Mortgages & Ethics

“Mortgages aren’t ethical documents, they’re legal contracts. The typical residential mortgage for an owner-occupied home gives the borrower 2 options: pay on time and in full, and keep paper title to the house and full entitlements to any appreciation upon its later sale after the mortgage is satisfied; or stop making payments, and hand the keys back to the lender.

“Morality and ethics don't even enter the equation. Both options are perfectly legal for the borrower, and the only criteria should be business-based. All the ethics you need are contained within the 4 corners of the pages of the mortgage contract.

“Indeed, the ethical thing to do is for each borrower who’s underwater to look without blinders at their family's financial situation -- not just now, but over the long term."

From Mike Shedlock in Minyanville.

A Tishman Speyer-led partnership is in default on debt tied to a large office portfolio in the Washington area. Tishman itself isn't at risk. 8/19/09 Wall Street Journal

Modification falters

"U.S. Effort to Modify Mortgages Falters
By RUTH SIMON Wall St Journal 7/28/09

"The Obama administration in February laid out its foreclosure-prevention plan to much fanfare.

"One issue was that mortgage companies were waiting for final federal guidelines on key issues such as how to determine whether a loan modification is preferable to a foreclosure, said Mary Coffin, head of loan servicing for Wells Fargo Home Mortgage

"Employees at mortgage-servicing companies often tell borrowers they can't be helped if they are current on their loans, said Michael van Zalingen, director of homeownership services for the nonprofit Neighborhood Housing Services of Chicago.

"Other borrowers complained of long waits for help. Suzanne DeNick of New Jersey said J.P. Morgan Chase & Co. told her it would take four to six weeks for her modification request to be assigned to an analyst and another 90 to 120 days before she received a decision. The company also asked her to resend her application, further delaying the process.

"Mortgage companies say that to be considered at risk of imminent default, borrowers must typically have liquid reserves that amount to less than three months of mortgage-related payments and, after figuring in expenses, a few hundred dollars or less left at the end of each month."

On Cove Street, the interest rate is merely dropped. There are no costs to the borrower. No hassling evaluation by the banks--which is expensive for the banks. Banks can focus on lending. The government is not involved. Borrowers on the borderline are in better shape. Borrowers above the border have more free cash.

Mortgage Rescue II

The 7/2 Wall Street Journal says that our Feds are raising the limits on borrowers. The first program said the refinanced loans couldn't be more than 105% of the new value of the homes. Now these fine folk have said they would consider refinancing the loans they have already made even if (shock) the loan was now 125% of the value of the home. These are loans which the feds already made to borrowers who previously "qualified," living in homes which previously "appraised." Now the feds are thinking they might lower the interest rates if their borrowers can survive the refinance torture chamber and only if they "qualify." The final paragraph says, "Some analysts and regulators who oversee Fannie and Freddie say expanding the program could decrease credit risks to the government-controlled mortgage companies because they already own or guarantee these mortgages; a refinancing to lower monthly payments could make those borrowers less likely to default."
Of course borrowers are less likely to default. Just get on with it and lower all the rates.

Appraisers squash sales

New York Attorney General Andrew Cuomo’s lawsuit against Washington Mutual has led to new appraisal rules for loans guaranteed by Fannie and Freddie. The new rules created a new middleman--the Appraisal Management Company--who assigns appraisers. What is your guess as to which appraiser is selected? Might it be that the jobs are handed out on the basis of the cheapest appraiser and the fastest turn-around time? Does that sound like a government quality improvement program?

"The increase in sales is less than expected because poor appraisals are stalling transactions. Pending home sales indicated much stronger activity, but some contracts are falling through from faulty valuations that keep buyers from getting a loan. Lenders are using appraisers who may not be familiar with a neighborhood, or who compare traditional homes with distressed and discounted sales." National Association of Realtors

Condo Boards Take on Lenders

Attorneys for condo boards claim some banks are intentionally slowing the foreclosure process to keep from forking out condo dues. In Florida, lenders are on the hook for as much as six months of late condo dues once they take title.

"It's become common practice to delay foreclosure," said Eric Glazer, a condo-association lawyer in Hallandale Beach, which is between Fort Lauderdale and Miami. "Banks are forcing the associations to take them the distance."

Last year, a unit in Miami Beach's Bath Club held by Wells Fargo & Co. racked up $32,000 in unpaid condo dues. The board attached a lien on a unit and filed to foreclose in December 2007. The unit sold in July at a foreclosure auction for $438,000; the condo association took its $32,000 and gave the balance to Wells Fargo.

The condo board that governs the Grand Condominium in downtown Miami has taken back 20 units in the 810-unit luxury development and collects a total of $25,000 a month in rent. The banks that hold the defaulted mortgages will eventually file to foreclose on the units. But meantime, the condo association uses the money to pay for building services. "I've had some units for over 16 months and I haven't heard one word from the bank," says Brendon Grubb, the general manager of the building.

