Successful loan modifications require increasing borrower entitlements
Every successful loan modification undertaken by the GSEs or FHA is paid for by the US taxpayer — paid for by you. The GSEs have already required a $150 billion government bailout, and the FHA is next on the bailout horizon. The losses on these entities that are not recovered are supplemented with tax dollars that you paid. So what’s the big deal? We pay for wasteful government programs all the time. The difference is simple. The money these entities lose, particularly those through loan modifications or principal forgiveness has no benefit to you whatsoever, but instead it’s a direct transfer of wealth from you to a banker and a borrower — and neither party deserves the money.
The malfeasance of banks has been well documented. Lenders are more culpable than borrowers for the housing bubble, but both parties share the blame. Responsibility for the bubble is not black and white, and although the crap stains lenders more, the borrowers still smell pretty shitty. Both the lender and the borrower pay a price — or at least they are supposed to. Instead, we bail them out, and we pay the price.
Part of the price we pay is obvious in the accounting for the various bailouts, but much of the price we pay is hidden in higher home prices, greater public indebtedness, and in the subsidized entitlements of borrowers everywhere.
Government backed loan modification attempts are ill-conceived because bailouts create moral hazard. However, the bailouts and the resulting moral hazard can be disguised inside the black box of obfuscation and paperwork of the HAMP program. If the banks and bureaucrats raise the standard of entitlement allowed under the loan modification program, more people will qualify — and more people will be sustaining their indulgences on your tax dollar.
If people are not forced to cut back discretionary spending before they obtain a government bailout, taxpayers are subsidizing their discretionary spending. The standards of what constitutes discretionary spending from essential spending depends greatly on the the spender’s sense of entitlement.
Personally, I really like to play golf. I don’t spend the $150 per week I would like to on golf because it isn’t an entitlement, and I can’t afford to treat it as one. However, if I were a loanowner, and if my sense of entitlement made it right, I could consider my weekly round of golf an essential. Since this entitlement creates a hardship for me, I can petition my lender for a break on my loan payments. After all, their loan payment is discretionary spending and the US taxpayer is picking up the cost.
Do you see the problem?
Everyone draws their own conclusions about what is essential and what is discretionary. The reviewers of the HAMP programs have broad guidelines and common sense, but they will succumb to the political pressure to get results and push people through the system. The HAMP program reviewers path of least resistance is allow petitioning borrowers their indulgences when borrowers ask for loan modifications. The HAMP program reviewers will achieve great results — at great taxpayer expense.
During the course of foreclosures when parties are discussing or attempting loss mitigation, borrowers submit financial records for lenders and servicers to review.
Sometimes, these records show a borrower’s financial condition to be unhealthy – not due to hardship like loss of job, reduction in income, divorce, medical bills, or funeral expenses – but due to uncontrolled, undisciplined, and/or unnecessary personal discretionary spending.
Review of some financial records have shown significant funds being spent on fast food, food deliveries, music downloads, lingerie, vacations, gambling at casinos and online, and even psychic advice instead of on existing financial obligations.
A couple of years ago, I profiled the OC Housewife, Peggy Tanous in The real Ponzis and posers of Irvine. She got plastic surgery while she wasn’t paying her mortgage.
“Orange County women are very big on up-keep. Some people go in for boob jobs has much has they go in for oil changes.” – Peggy Tanous commenting on her third boob job. “The Real Housewives of Orange County” Episode Five.
Back when she was contemplating the boob job, did her and her husband look at their income and their obligations and decide it was better to have big tits than pay a mortgage? Lenders must love that kind of decision making. Entitlements trump financial obligations every time.
Then, after all of this money is spent on these non-essential items, borrowers want their lenders/servicers to modify their mortgages – the terms of which they previously agreed to in writing – to get them out of their financial rut. They want lenders/servicers to take the hit for their financial irresponsibility.
That’s exactly what they want, and since Banks are still exposed to $1 trillion in unsecured mortgage debt, they have no choice but to encourage this form of moral hazard and modify the loan until prices return to the peak. At that point the loan modification entitlement will be rescinded. Lenders aren’t completely stupid. They know they are creating these problems, but they also don’t feel they have much choice.
This should be no surprise to lenders/servicers as mainstream media, government officials at all levels, and many in the court system believe that mortgagors can do no wrong and are victims of a banking system that is coined as “the evil empire,” “predatory,” and “greedy.”
It seems that mortgagors have become a de facto protected class. It appears to be taboo or politically incorrect to discuss borrowers’ excessive personal discretionary spending at court proceedings including mediations. If such topic is broached, the response is likely met with comments like: “the bank is beating up on the homeowner.”
One advantage of being openly politically incorrect is that I can write the truth. I don’t care if people don’t like to read uncomfortable realities. If they are offended, they can stop reading this blog. If they are concerned about the truth and want to really know what’s going on in the real estate market, they keep coming back and reading more. As I mentioned previously, Lenders are more culpable than borrowers, but borrowers are not blameless. The bad behavior of the banks does not justify equally reprehensible behavior by borrowers. Two wrongs does not make a right. Loanowners have become a protected class. They are showered with tax breaks, bailouts, and comforting words from pandering politicians. Renters are bent over and forced to pay for it all.
With mainstream media, government officials, and others repeatedly referring to borrowers as victims, the victim syndrome has become ingrained in our collective social consciousness. This card cannot be played indefinitely.
Bubble-era borrowers are victims — victims of their own bad decisions, greed, foolishness, and financial innumeracy. True victims are not responsible for their circumstances. Loanowners are responsible. They made a choice.
A pragmatic solution may be that borrowers in foreclosure, as a prerequisite to seeking participation in foreclosure diversion or mediation programs, be required to first obtain certificates of consumer counseling – much like the bankruptcy filing prerequisite.
To the extent counties and courts have such requirements but are not religiously or consistently enforcing them, lenders/servicers could then condition trial-period plans (TPPs) or other agreements on obtaining such certificates.
Putting more requirements on obtaining a loan modification means less of them will be done. Although I might think that’s a great thing, the purpose of loan modifications is not to help borrowers, it’s to help banks. Lenders need to do these loan modifications to kick the can while they wait for prices to get back near the peak where they can finally force the deadbeats out without losing a trillion dollars.
Alternatively, or in conjunction with the foregoing, is monitoring borrowers’ spending while they are in TPP’s or loan modifications by requiring periodic submissions of certain financial records. Though it may seem that these requirements are parens patriae in nature, some individuals would likely benefit from them and may exhibit more disciplined spending habits if “big brother” is monitoring them.
The foregoing requirements appear permissible under HAMP and Pennsylvania law, in particular. Template TPP’s and loan modification agreements may need to be revised or updated; or, lenders/servicers could task the drafting of such agreements to local counsel, who are already familiar with their jurisdiction’s laws.
How about we simply stop making loan modifications. That day will come soon because the loan modification entitlement will be rescinded as prices near the peak. Borrowers today think this is a new entitlement. Unless we get several million underwater borrowers with toxic loans again, borrowers who believe loan modifications will always be a part of the lending landscape will be very disappointed.
Loan modification programs are a consistent failure. Redefault rates are very high, and very few borrowers will ever hang on long enough to become an equity sale, particularly in the most beaten down markets. Lenders keep trying because they must kick the can. Politicians support them because it gets loanowners off their backs. Loanowners go along because the modifications help them supplement their profligate spending and support their entitlements.