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Loan modifications help keep homes
Mortgage help
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TEXT OF INTERVIEW
Bill Radke: The government has tried to help borrowers lower their mortgage payments and stay in their homes. Banks have been modifying mortgages, too. And there's news that those bank modifications are beginning to work. The report comes from a group of state regulators called the State Foreclosure Prevention Working Group. Mark Pearce is part of that group.
Mark, welcome to Marketplace.
Mark Pearce: Thanks for having me Bill.
Radke: You found that home owners who had their mortgages modified last year are faring better than people who did that the year before. Why is that?
Pearce: Well, we think that primary reason that that is happening is that loan modifications that are being offered to home owners are much better than they were two years ago. Most of them are now significantly reducing the monthly payments that the borrowers have to make. Ninety percent of them are now reducing mortgage payments, and 80 percent of them are actually reducing them by more than 10 percent.
Radke: Banks weren't so willing to do that in 2008?
Pearce: That's exactly right. One of the early learnings in the foreclosure crisis was that what banks were calling "loan modifications" were really just band-aids that kind of extended the payments and didn't really provide meaningful relief to home owners. But once they began offering significant relief, it turned out a lot of people actually could stay in their homes and avoid foreclosure.
Radke: Well, I want to talk about how much help banks are and are not giving home owners in a moment. First I want to know, if modifications are helping, how much do you think is going to help stop the foreclosure bleeding?
Pearce: You know, it's still, unfortunately, the minority of home owners that are able to get a loan modification. Really one of the primary reasons for that is most home owners aren't in the process of talking to their mortgage company. Six out of 10 home owners aren't working with their mortgage company at all.
Radke: Yeah, I saw that. Why aren't they picking up the phone for help?
Pearce: Sometimes they do pick up the phone. And the question is what happens when they do. This has been a very confusing and complex process, and so a lot of home owners have shut down and don't know who to call and don't know what to provide. There's the underlying problem that home owners in distress don't always open the mail. They put it in the "bad news" drawer and wait until it's too late.
Radke: Yes. A lot of us have a bad news drawer these days. Here's what I don't get: You found that the people who are able to get back to making their payments are the ones who have their principal reduced. But most banks aren't doing that. Most loan modifications lower the monthly payment, but they add service charges -- and in the end, they increase the loan amount. And you know, you can certainly understand why banks don't want to give away money, but how is this going to prevent enough foreclosures to be of any real help to the housing market?
Pearce: Well certainly, the reduction in payments has been a big help. But as you point out, even in those cases, something like 70 percent of those loans are increasing the amount that the borrower owes. And in markets like Arizona and California that have had huge price declines, we think that mortgage companies ought to be a little bit more aggressive in using principal reduction to make more loan modifications that will avoid foreclosures.
Radke: We haven't reached the point where forgiving some of those loan balances is worth it for banks?
Pearce: Well, some of them have done it, but we still see some reluctance in the marketplace. You know, one of the things that we have found all along in this crisis is that the tools that are being used are a bit slow to be implemented to adjust to market conditions. So our hope is that maybe principal reduction can become a little bit more widespread in some markets.
Radke: Mark Pearce is a bank regulator in North Carolina and he's part of the Foreclosure Prevention Working Group that's given us that new report. Mark, thank you.
Pearce: Thanks for having me Bill.
Mr. McCracken, you seem to be making an interesting point - that high cost of housing is a competitive disadvantage
for U.S. workers competing in a globalized world. If I understand you
correctly, you are suggesting that the high cost of necessities - like housing - increases the wages required
to maintain a decent standard of living,
and that this results in higher COSTs of
production in the U.S. which further exascerbates offshoring.
Eg : Is high COST of living a
competitive DISADVANTAGE for the U.S.?
Interesting.
RE: my foreclosure proposals -
I'm generally suggesting that
an overly rapid decline in housing
prices can provoke recession/depression
much the same way that a bank run or
a stock market crash can (in fact,
perhaps more so). If a crash in
housing prices leads to panic selling,
or **liquidity based** selling it can induce a SINK Hole (an inverted bubble) that has an excessively negative impact on economic growth and jobs. To the extent that the government felt it was necessary to intervene in the financial
markets to restore liquidity and avoid
panic, it may be necessary to do something similar for the housing
market in order to restore employment
and growth in the overall U.S. economy.
Over the longer term, I think that INDEED the high U.S. COST (NOT standard)
of Living may be a serious impediment
to our national competitiveness in
the world economy. A weaker dollar
(one result of some growth inducing inflation) may improve our exports,
reduce our imports, and may correct
the existing nominal deflation in housing prices while still allowing
real (inflation adjusted) housing prices
to drift down and correct.
