HousingStorm.com

Loss Mitigation Isn’t Working

One of the things that I love about my job is when I get to talk to people that are on the “inside”.  What I mean by the “inside” is someone that is working for the banks.  A disgruntled bank employee. A pissed off loss mitigator.  Someone who decides whether or not to pursue you for a deficiency judgment.  Each of my conversations have many commonalities.  Some are upset that the government is over promising and obviously… under delivering.  Others are happy to have a job, however are quite sick of feeling like they can’t get anything done because of the basic lack of resources.  I mean come on? Mr. CEO of XYZ Lender… after all that government bailout money…can’t you afford to get a new fax machine or use efax so you stop losing all our faxes?

After a long conversation with this particular head of loss mitigation for …………. Mortgage lender, I asked him to email me his thoughts on what he has been seeing and feeling.  Enjoy.

DUMP The HAMP

President Obama had big aspirations on bringing America a much needed change, yet “change” seems to be all that’s left in our bank accounts each month. We were promised a new modification program that would help between 3 to 4 million at-risk homeowners – both those who are in default and those who are at risk of imminent default – by reducing their mortgage payments to a more affordable rate. It sounded pretty good to me, until I found out how everything works.

First of all, there are 4 different versions of the Home Affordable Modification Program;

Non-GSE (loans owned by your lender)

The Treasury wrote this version in 3 weeks after Obama introduced his financial stability plan and has been continually revised since.

Fannie Mae

They took the Treasury’s version, rewrote it and took many things out of its original context (such as defining common definitions differently, thus causing massive confusion and ultimately making your lender’s job a heck of a lot harder…)

Freddie Mac

They say you have to be more than 60 days behind on your mortgage payment or you are considered current… and ineligible for this program…thanks! Fannie Mae will be implementing this by June 1st as well.

FHA

They will deny you if you have non-mortgage expenses that are over 24% of your total gross income, lame.

You can find out if your lender is participating by calling, or by visiting the Making Home Affordable website.

The one major pet peeve I have about this program is how it doesn’t help the average family man as mush as it helps a bachelor or someone who is single. Shouldn’t it be the other way around??  Let’s say you have a family of 4, a mortgage payment of $2,000, average monthly expenses around $2,000, and your total gross income has been dropped from $6,500 per month to $4,000. Will this program help you? The answer is NO! This is because the program multiplies your current monthly gross income by 31% to achieve your target monthly mortgage payment. In this case, $4,000 x 31% = $1,240. This would save you $760 per month. However, when you factor in the car payment, the kid’s clothes, food, insurance, utility bills, etc., you are left sailing toward the same iceberg you feared from the beginning ($1,240 + $2,000 = $3,240 subtracted from a net income of $3,200 = -$40/month). All it would take is one unexpected event to cause you to fall behind and be right back where you started. This brings me to my next point. If you happen to be lucky enough to receive this modification and face a new hardship 1 year later and you to fall behind, forget about asking for this HAMP again. You only get one shot.

I could go on and on about how terrible this program is, but I want to tell you about what is going on inside of your lender’s Loss Mitigation Department.

In the early 2000’s a typical lenders had about a 1% delinquency ratio. In 2007, after investors on Wall Street quit backing high-risk mortgage loans, your lender’s delinquency ratio’s began skyrocketing from 3 to 4% to up to 8% or more in other cases, and foreclosure ratios have jumped up to around 3 to 4% for stable lenders who never even originated high risk ARM loans! For your lender to keep up with the amount modification requests they receive, they would need to quadruple or even occtiply (yes, an octomom reference…) their Loss Mitigation Department to keep up and comply with investor modification guidelines. There lies the problem.   How do you fund your loss prevention department if your sales department isn’t making as much money? The answer is they have to convert the HAMP trial plans into actual modifications, so they can receive their pay for performance incentives from the government.  But they can’t…  The problem is the underwriting requirements.

Completing a HAMP modification is like originating a brand new loan, except your loan officer is unable to contact you by any other means than mail, and his/her processors are quickly (or inadequately) trained, robotic associates who have to keep up with rapidly changing, loosely defined guidelines from Fannie Mae, Freddie Mac, and FHA. It is almost impossible to ever finish one of these things correctly! Not to mention, loan modifications are so much like a originating a brand new mortgage loan that the government wants all Loss Mitigation employees to be licensed.   This is a good idea for training, but a bad idea for lenders because this will be very costly and time consuming to complete (this will ultimately have to happen though…). It’s just another daunting task for your lender’s loss mit department, which will ultimately slow down your modification.

Probably the most difficult thing your lender has to do is build calculators, use cumbersome excel documents, and report to numerous sources to correctly implement this modification. The HAMP is such a hassle, people who work at Fannie Mae don’t even like it and are praying it ends in 2012 like it’s suppose to. We need a better solution. DUMP the HAMP already, and give us something that works NOW!

——————————–

Conclusion

We have been getting calls non-stop from homeowners who are DONE.  If you are DONE, you know what I mean.  Tired of spending countless hours trying to save your home, when quite frankly it doesn’t seem like it’s worth it anyways.  You feel like your lender doesn’t give a crap.  Even if you get a modification, they won’t reduce your principle so… you’re still stuck with a home that’s not worth anywhere near what you owe on it.  Values are stagnant or dropping.  Credit is still contracting.  Banks like Citi and Wells have new incentive programs designed to lower your credit card limits and get you to pay down your principle.  It’s clear to me that lenders don’t want to lend and won’t resume common sense lending anytime soon.  Ask a local loan officer.  They are still having trouble getting great credit loans done.  I agree.  Dump the Hamp and start re-appraising homes, cut the principle balance down to 94% of the value (so people can sell their home if they’d like without being punished), give the same rate to anyone who accepts the program, whatever the 30 year fixed rate is at the time and revenue share on the upside 10-20% of the equity when they sell the house.  Another idea would be allow short refinancing.  This will not happen because the banks don’t have to “mark to market” their loans.  They are better off just leaving them delinquent.  Which is what we are seeing.  Lenders continuing to postpone auction dates.  14-18 month foreclosure timelines, where the lender should take only 8 months to foreclose.

