1. Welcome! Please take a few seconds to create your free account to post threads, make some friends, remove a few ads while surfing and much more. ClutchFans has been bringing fans together to talk Houston Sports since 1996. Join us!

Mortgage Rescue: Credit Score Killer

Discussion in 'BBS Hangout: Debate & Discussion' started by MojoMan, Dec 28, 2009.

  1. MojoMan

    MojoMan Member

    Joined:
    Apr 3, 2009
    Messages:
    7,746
    Likes Received:
    2,153
    In the bolded section above, I presume you are talking about adjustable rate mortgages with initially low teaser rates, which subsequently adjusted upwards, perhaps in some cases to very high levels. Teaser rates are, by their nature, temporary. If a borrower cannot afford to pay a mortgage at a rate higher than the teaser rate, then generally speaking, they cannot afford the mortgage.

    On the other hand, if the rate is scheduled to escalate to levels that are above market rates, given the borrower's risk profile and credit capacity, then that loan needs to be restructured or refinanced. Probably the best way to do this in most cases is to convert it into a long-term, fixed rate loan, with a market interest rate that is reflective of the borrower's risk profile and credit capacity. If the borrower still cannot afford the restructured loan payments, with whatever reasonable accommodations that the financial institution can make, then consideration has to be given to the possibility that the borrower has taken on more of a financial burden than they can bear.

    The answer cannot be to have the government bail out every borrower that cannot afford to make their payments. In a small number of cases, the government can help with the restructuring fees, either by encouraging the financial institution to waive them, or by subsidizing the fees. Going forward, these kinds of loan structures will need to be more closely regulated, especially with regards to excessive refinancing and restructuring fees. But to be fair, the borrowers who take out these kinds of loans are usually just as greedy as the lenders. In order for a mortgage loan contract to have effect, the borrower must be assumed to be responsible for the obligations they take on under the contract.

    These questions have to be analyzed and answered on a case-by-case basis. That is what has been happening, and unfortunately, it appears that most of these loans either do not qualify or cannot really be helped by these government programs. In fact, a huge percentage of the loans that have been restructured or refinanced using these programs have very quickly returned to delinquent or default status. But doing what you do for a living, you would certainly be aware of that, even though you failed to mention it in your previous post.

    And giving judges the right to effectively re-write mortgage loan contracts between a financial institution and a borrower (Mortgage loan cram-downs) is a truly unwise approach to handling these matters. Fortunately, as noted in my previous post, this bad suggestion is apparently so bad that even the Democrat-dominated House of Representatives has rejected it. Good for them.
     
  2. MojoMan

    MojoMan Member

    Joined:
    Apr 3, 2009
    Messages:
    7,746
    Likes Received:
    2,153
    Here is an interesting article in yesterday's New York Times on the effect of Obama's foreclosure protection plan on these borrowers generally, and on the economy as a whole:

    [RQUOTER]U.S. Loan Effort Is Seen as Adding to Housing Woes

    The Obama administration’s $75 billion program to protect homeowners from foreclosure has been widely pronounced a disappointment, and some economists and real estate experts now contend it has done more harm than good.

    Since President Obama announced the program in February, it has lowered mortgage payments on a trial basis for hundreds of thousands of people but has largely failed to provide permanent relief. Critics increasingly argue that the program, Making Home Affordable, has raised false hopes among people who simply cannot afford their homes.

    As a result, desperate homeowners have sent payments to banks in often-futile efforts to keep their homes, which some see as wasting dollars they could have saved in preparation for moving to cheaper rental residences. Some borrowers have seen their credit tarnished while falsely assuming that loan modifications involved no negative reports to credit agencies.

    Some experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.

    “The choice we appear to be making is trying to modify our way out of this, which has the effect of lengthening the crisis,” said Kevin Katari, managing member of Watershed Asset Management, a San Francisco-based hedge fund. “We have simply slowed the foreclosure pipeline, with people staying in houses they are ultimately not going to be able to afford anyway.”

