Irvine Housing Blog

House Democrats lobby to give free money to loan owners

Posted: 29 Nov 2011 02:20 AM PST

In what can only be described as buying votes, Democrats in the House of Representatives are lobbying to forgive principal on GSE held mortgages.

Irvine Home Address ... 27 SHEARWATER Irvine, CA 92604
Resale Home Price ...... $725,000

I never saw the end in sight;
fools are kind of blind.
Thought everything was going alright,
but I was running out of time.

Take my words, read 'em every day,
keep 'em close by, don't you let 'em fade away,
So you'll remember what I forgot to say,
write this down.
Write this Down -- George Strait

The legions of hopelessly underwater loan owners are all praying for a write down on their mortgage. It's a false hope, but with falling prices and little prospect of a recovery any time soon, false hope is all many of these borrowers has left.

US House Democrats press for mortgage write-downs

Reuters -- WASHINGTON | Tue Nov 22, 2011 4:33pm EST

Nov 22 (Reuters) - More than 20 Democrats in the U.S. House of Representatives on Tuesday called on the regulator of Fannie Mae and Freddie Mac to help underwater borrowers by allowing their loan principal to be reduced.

The regulator has faced increasing pressure to permit the write-down of principal by the two government-controlled mortgage finance providers as a way to help some of the millions of Americans who owe more than their homes are worth. The Federal Housing Finance Agency, however, has stood fast out of concern such a change would undercut finances of Fannie and Freddie.
"We strongly urge that you reconsider your refusal to allow principal reductions to achieve better-performing (loan) modifications and avoid the extreme losses of unnecessary foreclosures," the 21 lawmakers wrote in a letter to the FHFA.

Nobody is discussing the bigger issue of moral hazard. If you give away free money, it will encourage imprudent borrowing because the borrowers know they can petition for a bailout and get it. That's the real reason we shouldn't consider principal reductions.

I am relieved the FHFA is resisting increasing the losses on the government's GSE portfolio. Giving away free money will certainly do that.

As for the congressmen, their argument is specious. How does giving away free money avoid extreme losses? Doesn't that guarantee losses? Are the congressmen really arguing that by giving away some now taxpayers will lose less later? Does anyone else see the insanity in that?

Fannie Mae and Freddie Mac provide guarantees to investors against the possible default of loans, which encourages banks to make new loans. The two companies are the biggest sources of U.S. mortgage financing, and regulations on their activities have a widespread effect on the mortgage market.
Fannie Mae and Freddie Mac, which were taken over by the government in 2008, have together received more than $145 billion in taxpayer-funded support.
Given an expanding gap between U.S. home values and mortgage balances, many Democrats and housing industry representatives have argued for comprehensive anti-foreclosure efforts that include principal write-downs.

They are arguing against the cure to the problem. If they really wanted to bring down the gap between home values and mortgage balances, they would foreclose on underwater borrowers and put them out of their misery. These congressmen are correct that the gap between what the houses are worth and what is owed needs to be reduced, but their method of doing so is all wrong. Principal forgiveness will not deter irresponsible borrowing in the future. Foreclosure has consequences, principal forgiveness does not.

Mortgage modifications usually involve a reduction in the interest rate but not the principal balance of the loan.
In the letter, Democrats estimated principal reductions for troubled borrowers would lead to lower defaults and reduce the risk of default for about 20 percent of Fannie and Freddie's portfolio.

So they want to give away the money because the GSE might lose it? How stupid is that?

Efforts to reduce principal debt are rare, often voluntary. Fannie and Freddie are also concerned that writing down loan balances would create a moral hazard -- the concept that rescue efforts breed further behavior that exacerbates the existing problem -- prompting other borrowers to stop making timely loan payments.

They shouldn't just be concerned, they should be quite certain principal forgiveness will lead to moral hazard. No borrower will ever be prudent again. If borrowers believe they have no risk in the transaction, they will take all the money they can get under any terms available because they know they will get bailed out if things go wrong.

"The performance of the enterprises' mortgage modifications leaves much to be desired for homeowners, for the housing market, and for taxpayers," Representative Brad Miller, a Democrat and a member of the House Financial Services Committee, said in a statement. Miller, who has proposed legislation to reform housing finance, led the Democrats in writing the letter.

Some economists see principal reductions as central to cleaning up the housing mess and preventing foreclosures.