Wait a minute here.  If bankers got to “mark to market” when values were going up… thus taking HUGE bonuses based on those profits, and now they don’t have to “mark to market” when values are plummeting, so they can still take big bonuses…isn’t that called CHEATING? Uh let’s see… Isn’t that is exactly like heads I win, tails I win?  Hmm… So wouldn’t that be similar to a homeowner buying a house, value goes up, they take out all the cash, then when the value goes down, they walk away without recourse? Government, can you please change the recourse laws in all the other 40 or so states to make it fair?  Since you are taking care of your banking buddies, don’t forget about the people who pay taxes that you’re supposed to be WORKING FOR.  We want the same rules for us.  Please share your thoughts below…

Jon Maddux, CEO

www.YouWalkAway.com

This week we do some review on a very important topic, the velocity of money. If we don’t understand the basics, it is hard to make sense of the hash that our world economy is in, much less understand where we are headed.

But before we jump into that, I want to let my Conversations subscribers know that we have posted a recent conversation with two hedge-fund managers, Kyle Bass of Hayman Advisors [and his staff] here in Dallas and Hugh Hendry of the Eclectica Fund in London. Our discussions centered on what we all think has the potential to be the next Greece, but on a far more serious level. It was a fascinating time.

Then next Wednesday we will post a Conversation I had with George Friedman of Stratfor fame, and then the following Wednesday a Conversation that I just completed with Dr. Ken Rogoff and Dr. Carmen Reinhart, the authors of This Time Is Different.

For new readers, Conversations with John Mauldin is my one subscription service. While this letter will always be free, we have created a way for you to “listen in” on my conversations with some of my friends, many of whom you will recognize and some whom you will want to know after you hear our conversations. Basically, I will call one or two friends each month and, just as we do at dinner or at meetings, we will talk about the issues of the day, with back and forth, give and take, and friendly debate. I think you will find it very enlightening and thought-provoking and a real contribution to your education as an investor.

And as you can see, I can get some rather interesting people to come to the table. Current subscribers can renew for a deeply discounted $129, and we will extend that price to new subscribers as well. To learn more, go to http://www.johnmauldin.com/newsletters2.html. Click on the Subscribe button, and join me and my friends for some very interesting Conversations.

The Velocity of Money

The Federal Reserve and central banks in general are running a grand experiment on the economic body, without the benefit of anesthesia. They are testing the theories of Irving Fisher (representing the classical economists), John Keynes (the Keynesian school) Ludwig von Mises (the Austrian school), and Milton Friedman (the monetarist school). For the most part, the central banks are Keynesian, with a dollop of monetarist thrown in here and there.

Over the next few years, we will get to see who is right about debt and stimulus, the velocity of money, and other arcane topics, as we come to the End Game of the Debt Super Cycle, the decades-long cycle during which debt has grown. I have very smart friends who argue that the cycle is nowhere near an end, as governments are clearly increasing debt. My rejoinder is that it is nearing an end, and we need to think hard about what that end will look like. It will not be pretty for a period of time. The chart below shows the growth in debt, both public and private.

But the end of this debt cycle involves more than just debt reduction. There are a number of ideas we have to get our heads around, including the velocity of money. Basically, when we talk about the velocity of money, we are speaking of the average frequency with which a unit of money is spent. To give you a very rough understanding, let’s assume a very small economy of just you and me, which has a money supply of $100. I have the $100 and spend it to buy $100 of flowers from you. You in turn spend $100 to buy books from me. We have created $200 of our “gross domestic product” from a money supply of just $100. If we do that transaction every month, we will have $2400 of annual “GDP” from our $100 monetary base.

So, what that means is that gross domestic product is a function of not just the money supply but how fast that money moves through the economy. Stated as an equation, it is P=MV, where P is the nominal gross domestic product (not inflation-adjusted here), M is the money supply, and V is the velocity of money. You can solve for V by dividing P by M. By the way, this is known as an identity equation. It is true at all times and all places, whether in Greece or the US.

Our Little Island World

Now, let’s complicate our illustration a bit, but not too much at first. This is very basic, and for those of you who will complain that I am being too simple, wait a few pages, please. Let’s assume an island economy with 10 businesses and a money supply of $1,000,000. If each business does approximately $100,000 of business a quarter, then the gross domestic product for the island is $4,000,000 (4 times the $1,000,000 quarterly production). The velocity of money in that economy is 4.

But what if our businesses get more productive? We introduce all sorts of interesting financial instruments, banking, new production capacity, computers, etc., and now everyone is doing $100,000 per month. Now our GDP is $12,000,000 and the velocity of money is 12. But we have not increased the money supply. Again, we assume that all businesses are static. They buy and sell the same amount every month. There are no winners and losers yet.

Now let’s complicate matters. Two of the kids of the owners of the businesses decide to go into business for themselves. Having learned from their parents, they immediately become successful and start doing $100,000 a month themselves. GDP rises to $14,000,000. In order for everyone to stay at the same level of gross income, though, the velocity of money must increase to 14.

Now, this is important. If the velocity of money does not increase, that means that (in our simple island world) on average each business is now going to buy and sell less each month. Remember, nominal GDP is money supply times velocity. If velocity does not increase, GDP will stay the same. The average business (there are now 12) goes from doing $1,200,000 a year down to $1,000,000. The prices of products fall.

Each business now is doing around $80,000 per month. Overall production is the same, but divided up among more businesses. For each of the businesses, it feels like a recession. They have fewer dollars, so they buy less and prices fall. So, in that world, the local central bank recognizes that the money supply needs to grow at some rate in order to make the demand for money “neutral.”

