Coto Housing Blog

from PBS:

Watch the full episode. See more Need To Know.

In real life, the guys watching are Timothy Geithner and B-52 Ben.

The following article is about HAMP specifically, but the reasons HAMP loan mods fail are the same most loan mods fail, for the borrowers, lenders, and the economy as a whole.  Bottom line; if $X was borrowed on an asset which will only sell for $X – 30%X on the open market, someone has to eat the loss.

“Why Obama’s Mortgage Relief Program Failed”

By Matt Smith Wednesday, Sep 1 2010

And why not? Millions of homeowners owe far more than their houses are worth. Many of them can’t make payments. According to August statistics from the real estate website Zillow, 19.6 percent of San Francisco Bay Area homes are underwater, and the San Francisco Business Times cited a report last week that estimated there are 2.3 million homes with negative equity in California. If mortgage lenders wished to avoid the costs of foreclosure, it might be in their interest to cut a deal — right?

Wrong — at least in most cases. As of July, only 422,000 mortgage modifications overseen by the government were considered permanent; half as many homeowners ended up like Reed, navigating a Kafka-esque approval process with nothing to show for it.

Now, Treasury officials are reportedly moving the goalposts.

Conceived as a way to get borrowers back on track, HAMP now seems to merely have allowed banks to delay facing their own problems.

Job one has been denial: keep delinquent mortgages off lenders’ books, prevent additional bank failures, avoid further bailouts, and pump up housing prices to keep builders working and consumers spending.

Hiding the truth about home values is something banks have been happy to play along with. Whereas foreclosures might take a few months in better times, banks and loan servicers are sometimes waiting a year or more to face the reality of mortgages gone bad.

“There’s a lot of phantom inventory that could be foreclosed in a twinkling, but they’re not,” says Mountain View attorney Cathleen Moran, a certified bankruptcy specialist who has helped many clients who have failed to enroll in the HAMP program.

The ratings agency Standard & Poor’s reported in June that it would take at least three years for banks to sell the foreclosed houses they’ve withheld from the market. That doesn’t include selling delinquent mortgages on which they’ve postponed foreclosure.

In part, that was because the 2000s were an orgy of all kinds of borrowing — not just ill-advised mortgages. Millions of maxed-out homeowners are a bad risk, even if their mortgage payments are cut. Standard & Poor’s estimates that as many of 70 percent of HAMP participants could redefault.

“It’s deplorable,” Quigley says. “But it’s not terribly surprising that these voluntary programs don’t work.” But it has “worked,” in the sense of possibly allowing banks to postpone recording the loans on their books at decimated postrecession values.

“The underlying problem is that if we wrote all this stuff down to truly what it’s worth today, every bank would be insolvent,” Moran says. “So part of what we’re playing is a shell game. As long as we’re able to keep from recognizing that the assets on the balance sheets of these banks are worth markedly less than their face value, we can sustain the illusion that they’re solvent as long as we put an artificially high value on the properties.”

Houses in California, Arizona, and the rest of the country sit empty because buyers believe prices will continue to fall. If sellers listed them at more realistic prices, however, millions more people might be able to buy affordable homes. The market might finally hit its true trough and bounce upward. Enhanced employee mobility might lubricate the job market. And restored consumer confidence could boost the economy further still.

And silly us, we think lying is wrong.

From Benzinga:

Posted on 08/30/10 at 2:34am by William K. Black

Part One: The Unbearable Lightness of the Accounting Cover Up

Bad bankers, bad regulators, and bad politicians love to cover up losses, fraud, and bank failures. The snake oil peddlers pushing for a cover up scream that if losses are recognized capitalism will collapse. Recognizing losses “causes” bank failures (ponder that “logic”). Bank failures cause other banks to fail. Selling bad assets of failed banks is invariably described as a “fire sale” that causes further falls in asset values, which causes more banks to fail, which causes more assets to be sold, which causes – the end of life as we know it. If the snake oil guys are correct then financial markets aren’t fragile, they’re friable – a few bank failures away from crumbling. The solution under this logic is to lie about asset values and pretend that insolvent banks are healthy.

For a banker, what’s not to love about the right not to recognize even massive losses on assets? He gets to keep his job, reputation, and obtain bonuses for blowing up the bank. For a senior regulator whose failures allowed the bankers to cause the “epidemic” of mortgage fraud (FBI 2004), the mother of all bubbles, and the Great Recession a cover up is ideal. Bank failures are supposed to lead to investigations by the Inspector General and can lead to embarrassing congressional oversight hearings. Bankers and bad regulators sell the cover up to legislators as the miraculous “silver bullet” solution that can solve a crisis at no cost. Legislators wish everything they do could be that easy. Among my most painful memories are being in their offices to listen to their explanation of how simple, cheap, and pleasant the cover up will be. Everyone wins, no one loses. It’s just like the financial bubble that inflated the fictional asset values. Remember how wonderful the bubble was? The cover up pretends that the bubble prices were real. The cover up strategy says that the answer to a bubble is a bigger, longer bubble. Fiction can be so much more pleasant than reality.

Please click on this link to read the entire article.

We do not see most of the news regarding any market, the equities market, the bond market, the residential real estate market, etc. as being negative or positive.  For every home that is sold at foreclosure auction, some family eventually will own that home and that family can most likely afford that home, unlike it’s previous owners.  As painful as it may be for most to lose their home to foreclosure, at least they will no longer have the onerous debt they can not afford to pay. But, some news is so outrageous and preposterous that it appears overwhelmingly negative to us.  As does the following:

“Cut Down Payments to Boost Housing Recovery: Gross“  That’s Bill Gross of Pimco for those of you who think that ‘Gross’ may be our editorial on subject, which it is, but the article is refering to Bill Gross.

Government-sponsored enterprises Fannie Mae and Freddie Mac need to ease the requirements for down payments so debt-stressed consumers can afford to buy houses again, Pimco’s Bill Gross told CNBC.

The easing of up-front cash requirements is paramount so housing can play a leading role in the economic recovery, said Gross, co-CEO of Pacific Investment Management Co. (Pimco) and head of the world’s largest bond fund.

Record-low mortgage rates won’t help housing as long as consumers who are trying to reduce debt, don’t have the cash to take advantage of 4 percent interest rates. Housing starts and purchases for July hit multi-year and in some cases historic lows as federal tax credits expired and unemployment remained stubbornly high.

“To the extent that you can finance a 3.5 to 4 percent (mortgage) with a 20- or 25-percent down payment, most…households can’t come up with the money,” Gross said. “So there needs to be some type of cautionary reduction in terms of down payments.”

Does Mr. Gross really think we are that stupid?  I think he does.  And I think he may have good reason.  How long does it take to realize that it was Fannie, Freddie, and every other loan institution’s ease of credit that created the extreme in housing prices which now must fall to regain some semblance of affordability?  Talking your book is one thing, but laughing in the public’s face is … well … probably deserved.

Talking your book, no matter how ingracious, repugnant, and offensive is not illegal, (we don’t think), but at the very least Mr. Gross should be publicly vilified and socially shunned.