Still More Ideas To Fix Housing

I keep wondering when absurd housing proposals are going to stop. As of right now it appears the list is endless.

I started compiling a list in Absurd Housing Bailout Proposals :

• Bill Gross started things off when he proposed to Bush "Write some checks, bail ‘em out, prevent a destructive housing deflation that Ben Bernanke is unable to do." Please see Bill Gross Wants PIMCO Bailout and A Gross Challenge for more details.
• Bernanke soon followed with his Congressional Bailout proposal as outlined in Bernanke Proves he is a Complete Fool.
• Barack Obama proposed a bailout proposal that is best described as from "Outer Space". I talked about Obama's proposal in ARM Interest Rates Jump Most on Record.
• This was followed by Bush's proposal to bailout lenders as outlined in Bush Moves to Aid Lenders.
• That was followed by a "Twilight Zone" proposal from Steven Pearlstein at the Washington Post as outlined in Forestalling Foreclosures.

Well here is yet another one for the list with the Fed Urging Loan Holders to Avoid Defaults.

The Federal Reserve and other banking regulators issued special guidance Tuesday urging loan service companies to work with borrowers in danger of defaulting on their home mortgages. Sheila Bair, chairman of the Federal Deposit Insurance Corp., said that mortgage collectors have the authority under existing accounting and tax rules to help deserving borrowers.

"More and more consumers with subprime and hybrid mortgage products are facing the very real prospect of losing their homes through foreclosure as their payments reset and become unaffordable," she said in a statement. "It is vital that mortgage servicers work proactively with borrowers facing much higher payments as their interest rates reset."

The guidelines were aimed at addressing the fact that in many cases the company in charge of collecting monthly mortgage payments is not the same company that originated the loan.

Question of Authority

Since when do service providers have the authority to reduce interest rates, allow delayed payments, or change loan terms in any way?

Just to be sure the Fed was not misquoted, please take a look this September 4th 2007 joint press release entitled Statement on Loss Mitigation Strategies for Servicers of Residential Mortgages.

The keyword in that press release on loss mitigation is of course "servicers". But let's take a look inside. The Bolding below is mine.

The federal financial regulatory agencies and the Conference of State Bank Supervisors (CSBS) on Tuesday issued a statement encouraging federally regulated financial institutions and state-supervised entities that service securitized residential mortgages to review to determine the full extent of their authority under pooling and servicing agreements to identify borrowers at risk of default and pursue appropriate loss mitigation strategies designed to preserve homeownership.

Appropriate loss mitigation strategies may include, for example, loan modifications, deferral of payments, or a reduction of principal. In addition, institutions should consider referring appropriate borrowers to qualified homeownership counseling services that may be able to work with all parties to avoid unnecessary foreclosures.

Service providers generally get paid to service loans not make decisions. Yes they do have a stake in the matter, as the longer they service the loan the more they collect. But that typically is the extent of the contract because of obvious conflict of interest issues that would arise if the servicer could change the terms of the loan just to keep servicing it.

Real Word Example

Some random bank, big or small, makes a mortgage commitment. More often than not the loan is securitized (sold to investors like pension plans, foreign investors, life insurance companies etc). The originator may or may not service the loan but most often not. Typically the servicing is outsourced to an additional party. That party may again outsource it to someone else.

Now the Fed is proposing some second, third or even fourth removed party that services the loan, make "loan modifications, defer payments, or a reduce principal".

The idea is silly given the fact that the servicer may not have the slightest idea as to who owns the loan and likely has no ability (and should have no ability) to modify the terms of the loan because of conflict of interest issues.

Is the Fed really this clueless?

There was a great rant by Prof. Fil Zucchi on Minyanville this morning called When will they stop kidding themselves?

When will they stop kidding themselves?

If I hear one more time that the Fed needs to move because the housing market is crashing - and it is - my head is going to explode. People are not buying homes because:

1. Everyone with a pulse bought one or more homes during the bubble.
2. Everyone with a pulse bought one or more homes during the bubble.
3. Everyone with a pulse bought one or more homes during the bubble.

The "demographics and employment" arguments are a farce. I've quoted this stat too many times: 85% of individuals with income above the median already owned a home as of the middle of last year; the U.S. fertility rate is 2.02, which means that new births are barely replacing deaths; and if one wants to roll the dice on the veracity of the employment or inflation figures, then I suppose that one will also believe that the subprime mortgage problem is well contained - because the sources of both data are the same.

The Fed can lower rates to zero and the same people who could not afford their house for the last three years are still not going to be able to afford it ; the newly coined droves of "real estate investors" - the reason for the insanity we witnessed - are out of the picture, and they are not coming back.

More than a year ago everyone knew exactly the "movie" they were watching but it was much more fun to envision a different ending. Well, surprise: the end is here and it looks like the end of all other bubbles - only this one is way bigger.

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