It’s basic supply and demand. If the demand for corn increases, the price will go up. If Congress decides to remove the ethanol subsidy, the demand for corn will go down, as will the price.

If Island Central Bank increases the money supply too much, you will have too much money chasing too few goods and inflation will rear its ugly head. (Remember, this is a very simplistic example. We assume static production from each business, running at full capacity.)

Let’s say the central bank doubles the money supply to $2,000,000. If the velocity of money is still 12, then the GDP will grow to $24,000,000. That will be a good thing, won’t it?

No, because with the two new businesses only 20% more goods are produced. There is a relationship between production and price. Each business will now sell $200,000 per month, or double their previous sales, which they will spend on goods and services, which only grew by 20%. They will start to bid up the price of the goods they want, and inflation sets in. Think of the 1970s.

So, our mythical bank decides to boost the money supply by only 20%, which allows the economy to grow and prices to stay the same. Smart. And if only it were that simple.

Let’s assume 10 million businesses, from the size of Exxon down to the local dry cleaners, and a population that grows by 1% a year. Hundreds of thousands of new businesses are being started every month and another hundred thousand fail. Productivity over time increases, so that we are producing more “stuff” with fewer costly resources.

Now, there is no exact way to determine the right size of the money supply. It definitely needs to grow each year by at least the growth in the size of the economy, the population, and productivity, or deflation will appear. But if money supply grows too much then you have inflation.

And what about the velocity of money? Friedman assumed the velocity of money was constant, and therefore he stated that inflation is always and everywhere a function of the supply of money. And it was, from about 1950 until 1978 when he was doing his seminal work. But then things changed.

Note that nothing Friedman says contradicts the equation MV=PT, if you assume constant velocity. Almost by definition you get inflation if the money supply grows too fast.

Let’s look at two charts sent to me by Dr. Lacy Hunt of Hoisington Investment Management in Austin (and one of my favorite economists). First, let’s look at the velocity of money for the last 108 years.

Notice that the velocity of money fell during the Great Depression. And from 1953 to 1980 the velocity of money was almost exactly the average of the last 100 years. Also, Lacy pointed out in a conversation that helped me immensely in writing this letter, that the velocity of money is mean reverting over long periods of time. That means one would expect the velocity of money to fall over time back to the mean or average. Some would make the argument that we should use the mean from more modern times, since World War II; but even then, mean reversion would result in a slowing of the velocity of money (V), and mean reversion implies that V would go below (overcorrect) the mean. However you look at it, the clear implication is that V is going to drop. In a few paragraphs, we will see why that is the case from a practical standpoint. But let’s look at the first chart.

Now, let’s look at the same chart since 1959 but with shaded gray areas that show us the times the economy was in recession. Note that (with one exception in the 1970s) velocity drops during a recession. What is the Fed response? An offsetting increase in the money supply to try and overcome the effects of the business cycle and the recession. P=MV. If velocity falls then money supply must rise for nominal GDP to grow. The Fed attempts to jump-start the economy back into growth by increasing the money supply.

In this chart from Hoisington, the recessions are in gray. If you can’t read the print at the bottom of the chart, he assumes that GDP is $14.5 trillion, M2 is $8.2 trillion, and therefore velocity is 1.7, down from almost 1.97 just a few years ago. If velocity is to revert to or below the mean, it could easily drop 10% from here. We will explore why this could happen in a minute.

P=MV

But let’s go back to our equation, P=MV. If velocity does slow by another 10%, then money supply (M) would have to rise by 10% just to maintain a static economy. But if we assume 1% population growth, 2% (or thereabouts) productivity growth, and a target inflation of 2%, then M (money supply) actually needs to grow about 5% a year, even if V is constant. And that is not particularly stimulative, given that we are in recession.

Bottom line? Expect money-supply growth well north of 7% annually for the next few years, or at least the attempt. Is that enough? Too much? About right? We won’t know for a long time. This will allow armchair economists (and that is most of us) to sit back and Monday-morning quarterback for many years.

A Slowdown in Velocity

Now, why is the velocity of money slowing down? Notice the real rise in V from 1990 through about 1997. Growth in M2 (see the above chart) was falling during most of that period, yet the economy was growing. That means that velocity had to rise faster than normal. Why? Primarily because of the financial innovations introduced in the early ’90s, like securitizations, CDOs, etc. It is financial innovation that spurs above-trend growth in velocity.

And now we are watching the Great Unwind of financial innovations, as they were pursued to excess and caused a credit crisis. In principle, a CDO or subprime asset-backed security should be a good thing. And in the beginning they were. But then standards got loose, greed kicked in, and Wall Street began to game the system. End of game.

The financial innovation that drove velocity to new highs is no longer part of the equation. Its absence is slowing things down. If the money supply hadn’t risen significantly to offset that slowdown in velocity, the economy would have been in a much deeper recession, if not a depression. While the Fed does not have control over M2, when they lower interest rates it is supposed to make us want to take on more risk, borrow money, and boost the economy. So they have an indirect influence.

And now we come to the policy conundrum for the Fed. They have pumped a great deal of money (liquidity) into the economy. Normally, banks would take that money and multiply it by lending it out (through fractional reserve banking at a potential 9-times factor), increasing velocity and the overall money supply. In the past, the more the Fed increased the money supply, the more banks lent.

But today bank lending is still falling at an average of 15% annually, so far this year. But what if that trend stops?

Corporations in the US have more money on hand than ever in the last 54 years. They are more productive. Their debt-to-equity ratio has been dropping by about 25% for the last 3 quarters, as they repair balance sheets. Capital spending jumped 18% annually in the last quarter. If we are not at an inflection point of rising employment, we are close to it (although we do need at least 100,000 new jobs a month to make up for increased population). And thus are the stock market bulls inspired, and we hit new trend highs weekly.

