RESPA don't go to the heart of the lending process, a TILA/RESPA audit doesn't necessarily uncover issues more apparently with your Predatory Lending Audit.

You also state that LFI makes no attempt to contact the lender, servicer or title company b/c any contact with them would trigger governance of LFI by the California Foreclosure Act.

Of a 60+ page report, approximately 1.5 pages was dedicated to "Securitization" with links to the Prospectus, PSA and 8-K filings for the particular RMBS Trust involved in the particular analysis.

7 pages were dedicated to "Loan Modification" analysis with case law

8 pages to "Foreclosure/MERS/Securitization" analysis with case law

Was it *JUST* "borrower fraud" and attorney misrepresentation that turned you around in your business and personal and professional opinions?

Hopefully, Professor Lawless and everyone will forgive me for bringing attention to a particular corporate entity but I feel that it is necessary in this instance.

On the LFI site you take exception with the various "audit companies" performing various analyses and making claims that they can assist homeowners. Yet, you take pride in announcing that LFI and "Credit Masters" entered into a Strategic Partnership Alliance at some point. The home page of Credit Masters states that "Forensic Loan Audits CAN SAVE your home"."

"Credit Masters’ mission is simple, we help our Clients save their homes and commercial building owners save their businesses from bankruptcy and foreclosure, by conducting a complete and thorough Forensic Loan Audit using their original loan documentation. Credit Masters then prepares a complete case analysis and delivers a completed Case Binder to the attorney of your choice."

I have to admit, Mr. Pulatie, that the more I read, the more I am confused by statements made here, statements made on your own site and statements made within at least one analysis that you performed apparently sometime in 2010.

So what happened in the last year?

The 65% average debt ratio average for HAMP applicants does not mean they cannot afford their homes. First, the back-end ratio includes all debt payments. Many of these overindebted consumers need to file Chapter 7, or at least get into debt counseling. There are ways to deal with the non-mortgage debt payments. Second, the monthly mortgage payment is partly a function of interest rate, and partly a function of principal that exceeds home values. So, whether homeowners can afford their homes depends a great deal on what steps are available to adjust their payment obligations.

I see two competing arguments here on the cramdown concept: 1) it rewards dishonest and/or stupid and greedy homebuyers; and 2) we know that cramdown rapidly clears excessive capacity in commercial transactions, thereby allowing the market to reach equilibrium and recovery to begin. Here is my single solution that meets both concerns:

1) Limit cramdown to those borrowers who honestly reported their income;
2) Limit cramdown to those borrowers willing to file BK, i.e., those that are disclosing all of their other assets and, if available, using those assets to pay a dividend on the unsecured deficiency
3) Limit cramdown to those borrowers who completely perform the modified loan. In other words, if you've got to pay off the new, lower principal balance to receive the benefit of cramdown.
4) Limit cramdown to purchase money loans, non-cashout refis, and home improvement loans.

This would allow the hopeless situations (probably most of them) to clear through foreclosure, leaving meritorious reorganization plans for BK courts to confirm. The idea that people who "overpayed" for a home "knew" the risk they were taking is ludicrous. Government and corporate leaders alike claim they saw no bubble, so how could your average Joe be blamed for not seeing it either? And a lot of people make a lot of money from Joe "overpaying".

And, no, I have no axe to grind here. I own my home free and clear. I have purchased foreclosures for profit and stand to gain from doing so in the future if cramdown is not available to honest debtors. But I see such misery and waste from our current process of forcing these borrowers out of their home when they could easily afford mortgages that are more in line with traditional LTV. As others have said, keeping those people in their homes would benefit all of us by helping create a floor for fair value.

Is there no capacity for compromise on this issue?

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