More on the MN Foreclosure Mediation Plan

You know from reading our post last week on the Attorney General's Mandatory Mediation plan for fixing the foreclosure crisis is basically a foreclosure moratorium under separate cover. You also know that it is based, in part, on a plan used to halt Farm foreclosures in the 1980's. 

So, in the interest of identifying possible unintended consequences of such an action, we asked a few MN banking veterans (grizzled enough to remember the original program,) what they thought.

The following comment, from a 30+ year veteran of banking who shall remain nameless, was too good not to share:

[Attorney General Swanson] should do more research on the farm bill from the 80's.  What happened when they passed the farm foreclosure act was that banks quit lending on farms completely until they rescinded it.  It's where we got the 10 acre minimum.  Anything over 10 acres had a moratorium on foreclosure.

...we have to quit calling renters homeowners.  Until that happens this won't be fixed.

The last, absolute last, thing that we need is for lending to clamp down further based on the vagaries of "helpful" programs launched by aspirational politicians.  This is sounding more and more like a bad idea.

11/24/08 at 01:59 PM Permalink | Comments (1) | TrackBack (0)
Filed Under: Foreclosures, Housing Market Politics, Twin Cities

Fannie Mae: In Dire Need of Cash, Announces Plans to Lose More on Purpose

Two bits of news related to Fannie Mae. 

First, they are still losing money, but fast, and may need more government largess to survive.  From bloomberg:

Fannie Mae may need more than the $100 billion in funding pledged by the U.S. Treasury to stay afloat after reporting a record $29 billion loss and confronting more difficulty in issuing and refinancing debt.

``This commitment may not be sufficient to keep us in solvent condition or from being placed into receivership,''

Second, at 2PM today they are announcing a new loan modification initiative, from the WSJ:

Fannie Mae, Freddie Mac and U.S. officials are expected to announce plans Tuesday to speed up the modification of hundreds of thousands of loans held by the housing finance giants...

The streamlined effort will target certain loans that are 90 days or more past due, these people said. The program will aim to bring the ratio of mortgage payments for these homeowners to 38% of their income by modifying interest rates and in some cases forgiving portions of principal debt, these people said.

File this under the economic theory of "Some money is better than no money." 

In other words, if they can convince a few of these delinquent borrowers to make payments at reduced interest rates and/or principal amounts, they might have a prayer of staying solvent and preventing the economic carnage that would ensue if they just foreclosed on everyone.

Of course, the cynical take on this is we are rewarding the risk takers (overextended homeowners) at the expense of those who did not overextend themselves.  Also a totally true statement.

Update 4:16PM: Video of Today's loan modification presser from CNBC.

11/11/08 at 12:19 PM Permalink | Comments (1) | TrackBack (0)
Filed Under: Credit Crunch, Fannie Mae, Housing Market Politics, Mortgage Economics

Coming Soon? FDIC's Loan Modification Plan, Foreclosure Moratorium

Today's Wall Street Journal has an update on the forthcoming loan modification program from the Treasury and FDIC that we mentioned last week.  It appears they are getting closer:

And the Treasury, the Federal Deposit Insurance Corp. and other government agencies are said to be close to announcing a government program to address residential foreclosures at the root of the crisis.

Semi-related and also worth noting is that with the election over, a resurgent democrat congress will likely redouble it's pursuit of a 90 Day Moratorium on Foreclosures.  The general idea behind a moratorium is that it will (forcibly, we note) inspire servicers to consider modifications rather than foreclosures, thereby keeping people in homes.

American Banker notes that some servicers are terrified of this:

"A foreclosure moratorium would make a correction take much longer and have unintended consequences on servicers who already have liquidity constraints," said Dennis Stowe,a buyer and servicer of distressed mortgages."

The likelihood some sort of moratorium will pass as early as January has inspired at least one big bank, Chase, to institute it's own 90 day moratorium, presumably to get ahead of the coming legislative storm, and focus on modifications.

To supporters, a moratorium sounds great, albeit in a populist, "lets stick up for the little guy sort of way."   But in practice, these types of sweeping "solutions" can be riddled with problems.  And you can bet your sisters kitty that there will be consequences neither desirable nor intended from any moratorium.