While growth this quarter will not be as robust as last, it will be fairly good for an economy with 10% unemployment. If you are a Fed governor, you have to be worried that things could turn around quicker than now seems plausible. What if corporations decided to take their cash and start investing in growth?

The last chart showed a small uptick in velocity at the end of last year. What if that is for real? What if we have turned the corner? Then the Fed will have to start taking back the money they have put into the economy, unless they want to see inflation. And indeed, that is what some Fed governors are arguing. They want to raise rates now, or at least signal that they will begin to do so soon. Note there have been a number of speeches by Fed officials of late assuring the bond market that they are aware of the problem, and that they have all the tools they need to keep inflation (and higher interest rates) at bay.

But then again, while there are signs that the economy may be picking up, it is a strange type of recovery. It is what I call a statistical recovery. Let’s look at this litany from my friend David Rosenberg of Gluskin Sheff. He notes that there are measures of economic health other than the stock market and GDP. To wit:

• More than five million homeowners are behind on their mortgages.
• There are over six million Americans who have been unemployed for at least six months, a record 40% of the ranks of the jobless.
• The private capital stock is growing at its slowest rate in nearly two decades.
• Roughly 30% of manufacturing capacity is sitting idle.
• Nearly 19 million residential housing units, or about 15% of the stock, is vacant.
• One in six Americans is either unemployed or underemployed.
• Commercial real estate values are down 30% over the past year.
• The average American worker has seen his/her level of wealth plunge $100,000 over the last two years, even with the recovery in equity markets this past year.
• Bank credit is contracting at an unprecedented 15% annual rate so far this year as lenders sit on a record $1.3 trillion of cash.
• Unit labor costs are down an unprecedented 4.7% over the past year, and what has replenished household coffers has been the federal government, as transfer payments from Uncle Sam now make up a record 18% of personal income (and the Senate just passed yet another jobless benefit extension bill!).”

Wow. 18% of personal income in the US is now from the US government (also known as taxpayers, current and future).

If you take away the punchbowl too soon, you risk strangling a very shaky recovery that is significantly dependent on stimulus spending, which is going to rapidly go away the second half of this year. Further, the Fed situation is complicated by the fact that taxes are highly likely to go up in 2011 (maybe the largest tax increase ever), which will put a serious strain on the economy.

I think the Fed is on hold throughout 2010 and well into 2011, as they see what effect the tax hikes, coupled with decreased stimulus, bring. Next week we will explore the potential effects of the tax hike on the 2011 economy. Stay tuned.

Let me ask for a little bit of help. I am trying to find data on the potential tax increases, and what I am finding is all over the board. In fact, I had intended to write about that topic this week, but simply don’t trust the numbers I am reading. If you have a source or RECENT paper, I would love to see it. Thanks.

Dallas, and Thoughts on the Economy

What started me thinking about tax increases was the problems that so many people I know personally are having, including my kids. It is difficult watching your kids struggle with fewer work hours, the need to make car payments and buy diapers. For many, it’s cuts in pay, lost jobs, and more. Lack of health insurance is often a worry, too.

And knowing it could get worse is rather sobering. Trust me, I see the human side of the need for health-care reform, but also balance it with the need for some fiscal responsibility. We have $38 trillion in unfunded Medicare liabilities. How can we add more? Does anyone really believe that this bill being offered will actually cut spending? How do you cut Medicare by $500 billion when it is already so underfunded? Really? But what about kids and families with no insurance? Something better than what we are seeing is needed to get the problem solved. More on this next week.

I will be a panelist in the inaugural “America: Boom or Bankruptcy?” summit to be held in Dallas on March 26. There will be five of us, presenting problems (plenty of those!) and possible solutions. This promises to be a no-holds-barred, full-throttle event. It should be a lot of fun. Details at www.fedfriday.com.

It’s time to hit the send button. I have kids coming to the airport, and I want to be there. Spring break and all, and I look forward to it. Have a great week.

This is pretty funny.

You can follow the performance of this asset at: Tracking Our Toxic Asset

Planet Money is committed to following the financial crisis to the bitter end. And what better way to do that than to own a piece of it. We bought one of those things that no one wanted, one of those things that almost brought down the global economy: our very own toxic asset. This one has more than 2,000 mortgages in it. We paid $1,000, with our own money, for our piece. It used to be worth more like $75,000. Click on the timeline and roll over the states to watch a disaster in progress.

This post originally appeared on the Irvine Housing Blog.

Other governments around the world take steps to curb lending and warn citizens of the perils of excessive mortgage debt. Why don’t we?

My friends feel it’s their appointed duty
They keep trying to tell me all you want to do is use me
But my answer yeah to all that use me stuff
Is I wanna spread the news that if it feels this good getting used
Oh you just keep on using me until you use me up

Bill Withers — Use Me

Lenders with encouragement from the US Government want to use you to pay for their mistakes; they want to use you, and they want you to feel good about it. Buy now, it doesn’t matter if you go underwater; lenders don’t care as long as you make your rent payments on the money.

Recently, I wrote about Canadian finance minister Jim Flaherty preventing further inflation of Canadian housing bubble.

Allow me to recap and interpret:

(1) He is forcing qualification at a higher payment rate. If he had stated 30-year fixed rather than a 5-year fixed, It would be better, but it is a step toward stable financing. I wish the statement clarified whether or not interest-only ARMs are permitted there. I believe the qualification standard he is imposing is based on a 30-year amortizing mortgage with only a 5 year fixed rate.

(2) Twenty percent down payments? I would like to see this on all property, but common sense says investment properties and second homes should require a significant down payment — people don’t hesitate to walk away from investment properties.

(3) And limiting cash-out refinancing to 90% LTV is identical to the proposal I made. I like this requirement because it provides an equity cushion that stabilizes markets and prevents walkaways.

