How to give an economics writer a coronary:
Recommend something that has been done twice before, and both times led to disaster, including being a major contributor to The Great Depression.
Well guess what: JP Morgan and the other banks are doing exactly that.
Oct. 13 (Bloomberg) — Banks will push the Obama administration to expand its mortgage-modification program to allow interest-only periods on reworked loans, seeking to bring more homeowners into the initiative while recognizing concern that it may only postpone defaults, according to JPMorgan Chase & Co.
Prior to the depression of the 1920s, there was a mortgage loan product used by many of the American people, known as the interest only loan. Why did this long disappear? And why has it suddenly reappeared? Let’s take a moment to answer each question, and hopefully provide some food for thought.
During the 1920s and into the early 30s, many of the citizenry of this country chose to live above their means. They chose the interest only loan because it allowed them to purchase a larger home for less money. What happened when the stock market crashed and jobs were scarce, and there was no income? Many of these people were left without homes; as they had chosen to simply pay the interest on their mortgage there was no equity built into their homeownership. When no equity builds, and the income ceases, the bank forecloses and residents are forced from their homes.
If our government allows this it will guarantee a GREATER DEPRESSION. Whether it comes now or in a few years, it will happen. This is the precise same stupidity that led to the 1930s and it will have the exact same outcome this time.
Here’s the problem folks, in one sentence:
The banks are STILL insolvent.
They are sitting on over a trillion of dollars of this paper (about $1.1 trillion to be exact) and several hundred billion is severely impaired or even worthless. Wells Fargo, just as one example, has (as of its last 10Q) $106 billion of second lines outstanding on balance sheet, and God only knows how much in SPVs (Wells is known to have significant off-sheet exposure “inherited” from Wachovia.) Let me put this in perspective for everyone.
Essentially all of the first mortgage loans written in California and Florida after 2003 are underwater. Even in parts of the state (such as my area of Florida) that have been “relatively” untouched (compared to, for example, Naples) homes are below 2003 prices. In “bubble” areas prices have in many cases returned to levels such that anything purchased before 1995 or thereabouts is underwater. In some parts of SW Florida you can buy a home that sold for $500,000 for $50-75,000, cash, right now. Those are 1970s and early 1980s prices. While that is an extreme example the most bubbled areas are the ones with the greatest over-representation of paper from Wells (and ex-Wachovia), JP Morgan/Chase (ex-WaMu) and Bank America (ex-Countrywide.)
Many of the homes in these areas, especially in Florida, that have undergone this sort of collapse in price have a literal negative value. That’s because the former owner has departed and the power was shut off for non-payment; the banks have constructively abandoned these homes. In Florida if you do this within a reasonably short period of time mold will become established inside the sheetrock. Once that happens the home must be gutted to the studs or razed, and the cost of doing so exceeds the value of the bare lot. Then there are the delinquent property taxes, frequently in arrears for two years or more at this point. Many people have said that “oh there’s a decent recovery” on all this paper. No, in many cases, there is is in fact no recovery at all, and that’s a fact.
In essentially every case a 2nd Line (HELOC or “Silent Second”) behind a first in Florida and California taken out since 2003 is worthless if the primary note goes into foreclosure. That’s because such a second is a subordinate lien and entitled to nothing until the first is fully satisfied. But the first can’t be fully satisfied as the home’s value is less than the first line’s balance. As a consequence these loans are worth zero – literal zero. Wells may have as much as $25 billion of this worthless paper on balance sheet all on its own and Bank America may have as much as $30-50 billion. (Pinning down the exact amounts is impossible as the companies do not disclose geographic concentration metrics necessary to do so.) It is not unreasonable to believe that $200 billion in junior lien losses are being hidden – right here and now – which is sufficient to detonate these institutions even without the primary mortgage losses being counted!
This is the truth behind the housing mess and our government and banking regulators are engaged in an active cover-up to prevent recognition of the truth. Banks were given the ability to do other than “mark to market” earlier this year, and they have roundly abused this privilege to hold both first and second lines at ridiculously above market value. But Treasury is also interfering with contract law in an attempt to “protect” bank balance sheets. How? By violating lien priority – again – exactly as they did with Chrysler and GM.
