Mortgage crisis

In today's New York Times, Gretchen Morgenson has an interesting column that validates one of the key points I made in my post from several days ago about why the owners of mortgages are not foreclosing more often on homeowners who aren't making their monthly payments.  The answer: Foreclosing would require that the mortgage owners re-estimate downward the value of the second liens to what Morgenson calls "fantasy levels."  That, in turn, would require them to admit that the loans had gone bad and, therefore, require that they repurchase the loans from Fannie Mae and Freddie Mac.

It's hard not to be both amused and angry after reading this story by David Streitfeld in yesterday's New York Times about homeowners who are intentionally not paying their mortgages but are not facing foreclosure because...well...their mortgage servicer isn't foreclosing on them.

You can't call this a "movement" because it doesn't appear to be organized.  As the Times story notes, this is happening with increasing frequency because individual homeowners are realizing that the foreclosure process isn't automatic and are taking advantage of the situation by deciding not to pay. 

Stories like this almost certainly will encourage others to stop making payments, and, as the story also notes, a new business/industry/profession seems to be developing in mortgage payment avoidance counseling.  So, the number of homeowners who simply stop making payments and dare their servicer to do something about it may well continue to grow.

Hardly a month has gone by in Washington since late 2007 without another government effort to avert the tidal wave of millions of home foreclosures.  President Bush established HopeNow in December, 2007.  He signed the Hope for Homeowners Act in July, 2008, and created the Troubled Asset Relief Program to purchase mortgage securities on October 3, 2008.  President-elect Obama backed the second $350 b. tranche of TARP, which was released by a Senate vote on January 15, 2009, with a new requirement that at least $40 b. set aside for averting foreclosures.  Mr. Obama established the Making Home Affordable Program on February 18, 2009 and signed the Helping Families Save Their Homes Act making modifications to the Hope for Homeowners Program to make it more effective on May 20, 2009. Early this week, Larry Summers and senior administration officials called mortgage servicers to the White House to berate them for not doing more to avoid foreclosures.

None have worked.

CNBC's Rick Santelli started this (see below).  Now it's my turn to vent.

See if you can watch this report by Jane Wells from CNBC that aired yesterday without cursing.

http://www.cnbc.com/id/15840232?video=1008119754

The piece is about a chiropractor who owns four homes, is behind and underwater on all of them, and is demanding that he be bailed out.  He insists that the only appropriate thing is for his lenders to refinance these properties at their current market value.  Otherwise, he says he's going to abandon all of them and hurt the economy.  In other words, he says he has a gun pointed directly at the economy's head and is going to pull it unless someone meets his demand.

Also note that he's unrepetant, that he's an investor trying to retain his investment ather than someone who is just trying to stay in his home, that he's intentionally leveraged to the hilt, and that he absolutely thinks he deserves the help.

Remember that he no longer deserves to be considered innocent because he's admitted everything.

I'm just starting to catch up on a few things that caught my eye (and in some cases got my blood pressure up) over the past few days.

This story by Nancy Trejos from the December 21 business section of The Washington Post definitely got my attention.  To my mind, the money quote was from a homeowner who was complaining about his situation, especially about his inability to refinance his second loan on a home that is now worth much less than when he bought it:

It's no fun when your house is upside-down by $80,000. I didn't create it.

Th emphasis in the above quote, which is mine, is my BIG complaint about the current housing situation.  Even though many, or perhaps even most, people who bought a home over the past decade did so as an investment, that is, because they thought it was a can't-lose way to make money, they are refusing to take any responsibility for the fact that their decision turned out to be bad.

First, some full disclosure: In my day job I have a number of mortgage lending industry clients.  None of them knows about or were involved in this post in any way.

Dean Baker has a post today using his usual excellent analytic abilities to dissect a story in today's New York Times about the current state of the mortgage issue.  While I don't always agree with Dean's sense of outrage, his post is definitely worth looking at after you read the Times.

One thing the article and Dean fail to point out is that the housing/mortgage crisis isn't really one problem; it's a steady series of different problems that absolutely defy a single or simple solution.  Lumping them together as "The Crisis" as the Times does complicates the public policy process.

Just as students are about to apply for their loans for next fall, many lenders have stopped making student loans. This week, two of the largest, Citicorp and Bank of America, pulled out. Higher educational institutions are rapidly switching back to direct loans from the government, but the Department of Education may be swamped despite the fact that no student has been denied a loan yet and despite DOE's claims that it's ready to make loans that private lenders won't.

Sallie Mae's CEO Albert Lord wrote two days ago in Wednesday's quarterly earnings report, "Today's environment is the most difficult we have seen in our 35-year history of student lending. It has become obvious that we can only meet the enormous student credit demands we are seeing at Sallie Mae if there is a near-term, system-wide liquidity solution."

Every American supposedly dreams about living in/owning their own home. 

That's a romantic formulation: we all dream about a home where we can provide for our families and everyone wants to have the equivalent of picket fences, front yards, and two-car garages.  That's why being able to buy a home is the goal and federal policy has been devoted to making that easier.

But as I've watched the issue unfold over the past few months, I've started to wonder whether this romantic version of the American Dream is really nothing more than a myth. Would homeownership be as desirable to most people if they thought they would break even or lose money when they sold the house, condo, or co-op?  Would renting then grow in popularity

In other words, is owning a home more one about investing and making money?  Rather than owning their own home, does everyone actually dream about selling it?

I'm rapidly coming to this conclusion because it's one of the only ways I know to explain the emotions that seem to be so much a part of the current issue. 

That was quite a speech former Fed Chair Paul Volcker gave to the Economic Club of New York yesterday. He recalled his stand against bailing out New York City and the beneficial long-run effects that resulted. Then he contrasted that with recent Fed actions under Ben Bernanke.