“We do want to discourage the tendency by some to use their home as an ATM machine, the tendency by some to buy three or four condominiums by way of speculation,” Flaherty said. “This will discourage the kind of mortgage refinancing that can create unsustainable debt levels as interest rates go up.”

Our government actively encouraged us to borrow, spend and be happy while Canadians are being warned about excessive debt and spending their equity foolishly. The contrast is conspicuous.

It isn’t just the Canadians who exercise better control over lending and warn their citizens of the perils of buying and borrowing today. The Swiss, long known for their banking prowess, do not cave in to banking interests.

The Swiss Central Bank sends warning on excessive mortgage borrowing

By Catherine Bosley

The Swiss National Bank warned banks and borrowers on Thursday about taking on too much debt while interest rates were still very low, indicating it is concerned about a possible housing bubble.

…”The SNB is warning banks and borrowers to be extremely cautious,” the central bank said in its quarterly policy statement. “The fact that interest rates are exceptionally low by historical standards must be taken into account.”

…”What they wanted to avoid is house prices going up too much in response to a slightly brighter economic outlook. That would mean another bubble,” said Henrik Gullberg of Deutsche Bank. “One way of doing that is to keep sending these verbal warning shots while policy is still very expansive.”

The Swiss government is openly concerned about its citizens financial well being, and they post warnings about mortgage borrowing to help people. Why is it only bloggers like me who issue these warnings here in the US?

The US Government wants its citizens to borrow as much as possible to help out ailing banks even if that destroys the borrower. Shameful.

Some analysts have argued that the central bank may raise borrowing costs earlier than the market currently predicts, and despite the strong Swiss franc, due to the housing concerns.

The SNB said it was conducting an in-depth investigation into banks’ mortgage-granting practices and that it would work with regulators to see if any corrective steps were needed.

SNB statistics show that prices for single family homes in Switzerland rose by some 4 percent last year.

SNB vice-chairman Thomas Jordan warned as early as autumn last year of a possible bubble in the private housing market.

Why is the US Government out to screw us?

Hasn’t it become obvious that our government does not care about the people? As a citizen of this country, you should be outraged by the way your government puts your interests last. Our government openly advocates destructive policies that transfer wealth from you to the lenders.  The US Government as ruled today is completely captured by money interests; they feed us a steady stream of bullshit bailouts and false hopes to convince us to take on more debt and keep the Ponzi Scheme alive.

It wasn’t always that way.

Andrew Jackson and the Second Bank of the United States

AIG was not the first institution that was too big to fail. Andrew Jackson waged a personal war against the banking behemoth of his era, and as a former general, he knew how to win a battle. From Wikipedia:

The Second Bank of the United States was authorized for a twenty year period during James Madison’s tenure in 1816. As President, Jackson worked to rescind the bank’s federal charter. In Jackson’s veto message (written by George Bancroft), the bank needed to be abolished because:

• It concentrated the nation’s financial strength in a single institution.
• It exposed the government to control by foreign interests.
• It served mainly to make the rich richer.
• It exercised too much control over members of Congress.
• It favored northeastern states over southern and western states.

Following Jefferson, Jackson supported an “agricultural republic” and felt the Bank improved the fortunes of an “elite circle” of commercial and industrial entrepreneurs at the expense of farmers and laborers. After a titanic struggle, Jackson succeeded in destroying the Bank by vetoing its 1832 re-charter by Congress and by withdrawing U.S. funds in 1833.

Does Jackson’s reasoning sound familiar to you? Isn’t most of what he identified as problems exactly what we have with too-big-to-fail institutions? Who will be our modern Andrew Jackson who will crush our banking cartel? Our current crop of politicians are hopeless or worthless completely captured by banking interests and too fearful to do anything to help the people. We are lost, and we need a real leader like Andrew Jackson to help us find our way.

5 Reasons Why The Program Is Doomed To Fail:

Like the federal loan modification program that was put into effect just over a year ago, the federally subsidized short sale program, set to take effect April 5^th, is now being touted as the next great hope for homeowners who either can’t afford to, or are choosing not to, pay their mortgages.

But, just like the Making Home Affordable program that released last year with the promise of saving millions of homes, the federal short sale program is drastically flawed, and if enacted, will more than likely end up with the same exact outcome… after many months and billions of wasted taxpayer dollars, the “experts” will be that it isn’t working for a variety of reasons.

In this Nostradamus like post, we’re going to examine why this new program is doomed to fail… do us a favor – bookmark it, and in a year come back and revisit it, and see how many of these predictions come true. Without further adieu, here are 5 reasons why a federal short sale program won’t work:

1. Second (and third) mortgage holders

Here’s a potential scenario: You owe $500,000 on your home, which was purchased in 2005 with an 80/20 loan, meaning your first loan was for $400,000 (80%) and the second loan is for $100,000 (20%). Due to the collapse of the housing market, the home is now worth $300,000. You put it on the market for $300,000 and get an offer for $250,000, which you take to your first lender. Even if you jump through all their hoops, have a valid hardship, and get your short sale approved, that still leaves the second lender out in the cold, holding the bag to the tune of $100,000. The logical, and typical response from the second lender, will be to block the short sale any way they can.

2. Lack of buyers

Even in a perfect world where every lender agreed to take a loss and accept a short sale, there’s still one major flaw – we’re still in a recession, unemployment is at a multi-decade high and still rising, and consumer confidence is at an all time low. Add to that the fact that due to lack of liquidity and tightening of lending standards, many would be homebuyers are now ineligible for a mortgage anyway. Not exactly a formula for people rushing out to buy all these short sale properties, or to secure the funding to do so even if there were.

3. Bureaucracy & red tape by the banks

Have you ever tried to contact your bank for anything? Loan modification, find about or try to reverse a credit card fee, anything?

