Behind All The Problems, It's Still About Foreclosures

Behind All The Problems, It’s Still About Foreclosures

As the government’s Hope for Homeowners program, designed to fend off foreclosures, kicks in this month, it could face hurdles from the government itself. Hope for Homeowners gives the FHA the authority to back 300 billion dollars worth of restructured loans, if, among other things, the lenders voluntarily agree to drop the value of the principal to 90 percent of the home’s current value.

But with the 700 billion dollar bailout also in gear, which includes the government buying whole loans and bundles of loans owned by banks, I’m hearing that many banks and lenders are choosing to hold off on modifying or restructuring loans–thinking they might get a better deal from the bailout.

Banks are also holding off on selling foreclosed properties and doing short sales, again hoping to get a better deal on those as well (short sales are when the bank agrees to let the owner sell the home for less than the value of the mortgage, which can cost less than foreclosure).

On top of all that, mortgage rates are climbing, which could make things even tougher for those troubled borrowers still trying to get help on their loans. Why are they rising? All has to do with fear and treasury spreads. It doesn’t make a whole lot of sense since the government is selling all these treasuries, causing the spread between Fannie and Freddie, but Fannie and Freddie are now owned by the government, mostly. Ah, the new landscape.

And, of course, the banks really should sit on their money until after election day.
No wonder there’s a credit freeze, the financiers are waiting to see what move the gov’t will come up with next. So much for market forces.

The only ‘market forces’ involved are the banks and their desire for profits. They can afford to wait. Profits are not a bad thing in a capitalist country, but mortgages did not cause the crisis.

Financial experts decided to take a big risk. The ‘chicken in every pot’ and a house for everybody are nice ideas, but mortgages and homes should not be passed out to people who can barely afford to pay their other bills.

According to CNN Money, the Federal Reserve is prepared to give banks a very precise amount of money to bring them out of the crisis, the amount announced was “unlimited.”


Most banks do not have net worth in excess of 10%. I think before any bank took this deal, they would want to be absolutely certain they could not come out better on foreclosure.

Rarely would the originating banks hold the mortgages in question. Banks would, if anything, be holding mortgage backed securities, and would have no idea what mortgages are behind those securities. The mortgages could be in various states. Quite frequently the “servicer” is the one the customer pays, and the customer doesn’t know who actually owns the mortgage itself.

Now, if the bank owns FNMA or FHLMC securities, my impression is that the government has already guaranteed those. So it would only apply to the rare bank that actually holds the mortgages, or to holders of securities issued without FNMA or FHLMC guarantees. Not sure how many of those are out there, but I also don’t see how the bank and the debtor are ever going to get together on this.

And if the government is going to delve into the securities and tell some bank that, well, we determined that there are “X” number of defaulting mortgages behind your non-FNMA or FHLMC guaranteed security package, and so we want you to discount your security by “Y” percent, I suppose the banker will just have to take the government’s assessment of the bank’s likelihood of coming out by foreclosure “up the line”.

I really don’t see how this does much of anything. Doubtless there is a piece missing in this.

I am also puzzled at how a 10% discount is going to help somebody pay his mortgage who can’t presently pay it. Is 10% really going to make that much difference?

To me, the one thing that held out the most hope is the government’s offer to purchase preferred stock in the banks. Bank solvency is actually a government formulation. An insolvent bank could go on for a long time without actually being “illiquid”; the thing that causes it to run out of money to pay savers with. Quite possibly, it could even recover. A function of examiners is to evaluate the bank’s assets and see whether the bank meets the “net worth” requirements for “bank capitalization”. It’s a complicated thing, but basically what happens is that the FDIC shuts down a bank when it goes below the minimum net worth requirement, not when it runs out of cash in the drawer. Over the years, the net worth requirement has varied a lot. So it’s kind of an artificial thing to begin with.

By purchasing preferred stock, a bank that can still make it gets its capital “boosted” because preferred stock is part of capital. It isn’t a liquidity move, it’s a capitalization move. Stockholders aren’t wiped out, though obviously they have preferred stockholders ahead of them in the income and liquidation line. But if the bank eventually makes it, it will eventually buy back the preferred shares, making the government whole again and paying dividends to the government the whole time.

Since government is what determines whether a bank meets capital requirements or not, and can pretty well control the lending activity of the bank whose preferred shares it buys (not because it owns the shares but because it’s the regulator) , and since the government’s attitude toward “substandard assets” is also a government determination, it does not seem out of the way to me for the government to buy preferred shares.

Now, what we don’t know is just how voluntary that program is going to be. I read one story that said the top five or nine banks or whatever, really didn’t want the deal but were pressured to take it. I don’t know who can “get the deal”, or “has to take the deal” or just what.

But the concept makes sense to me.

Correct. The market should be allowed to work. Government interference should stop. First, remove the interest and property tax deductions for homeowners. People would then not be using their houses as piggy banks because the tax benefit of such loans would cease.

Second, the government should stop being involved with evictions. If some foolish bank loans money to deadbeats, they should have to live with their problem; it was their own creation.

Third, there should be no bailouts; let housing prices tank. The market will bring in buyers when these insane, high prices for housing become realistic.

Fourth, repeal Proposition 13 type tax relief for property owners. All property should be taxed the same. People will then pay attention to their local expenditures.

  • Kathie :bowdown:
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