Tuesday, May 25, 2010

Restructuring Mortgages

We know the Senate—in rejecting a Republican effort to euthanize Fannie Mae and Freddie Mac--isn’t ready to deal with GSE issues, and now that it’s recently approved bipartisan regulatory reform bill has “solved” all of the nation’s financial regulatory issues (I’m being sarcastic), it can turn to some other knotty problems facing our nation. Class, Class?

Oh, oh, teacher, I have one.

Has any effort promised so much and produced so little as the federal government’s campaign to reverse the flow of defaulting mortgages and restructure or rewrite them so that deserving borrowers can stay in their homes and repay their financial obligations?

Just who and what has hindered the effort?

The major culprits, Pogo, have been the Treasury, the lender/servicing community, and even some of the very people the efforts hope to help.

Yes, high unemployment and prevailing recession conditions—turned what started as a subprime mortgage problem and into a prime mortgage matter--still are defying myriad federal, state, local and private efforts at amelioration.

But the question has to be asked, how could the Treasury, and other federal and state financial regulators have done so poorly trying to fix, replace, and restructure millions of underwater mortgages?

One almost would have to set out to purposely design a “failing remedial process” to achieve less. But, that wasn’t the case, although it has been the result.

Too Many Cooks, Making Lousy Soup

We have had too many cooks with their hands in the soup, which is why the fare has been lousy.

Massive mortgage defaults first were identified in 2007-2008 and every mortgage lender, every agency with any jurisdiction and, every Senator and Congressman had some approach, yet the net effect federally—almost exclusively undertaken by the Obama Administration--has not been fruitful, as measured by the small number of mortgagors who have gotten relief and the of mortgages which still are in default, rushing to foreclosure, or are “upside down.” Upside down loans mean the borrowers owe more than the properties are worth.

Inside Mortgage Finance, Guy Cecala’s excellent publication, reports that slightly more than 9.5% of all mortgage loans--tracked by major servicers--were “seriously delinquent,” meaning in foreclosure or missing more than three months worth of payments. That’s 4 million loans, which some believe is a conservative estimate.

Since 2009, the Obama Treasury, under Secretary Tim Geithner, has initiated a half dozen mortgage amelioration efforts, including changes to previous plans, according to the Congressional TARP Study Commission, headed by Elizabeth Warren, which has reported critically on the Treasury’s progress.

The Treasury’s signature effort, the Housing Affordable Modification Program (HAMP), has moved so slowly that, in 2009, for every family it helped 10 more lost their homes to foreclosure.

At their current pace, HAMP may help 250,000 mortgagors 2010. But with upwards of 20 times that number—or more--needing help in 2010, that success won’t staunch the bleeding.

The TARP Commission says that currently about 6 million mortgagors are “60 days or more delinquent,” meaning they are on the cusp of inflating that 9.5% figure noted above.

HAMP, recently itself has been restructured, and Treasury hopes for more production this year, but doubt remains.

The tragedy is that the incentive for families to walk away from mortgage debt and just “mail in the keys” seems greater than that needed to stay and work it out.

My one Fannie/Freddie complaint merely is that 15 months ago, I argued that the federal government—which had “federalized both companies” and owned and controlled them--should turn the a unified Fannie/Freddie 8000 employee work force loose and let them implement the most efficient ways to solve the problem, with compensation for their successes that go beyond just healing their own hemorrhaging loan portfolios.

Treasury, Lenders, and Consumers

Naturally, that was too simple and direct for Treasury, the Fed, FDIC, DOJ, HUD, etc.
Instead, despite their task forces and coordinating meetings, predictably the federal government put up a patchwork of programs--albeit with different standards, operating systems, different industry and agency departmental priorities, and importantly different incentives—which barely have helped families needing help.

Lenders share in this blame in a couple of ways. When the government started throwing all of the TARP money around, smart bankers figured they would hold off really helping until the government sweetened the pot; sure that it was just a matter of time.

And despite the fact that the bankers were carrying bad loans which were performing poorly in greater numbers, they still were reluctant to take the full financial hits and write off their losses, hoping instead for congressional, accounting or regulatory relief miracles which haven’t yet come.