If so, you certainly know that it’s not the easiest task in the world. One department sends you over to another, who makes you repeat your info and your story. They tell you to fax in documents, then claim to never receive them. They say you’ll get a call back and you never do.

The point is that if the lender needs an excuse to postpone or make it  difficult for you to do anything, they have it… even if they have the best of intentions, the sheer volume of the requests for modifications, short sales, etc, has most lenders scrambling to play catch up.

Then there’s the fact that has squashed the hopes of so many short sellers in the past – even if you can get all the lenders and investors to agree on the short sale, that usually takes 3-6 months! By that time most qualified buyers have either found another home and lost interest in the current deal.

4. Lack of incentive & penalties

Just like the Federal Loan Modification program, this plan is lacking a huge ingredient… namely the lack of incentive for banks to take less than what they’re owed, and the lack of penalties for delaying or not complying with the rules of the program.

According to a NY Times article on Sunday, the program will offer $1000 apiece for 1^st and 2^nd mortgage holders, and $1500 for the seller.

Sure, there’s a $1,000 incentive payout for a bank to accept a short sale, that’s almost more of a slap in the face than anything. Actually, I’m kind of laughing out loud right now at the absurdity of this.  If someone owed you $100,000, and they came to you and said… “well I can only pay you $25,000, but  don’t worry, because my buddy here has another $1,000 for you…cool?” Haha… Does that really make anything better – it’s still only $26,000!!!

Or it looks more like this…

Borrower:  I know I owe you $100,000, but I can pay you $25,000… Is that ok?

Lender: No

Borrower: Ok, ok… well what if my friend uncle sam gives you $1,000 will that help?

Lender: Sure

I mean come on! Where do these smart people come up with these programs?

You really don’t need to incentivize the seller to sell – the fact that they are out of an underwater mortgage is incentive enough in most cases. The problem is, how can it possibly seem like a good idea for banks to take a $1000 consolation prize to take a loss of 5 or 6 figures on a deal?

Without a real, valuable incentive to accept short sale offers, and without a real penalty to lenders who don’t try to make things happen, there will be no real reason for lenders to go the extra mile to accept the short sales.

5. Lack of clear cut, uniform guidelines

Again, there is another huge comparison to be drawn with the federal loan modification program… the final decision is to be made at the sole discretion of the lender. One of the main reasons that the modification program failed is because you could submit the same application to 2 different lenders, or in some cases to 2 different people at the same lender, and receive 2 completely different answers.

Unless there is a uniform set of guidelines for acceptance, there is no way this will work.

Conclusion:

As with the loan modification program of a year ago, this program is destined for failure unless drastic changes are made to it by the government. By enacting these programs that are meant to be a show of the governments dedication to fixing the economy, but not including any real rules for banks to follow, they are delaying the inevitable, costing taxpayers billions more dollars, and making themselves look foolish and corrupt. Now is no time for token gestures, the economy is at the brink of collapse.

Either make changes that have some teeth and force the banks to start playing by some logical rules again, or do nothing, step back and let free market capitalism run its course. Let the market decide what the prices of homes should be, and who can qualify for them.

Sure there will be bank failures, foreclosures, and more pain, but most people who have an understanding of the economy, a few ounces of logic in their head, and don’t have a bank lobbyist at their doorstep daily, will tell you that this is bound to happen anyway. So isn’t it better to “rip the band aid off quickly”? Either let things take their course naturally, or to really take some action to change that course, instead of doing everything and anything, at all costs (literally) to keep playing by the bank’s rules, and stay on the same crash course that we’re currently on?

And then there’s the issue of the millions of people who are facing foreclosure. If they have tried everything possible to get a short sale done – jumped through all their banks hoops, found a buyer, did all the proper negotiation with all involved parties, and the banks still said no… then shouldn’t those people have the right to give the bank their home back with the same ramifications as if they did a short sale? It just seems very illogical to penalize a seller for circumstances that are far beyond their control, and very unproductive… why not penalize the banks who drag their feet and lose deals instead? You’d at least get some more short sales closed.

New York Times Reported on March 7, 2010:

But at the end of the day, the banks would rather make things difficult. According to J. K. Huey, a Wells Fargo vice president, said a short sale, like a loan modification, would have to meet the requirements of the investor who owns the loan.

“This is not an opportunity for the customer to just walk away,” Ms. Huey said. “If someone doesn’t come to us saying, ‘I’ve done everything I can, I used all my savings, I borrowed money and, by the way, I’m losing my job and moving to another city, and have all the documentation,’ we’re not going to do a short sale.”

Please comment below and let us know why you think this new program either will or won’t work. Thanks!

We’ve now come full circle. Instead of trying to get people to stay in their homes, Obama is willing to pay them to leave. Please consider Program Will Pay Homeowners to Sell at a Loss.

In an effort to end the foreclosure crisis, the Obama administration has been trying to keep defaulting owners in their homes. Now it will take a new approach: paying some of them to leave.

This latest program, which will allow owners to sell for less than they owe and will give them a little cash to speed them on their way, is one of the administration’s most aggressive attempts to grapple with a problem that has defied solutions.

Under the new program, the servicing bank, as with all modifications, will get $1,000. Another $1,000 can go toward a second loan, if there is one. And for the first time the government would give money to the distressed homeowners themselves. They will get $1,500 in “relocation assistance.”

Short sales are “tailor-made for fraud,” said Mr. Lawler, a former executive at the mortgage finance company Fannie Mae.

Under the new federal program, a lender will use real estate agents to determine the value of a home and thus the minimum to accept. This figure will not be shared with the owner, but if an offer comes in that is equal to or higher than this amount, the lender must take it.

Big Shell Game

Diana Olick describes the situation perfectly in Mortgage Principal Writedown Won’t Save Housing.

