It ended up being a late night for me last night and I wasn’t up to commenting much on the latest Mortgage Metrics Report from the Office of the Comptroller of the Currency. I thought however that the following two charts spoke volumes about loan modifications, so I thought I’d let them speak for themselves: [Thanks L!]
Just off hand I’d say that for the most part, loan mods aren’t working out. What do you think?
Never mind that. The following is the first glimmering of the Federal Government’s acceptance of the maintenance provision of the New Bill of Rights (see my book, John Ryskamp, The Eminent Domain Revolt). It is a very hard slog, removing the scrutiny regime from power, putting the maintenance regime in power, and enforcing the New Bill of Rights. However, it is materially aided by the collapse of the economy. Let’s hope we don’t get to Austria 1919 inflation too soon, although keep your eye on two important components of the collapse of the supply chain: shipping and agriculture. Particularly agriculture.
Sooner or later, I’ll get exactly what I want, and like a good little revolutionary, I put it all down in detail in my book. No surprises. Can’t say you were advised of what is coming.
BAN ALL HOUSING EVICTIONS.
Bernanke: Government should help long-term jobless WASHINGTON (MarketWatch) – Federal Reserve Chairman Ben Bernanke said Thursday that the government should take steps to address the problem not only of high unemployment but also the issue of too many people that have been unemployed for too long. “Not only is unemployment high but the number of people who have been out of work for long periods of time is high, and as a result they lose skills,” Bernanke said. “There is some scope for trying to ensure that people who do want to come back to work keep their skills fresh and have opportunities to have additional training, particularly in a situation now where we have such a high unemployment rate.”
Here’s a followup, a posting on a blog I made, in response to the happy notion that “Oh well, bonds will always pay.” Kisses to Bill Gross.
Investing in bonds is OK if you think the current United States “scrutiny” regime is going to survive. THAT is the bet. But it is a bad bet. You will lose by it.
The evidence shows that the scrutiny regime is in the process of being replaced: the United States is in the process of installing a new Constitutional regime.
This will result in a de facto default on U.S. Treasuries. The following is the story behind this:
We will face inflation, but it will be Austria 1919 inflation: inflation due to a collapse of the supply chain. This supply chain collapse is mirroring the Great Depression. Of course, people have been observing shipping in this respect.
But there is a new event on the supply-chain-collapse horizon: agriculture. This is the “ultimate” supply chain collapse. That is, it triggers changes in the political system’s doctrine.
What is the change? It is a move away from the “scrutiny” regime of West Coast Hotel v. Parrish (1937), to the “maintenance” regime I describe in my book, The Eminent Domain Revolt.
The scrutiny regime has been in power for 70 years: its useful life is over. In order to familiarize yourself with the notion of Constitutional regime change in the United States, I suggest you read the excellent online essay of G. Edward White of the University of Virginia Law School, “Historicizing Judicial Scrutiny.”
Now that you are comfortable with the idea that the United States is undergoing a Constitutional revolution, read on:
“Maintenance” is being drawn from its EXPLICIT use in three “scrutiny” regime foundational cases:
1. West Coast
2. Berman v. Parker
3. U.S. v. Carolene Products
Together, these cases are viewed as mandating not discretion, but rather, the maintenance of important facts. The term “maintenance” is used in each of them. This will raise the question, in litigation: what in FACT is maintenance?
The question is already being broached in litigation. Look for the Court to shift away from discretion by noting that policy discretion in the political system was ALWAYS grounded on “maintenance,” since “maintenance” is even in West Coast (and even in Carolene, which has–incorrectly–been said to stand for differing individual rights according to whether we are talking about “social” or “political” facts). Thus, a well-prepared ground is about to change the context in which government borrowing takes place. As follows:
Important facts are maintained by INCREASED INDIVIDUALLY ENFORCEABLE RIGHTS. This means we are moving facts UP the scrutiny ladder from minimum scrutiny. This means a de facto overruling of cases such as Lindsey v. Normet, DeShaney v. Winnebago County, and San Antonio v. Rodriguez.
This means the political system will lose discretion over spending.
ALSO, scrutiny regime doctrines will be replaced by the “maintenance” doctrine. For example, the sole justification of taxation will be that taxation maintains important facts. Tax law will be rewritten to conform it to this doctrine.