Higher rates, higher down payments, higher mortgage insurance rates, a prolonged housing correction, and the possibility that we'll have to shovel more taxpayer dollars into the ailing banking system are the first few that spring to mind. There are more.

On the other hand we've already seen much the preceeding list happen, so I guess the questions worth asking are: How much worse could a moratorium make things, and whether servicer objections are as much about keeping congress out of their knickers as they are about preventing distress to future borrowers.

One thing is clear, and worth keeping in mind when the details of these efforts are put forth: Any attempt to prop up housing values will not work, and the shortest distance between where we are now and a healthy housing market is to let the correction happen, and get it over with as quickly as possible. We don't see how a moratorium helps in that regard.

Our guess is that the number of additional modifications that happen as a result of a moratorium will be small, at least if the industry and FDIC's modification track record thus far are an indication of how this will go.

For most, the best this will do is forestall the inevitable.

We'll be sure to update you when there's an official announcement.

11/06/08 at 01:19 PM Permalink | Comments (2) | TrackBack (0)
Filed Under: Banking Bailout, Credit Crunch, Foreclosures, Housing Market Politics

Deathmatch: NYT vs. Freddie Mac

Interesting little dust-up between the New York Times and Freddie Mac.  The executive summary:

NYT reporter alleges Freddie Mac CEO Syron was warned, ignored these warnings and should have known about looming problems with riskier loans in their portfolio.

Freddie responds, stating that at best, this is revisionist history, sloppy reporting, and utter bunk.

Also worth reading is Tanta's take-down of the NYT article over at Calculated Risk, and Jeff Miller's analysis of over at A Dash of Insight.

This may seem like inside baseball to many, but it would be a mistake to ignore this.  Legislators are already wielding the housing correction like a cudgel (which can be good, so long as they are crushing the right skulls) so it will pay to understand the facts in the rush to assign blame somewhere.

08/06/08 at 07:58 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Freddie Mac, GSE's, Housing Market Politics

Housing Bill Passed, Awaits Senate Vote, Presidential Signature

As expected, the omnibus housing bill was passed by the house yesterday.  There's all sorts of housing related fine print in this bill, but here are what we see as the key provisions:

07/24/08 at 10:58 AM Permalink | Comments (1) | TrackBack (0)
Filed Under: Financing Options, Housing Market Politics, National & Abroad

Pawlenty May Veto Foreclosure Moratorium Bill

From the Star-Tribune, reporting that governor Pawlenty will "probably" veto the Foreclsoure Moratorium bill currently winding it's way through the State Legislature:

Pawlenty said he is concerned about the potential effect on credit for the entire Minnesota mortgage market.

"Even though the concept is well-intentioned, it could have some pretty significant unintended consequences for the 98 percent of the credit market that are not in foreclosure," the GOP governor said.

For those unable to read between the lines here, what the Governor is getting at is this:  If Minnesota is going to pass legislation that invalidates a lender's contractual right to foreclose, these same lenders might not be so eager to issue mortgages around here, or at the very least may charge some Minnesota borrowers a premium - call it a Legislative Risk Adjustment - in the future.

To be fair, the moratorium targets owner occupant, sub-prime borrowers, so it remains to be seen whether a bill like this will meaningfully impact the pricing and/or costs for the "other 98%" of borrowers, but it is a real risk.

Also, the proposed moratorium may have costs beyond "higher future rates."  That's because interest, penalties, and tax bills continue to accrue, and are not forgiven (only deferred) under this bill.  The borrowers are still on the hook after the moratorium expires - and precious few will be able to pay then what they can't pay now.

The end result is after the moratorium expires, the lender and/or the borrower will be stuck with an even larger loss.  That may well have costs for us all in the form of a direct taxpayer bailout, of some form or another, at the State or Federal level.

In that sense, what's being billed as a "solution," just isn't. All we are really doing is deciding who to foreclose on now, who to foreclose on later, and increasing the cost of the end game.
-------- 
Proposed Freeze on Foreclosures Runs Into Obstacle [Strib]
Previous Coverage of this topic at BTM:
MN May Pass Nations Strongest Foreclosure Moratorium [BTM]
More on Foreclosure Moratorium [BTM]

04/03/08 at 10:00 AM Permalink | Comments (1) | TrackBack (0)
Filed Under: Foreclosures, Housing Market Politics, Minneapolis, Sub-Prime

More on The Foreclosure Moratorium: What Happens After The Deferment is Up?