    Mr. Katari contends that banks have been using temporary loan modifications under the Obama plan as justification to avoid an honest accounting of the mortgage losses still on their books. Only after banks are forced to acknowledge losses and the real estate market absorbs a now pent-up surge of foreclosed properties will housing prices drop to levels at which enough Americans can afford to buy, he argues.

    “Then the carpenters can go back to work,” Mr. Katari said. “The roofers can go back to work, and we start building housing again. If this drips out over the next few years, that whole sector of the economy isn’t going to recover.”

    ....[/RQUOTER]
     
  3. Refman

    Refman Member

    Joined:
    Mar 31, 2002
    Messages:
    13,674
    Likes Received:
    312
    Then you would presume incorrectly. Most of the ARM loans that were made between 2000 and 2004 did not have a low teaser rate. They started at a rate around 7 to 8 percent. The rate was then tied to LIBOR. This is where trouble began. LIBOR rose to levels in 2007 and 2008 that nobody predicted. That resulted in these loans reaching their contractual maximums (around 14 percent or so), and staying there for quite some time.

    In my representation of debtors and now of mortgage servicers, I have read thousands of these notes. Out of curiosity, how many of them have you read?

    Since comparatively few of these had a "teaser rate," this assertion is irrelevant.

    With the freeze in the consumer credit markets, this has been much easier said than done even under the best of circumstances.

    Absolutely. I have on many occasions counseled clients that it would be in their long term best interests to let the house go and lessen the overall stress in their lives.

    Some work. Some don't. That is the nature of loan mods in general.

    Why is it ok for non-homestead (ie rental) property and not the homestead? Why is it ok in a Chapter 11 for jumbo mortgages and not the average Joe?

    It would be more instructive to look to see who is lining their pockets.

    You can institute whatever program you would like regarding loan mods. It does not change the fiduciary relationship that the bank has with the investors. That is the real reason that meaningful mods do not get done. If you allow bankruptcy judges to write down the interest rate, that problem goes away.

    Allowing bankruptcy judges to write down car loans to a reasonable rate or interest (prime plus 1 to 3 percent) (See Till v. SCS Credit) has not resulted in car loans becoming unavailable. Boogey man.
     
  4. langal

    langal Member

    Joined:
    Nov 13, 2004
    Messages:
    3,824
    Likes Received:
    91
    I disagree. Individuals ruin their own credit score. Not the private market.

    Likewise, the people who need to apply for this govt. programs are responsible for their own credit scores. Their scores should plummet because they basically defaulted on the original loan.

    Silly to blame the government, also silly to blame the bank.

    I consider myself a conservative. True conservatives would be more pissed off if the bailout did NOT lower credit scores.
     
  5. Refman

    Refman Member

    Joined:
    Mar 31, 2002
    Messages:
    13,674
    Likes Received:
    312
    I basically agree, but I believe that you have made a few misstatements.

    1. This is not a "bailout." The money to the servicers is to allow them to mod mortgages. The problem is that servicers have been reluctant to modify mortgages because they cannot do so without potential breach of fiduciary liability. This money indemnifies them in a sense.

    2. It is not silly to blame the banks. Many financial institutions made these loans and immediately sold them off. This is because of the uncertainty of what would happen when the interest rate changed. Many times, they acted in concert with mortgage brokers. All just wanted a deal done, regardless of who got hurt in the process.

    In the end, credit scores should suffer when you cannot meet the contract obligation.

    Carry on.
     
  6. MojoMan

    MojoMan Member

    Joined:
    Apr 3, 2009
    Messages:
    7,746
    Likes Received:
    2,153
    LIBOR is not high at all right now, but mortgage loan defaults continue at record rates. The factors you mentioned may well have played a limited role in this mess, but they did not drive the levels of defaults to the extent that you seem to be suggesting. Overall, your analysis is well off of the mark. Shocker.

    Feel free to take your credentials and stick them wherever you like. I am not impressed by you or your arguments on this matter. My credentials are none of your business. But suffice it to say, I have no cause to defer to you on this topic at all, and I will not be doing so. So you can take your arrogant, condescending, self important, know-it-all attitude elsewhere. It caries no weight with me.