When you get down to the interstices of some of the problem, you realize that for a variety of reason delinquent home owners are reluctant to deal with their lender/servicer or the government, even when offered money, as in, “We can lower your monthly mortgage payments from x to y and allow you to stay in the house, paying off your debt at a much more affordable rate.”

Who ignores that offer? Who balks at that help if properly delivered and why?

Some lender personnel even slow walked this relief because their compensation incentives still are with new loans and new families, not re-structured mortgages.
This dilemma shows no signs of solving itself and every signal is that worse news lies ahead. The Obama Administration needed and needs to do better.

Until it does then homeowners requiring relief easily can turn sour as they see a steady flow of cash going to financial institutions but bypassing them.

Only the federal government can try to minimize the problems and introduce simple, easier to implement, financial relief efforts—minimizing the number of chiefs and employing more Indians—to really get at helping borrowers. Reducing principle owed as well as mortgage payments is a major part of the answer.

Needed: A Real Czar

The nation needs a presidentially appointed “Mortgage Restructuring Czar,” who can cut through the agency and industry BS and start handing our fines for institutional foot dragging, as well as kick a lot of bureaucratic butt and embarrass slackers. (Sorry, Herb Allison, you’re not doing the job.)

And, the President could do a lot worse than asking Fannie and Freddie to unleash their work forces—who largely continue to do little real business under their new government overseers—to create a sustained effort to restructure the millions of loans which need fixing and using common underwriting, back offices, and restructuring methodologies.

The combined GSEs could do better than the guys running it now.

The WSJ and “Nessie?”

Recently I asked if anyone else, but me, thought the Russians could have been culpable in a plane crash several weeks ago which took the lives of Polish President Lech Kaczynski and much of their government leadership. Now the Wall Street Journal has weighed in, kind of.


I wonder if the paper agrees with me, too, on the existence of UFO’s and the Loch Ness monster.

Andrew for Governor!!

I’ve often written, teasingly, about Andrew Cuomo, whom I got to know when he was in Washington working at HUD in the Clinton Administration and later running the agency as Secretary.

Now—to the surprise of few—the super ambitious Andrew has announced his candidacy for Governor of the Empire State and hopes to succeed his father, Mario Cuomo, who was New York’s highly regarded chief executive, from 1983 through 1994.
It appears, unless some sort of scandal arises, that Andrew should have an easy run to run to win the state’s highest job and “clean up Albany,” which is his stated highest priority.

It will be easy for him to take aim at Republicans but he better have a sharp eye for Democrats, too. If Albany is a cesspool, it’s been made so by both political parties contributing.

Fumigating and sterilizing Albany will be lonely work. Andrew will need a bulldozer to clean out those “Aegean Stables.”

Maloni, 5-26-2010


Rod said...

Bill, like the article but your statement about new york being a cesspool due to both parties seems a little out of whack. The democrats have run that state for a good two decades now. While the republicans have not helped matters by providing a viable alternative, the problems in New York State seem to be consistently coming from the 'D' side of the aisle (Spitzer, Patterson, etc.)

Bill Maloni said...

I suspect that we are not too far apart on this.

I believe that I suggested that a successful "Governor Andrew Cuomo" couldn't clean up Albany without targeting Democrats, who helped create the situation which made the capital cleanup a priority for him.

The NY D's get no pass for me.

I also suspect that, like most state capitals, both parties have "slime" in their recent histories, whether they control the state governments or not.

At the time you measure the "slime factor," the party out of power may just have a ltitle less.

Bill Maloni said...

One thing not absolutely clear in what I wrote.

I wasn't criticizing Herb Allison for his management of the federal mortgage restructuring efforts as much as suggesting he doesn't have enough institutional power to demand action from Cabinet secretaries, federal agency heads, and industries, ergo the call for a "Czar" with that power.

Anonymous said...

Local governments should take underwater second mortgages by eminent domain, and pay the banks what those second mortgages are worth -- nothing. That would force the writedowns and, if that threatened a bank's capital, well welcome to TARP.

To those who say that would be a windfall to the overleveraged homeowner, the takings could be limited to owner occupant homeowners who purchased between 2005 and 2007 -- not the folks who used their homes as ATMs, or investor/speculators.