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Obama Socialized Housing Policy: If At First You Don’t Succeed . . . Try, Try, Again

Posted by Larry Doyle on November 30, 2009 4:13 PM |

The fact that the Obama administration is reticent to release data pertaining to completed mortgage modifications speaks volumes as to the lack of success of this initiative. With almost a third of American homeowners now ‘underwater’ on their mortgages, Obama and team are sticking to their game plan to modify mortgages. Details of Obama’s revised game plan can be accessed at MakingHomeAffordable.gov:

The U.S. Department of the Treasury and Department of Housing and Urban Development (HUD) today kick off a nationwide campaign to help borrowers who are currently in the trial phase of their modified mortgages under the Obama Administration’s Home Affordable Modification Program (HAMP) convert to permanent modifications. The modification program, which has helped over 650,000 borrowers, is part of the Administration’s broader commitment to stabilize housing markets and to provide relief to struggling homeowners and is a primary focus of financial stability efforts moving forward. Roughly 375,000 of the borrowers who have begun trial modifications since the start of the program are scheduled to convert to permanent modifications by the end of the year.

375,000? I will take the under on that. Why? As I highlighted on October 29th in my commentary “Mortgage Modifications: Statistically Insignificant”, up to that point a whopping 1,080 mortgages had been successfully and permanently modified. Policy makers believe 374,000 mortgages will be successfully and permanently modified in the last ten weeks of the year. Who’s zooming who? Would they like to place a wager on that? I’ll give odds.

Through the efforts being announced today, Treasury and HUD will implement new outreach tools and borrower resources to help convert as many trial modifications as possible to permanent ones.

Without spending excessive time detailing the administration’s efforts, the fact is very little has changed with their basic approach. They will attempt to facilitate the modification process by compelling mortgage servicers to perform.

Servicer Accountability. As part of the Administration’s ongoing efforts to hold servicers accountable for their commitment to the program and responsibility to borrowers, the following measures will be added:

— Top servicers will be required to submit a schedule demonstrating their plans to reach a decision on each loan for which they have documentation and to communicate either a modification agreement or denial letter to those borrowers. Treasury/Fannie Mae “account liaisons” are being assigned to these servicers and will follow up daily as necessary to monitor progress against the servicer’s plan. Daily progress will be aggregated by the end of each business day and reported to the Administration.

— Servicers failing to meet performance obligations under the Servicer Participation Agreement will be subject to consequences which could include monetary penalties and sanctions.

If in fact they do not perform or are delinquent in the process, the administration has agreed to publicly highlight their ineptitude. I read this as shaming them into performing. Does the administration truly think that approach will work? How do you shame the shameless? The banks that originate and service these mortgages are so far beyond being shamed that the mere thought of the administration considering this approach is comical.

Shaming banks at this juncture is the equivalent of stating, “the beatings will continue until morale improves.”  The problem is the banks are not receiving the beatings but au contraire, the banks are dispensing the beatings on both Washington and America.

Make no mistake, Wall Street still owns Washington. Socialized housing is akin to pissing into the wind. Where is this headed? Do not be surprised to see the Obama administration look to reignite efforts for mortgage cramdowns in which mortgage principal is reduced.

LD

  • fiscalliberal

    Interesting thought – judicial cramdowns might be the fastest way back to mark to market. I am evolving to the view that unless some thing like that is done, we are into a 5 to 10 year flushing of the bad assets.

    I think the RTC took 10 years to flush out. At least the judicial cram downs keeps the losses in the financial markets and not government dole. It really comes down to buyer beware when dealing with financial offerings from the banks.

    • Larry Doyle

      If in fact the government resorts to principal reduction via mortgage cramdown, the thought that a mortgage securities market will ever truly function again is a misnomer.

      Why would an investor ever purchase that product? If and when a judge can unilaterally make that decision, the investor will take his capital elsewhere. The ultimate cost of the program will be higher mortgage rates.

      That said, mortgage cramdowns may very well occur and they will be just another step toward socialized housing.

      • fiscalliberal

        I guess that I was hoping that we go back to the model that worked in in our prime years in that local banks hold the mortgages. I wonder why we think we need a unsustainable bubble shadow market to make the system work. On so many levels it is unsustainable and subject to corruption.

        Some how the corruption on a local bank basis is minimized and is not a financial systemic risk.

  • fiscalliberal

    I find your view regarding shame and banks very interesting. I agree – next thing will be people just walking away from the loans/houses. I think personal real estate has the quirk that the bank can only claim the house and not go after other assets. So if that is going to happen eventually, why not do it now. Move in with the folks or kids as appropriate. 🙂

    Articles are starting to show up talking about pro’s and con’s of just walking away. See http://www.cnbc.com/id/34207654 for example. Once these things start being talked about it will happen more.

    If the unemployment continues, people will migrate to cash only and in that mode, you really do not need a credit score.

    Now maybe these are extreme measures, but it helps to define the boundries of the problme.

    • Larry Doyle

      Thanks for the link. No doubt once people start talking and thinking about these possibilities, they will happen at an ever increasing rate.

  • TeakWoodKite

    LD, I hope your Thanksgiving was enjoyable.
    Great read.
    This can be viewed in the exact same light as the what BO Rezko and friends did in Chicago. The recent “ruling” by the DOJ regarding ACORN and BO’s history with them is telling, in the current context. There is evidence to support your position. Plenty of zoom there.






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