The Truth is that there has been no material completion of these “modifications” promised under HAMP:
Only “a couple thousand” conversions have been completed, Maggiano said. To aid the process, the government last week streamlined documentation requirements, and granted borrowers and loan servicers on initial trials an extra two months to complete the work, which typically must be finished after three months of timely payments, she said.
“Streamlined documentation requirements” = You can lie about income and assets. Again. Once again, fully-documented underwriting is not being required, all in the name of preventing the truth from being recognized – the banks are insolvent as they are holding hundreds of billions of dollars of worthless trash, almost assuredly $100 billion or more of it in second lines alone, at or near 100 cents on the dollar.
An unresolved piece of the administration’s program, she said, remains a plan to have second-mortgage owners rework that debt whenever first mortgages are changed, an initiative that U.S. officials said would likely be in effect by June when outlining it in April.
Again, we’re back to the basic problem:
If you recognize these losses the second lien holders all blow up. If you roll the second into the first mortgage then the property is so far underwater that not only is the mortgage unaffordable but there is no reason for anyone to take the deal. If you force first lienholders to take damage that the second should take then you destroy the securitization market for mortgages as you force losses on people that should be protected from them under black-letter law.
In any event there are plenty of detonated (and actively hidden) first mortgages that have blown up too, and we’ve not even talked about commercial real estate exposure yet.
On the document changes:
To help move more borrowers out of trials, the Treasury last week dropped a need for them to provide tax returns, Maggiano said. Servicers instead will be able collect documents allowing information to be pulled directly from the Internal Revenue Service, a process it’s trying to enhance with new forms and processes, she said.
Uh huh. That was done during the housing boom too. It was known as a 4506-T and was a routine part of even “Stated Income” loans. However the verification wasn’t done, which is why we had tens if not hundreds of thousands of WalMart employees buying $500,000 houses while making $30,000 a year – on an OptionARM mortgage that was guaranteed to detonate in their face a few years down the road.
Other document changes mainly involve creating more “customer-friendly” layouts, Schwartz said. The changes aren’t similar to the “stated-income” lending popular during the housing boom that later created high defaults, she said; pay and employment information still is verified.
Riiight. If pay and employment information is verified what’s difficult about it? Is it too much to ask for a current pay stub? Who (that is actually employed) doesn’t have a new one every couple of weeks? Nobody I know!
All these new “proposals” are doing is attempting to once again screw the American public, turning them (once again!) into debtors and renters while lying to them about being a “homeowner.” In addition if the original mortgage was a purchase money first an effective refinance into an interest-only product will destroy the non-recourse nature of the note in those states where it applies, leading those who are trapped in these loans a couple of years from now to lose not only their house but everything else they possess.
Yes, I know, JP Morgan reported “good” earnings this morning. If their earnings are so strong, and the franchise so healthy, why are they arguing for “interest only” exploding mortgages as a modification tool?
There is one and only one way to solve the housing crisis that will actually work, as I have said now for more than two and a half years:
Withdraw the fraud and lies, allowing home prices to contract to sustainable levels so that ordinary Americans can actually afford to buy a home with 20% down and a maximum 36% “back end” or DTI ratio.
At the same time force the banks to recognize the bad paper they are carrying – both on firsts and seconds. If this detonates them then so be it. There are banks who are not insolvent and those who were not and are not fraudsters deserve to prosper in a capitalist system for doing the right thing, not be punished for failing to engage in fraud as is now the case.
Those who are displaced by their homes will indeed be foreclosed upon, but in a year or two after rebuilding their credit they will be able to buy the same house back (or one similar to it) at a price that represents no more than three times their income with a sustainable, 20% down fixed-rate mortgage.
THAT is how we solve this crisis; those banks and the Mortgage Bankers Association who continue to demand that bogus and unsustainable lending be shoved down the American people’s throat must be run out of Washington DC on a rail, AFTER being waterboarded as a consequence of demonstrating to the world their own particular brand of financial terrorism.
The American people have HAD IT with the lies and theft.
IT IS TIME TO TAKE THIS NATION BACK FROM THESE SCAMMERS.