And so it begins. Big gun lawmakers are making the move toward principal writedowns as the last resort to save the housing market.

The problem is prices. Home prices have fallen so far in the hardest hit areas, the areas where the bulk of the troubled loans are, that banks would have to write down principal 30 to 50 percent to put borrowers back in the green. Accounting rules require that banks write down the value of those loans on their books, and experts tell me that if banks really accounted for all the losses in the home loan market, they’d all be insolvent.

That’s why the Obama Administration has created this kind of shell game in the first place.

I stole that shell game idea from housing consultant Howard Glaser: “We’re spending tens of billions of dollars on a tax credit to get people to purchase homes, we’re spending federal money to keep them in their homes through the modification program, and now we’re going to pay them to move out of their homes. This is not a sustainable system for the housing market. It’s a shell game. Bernie Madoff could have created this system,” Glaser told me today.

F.R.A.U.D.

Let’s take real estate agents who might not have had any sales for 6 months or even a year, and agents who have a vested interest (a commission) in selling a home, and let’s put them in charge of figuring out what a home is worth. Good idea.

Oh…there’s no chance real estate agents will sell homes to their friends for cheap or to total strangers for that matter, just to get a commission. Indeed, real estate agents have been the paragon of virtue throughout the crisis so this is the culmination of a perfect idea.

Even appraisers working directly for the bank might be tempted to make special arrangements with favored real estate agents. A final approval process at the bank would make fraud harder, but that is contrary the idea the lender must take an offer if it hits the established minimum bid. A secondary review would also slow things down.

That aside, even with the chance for fraud, lenders are losing money by doing nothing, and in many cases by letting people live in homes rent free for 18 months or longer. Perhaps dealing with fraud issues is the lesser of two evils, assuming of course the banks can afford the loan losses. Then again, what alternative is there besides pretending loans on the books are worth full value?

This is what our affordable housing program has become: Giving tax credits to new home buyers, spending taxpayer money to keep people in their homes, paying people to move out of their homes, and bankrolling Fannie Mae and Freddie Mac with tax dollars for unlimited losses.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Banks Are Now Walking Away From HOA Fees

In an eye opening interview by Chicago Public Radio on Friday, I learned of a Chicago condo owner whose building had turned into an absolute nightmare – 2/3 of the residents were gone, the utilities had been shut off, the place was literally crawling with maggots.

Of the 27 unit building, Dee Hutchinson and two of her neighbors were left with the sole burden of all the HOA fees, leaving them virtually helpless to take care of even the most basic of necessities like heat and extermination.

What really caught my attention about the story, the problem wasn’t that the residents of the building weren’t paying their dues – that problem had come and gone… the interesting, albeit not really surprising fact about this story was the fact that almost all of the condos in the building were owned by banks, mostly large ones like B of A.

Listen to the full interview here…

This story is yet another in a string recently that illustrates the fact that despite banks trying desperately to paint the picture that defaulting on one’s financial obligations is immoral, they are the first to do it when the tables are turned.

Paul Leonard is with the Financial Services Roundtable, a banking industry trade group. He says banks aren’t set up to handle this.

“The entire issue of a bank as landlord is a very challenging one, because they’re not in the business, nor do they want to be in the business of being a landlord. You know, they don’t have “Oh, we’ll just switch over to our system to pay condo fees.” They don’t have that.” said Leonard.

Aren’t set up to handle it eh? Yet they are set up to call and harass a family who’s main breadwinner has just lost their job, or just found out that they had cancer, or had just died? These stories are a dime a dozen, meanwhile while the banks are raking in record profits and charging ridiculous interest rates and fees to everyday folks just trying to get by, yet they see no moral responsibility to their new neighbors in the condo to help pay their share so the residents who have heeded their plea to do what’s right and keep paying, can have heat, and a fridge that isn’t infested with maggots.

But of course, far be it for us to ask them to “switch over their system to pay condo fees”, because that would be just unreasonable, immoral even. Boo-freakin-hoo guys, if you can dish it out, you should be able to take it. That’s kindergarten stuff.  I don’t EVER want to hear an executive from B of A or one of these banks say anything negative about someone walking away from their underwater mortgage again.  Hypocrites!

Jon Maddux

CEO

www.YouWalkAway.com

As I had written about in January of 2009, in which I suggested that some builders could keep their operations alive by taking on remodeling work and also working for banks to finish up half-finished project, it appears that’s just what has happened. From a story in the Wall Street Journal:

Home builders in some of the nation’s hardest-hit housing markets are going to work directly for banks, in a little-used arrangement that is helping to ameliorate conditions in some battered local economies.The builders traditionally got loans from banks to build homes, but that credit has largely dried up. The contract work builders are getting is welcome as many of them struggle to stay afloat…

…builders from California to Florida are starting to contract their services to lenders, many of whom have been left holding unfinished homes after the original builder went belly up. While there are no data on the trend, many builders are taking this work for the first time, particularly in markets like Nevada, Arizona and California, says Stephen Melman, director of economic services for the National Association of Home Builders.

The trend helps preserve relationships between builders and lenders in a strained time for the two. In some of these situations, home builders are working for the same institutions that won’t lend money to them. While banks have hired builders before for fees, the trend is more prevalent now as more financial institutions own foreclosed properties, experts said…

The shift also helps the banks. In Atlanta, Beazer Homes USA Inc. in November was selected by Hearthstone Inc., an institutional investor in Los Angeles, to build and market homes on 462 lots over the next two to three years after another builder on the job went out of business. Hearthstone President Mark Porath said the company initially faced selling the lots for a loss after the first builder went bust. Now with Beazer on board, Hearthstone stands to eke out a small profit, he said.