Also, BOND doctrine will now be that bonds maintain important facts.
The interrelation of these doctrines will mean de facto defaulting on bonds.
So watch out for PIMCO’s comfortable assumption that all is well in bond land, that the fundamental law of repayment and payment on interest, is still in effect. Deep within the bowels of the establishment–political and unofficial–preparations are already well under way for the “maintenance” regime and pulling the rug out from under bonds.
Bonds–regardless of the kind–are a FATAL investment. They are the bear’s ultimate lure. You will lose EVERYTHING by investing in them, because the new regime will not tolerate or enforce “scrutiny” regime rules regarding them.
This is a warning.
This data begs the question: Why are the loan mods not working?
The seemingly obvious answer is: These borrowers are overleveraged, and can’t afford the payments anyway.
A more nuanced answer: The loan modifications are not aggressive enough.
There are forces in place that prevent more aggressive modifications.
Many mortgage companies that service the loans for these banks are reluctant to give strapped homeowners a break because the companies collect lucrative fees on delinquent loans. Even when borrowers stop paying, mortgage companies that service the loans collect fees out of the proceeds when homes are ultimately sold in foreclosure. So the longer borrowers remain delinquent, the greater the opportunities for these mortgage companies to extract revenue — fees for insurance, appraisals, title searches and legal services.
To quote Upton Sinclair: “It is difficult to get a man to understand something when his job depends on not understanding it.”
Service providers and their employees may have a fiduciary duty to salvage the defaulted loans for the banks. This, however, often gets subsumed by their own self-interest in amassing fees.
Las Vegas real estate agent Rob Jenson lost a deal after lenders dragged their feet. In April, buyers agreed to pay $747,000 for a five-bedroom Spanish-style home, the owner of which had $1.3 million of loans on the property. Jenson contacted the lender, Bank of America, about forgiving the remaining amount.
A BofA VP called Jenson back that night, gave Jenson his cell phone number, told him, “We’re in this together,” and followed up every week. Jenson, however, never returned any of the calls.
Back to reality:
BofA responded four months later, saying it wanted an additional $19,000 in cash from the seller, or a $38,000 promissory note payable over 10 years. When the homeowner wouldn’t come up with the money, Jenson agreed to give the bank $7,500 of his commission. BofA agreed to the terms. But by then the buyer had walked away.
This reflects my experience as a commercial real estate broker to a tee.
A recent short sale I worked on involved multiple properties, overleveraged with the help of no fewer than five financial institutions. In order for the deal to have succeeded, all five lenders had to agree to take a significant, but not life-threatening hit on the face value of the note. Some lenders were surprisingly cooperative, but others threw every conceivable bureaucratic road block in front of me.
The more egregious defenders did one or more of the following:
denied they received the faxes I sent by electronic fax (repeatedly);
required several years of borrower W-2s;
took months to arrange appraisals because they would only use one company;
refused to communicate by email (for fear of leaving an objective trail of events);
passed the file around to different people, and arbitrarily changed the designated contact person, requiring the process to start from scratch;
inserted multiple, unnecessary layers of bureaucracy to the process (which makes mortgage companies’ cries of being overwhelmed fall upon my deaf ears)
refused to deal with me directly, despite authorizations from my client
refused to modify the loan at all, perhaps on the mistaken belief that “property values are going to come back around in the next couple years, so why sell at bargain basement prices now?”
The least worst solution I see to all this was proposed by Marty Feldstein in the Wall Street Journal a few months back: get the government to refinance the underwater residential loans with a very low interest rate. In exchange for this generosity, the borrower will have to sign personally. The rate will be lower than what’s keeping the borrower underwater. Uncle Sam will still make money because his cost of funds is near zero. Fewer homes will need to be foreclosed. Available housing stock will shrink.
Since this plan will not be implemented anytime soon, I do not see either residential or multifamily values recovering from their peak for a long time.
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UPDATE (jm): link to the relevant blog post added at commenter’s request.
“Throw the Lenders Your Keys, But They’ll Throw Them Right Back”, by Neil, Multi-Family Investor, October 3, 2009.