Loan Modifications - what will happen?

Question

If a plan passes where the government shells out a bunch of money to write down principal and adjust rates to get people out of trouble what will happen to the rest of us?

Lets assume that for every house that has started the foreclosure process...whether its preforeclsure notices on down the line....get the benifit of a 1.5% reduction in their rate (fixed) and a 10% reduction on principal. I have no idea if thats how it goes down but I am just using a gerneal assumption.

Does that essentially hammer the entire economy by another 10% or more of depreciation in the real estate market? Even if your house doesn't get the loan modification I gotta think its lowers the bar on the market price for ALL homes. So it'll just compound the falling prices on housing...no?

If thats the case all it will do is create more people to be upside on there homes. To me its like guaranteeing the market to drop another 10% or more.

What do you guys think?

So not only to convervative hard working people have to bailout the deadbeats because we have to pay for there modification through more taxes but now our value in our house will drop in relation to the % of principal write downs. Double whammy and a big F U to honest people.

The reason I think it'd deflate the real estate market is because lets say "Joe Six Pack" decides to sell his house after his principal was dropped. He can now sell his house at a lower rate then before and still walk away with less of a loss. Thus leading to a trickle down effect in all houses. Further depressing the market.

Am I way off track?

Dave P. · Answer

Actually, a "write-down" on a mortgage balance does little if anything (there's no "sale" there) to actually affect home values ...
                                    
                                    David,
                                    
                                    Unfortunately, this is the myth that every buys into. Propping up home values with techniques like loan modifications will prolong our pain worse than you can imagine. What you are implying is that just because "comps" don't support lower values, then they don't really exist. But, the market is smarter than that. Once one McMansion gets its' principal reduced by 100K, then there goes the neighborhood, just like a foreclosure.
                                    
                                    Short sales and foreclosures represent "market value" for real estate, whether you like it or not. Anything done to prevent natural market driven occurrences will lead to "artificial wealth" and inflation. 
                                    
                                    It will only lead to the same problem that we had originally, just like Shari said:
                                    
                                    I heard Maria Bartaromo state on the Today Show that "as soon as credit starts flowing again, people can get higher limits on their credit cards and get home equity loans to start spending again." Like that is the solution!?!

David Pullen · Answer

Just a quick note...I'm in the loan modification business and not very many lenders (if any) are writing down balances yet. Countrywide was "forced" to do so by the CA Attorney General starting in December. This "may" open up the dam for other big lenders like Wachovia or Wamu to start doing so, but they're still in limbo with their buyouts.

Actually, a "write-down" on a mortgage balance does little if anything (there's no "sale" there) to actually affect home values ...it's the flood of foreclosures and
short sales that does this. Plus, empty homes owned by the bank are a blight on neighborhoods...so it is MUCH more advantageous to keep the homeowner in their home than have a lender take it back and THEN sell it a greatly reduced price...[b]THAT[b] is what reduces home values!

So don't be so upset at people trying to stay in their homes and get a fair shake from the lender...it actually HELPS the overall situation when a lender does this!

Shari Posey · Answer

I heard Maria Bartaromo state on the Today Show that "as soon as credit starts flowing again, people can get higher limits on their credit cards and get home equity loans to start spending again." Like that is the solution!?!

I can't really see bringing manufacturing back, mainly because we are used extremely low cost of goods and nobody will work as cheap as the Chinese, Indians, etc.

However, I do see America creating a totally new mini economy like we did with the Internet. Maybe it would be based on renewable energy and environmental interests.

Tracy Harmon · Answer

Exactly so, Shari.  As a country, we've borrowed our way into a pretty big hole, and now the government proposes borrowing our way out of it.  Since we have no manufacturing base to speak of, we have no real way of creating wealth to get us out of this hole.

It's very clear that most people will keep voting for the dorks that helped create this mess, and the dorks will evidently hire the guys that made the problem to help "fix" it.

I'd suggest an economic revolution.  Given the communication tech nowdays, why can't we create local co-ops to fund small manufacturing businesses to start creating real wealth.  I don't see how it's really cheaper to ship our raw materials to China and let them make things and then ship them back here than it would be to make things locally and save mass quantities of oil in shipping costs.

We've let the "experts" tell us we don't need to manufacture the things we use, and now we're paying the price.

Time to do things differently.

Shari Posey · Answer

Most of the guys operating these companies like Blackrock used to be executives for the mortgage companies and investment banks. Wow...they made millions creating a mess that they will make millions cleaning up. Now, that's truly the American Dream!

Dave P. · Answer

I don't see the principal reductions happening in any enormous volume. There is too much greed in the world (in a good way) for this to happen.
            
            Cartus Corporation just got into the distressed asset management business. Blackrock is about to get in the distressed asset management business. Other companies will follow suit and their role will be to "minimize damages" for their customers....lenders, loan servicers, and private mortgage insurers. 
            
            There is real money to be made in distressed asset management. Joe six pack won't get the majority of this money, smart (big) businesses will.
            
            Just my guess, what do I know?
            
            ps- I agree with Mike, we need new leadership. Not the "new" kind that promises "change", but the new kind that stands by their beliefs, in good times and bad.

C Folland · Answer

I agree--if the government pays to write down the loan amount, then the government should be able to recoup some of it when the property is sold.

Michael Rossi · Answer

What will happen?  You will get to pay for it!!!  This is EXACTLY the opposite of what should be happening and WE THE PEOPLE need to call the idiots in Washington and let them know what we think.

Mike

Shari Posey · Answer

The plan penalizes people who bought at the peak but put a large downpayment and people who bought at the peak but who are making their payments. I'm afraid it may encourage the second group to stop making payments and it may encourage future buyers to put down as little as possible.

The plan may reduce the bleeding but won't heal the wound. I agree with Dave that many people may choose to sell their house after the principle is reduced but I guess that won't lower neighborhood values anymore than bank-owned sales do. However, it seems to encourages more bad behavior because people won't feel the pain of bad decisions. A possible provision would be that if your principle is lowered, whenever you sell you must give any profit equal to the amount of the reduction back to the government or bank who granted you the reduction.

Jon Holdman · Answer

I don't think this will cause house prices fall.  Just the reverse.  Houses prices have fallen, and this, if it happens, would reduce loan balances to better match the values.  Prices still have some falling, with or without these loan modifications.  The mods are really just an acknowledgment that many mortgages are underwater, and more and more people are willing to just walk away.

I find this very frustrating.  Folks who were throughtful, bought a house they could afford, and then didn't suck every last penny out of their house with HELOCs and refis get nothing.  Folks who bought at the height of the bubble when they legitimately needed a house get some relief.  But so do folks who bought because "prices always go up", and folks who bought houses they could only afford based on the teaser, and folks who refied and HELOCed every penny out of their house.