Invasion of the House Snatchers

"Invasion of the House Snatchers" is the latest in Rolling Stone

http://www.rollingstone.com/politics/news/17390/232611

Here are two quotes, "the borrower-lender relationship can only go one of two ways: full payment or total war." And "Why don't the banks want us to see the paperwork on all these mortgages? Because the documents represent a death sentence for them.... Bank of America...is required by law to buy back every faulty loan."

Drop the rates, fewer foreclosures. Better for the bank. Better for the borrower.

True interest rates and default rates

From Minyanville:

"Default rates estimate the probability of getting your money back; interest rates how much you get paid for taking that risk. Banks and dealers made gobs of loans valuing them way too high because they under-estimated default rates and over-estimated the interest rates they'd receive (the bank gave full value to the paper assuming the borrower would successfully be able to pay higher rates when the lower teaser rate converted to a higher fixed rate).

"So all this paper was carried on the books at a high price: The banks showed profits by marking up the value of the paper.

"That brings us to our paradox. Now we know that those variables were fallacious: higher default rates and lower interest rate assumptions are forcing those banks to write-down the value of those loans. … If banks assume higher interest rates so they get more cash over the life of the loan, they must then assume higher default rates for those go up when interest rates, the cost of a loan, goes up."

http://www.minyanville.com/businessmarkets/articles/todd-harrison-midterm-elections-quantitative-easing/11/2/2010/id/30895

And, if interest rates on a given loan goes down, the default rate goes down. The rate which the bank makes, net of defaults, improves. Just lower the mortgage rate on exisiting loans!

Appraisals prevent refinance

1. Think about it. You are an appraiser. All the appraisals you did for the last 3 years are "wrong." And every media outlet claims you made a mistake by "over-valuing" houses. They question your integrity. What do you do today to compensate? .... Undervalue. So current owners can not refinance their own home and get a lower interest rate. Does this mean appraisers are now operating with more integrity now than in the past? Or less?

2. It gets worse. One method of appraising is "Capitalizing" the expected cash return. This is not normally applied to houses, since houses don't have an "income stream." (Or do they? Isn't a mortgage payment a negative income stream?) The "cap rate" is normally related to the interest rate on a loan. The appraisal process incorporates sophisticated arguments, but basically just divides the income stream by the "cap rate." Apply that approach to the 7%, 30 year, $100,000 house loan. The monthly payment is $661.44. Cap that at 7% and the "value" is $113,000. ($100k/7% x 12).
Now cap it at the current mortgage rate of 4.5% and the "value" is $175,000. The lower the interest rate, the higher the value of the home.

Of course it makes intuitive sense. The lower the monthly payment, the more likely the borrower can make the payment, the more secure the loan. Lower the interest rates!

3. "The real estate market depends on such homeowners being able to sell and move up; without them the trade-up market can't grow." -LA Times. What if these underwater borrowers lived on Cove Street and just got the lower rate but did not lower their monthly payment? Assume they are currently 75% underwater. With their current 7% interest rate, they would take over 14 years to reduce the principle to 75% of their original balance. After 14 years, their home is now worth the amount of the mortgage. After 14 years, they can trade up.
However, if rates were dropped to 4.5% and they kept making the old monthly payment, it would take less than half that time. And, if houses stop depreciating, (which they will if rates are dropped), and modestly appreciated (which they will if rates are dropped), then that 6 years compresses to less than 5. They can trade up in less than half the time. Drop the interest rates!

Millions of homeowners keep paying on underwater mortgages

But a bigger problem may turn out to be the millions of Americans who are still faithfully paying their mortgages, but on houses worth far less than before the bubble burst. It's not that these homeowners will stop making their payments. It's just the opposite — that they will keep doing it.

How could that be a source of future trouble? Because, with home prices stagnant in much of the country, payments on mortgages that are underwater could absorb billions of dollars that might be used for other forms of consumer spending — a drag on family finances, the housing market and the overall economy.

http://www.latimes.com/business/la-fi-economy-mortgages-20101101,0,722187,full.story

Just drop the rates, without the hazing of refinancing.

Foreclosure

The Wall Street Journal reports that foreclosure is a stealth stimulus

"Defaulters living in their homes are getting a subsidy worth about $2.6 billion a month, according to a Wall Street Journal analysis based on mortgage data from LPS Applied Analytics and rent data from the Commerce Department. That's 0.25% of U.S. personal income, roughly equivalent to the benefit top earners receive from Bush-era tax breaks.

"It's hard to know how much of that money will find its way into the economy through consumer spending. Some defaulters sock away their mortgage payments, in hopes that they'll strike a modification agreement with their bank and get current again."

Why not just stop the clock on fees and drop the rates for those in and out of foreclosure?