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?

Obama's mortgage rescue plan

If you'd like to know what's in President Barack Obama's mortgage rescue plan, the Wall Street Journal's Washington Wire has a good summary of the Homeowner Affordability and Stability Plan.

From the article:

The Homeowner Affordability and Stability Plan is part of the President’s broad, comprehensive strategy to get the economy back on track. The plan will help up to 7 to 9 million families restructure or refinance their mortgages to avoid foreclosure. In doing so, the plan not only helps responsible homeowners on the verge of defaulting, but prevents neighborhoods and communities from being pulled over the edge too, as defaults and foreclosures contribute to falling home values, failing local businesses, and lost jobs. The key components of the Homeowner Affordability and Stability Plan are:

1. Affordability: Provide Access to Low-Cost Refinancing for Responsible Homeowners Suffering From Falling Home Prices

· Enabling Up to 4 to 5 Million Responsible Homeowners to Refinance: Mortgage rates are currently at historically low levels, providing homeowners with the opportunity to reduce their monthly payments by refinancing. But under current rules, most families who owe more than 80 percent of the value of their homes have a difficult time refinancing. Yet millions of responsible homeowners who put money down and made their mortgage payments on time have – through no fault of their own – seen the value of their homes drop low enough to make them unable to access these lower rates. As a result, the Obama Administration is announcing a new program that will help as many as 4 to 5 million responsible homeowners who took out conforming loans owned or guaranteed by Fannie Mae or Freddie Mac to refinance through those two institutions.

· Reducing Monthly Payments: For many families, a low-cost refinancing could reduce mortgage payments by thousands of dollars per year:

o Consider a family that took out a 30-year fixed rate mortgage of $207,000 with an interest rate of 6.50% on a house worth $260,000 at the time. Today, that family has about $200,000 remaining on their mortgage, but the value of that home has fallen 15 percent to $221,000 – making them ineligible for today’s low interest rates that now generally require the borrower to have 20 percent home equity. Under this refinancing plan, that family could refinance to a rate near 5.16% – reducing their annual payments by over $2,300.

2. Stability: Create A $75 Billion Homeowner Stability Initiative to Reach Up to 3 to 4 Million At-Risk Homeowners

· Helping Hard-Pressed Homeowners Stay in their Homes: This initiative is intended to reach millions of responsible homeowners who are struggling to afford their mortgage payments because of the current recession, yet cannot sell their homes because prices have fallen so significantly. Millions of hard-working families have seen their mortgage payments rise to 40 or even 50 percent of their monthly income – particularly those who received subprime and exotic loans with exploding terms and hidden fees. The Homeowner Stability Initiative helps those who commit to make reasonable monthly mortgage payments to stay in their homes – providing families with security and neighborhoods with stability.

· No Aid for Speculators: This initiative will go solely to helping homeowners who commit to make payments to stay in their home – it will not aid speculators or house flippers.

· Protecting Neighborhoods: This plan will also help to stabilize home prices for all homeowners in a neighborhood. When a home goes into foreclosure, the entire neighborhood is hurt. The average homeowner could see his or her home value stabilized against declines in price by as much as $6,000 relative to what it would otherwise be absent the Homeowner Stability Initiative.

· Providing Support for Responsible Homeowners: Because loan modifications are more likely to succeed if they are made before a borrower misses a payment, the plan will include households at risk of imminent default despite being current on their mortgage payments.

· Providing Loan Modifications to Bring Monthly Payments to Sustainable Levels: The Homeowner Stability Initiative has a simple goal: reduce the amount homeowners owe per month to sustainable levels. Using money allocated under the Financial Stability Plan and the full strength of Fannie Mae and Freddie Mac, this program has several key components:

§ A Shared Effort to Reduce Monthly Payments: For a sample household with payments adding up to 43 percent of his monthly income, the lender would first be responsible for bringing down interest rates so that the borrower’s monthly mortgage payment is no more than 38 percent of his or her income. Next, the initiative would match further reductions in interest payments dollar-for-dollar with the lender to bring that ratio down to 31 percent. If that borrower had a $220,000 mortgage, that could mean a reduction in monthly payments by over $400. That lower interest rate must be kept in place for five years, after which it could gradually be stepped up to the conforming loan rate in place at the time of the modification. Lenders will also be able to bring down monthly payments by reducing the principal owed on the mortgage, with Treasury sharing in the costs.

§ “Pay for Success” Incentives to Servicers: Servicers will receive an up-front fee of $1,000 for each eligible modification meeting guidelines established under this initiative. They will also receive “pay for success” fees – awarded monthly as long as the borrower stays current on the loan – of up to $1,000 each year for three years.

§ Incentives to Help Borrowers Stay Current: To provide an extra incentive for borrowers to keep paying on time, the initiative will provide a monthly balance reduction payment that goes straight towards reducing the principal balance of the mortgage loan. As long as a borrower stays current on his or her loan, he or she can get up to $1,000 each year for five years.

§ Reaching Borrowers Early: To keep lenders focused on reaching borrowers who are trying their best to stay current on their mortgages, an incentive payment of $500 will be paid to servicers, and an incentive payment of $1,500 will be paid to mortgage holders, if they modify at-risk loans before the borrower falls behind.

§ Home Price Decline Reserve Payments: To encourage lenders to modify more mortgages and enable more families to keep their homes, the Administration — together with the FDIC — has developed an innovative partial guarantee initiative. The insurance fund – to be created by the Treasury Department at a size of up to $10 billion – will be designed to discourage lenders from opting to foreclose on mortgages that could be viable now out of fear that home prices will fall even further later on. Holders of mortgages modified under the program would be provided with an additional insurance payment on each modified loan, linked to declines in the home price index.

· Institute Clear and Consistent Guidelines for Loan Modifications: Treasury will develop uniform guidance for loan modifications across the mortgage industry, working closely with the bank agencies and building on the FDIC’s pioneering work. The Guidelines will be used for the Administration’s new foreclosure prevention plan. Moreover, all financial institutions receiving Financial Stability Plan financial assistance going forward will be required to implement loan modification plans consistent with Treasury Guidance. Fannie Mae and Freddie Mac will use these guidelines for loans that they own or guarantee, and the Administration will work with regulators and other federal and state agencies to implement these guidelines across the entire mortgage market. The agencies will seek to apply these guidelines when permissible and appropriate to all loans owned or guaranteed by the federal government, including those owned or guaranteed by Ginnie Mae, the Federal Housing Administration, Treasury, the Federal Reserve, the FDIC, Veterans’ Affairs and the Department of Agriculture.

They also have a 2-page document that lists several examples of how the plan would work.