Some economists are really stupid.

Settlement talks between the government and some of the biggest mortgage servicers to clean up alleged foreclosure abuses include widespread principle reductions in their agreement.

There's the money shot -- the false hope to keep more loan owners paying. Widespread principal reductions are coming, right?

If there is principal reduction in the agreement, it will be targeted to the most severely underwater borrowers who are most likely to strategically default anyway. By reducing the principal a little, they will get a few more payments out of the borrowers before they implode. Perhaps this is what the Democrats had in mind when the proposed principal reduction, but I rather doubt it.

A house I know

When I first began writing for the IHB back in February of 2007, I had just moved into a property in University Park. While I was looking for that property, I made an offer to rent this property. At the time, the asking rent was $2,700, and with the prevailing 6.3% interest rate, the house was well over rental parity. It's amazing what a difference a 4% interest rate makes.

At the time, one of the main reasons I didn't rent this property was because I knew the owner was a speculator who just bought the property, fixed it up, and was using an Option ARM with a 1.5% teaser rate to keep his monthly cost down. In other words, I knew he was going to blow up.

He did. Despite putting $142,000 down on this property, the negative amortization and declining value prompted him to give up. He quit paying sometime this year, probably when his payment recasted to fully amortizing and the cost of ownership started burning a hole in his wallet.

Foreclosure Record
Recording Date: 09/23/2011
Document Type: Notice of Default

The description says it's an equity sale, but I rather doubt he has much flexibility to lower the price and still pay off the loan. This will probably die on the MLS and either become a short sale or an REO.

With 4% interest rates, this house costs less to own than to rent. The price is still ridiculous, but the cost of ownership is what it is. The buyer of this property will be saving money versus renting, and for a single-story home in Woodbridge, that's not all bad.

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This property is available for sale via the MLS.
Please contact Shevy Akason, #01836707
949.769.1599
sales@idealhomebrokers.com

Irvine House Address ... 27 SHEARWATER Irvine, CA 92604
Resale House Price ...... $725,000

Beds: 3
Baths: 2
Sq. Ft.: 1538
$471/SF
Property Type: Residential, Single Family
Style: One Level, Contemporary
Year Built: 1979
Community: Woodbridge
County: Orange
MLS#: S679826
Source: CRMLS
Status: Active
On Redfin: 10 days
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Equity sale in North Lake, Woodbridge! Move-in ready. Upgraded maple kitchen cabinets, granite countertops, stainless steel appliances. Neutral ceramic tile, carpet, paint and decor. This highly-desireable floorplan boasts private Atrium off master bedroom. Nice open floor plan, great for entertaining. Walking distance to Eastshore, Lakeside & Woodbridge High.
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Proprietary IHB commentary and analysis

Resale Home Price ...... $725,000
House Purchase Price … $740,000
House Purchase Date .... 11/17/2006

Net Gain (Loss) .......... ($58,500)
Percent Change .......... -7.9%
Annual Appreciation … -0.4%

Cost of Home Ownership
-------------------------------------------------
$725,000 .......... Asking Price
$145,000 .......... 20% Down Conventional
4.02% ............... Mortgage Interest Rate
$580,000 .......... 30-Year Mortgage
$140,790 .......... Income Requirement

$2,776 .......... Monthly Mortgage Payment
$628 .......... Property Tax (@1.04%)
$0 .......... Special Taxes and Levies (Mello Roos)
$151 .......... Homeowners Insurance (@ 0.25%)
$0 .......... Private Mortgage Insurance
$82 .......... Homeowners Association Fees
============================================
$3,637 .......... Monthly Cash Outlays

-$643 .......... Tax Savings (% of Interest and Property Tax)
-$833 .......... Equity Hidden in Payment (Amortization)
$203 .......... Lost Income to Down Payment (net of taxes)
$111 .......... Maintenance and Replacement Reserves
============================================
$2,475 .......... Monthly Cost of Ownership

Cash Acquisition Demands
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$7,250 .......... Furnishing and Move In @1%
$7,250 .......... Closing Costs @1%
$5,800 .......... Interest Points
$145,000 .......... Down Payment
============================================
$165,300 .......... Total Cash Costs
$37,900 ............ Emergency Cash Reserves
============================================
$203,200 .......... Total Savings Needed
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