According to Ms. Blair "Our goal is to get the greatest recovery possible on loans in default or in danger of default, while helping troubled borrowers remain in their homes." I am thoroughly in agreement with Ms. Blair about getting the greatest recovery possible on the loans to keep the costs of this messy bailout at a minimum. However, I don't think that helping delinquent Alt-A borrowers keep their homes should be a priority for the US taxpayer. In most cases, Alt-A loans were granted to borrowers with good credit scores who stated their own incomes without providing documentation. What happens if the loan modification documents are returned by the delinquent borrower to the FDIC with proof of income that shows that the borrower clearly overstated his income in order to obtain a loan to buy a house that he otherwise couldn't afford? Is the FDIC still going to modify that mortgage, grant that person forbearance, so that he gets to keep his house? What about the guy who lives next door to the delinquent borrower, who pays his mortgage every month on time and never lied about his income to purchase his house? If the FDIC is so concerned about keeping liars in their houses, they should foreclose on the property, sell it to an investor, and allow the delinquent borrower first dibs on renting the house from the investor.
Thursday, August 21, 2008
FDIC's Sheila Blair Vows to Keep Delinquent Borrowers in Their Homes
Yesterday, the FDIC unveiled a plan to keep thousands of currently delinquent IndyMac borrowers from losing their homes to foreclosure. IndyMac, a formerly top ten mortgage lender that specialized in Alt-A loans during the boom, was seized by the FDIC on July 11th in one of the largest bank failures in US history. The plan involves modifying thousands of loans through a combination of interest-rate reductions, longer repayment periods and principal forbearance. The modifications will result in the reduction of homeowners' debt to no more than 38% of income. Borrowers will need to provide documents verifying their incomes to have their loans modified. Borrowers will be eligible for the program if they have a first mortgage serviced by IndyMac and are "seriously delinquent" or in default.
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5 comments:
I read your blog with great interest and I value your opinions very much. My question to you is if the FDIC does not work to keep these "liars" in their houses, does not the valuation of houses for the "truthful" neighbor take a hit?
I believe this is the major reason the FDIC and the FED in general is trying to save as many houses as possible, as they know that the value of the entire US economy, which lies in bed with the housing industry, is at stake.
And why not charge the borrower with fraud if they lied about their income? While we're at it, why not charge lenders with fraud too. I'm sure Ms. Blair has found plenty of evidence in the IndyMac loan files to support that action.
Also, if I was one of those borrowers, I would rather send the keys back to the lender than continue to pay on a loan balance that is 50% higher than the current market value of the home. Ms. Blair would have to reduce the principle to market value. I know the neighbor's home value would take a hit, but hey, it's a false value anyway.
Housing prices should be in line with the average families' incomes.
Anon-I know that the popular political opinion is to allow as many people to stay in their homes as possible. That should, in theory, keep fewer homes on the market and reduce the pressure on prices which is obviously a drag for everyone. However, I also believe that slowing the foreclosure process down, and delaying the inevitable is actually worse. It doesn't allow the market to find an appropriate clearing price for the current housing inventory because nobody knows how big the inventory is going to be. I honestly think that the FDIC would be better off by immediately foreclosing on all of the seriously delinquent borrowers, and then finding an investor to buy those properties in bulk. The problem that IndyMac will have in delaying the foreclosure process is that potential investors will not be able to value the remaining portfolio because they won't have the actual delinquency and default statistics. So now, everyone is going to wait around several more months to see how many modifications the FDIC will do, and it will take even longer to find a serious buyer for the rest of the bank. Furthermore if the incidents of lying about incomes were as pervasive as indicated in the default rates of recent Alt-A vintages, then very few modifications will actually be achieved and this whole process will be an enormous waste of time and possibly taxpayer's money.
All of this is in addition to the obvious unfairness of rewarding people who used the housing market as a lottery ticket at the expense of others (i.e. it is the honest, hardworking prudent people who wind up paying through their tax dollars, as well as lost equity if they happened to buy a house at the wrong time)
In general, I suspect that it could be better for the US economy if everyone who bought a house they couldn't afford lost their house. They can go back to renting. Then people who actually can afford a house now because prices have dropped enough, can put 20% down and get a 30 year fixed again. I also think there is plenty of investment money on the sidelines waiting to buy distressed properties but are hesitant because they know that more foreclosures are on the way. If they knew what the total supply would be, investors could establish a price, bid for them in bulk and help clear up the inventory problem.
These are my thoughts on the matter. Thank goodness I'm not a politician because I'd never get elected on this platform!
I do appreciate the comments. Sorry for the delay in responding.
Ms. Knowles-The FBI is apparently investigating IndyMac for fraud. I'm certain they won't come up empty handed...
http://www.cnn.com/2008/US/07/16/fbi.indymac/index.html
k10, Thanks for your input. I am anon from the first question. My other inquiry is whether or not it is possible to allow the banks who pushed these ridiculous mortgages to pay the price. Can the US economy survive the failure of banks without any help from the FED?
The predatory lending that occurred that aggressively pursued these customers should also be blamed, not just the consumers who were looking for their "lottery ticket" by buying a home. If the banks had done their due diligence in finding out financial information from these customers, which to me is par for the course, we wouldn't be in this mess. Of course, banking is a dog eat dog world, and often times banks will shoot themselves in the foot by making money unethically. Stealing from people basically will bankrupt the customer base and bankrupt the banks.
Your thoughts are much appreciated.
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