Friday, February 20, 2009

Chicago Tea Party and re-default rates

Yesterday I posted a link to Rick Santelli's rant on the Chicago trading floor.

Today, CNBC has a poll asking, Would you want to join Rick Santelli's "Chicago Tea Party?" With over 164,000 votes as of the time writing, 93% say 'yes.' Only 5.2% say 'no' and 1.6% are 'not sure.'

I think people are tired of working hard to meet their own obligations while watching the government take nearly half their earnings to pay for others who can't, or won't, do the same.

Don't misunderstand - Americans are a generous people and we are more than happy to help others when they are in need. But more and more, we believe the best way to help others is 1) to do it ourselves and not abdicate that responsibility to a monolithic bureaucracy, and 2) insist that those being helped are doing the utmost to help themselves first.

When we see the President offering a gift to people - $1,000 per year for simply paying their mortgage on time - while we've cut down our own expenses to do just that, all the while using our tax dollars to fund the program, isn't our anger justified? As Rep. John Boehner asked, what about the 90% of us who don't have mortgage problems?

When you reward bad behavior, you just get more of it. That's what's going to happen. Responsible homeowners are wondering why they should pay their mortgages if, by not paying, they might qualify for a reduction in principle, cash assistance and monetary rewards.

And if you're a renter and don't own a home, how much righteous indignation do you have? You're probably living within your means - maybe saving money to buy a home - and your tax dollars are going toward 'incentives' to get people to actually pay the obligations they owe.

I guess our elected officials no longer believe that the best 'reward' for paying your mortgage is that you get to keep living in the house you're purchasing. They obviously also believe that you have some sort of 'right' to remain in possession of something you cannot afford.

Here's an idea: I'll go out and purchase a Mercedes-Benz SLR McLaren for $457,250. It's listed as the 7th most expensive car in the world and I picked it because I liked how it looked. I'll make some of the payments on it and then, when I can no longer afford to do so, I'll turn to government and politicians and make the case that without my car I won't be able to work, so I need them to create a program that makes banks renegotiate with me to lower the amount I owe. After all, it's no longer new and it's just not worth what I originally agreed to pay for it.

Then, I'll insist on limits to how much my payments can be - no more than, say, 15% of my monthly gross income. If a house payment is okay at around 30% of monthly gross income, 15% seems like a fair number for a vehicle.

And, to top it all off, once I've got the debt reduced and the payments at a manageable level, I'll demand a prize for actually honoring the obligations I've committed to.

That's the equivalent of President Obama's Homeowner Affordability and Stability Plan applied to a car rather than a house. Doesn't quite seem right when you remove the emotion of 'home' from the equation, does it?

Whether a house or a car, they're both pieces of property and other options exist if either or both are taken from you because you don't pay. Perhaps, even, you might find an option you can actually afford in your current circumstances rather than live beyond your means at the expense of taxpayers.

The worst part of the plan, however, is not the actual components, though they're bad enough. The worst part is that there is no assurance it will actually solve the problem.

Each quarter, the Comptroller of the Currency issues a Mortgage Metrics Report. The most recent, for the third quarter of 2008, included

"... the first available data on the performance of loans that have previously been modified to encourage home retention. Data on the performance of modified loans provide insight into the effectiveness of loss mitigation actions.

The conclusion of the report, in brief, is that delinquencies continue to rise, foreclosures and other actions leading to home forfeiture also continued to rise, and loan modifications were associated with high levels of re-default."

But the most startling data in this report is the re-default rate for loans that had been modified, as the President's plan would do.

For loans modified in the first quarter of 2008, more than 37 percent of modified loans were 30 or more days delinquent or in the process of foreclosure after three months. After six months, that re-default rate was more than 55 percent. For loans modified during the second quarter, the three-month 30+ day delinquent re-default rate was more than 40 percent.

For loans modified in the first quarter, more than 19 percent were 60 or more days delinquent or in process of foreclosure after three months. That rate grew to nearly 37 percent after six months. For loans modified in the second quarter, that re-default rate was more than 21 percent after three months.

More than half the loans modified re-defaulted within six months.

(Side note: Fannie Mae and Freddie Mac had higher default rates than traditional lenders. I'm sure there's an entire blog post for the implications of this fact alone.)

Obviously, the issue is more than just an 'affordable' mortgage payment. But giving out other people's money is the solution politicians are promoting in spite of this evidence that the action is only delaying the inevitable - not 'solving' the problem.

And those of us who are doing all the right things are going to foot the bill - again.

I think Santelli has it right. Tea, anyone?

8 comments:

Troy said...

Maggie,
Great insight. The reporter hit a greater nerve than just the mortgage bailout plan. He touched on the helplessness that the vast majority of hard-working taxpayers are feeling right now. Where do we turn? What can we do? Our political leaders KNOW that the "producers" in this country are too busy doing what we do best...producing. We are forced to produce more and more so they can take the proceeds and redistribute them. We are tired, angry, and over-stimulated by marketing campains that try to convince us we need more of what we already can't afford. My wish is now simple...Let me live in a place where hard work is rewarded, not penalized. Let me live in America again. As a business owner and father of five, I feel I was sold a false bill of goods as a young person. "Work hard and good things will happen." Bull! I was lied to along with every other producer in this country. Ultimately, we must find a way to restore our great nation to what it once was. If that requires missing my children's dance recital or ball game to go to the Chicago Tea Party, then I guess I'm in. Our leaders will have to understand that I will not be "producing" that day.

Troy

Chris said...

Another way to look at this is--I play by the rules, work hard, pay my mortgage on time--and because banks are acting irresponsibly and making risky loans, my property values go down because of the foreclosures in the neighborhood.

Maggie Thurber said...

Chris - not just banks ... banks, people, financers, government, politicians...I blame all of them, but especially Congress who wrote the laws that lenders and borrowers are following.

It seems that 'acting irresponsibly' applies to everyone except the 'average homeowner.'

Roman said...

Long ago, someone much smarter than me said: If you want more of something-subsidize it, if you want less of something-tax it. This seem almost profoundly simple!

Maggie Thurber said...

Roman - I'm not 100% on this, but I'm fairly confident that the author of such idea did not support subsidizing some at the expense of others...

Of course, we could remove all taxation from homes as a solution - just think how much more 'home' all of us would be able to afford if we didn't have to pay a fortune in property taxes on it...

I don't know about you, but property taxes are about 28% of monthly mortgage...think of all the 'stimulating' I could do with that...LOL!

Mad Jack said...

Sign me up for the Chicago Tea Party. Rick Santelli should start his run for the White House right now and form a brand new political party to go along with his campaign.

I blame the US Congress for most of this. Various State governments can get the rest of the blame. The most frustrating part about this whole mess is that the people most responsible are also most likely to escape their own responsibility.

Roman said...

Maggie, what I meant is that we seem to be rewarding negative behavior and penalizing good behavior. I do not think this is proper at all. If taxes were reduced, the money(yours) would be spent much more efficiently than any government could spend it. My thinking is that government, by definition, is very inefficient, however well intentioned it may be.

Maggie Thurber said...

Roman - thanks for clarifying.

We are definitely in agreement!

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