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UPDATE: Mortgage Modifications Leading to Mortgage Cram-Downs

By Larry Doyle on December 13, 2009 at 6:30 PM in American Consumers, Current Affairs, Economy, Housing & Housing Crisis, Mortgage Crisis, Mortgages, Sense on Cents (Larry Doyle blog)

Despite overwhelming efforts on the part of Uncle Sam, the simple fact of the matter is the program to successfully and permanently modify mortgages has not gained truly meaningful traction. Public pressure on mortgage servicers specifically and the mortgage modification program at large have generated a slight, but hardly significant, increase in permanent modifications over the last month. Let’s review the statistics provided by Uncle Sam’s Making Home Affordable Program:

Home Affordable Modification Program (HAMP) Snapshot through November 2009

HAMP Trial Plans Offered to Borrowers

Making Home Affordable Program Servicer Performance Report Through November 2009

Number of Requests for Financial Information Sent to Borrowers (Cumulative): 3,137,548

Number of Trial Period Plan Offers Extended to Borrowers (Cumulative): 1,032,837

All HAMP Trials Started Since Program Inception: 759,058

All Active Modifications (Trial and Permanent): 728,408

Number of Active Trial Modifications: 697,026

Number of Permanent Modifications: 31,382

What does that 31,382 figure under the permanent modifications represent? 4% of all active modifications and 1% of those who have been solicited. At this rate, we will be waiting a LONG time for this program to have a meaningful impact on our housing market.

Where is this leading? Mortgage cram-downs. Reps. John Conyers and Barney Frank are starting to wave the cram-down flag once again. For those unfamiliar with a mortgage cram-down, it is the practice of reducing principal on the mortgage. In the process, the homeowner will be less underwater or not underwater at all and thus choose to stay in his home. Given the fact that there is no free lunch, taxpayers pick up the tab along with investors who have purchased mortgage securities backed by these mortgages.

Expect a massive fight over the implementation of mortgage cram-downs in 2010.

Thanks to our friends at 12th Street Capital for sharing the link to the Making Home Affordable Program.

LD

Related Sense on Cents Commentary:
   What is a Mortgage Cram Down? (January 1, 2009)

  • elaine

    Let’s for a minute assume the banks/lenders accept the cram downs & everybody refis at 4% (more punishing savings & rewarding debt big time) then what do I get on a CD? .01% & on a money market? 001%, plus my house looses even more value. Hell why not just have a damn depression & get it over with. Don’t forget in 2011 we get to pay 20% cap gains tax on less than 1% on interest income. This b.s. along with the constant increases in medical insurance will reduce me to financial ruin in a few years. This whole scheme will get the younger crowd all excited because it really screws retirees. I guess when retirees go broke they can just go on the dole & finish bankrupting the younger crowd…viscous cycle.

  • ahs

    Given the fact that there is no free lunch, taxpayers pick up the tab along with investors who have purchased mortgage securities backed by these mortgages.

    Why do you assume this is true? The only cramdown proposals I’ve read about would be quite straightforward — they’d allow bankruptcy judges to reduce the principal and/or interest on mortgages, which is something they can already do for pretty much all other kinds of debt. And that’s it. The only clear losers* in this sort of thing would be the banks (RMBS investors get basically wiped out by foreclosures anyway — they only make money if homeowners continue to make payments). That’s why the banking lobby hates the idea so much.

    If you’ve seen somebody proposing a cramdown rule in which the government pays the banks for the write-down on the back end, I’m all ears. I sure haven’t heard that myself, though. As long as the cramdown happens in bankruptcy court, the taxpayer could care less.

    *yeah, I know the arguments that doing this would drive up borrowing costs. I’m just not convinced that they would drive them up by enough to outweigh the benefits.

  • objective analysis

    Welcome to Hope & Change – Jimmy Carter Style II….