With empty pockets, more condo associations are forced to raise homeowner dues. "We call it the downward spiral. How many of those owners are actually going to be able to pay an additional assessment?" says Kristy Phillips, a condo-association attorney in Hallandale Beach. "They're picking up the pieces for the banks." -Wall Street Journal, 6/18/09

How much simpler it would be to drop the interest rates on loans? What are the banks going to do when the next wave of foreclosures hit in the fall when the Alt-A's reset?

Loan Redoes Get Tangled in Thicket of Red Tape

"Getting a mortgage modified can take months, slowed by thin staffing and mountains of paperwork. With so many loans bundled and sold to investors, it's sometimes hard to figure out who even owns them. The new federal program requires borrowers to meet slightly different requirements than bank programs do, meaning banks need to navigate two procedures.
...[For one borrower] The interest rate on her $412,000 mortgage rose to 9.943%, and by last year, she couldn't afford her $4,735 monthly payment. It took her 10 months of working with Chase to get a lower rate. She was recently approved for a trial modification program that will cut her payments by nearly 40% to $2,937. "This has been the most grueling 10 months of my life," she says." Wall Street Journal , 6/17/09
A page one story. As if this travesty is news.
Is there anyone who seriously thinks that 10 months is acceptable? The borrower hasn't changed. The property hasn't changed. The bank hasn't changed. How long can it take to write a note to the borrower? "Dear Borrower, Your new monthly payment is $2,937. Have a nice day." How long did that take? 20 seconds. Banks can't find enough people to work. No wonder--they take 10 months and billions of TARP money to do 20 seconds worth of work.
And don't forget. This is only a "trial." Perhaps Chase should be on trial? They are trying.

Relief for Commercial Real Estate Debt?

Your Treasurey is working on changes that will enable commercial real estate borrowers to more easily restructure debt. How? Lower the interest rate! -Wall Street Journal, 6/10/09
Why just commercial real estate? How about lowering the interest rate for home loans?

Appraisals preventing refi!

"Patti Sanders, an aerospace engineer in Oakdale, Calif., knew prices were down sharply but said she was "flabbergasted" recently when her 3,100-square-foot Victorian home was appraised at $250,000, compared with $635,000 assayed two years earlier. The new estimate prompted a lender to reject her application for a refinancing that would have lowered her mortgage payments about $400 a month." Wall Street Journal, 6/9/09
To be clear--her lender is willing to lower the interest rate on her loan. But won't lower it because the appraised value has dropped. So the lender won't make it easier for her to stay current on the lender's loan. Why are lenders shooting themselves?

Rates up. So house prices have to go lower!

The higher Treasury yields had a further negative impact on mortgage rates, with the 30-year fixed rate increasing by 19 basis points to 5.46% on the week and the 15-year fixed rate by 15 basis points to 5.02%, as indicated by Bankrate.com. “That’s quite a jump,” said Donald Rissmiller, chief economist at New York-based Strategas Research Partners, in a Bloomberg interview. “The more rates go up, the more we need home prices to go down to equalize consumers’ payments. It’s those payments that have brought about a level of stability in housing unit sales.”

Low Mortgage Rates Are Going, Going…

"Ironically, if you were stuck crawling through the refi process when the rates jumped, you may be a victim of new mortgage rules. These were introduced in the last year to prevent another subprime scandal. They have slowed down the loan approval process and have discouraged most lenders from offering rate locks until other steps have been completed. "Lenders are not locking in borrowers' rates until the (home) appraisals are in," says Paul Sapienza, broker at Drew Mortgage in Boston. Until last year you could lock in a rate while you refinanced, or even looked for a new home. "That's over," Mr Sapienza says. " - Brett Arends , The Wall Street Journal

Fed Mortgage Efforts Prove Costly

"The Fed has spent about $2,500 per borrower, by J. P. Morgan's analysis--more than it costs a typical mortgage borrower to refince their debt. Higher fees and adjustments based on a borrower's credit score or home's value have been an impediment to borrowers looking to refinance a mortgage, damping the refinancing wave the Fed hoped for, analysts say." -Liz Rapppaport in the June 1 Wall Street Journal.

The alternative. Don't spend the $2,500. Don't reaudit the loan. Just drop the rate.

Bing's Stress Test -- One Pinkie

Stanley Bing writes about the horror's of refinance in the June 8, 2009, Fortune. He writes, "I'm happy to tell you that I did get my refinancing package through at last. And in the end, I don't think I had to sacrifice too much.
"It's amazing what you can do without a pinkie."
The bank already made the loan. Just drop the rate and move on.

Borrower is hit twice!