Answering our own question from yesterday on the proposed (this is not a done deal yet) foreclosure moratorium:

Questions, questions.  Chief among them: What happens when the 12 month deferment period is up?  Can the lender go after the borrower for unpaid principal and interest during the deferment period after it is over? What about unpaid amounts that pre-date the deferment?  If that's the case, aren't we just postponing the inevitable?

We traded emails on this with U of M law professor (and primary architect of Minnesota's Predatory Lending Law) Prentiss Cox, who confirmed our take - The outstanding mortgage debt will not be discharged, and past due principal, interest, and penalties not only carry over, but continue to accrue during the 12 month deferment period.

In other words, even if your subprime loan is not negatively amortizing now, it sure will be after signing up for the deferment. 

The cynical take on this is that all that's being accomplished is a delay of the inevitable - which will be the case for many if not most that qualify for the deferment - but a few folks should and will use this time to get their finances in order, we suppose.

And they better, because if they're underwater now, just wait until a years worth of payment shortfalls rack up.

03/06/08 at 02:39 PM Permalink | Comments (0) | TrackBack (0)
Filed Under: Consumer Protection, Foreclosures, Housing Market Politics, Sub-Prime, Twin Cities

Minnesota May Pass Nations Strongest Foreclosure Moratorium

Audio only from MPR.  A few highlights we pulled from a quick listen:

• The measure would block foreclosures for a full year.
• Applys to owner occupied properties only.
• It is intended to force lenders to modifyout the loan, rather than foreclose.
• Borrowers would be required to Keep making payments - 65% of payment at the time of default, or initial interest rate, whichever is lower.

Here's a link to the text of the bill, we'll scan through it and share any further thoughts later:

UPDATE: More highlights, from the bill:

• Loan must have closed between January 1st 2001 and August 1st 2007.
• Must be a sub-prime or a loan with negative amortization for which the minimum payment increased.
• To suspend foreclosure, borrower must send an affidavit to the lender, which states:
  • I am the borrower
  • A foreclosure sale has been scheduled
  • I currently reside at subject property
  • I intend to reside at the subject property for 12 months.
  • I believe that the mortgage loan is sub-prime or has negative amortization and the payment has increased.
• There are criminal penalties (2yrs, $2000 fine) for misrepresentation in affidavit above.
• If the borrower does not make the reduced payment, the lender may re-initiate the foreclosure process and schedule a foreclosure sale.
• During the deferrment period, lender cannot charge an eligible foreclosed borrower any other amount than the reduced payment.

Questions, questions.  Chief among them: What happens when the 12 month deferrment period is up?  Can the lender go after the borrower for unpaid principal and interest during the deferrment period after it is over? What about unpaid amounts that pre-date the deferrment?  If that's the case, aren't we just postponing the inevitable?

Will the wholesale we-writing of these contracts make lenders less likely to lend in MN in the future?

03/05/08 at 02:11 PM Permalink | Comments (2) | TrackBack (0)
Filed Under: Breaking News, Consumer Protection, Foreclosures, Housing Market Politics

The Worst News Yet for the Housing Market

Want a recipe to make a bad problem worse?  This is it. 

From the WSJ:

Tensions over housing and credit are emerging across the country as voters confront the reality that their biggest personal investment is no longer a guaranteed store of wealth...What is notable in the unfolding fight for Congress is how the collapse of the housing bubble has so swiftly become a defining political issue...

The politicians smell votes in this here crisis, and are latching on. 

Though any rational observer will tell you that there is nothing Washington can do to stop the fall or re-inflate home prices, that won't stop them from trying.  Might as well drag a caribou carcass into a pack of wolves and tell them not to eat.
Voters Feel Mortgage Crisis [WSJ]

02/13/08 at 08:52 AM Permalink | Comments (2) | TrackBack (0)
Filed Under: Housing Market Politics