    Repeal the Community Reinvestment Act (CRA)

    Two Crises (Savings & Loans Debacle of the late 1970′s to 1980′s and Sub-prime Mortgage Crisis of the 1990′s to 2000′s) have shown that this piece of liberal progressive legislation of socialism (oil) does not mix well with capitalism (water).

    The redlining that Jimmy Carter and his congress put in and has been motivated with the likes of the corrupt ACORN and bully pen SEIU needs to be removed by the People of the U.S.

  • imustprotest

    Banks need to let go of the money. Mortgage rates are the lowest since before WWII but they’re not letting go of the $$. People with great credit are unable to refinance. Time to put pressure on the bankers.

  • Peggy Sue

    Correct me if I’m wrong, Larry, but I’ve read that even with cram downs and modification, the vast majority of these homeowners cannot and will not meet their mortgages.

    So what will be gained? Extend and pretend? I do not think we’re doing people a favor with these fantasy games.

    But I’d sure like to be wrong.

    Correct me, please.

  • http://www.speakingminds.net/ pc

    I truly believe this program is a bust. If you are in financial trouble and do get your mortgage modified, the odds are that you will be back in foreclosure within 6 months.

    Most of the mortgages are owned by Fannie Mae and Freddie Mac (that means you and me). Can the banks modify loans without the investor approval?

    And another thing, who is tracking if the program is really being used by homeonwers under water with their values? Is income being verified on these loans?

  • Lisa

    This video clearly shows that George Bush warned
    Congress starting in 2001, that this economic crisis was
    coming, if something was not done. But Congress refused to
    listen, along with the arrogant Congressman, Barney Frank.
    This video says it a ll.

    You Tube; it was taken off.
    This link is of the same video, but is routed through
    Canada . Everyone in America needs to see this before it is
    yanked off the Internet again!

    http://www.youtube.com/watch?v=cMnSp4qEXNM&NR=1

    • ahs

      Here’s Nobel Laureate economist Paul Krugman, from today’s Times, on those specious ideas re: Fannie and Freddie:

      “Talk to conservatives about the financial crisis and you enter an alternative, bizarro universe in which government bureaucrats, not greedy bankers, caused the meltdown. It’s a universe in which government-sponsored lending agencies triggered the crisis, even though private lenders actually made the vast majority of subprime loans. It’s a universe in which regulators coerced bankers into making loans to unqualified borrowers, even though only one of the top 25 subprime lenders was subject to the regulations in question.”

      He’s right. Were Fannie and Freddie too big, and too overexposed? Yes. So were all the big players in the downstream mortgage markets, including the private ones. But were Fannie and Freddie the underlying cause? Under any honest assessment, certainly not.

      The real estate bubble was fueled by loose lending standards, and those standards did not originate with Fannie and Freddie. No government bureaucrats were commanding sketchy mortgage originators to make low-quality subprime loans. Those loans were made because of a failure of regulation, not an overabundance of it.

      Having Fannie and Freddie as a backstop, guaranteeing the value of mortgages purchased in the secondary market, did have a huge impact on the residential real estate bubble. And they are vulnerable to fair criticism for setting the standards too low for mortgages they were willing to purchase. But being willing to purchase mortgages in the secondary market does not mean they were forcing the loans to be made in the primary market. That’s the basic disconnect underlying the error in the typical conservative talking points which seek to blame this crisis on Clinton and Frank, rather than on Bush, Greenspan, and (most notably) the authors of Gramm-Leach-Bliley.

  • I’m a Linda too

    yep, this is what the Democrats want, and it will tank the price of the homes for the people who are making their payments.

    • Obamastolemycounty

      Yes, I am stuck with my house. People can get way cheaper foreclosures and such for less than what I need to pay off my mortgage and home equity line! I really regret the home equity line I took a few years ago, but I needed to repair some obvious things prior to selling and was planning to get married and buy a different house with my former BF. To make a long story short I used to go by the name Obamastolemyboyfriend and got screwed on both the home and the marriage. I no longer miss the BF. I do miss the equity!