Beazer officials said the deal—its biggest ever with a bank—allows it to expand in a market they feel has growth potential without facing much downside risk. Beazer is being paid “more a fixed than variable” payment for its work, with some “upside” compensation if certain goals are met, said Beazer Chief Financial Officer Allan Merrill…

First of all, this survey is a complete sham…which is probably why it wasn’t talked about outside of the industry press. Second, the survey proves that most people simply don’t understand basic economics.

DS News reports Americans Strongly Support Government Housing Initiatives: Survey

Americans remain deeply committed to federal support for homebuyers, and many believe the government should

provide more protection against foreclosure, according to the results of a recent survey conducted for the National Association of Home Builders by RT Strategies, a bipartisan public opinion polling firm headquartered in Washington, D.C.

Of the households polled, 68 percent said the government should continue to support housing. This belief was found to be especially true for potential homebuyers, as 78 percent of respondents in this group, including 81 percent of renters who intend to buy a home in the near future, said government housing initiatives should carry on.

Many who were polled also said the government should be doing more to help families avoid foreclosure. Overall, 65 percent of homeowners said government support needs to be expanded, and 84 percent of renters believe the government needs to offer additional assistance to troubled borrowers.

The NAHB saying that people want the Government to support housing is like the tobacco industry saying that people support cheap cigarettes.  Home Builders have a horse in the race and could ask poll questions in a way to create answers to support their own cause.  Hence, a sham.

Now for a basic economics lesson:

Prices are dictated by Supply and Demand. As demand for a good increases, so naturally does the price.

Government “support” for housing…be it in the form of foreclosure prevention, low interest rates, tax credits, the entire existence of FHA, Fannie Mae, Freddie Mac, Ginny Mae, or low-income housing initiatives…results in INCREASED demand for housing.  Prices go up.

Government efforts to make housing more attainable result in housing becoming more expensive.

Those who say that they are in favor of “Government Support” are therefore in favor of the Government making housing more expensive than it has to be.

That means more money each month goes to the mortgage payment and less is available for everything else.  Banks do well. Home builders do well.  But the quality of life for just about everyone else goes down.

It is mind-blowing that 78-81% of potential homebuyers would be in favor of Government support.  Do they not understand that if the support went away, they could buy a house for a lot less money?

How could 84% of renters be in favor of higher prices? Do they want to rent forever?

As the economy continues to struggle and the foreclosure crisis moves to the next painful phase, perhaps people will get more skeptical, more angry, and more educated. If the electorate demanded the Government stop propping up home prices, maybe they would stop.

This poll suggest that people believe that the same Government programs that helped cause this crisis will help us get out of it.

But. like giving a drug addict more drugs, more stimulus will not cure our real estate ills.

Debt-addiction is the disease. Debt destruction is the cure.

Foreclosures aren’t the illness, they are the cure.

A new bubble isn’t the answer.

It is time to end the Government’s perverse support of high home prices.

The euro as presently configured is doomed due to structural imbalances between mercantilist and consumer nations. A “euro1 and euro2″ system would allow a face-saving demise to euroland’s single currency.

This week’s theme will be familiar to anyone who has seen the original Star Wars films in which Luke, Leia or Hans Solo utter the ominous words “I’ve got a bad feeling about this…” just before a crisis strikes.I’ve got a bad feeling about the Euro: the structural imbalances I presented yesterday irrevocably doom the single currency.

Just to recap the cycle and its consequences, here is a chart:

Since the euroland leaders have invested their prestige and credibility in the single currency euro, it’s demise will likely be cloaked in some “face-saving” measure. My best guess is euro-denominated bonds, both public and private, will be offered in two flavors: “euro 1″ for mercantilist Germany, France, the Netherlands, etc. and “euro 2″ for the highly indebted, debt-and-asset-bubble-dependent consumer nations: Portugal, Ireland, Italy, Greece, Spain, etc.

This could be a de facto (unofficial) “solution” to repricing debt and assets in each nation, or it might even become “official policy” as the great structural divide between mercantilist and consumer nations become unbridgeable even rhetorically.

Eventually, the “euro 1″ currency will be valued more highly than the “euro 2″ currency–again, either de facto or de jure. If the E.U. prefers total denial as a policy, then the revaluation/devaluation will be de facto; the “street price” of euro 2s will be worth less in the real world even if the E.U. maintains the fantasy of a single currency.

State and supra-State institutions like the E.U. can afford the facades of illusion; the real world of commerce has to adapt to reality.

China has already decided on its de facto policy on dollar-denominated debt: it is selling longer-term T-bills and buying short-term Treasuries as a way to limit its long-term risk to rising interest rates; the short-term T-bills offer a liquid market to “park” its dollar-denominated earnings.

China’s strategy will pay handsome returns if the dollar strengthens and interest rates rise–both possibilities I consider highly likely. Right now the dollar doomsdayers are still holding sway; commercial interests are long the euro but they are playing with fire. The structural imbalance outlined above will not go away because it is inherent to the euro itself; it cannot be papered over for long.

As for China, I suspect that nation will be drawing down its foreign reserves to fund various make-work “stimulus” and social safety-net programs to calm domestic restiveness as the global economy devolves.

Thus Chinese selling of Treasuries should not automatically be interpreted as “financial warfare;” it might be that having squandered trillions of yuan on absurd and unneeded real estate developments, China actually needs its cash to fund domestic initiatives.

As the structural flaws in the euro and China’s mercantilist economy become undeniable, then global capital will flow to the one remaining liquid market: the U.S. dollar.

Those calling for the immediate collapse of the dollar might want to switch to a longer-term time frame. If the dollar and euro (1) revert to parity (1 to 1, as in 2002-2003) then those holders of euros who switch out to the dollar now will be handsomely rewarded, while those who cling to the euro fantasy will suffer losses on the order of 35%-40% on the currency swap alone.

Yes, yes, I know: “that’s impossible.” Yes, just like the housing bubble wasn’t a bubble, and housing never goes down in value, etc. Structural imbalances cannot be denied forever.