"Without naming BlackRock, federal auditors have warned that any private parties that purchase distressed assets on the government’s behalf could use generous federal subsidies to overpay, artificially pushing up the price of similar assets that they manage for their own portfolios.
“'In other words, the conflict results in an enormous profit for the fund manager at the expense of the taxpayer,'” Neil M. Barofsky, the special inspector general for the Troubled Asset Relief Program, wrote in a report last month." New York Times 5/19/09
The borrower is hit twice. (1) His taxes increase to pay for the federal program. (2) The federal program raises the "value" of his loan so that the bank is less willing to reduce the interest rate (it is no longer a "toxic" asset). Voila. Higher taxes and the same high mortgage payment.
Why are we picking on the U. S. home owners? Just reduce all mortgage rates now.

Mortgage Rates haven't dropped!

"After hitting a peak of 6.51% in July last year, the average rate for a US 30-year mortgage declined markedly. ... Also, the lower interest rates aren't being passed on to consumers, as seen from the 414 basis-point spread of the 30-year mortgage rate compared with the 3-month dollar LIBOR rate. According to Bloomberg, this spread averaged 97 basis points during the 12 months preceding the crisis." So, while other rates dropped, home loan rates did not drop as much. What is "as much?" 3.17% according to Bloomberg.

-Credit Crisis Watch: Has the Tide Turned? Prieur Du Plessis May 19, 2009 Minyanville

Chrysler and home loans

"U. S. Forced Chrysler Creditors to blink" Wall Street Journal headline May 11, 2009. The lenders were owed $6.9 billion. Mr Rattner said, "It's $2 billion, take it or leave it." That 29 cents on the dollar. "On Friday, the holdouts abandoned the fight as too costly, financially and politically."

Will Mr. Rattner now call the banks and tell them to reduce the mortgage principle for home owners to the same 29 cents on the dollar? The banks would come out ahead politically and financially if they merely dropped the interest rates on all home loans to the market rates.

If Reit's can do it, why can't the homeowner?

In the May 6th Wall Street Journal, a headline reads, "REIT's seize a chance to deleverage. at discounted prices." "Diversified Realty Corporation ... repurchased several of its bonds at 49% discount." The resulting profit impact can be spread over 5 years under the new stimulus legislation.

If a REIT can pay off its loan at 49% of its face value, shouldn't a homeowner be able to do this?

Wouldn't it be wisdom for a bank to merely drop the interest rates on all its mortgages to the current rate? Then the bank is more likely to get back 100% of its principle--not 49%.

A Conundrum

Bank of America and Citicorp reported profits. Bank of America said, “Non interest income included $2.2 billion in gains related to mark-to-market adjustments on certain Merrill Lynch structured notes as a result of credit spreads widening.” The translation—The market is more doubtful of our ability to pay our loan. Therefore the loan has decreased in value. Voila, we can report profits on that decrease in value.

So, how about the homeowners? It’s more doubtful that they’ll be able to pay off their loan. Do you think the bank will decrease the value of the loan? “What’s sauce for the goose is sauce for the gander.”

Home Values

Alexander Hamilton started the U. S. Treasury with nothing—and that was the closest our country has ever been to being even. –Will Rogers

Bond-holders know that when interest rates go down, the value of an 8% bond or mortgage goes up. If a mortgage could not be prepaid (it can), then the “value” of an 8% 30 year, $100,000 mortgage is--

Rate ---Value
4.5%----$144k
6%------$122k
7%..........$110k
8%------$100k

The fact that mortgages can be prepaid, means that the value of an 8% mortgage is not 144% in a 4.5% market. But it is above par.

If the value of the mortgage goes up, doesn’t the value of the home have to go up also? That's what Sinatra thought, "You can't have one without the other."

Today many home-owners are under-water—the mortgage is bigger than the value of the home. If the home-owner gets a lower interest rate on his home is he recapturing some of that lost value?

Cleaning "Toxic" Mortgage loans

Everyone--Alt A, Sub-prime, conventional, jumbo, FHA, VA--should get lower interest rates. Not just those who go through the rigor of a refinance.

How? Lenders send a notice to borrowers--"Your interest rate has been changed to ___ and your new payment is ____."

When? By July 4th.

The result-

• The borrower can more easily make his monthly payment--making the loan more secure for the lender.
• The borrower has extra money to spend--boosting the economy.
• The investor has a more secure, more valuable loan--improving its balance sheet.

But some borrowers may not qualify? The answer--the lender already made the loan, so qualification as a new borrower does not apply. The lender and borrower are already married. Dropping the rate merely makes the borrower closer to qualifying. If the rate stays high, then the borrower is worse off, and for the lender, the loan is more risky.

Older Borrowers

What doth the Lord require of the but to do justly-Micah

This is from the Wall Street Journal Older Borrowers, Out in the Cold By ELLEN E. SCHULTZhttp://online.wsj.com/article/SB123967085817315655.html

Welcome

The Captains would come into port.
They would go to the point, while the sailors would go to Cove Street.

Welcome to Cove Street.