    There is not currently a "freeze" in the consumer credit markets. Once again, you are mistaken. The banks and credit card companies have tightened their underwriting standards from the ridiculously loose policies that existed prior to the outset of the current financial crisis. This desperately needed to happen, and it is vitally important that these financial institutions not return to the foolish practices that helped to cause this whole mess, even if Barack Obama and the Democrats continue to pressure them to do just that, as they have been doing.

    I still receive zero percent credit card offers in my mailbox several times a week. There is no freeze on credit, except to those borrowers who have weak credit. If you want a home loan and you meet the qualifications using traditional, conservative mortgage underwriting criteria, you can certainly get one. Same thing for credit cards. Anyone who suggests otherwise simply does not know what they are talking about.

    The days of home loans with no money down, and no verification of income or credit history are probably gone for good. At least let's hope so. As hard as this return to a paradigm of financial standards and responsibility is for some people, it is a good thing overall for our economy and our financial system.
     
  7. Refman

    Refman Member

    Joined:
    Mar 31, 2002
    Messages:
    13,674
    Likes Received:
    312
    The defaults you are trumpeting are of a completely different class of paper than those that HAMP was even designed to help. HAMP was designed to provide loan mods for the ARM notes that fell into arrears due to the soar in rates during 2007 and 2008. These borrowers have been forestalling foreclosure through bankruptcy and forbearance arrangements. The rise in LIBOR during that time period certainly contributed significantly to this mess.

    If you think otherwise, you are simply incorrect. Shocker.

    Cute...because my experience in seeing scores of these over the last 7 years differs from the way you think the world works. Funny.

    There are many things in this world that I do not know. I do have significant experience in this area, and have seen how this all happened. I knew that HAMP would be a failure when it was first discussed for the reasons I have previously stated. I was right.

    If you are going to liken the availability of credit cards to the availability of other consumer credit, then it is of little use to argue with you. They are very, VERY different things.

    Actually, it all started with Bill Clinton and was expanded by George Bush. Remember when each of them stood at a podium beating their chests about how more Americans will be able to own a home, etc etc? Yeah...that is how it all started.

    The notion of zero down home buying was destined for failure. I don't think that anybody believes that it should ever return to that. There also needs to be income verification. If you go to rent an apartment, many lessors will require that you have 3.5 times the rent in monthly disposable income. A similar analysis should be done for mortgages.

    So...here's a good question...if you are the lending institution, would you rather have a performing loan at 7 or 8 percent or a non-performing loan at 14 percent? This is especially relevant in the current market where many of these homes are underwater and the lending institution stands to take a $40,000 to $50,000 hickey at a foreclosure sale.

    That is what I have been talking about. The servicers generally cannot simply agree to this due to fiduciary concerns with the certificateholders. You allow the judges to mod the rate in a Chapter 13 just like they do in Chapter 11 and in Chapter 13 for cars and non-homestead property.

    You have failed to explain why these properties should be any different than non-homestead properties or property in a Chapter 11.
     
  8. MojoMan

    MojoMan Member

    Joined:
    Apr 3, 2009
    Messages:
    7,746
    Likes Received:
    2,153
    Here is a link to the government website "Making Home Affordable.gov", which is the website for borrowers to determine if they are eligible to receive help under the Home Affordable Modification Program (HAMP) program:

    Making Home Affordable.gov

    As anyone who clicks on the above link will quickly see for themselves, there are two options on this page: one for determining if you are eligible for help refinancing your mortgage (HARP), and one for determining if you are eligible for help modifying your mortgage (HAMP).

    By clicking on button for determining eligibility for mortgage refinancing help, you can see there are four simple questions the borrower must answer. Likewise, by clicking on the button for determining eligibility for mortgage modification help, you can see there are five simple questions the borrower must answer. Everybody can easily read these simple questions and see for themselves. Clearly, there is nothing that requires these borrowers to establish that they had loans with the kinds of adjustable rate structures you have been emphasizing in order to participate in these programs.

    Some kind of expert you appear to be.