Thank you for your thoughts in this matter.
Your saying "considering" more tampering with the market.
Let's replace the word "consider" with the word theorise.
G Holt! in addition to the flip of a switch set of steps with which you will improve the economy let's also outlaw globalization so that products made by cheaper labor cannot be imported. That should be easy enough to pull off in our fiction based economy.
Why is it that denial is so ineffective in our fiction based economy? Actually it isn't ineffective and niether is pretending. We've been pretending that we've been in recovery. The problem is just that our fiction based economy is failing.
Slump, Plummet, Tank, Collapse could be a chant to employ while praying for forclosures but always include positive thoughts of them promptly winding up back on the market. We need to keep the forclosures flowing. The yardstick measuring anyones pay typically is how well it enables them to buy a house. House prices could be a leading cause of wage dissatisfaction. Higher wages here encourage jobs to drop out of expensive markets in favor of cheaper labor pools.
Theres an epidemic of crying and denial as pay cuts loom for all of us. Lower house prices aren't an easy thing to bring about but at least we have an effective means of getting price declines. Though the government considers it their responsibility to tamper with house prices to keep them propped up at the artificially high levels that were made possible by all the easy mortgage money, markets do correct themselves. It's just that we are a people who get deeper into denial the bigger the mistake. hopefully it will be possible to saturate the market sufficiantly to discourage the companies and investors who have been going around buying up so much property even sight unseen. Try not to buy from them there's other property out there that hasn't been tainted by them.
Foreclosures depress the economy and
create a viscious cycle :
1) Home prices fall - often below the
homeowners' equity in the properties.
2) This causes more people to walk away.
3) Growth and jobs in the economy declines leading to reduced demand for
housing. Expectations decline.
4) GOTO (1)
**In this sense, a RASH of FORECLOSURES IS LIKE A BANK RUN - it can escalate
and lead to a "SINK HOLE" (inverse
bubble).
Approach :
1) DIRECTLY INTERVENE (not
via "cooperative" programs secondhand through banks).
a) Consider a blanket FORCED moratorium on foreclosures for a year. This will
help the housing sector recover and
avoid deflation in housing prices.
It will also save jobs and homes.
b) Consider a limited moratorium on
foreclosures for a year (Ex : for
people who lost their job, or had
high medical bills from illness, or
for people earning under the median
wage in their region, and/or only
for a non-investment homes).
(c) Alternatively, Consider FORCED principle reductions on morgages of
10 % for the first 100,000 - 200,000 of morgage value in areas where average home prices have fallen more than
20 % from their highs.
2) Consider CAPPING interest rates
nationally at 15 % (1500 basis points)
above treasuries. Do not allow banks
to adjust **the spread** that they charge customers on existing debt. This will prevent what has become
LEGAL USUARY.
Currently, lower interest rates to banks
have not successfully "trickled down"
to much of the economy. The government
should ACT DIRECTLY TO HELP THE MIDDLE
CLASS - NOT VIA BANKS ACTING AS
voluntary MIDDLE-MEN :
lower rates, anti-foreclosure programs and other good government ideas FAIL to have suitable effect because the banks -acting as intermediaries - prefer to minimize and delay the "trickle down" of such benefits. This creates a public-good/ prisoner's dilemma for the economy as a whole.
3) Consider making Inflation Adjusted
GROWTH in GDP per capita as the new
goal of federal economic policy.
Currently, the Fed focuses too much
on controlling inflation.
This is REDISTRIBUTIVE, (and regressive), and may be against
the broader national interest.
In fact, a bout of inflation - with
growth and a weaker dollar - might
be just what we need to bail the
U.S. out of its current hole.
It is much better to have 15 % nominal
growth with 10 % inflation than 0 %
inflation and 0% growth. FEDERAL
ECONOMIC POLICY PRIORITY SHOULD EXPLICITLY Address this - particularly
in agencies with considerable independence from the rest of society.
I hope this helps.
Banks purposely deny loan modifications because they stand to make much more by denying them and getting the payout on the ORIGINAL loan amount from the FDIC. I can't find the article I read last week explaining the math, with an example, but it's no wonder the whole thing isn't working.
Recently, my husband and I (both physicians) decided to refinance due to the falling mortgage rates. We were not at risk of losing our home and have good credit. It took multiple phone calls to our mortgage company to get a refinance started and a full 6 months with much persistence to even complete the process. I imagine this would be overwhelming for many, especially those without easy access to copy machines and faxes.