    You were the one who opened the discussion of the consumer credit markets with the following comment:

    In any case, there is currently no freeze on any kind of consumer credit, whether that be mortgage financing, auto loans, credit cards, or any other kind that I am aware of. Underwriting standards for all of these types of credit have been strengthened in the aftermath of the financial meltdown last year. Everyone needs to realize that this is not a temporary situation. What you are seeing here is the new status quo.

    Credit standards have been changed back to the more conservative, traditional standards that existed before 1) Alan Greenspan flooded the economy with easy, low interest money after 9/11, and 2) Fannie Mae and Freddie Mac aggressively promoted easy mortgage loans to people who could not afford to pay for them. Make no mistake about it, without these two initiatives, this crisis would not have occurred.

    The transition for many people with weak credit and excessively large financial obligations will be very difficult over the next few years. And not just for them, but also for the financial institutions who provided financing to these kinds of borrowers. I feel sincerely sorry for these people and the hardships they will have to bear. But we simply cannot continue to live beyond our means. Not individually, or as a nation. It is simply not possible to sustain this kind of behavior. Ultimately, the bottom falls out and catastrophe results. That is what we are seeing now.

    Unfortunately, here in the United States we never learn. There will be another financial downturn in our relatively near future, probably within the next 10 years. {facepalm}

    There are obviously quite a few other considerations that go into the consideration to modify or refinance a mortgage loan than the overly simple choice you present above. For example, does the borrower have enough income to make the revised payments, as modified or refinanced, on the current balance that they owe? If they do, then the borrower can refinance the loan, using the proceeds to pay off the previous amount.

    Banks do not want to foreclose on these properties, and they certainly do not benefit from doing so. Foreclosing on any property or asset is a money loser for a bank, which is a scenario that they have every incentive to avoid. I certainly hope you are not trying to suggest that banks are refusing to cooperate with these borrowers because of their desire to foreclose on the borrowers homes. That is simply not the case, which if you are anything close to as knowledgeable as your are trying to hold yourself out as, you would know quite well.

    Even the Democrat-dominated House of Representatives has shot this bad idea down in flames. It is not going to happen. Nor should it. Case closed.
     
  9. BetterThanEver

    Joined:
    Oct 9, 2007
    Messages:
    9,931
    Likes Received:
    189
    With the U-6 unemployment rate at 17-18%, you will see alot more of these loans. The difference might be that you are only seeing the ones that file bankruptcy, while the other folks can't even afford bankruptcy.
     
  10. Refman

    Refman Member

    Joined:
    Mar 31, 2002
    Messages:
    13,674
    Likes Received:
    312
    No. You either have managed to totally misunderstand what I was saying or are simply trying to be contrarian.

    Were it not for the ARM loans, these programs would not have been established at all. They were established only after the public outcry once rates became what they were.

    Just because you do not have to have one of these loans to qualify does not change the fact that these loans provided the political momentum to establish the programs.

    All of this was pursuant to Federal law signed by Clinton and Bush. Greenspan was part of the problem, but the Federal law required "innovative loan products" in order to meet the quotas set by the law.

    You clearly have no understanding of how or why this happened.

    Again...easier said than done. I had clients (who had not filed bk) that I assisted in attempting to refi (I set them up with financing help). For a period of time, only A paper was being written, and on a limited basis at that.

    It is not as easy as you would make it out to be for most people.

    Of course not. I can tell you that quite often, the choice is mod or foreclose. The servicer often cannot mod because they serve as a trustee to a diverse group of certificateholders. If they simply agree to give up the right to a certain amount of interest voluntarily, they could be putting themselves at peril.

    So, yes, because of that concern, they will foreclose rather than mod.

    This is not really that hard to understand if you have even a basic grasp of how the mortgage structure is set up.
     
  11. BetterThanEver

    Joined:
    Oct 9, 2007
    Messages:
    9,931
    Likes Received:
    189

    What my friend was seeing is true for the rest of the banks after all. Many people weren't qualifying, because even if the loan was modded their reduced income wasn't even enough 2% interest rates.

    The Treasury is looking at changing the modification critieria to take into account unemployment and reduced salaries. The government is looking at giving borrowers the money to make the payments or postponing payments.

    http://www.nytimes.com/2010/01/22/business/economy/22modify.html

     

Share This Page