Definition of Insanity
Posted by Jeff Pruitt - 7/5/09 @ 12:32 pm - Filed Under National Politics
There’s a must-read story in today’s NY Times about the current foreclosure crisis and the idiocy behind the banking sector’s response to it. A Valparaiso study has looked at some recent data and found that while banks refuse to reduce the principle on mortgages, they seem completely happy to take massive losses in foreclosure sales:
Alan M. White, an assistant professor at the Valparaiso University law school in Indiana, analyzed data on 3.5 million subprime and alt-A mortgages in securitization pools overseen by Wells Fargo.
[...]
Mr. White found that mortgage modifications peaked in February and have declined in all but one month since. While servicers modified 23,749 loans in these trusts in February, they changed only 19,041 in May and 18,179 in June. This is exactly when servicers were supposed to be responding to the government’s loan modification urgings.Foreclosures, meanwhile, keep rising. In June, 281,560 were in process, slightly above the 277,847 in May. Last January, there were about 242,000 foreclosures in the pipeline among the Wells Fargo trusts.
“I was hoping we would see some impact in June of the government’s program,” Mr. White said. “Is ‘Home Affordable’ working? My short answer is no.”
[...]
But the most fascinating, and frightening, figures in the data detail how much money is lost when foreclosed homes are sold. In June, the data show almost 32,000 liquidation sales; the average loss on those was 64.7 percent of the original loan balance.Given losses like these, Mr. White said he was perplexed that lenders and their representatives were resisting reducing principal when they modify loans. His data shows how rare it is for lenders to reduce principal. In June, for example, 3,135 loans — just 17.2 percent of the total modified — involved write-downs of principal, interest or fees. The total loss from these write-downs was just $45 million in June.
And yet, the losses incurred in foreclosure sales involving loans in the securitization trusts were a staggering $4.59 billion in June. “There is 100 times as much money lost in foreclosure sales as there was in writing down balances in modifications,” Mr. White said. “That is not rational economic behavior.”
Rational economic behavior? Why would anyone expect the same bozos that handed out loans without requiring people to prove they even had a job, to now make “rational economic” decisions? The problem is these guys aren’t using their money. You can bet that if the government stopped propping these failed banks up they would start modifying loans in the most efficient way possible.
I’m not a big proponent of loan modifications - at least not government subsidized modifications. Everyone involved who made poor decisions needs to be held accountable. But right now the Obama administration’s policies are only hurting homeowners while giving lending institutions a free pass.
Their foreclosure prevention policies have been a failure. It’s past time they recognize that and change course…
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26 Responses to “Definition of Insanity”
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There is always a solution even under tough circumstances. For many that could be loan modification.
Jeff Pruitt: Commenter’s URL removed
I’d be a bit leary about hooking up with a loan modification company (above) based in Las Vegas that can’t even spell correctly.
From their main web page - “Yes, financial hardships due happen and they often happen unexpectedly. This places homeowner in the unenviable position of not being able to stay on top of their monthly mortgage obligation.”
I’d also go slowly in doing business with an entity whose idea of marketing is spam-commenting blogs.
I may have missed it in your writing, but one reason why banks will accept a loss on a loan versus reducing the principal is because they buy insurance to protect against a bad mortgage, but not a reduction in principal. AIG is the prime example of a company that insured against mortgage losses.
This letter summarizes some of the details associated with our attempts to save our family home from foreclosure. If we were to outline the entire fiasco this would be a 3 volume set instead of a 1 pager.
My wife and I maintained a proactive and level headed approach to the situation hoping that our cooperation would lend itself to a faster end to the nightmare our “American Dream” of home ownership became. Ultimately we did avoid foreclosure; however we were unable to save our family home.
What awesome prey we troubled borrowers made for packs of frustrated citizenry needing an outlet for their justified outrage as well as the financial sector/Government agencies urgently seeking a convenient lamb to sacrifice at the alter of the angered American consumer/electorate!
Many troubled borrowers (such as our family) realized their mistakes, had the capacity to fix the issues, and desired to maintain a profitable relationship with their lenders.
Yet the mortgage industries business processes are SO TRAGICALLY BROKEN that the word dysfunctional does not even come close to an accurate description!
Multiple lawyers flatly told us (as they quickly walked us to the door) to let the Mortgage Company foreclose because attempting to work with them is a WASTE of time.
How does a willing borrower in a market where home values have plummeted (to say the least) reach a proactive compromise with a lender whose idea of a helpful modification would increase the principle balance by nearly $30,000.00? Not to mention that this “whopper” of a deal was delivered with the belligerent threat that anything short of immediate acceptance would result in aggressive pursuit of foreclosure.
Wells Fargo repeatedly denied our modification offers, while instead focusing their energies on outcomes resulting in extreme losses for both themselves & investors (Fannie Mae in this case). What a surprise the Government (i.e. the American Taxpayer) now owns Fannie Mae!!!
Wells Fargo & Fannie Mae ultimately decided that accepting a short sale offer resulting in a principle loss of $88,000.00 was better than working with willing & qualified borrowers through the Home Affordable program to adjust the interest rate of the existing note (i.e. No Principle Reduction)!
After reviewing our circumstances using the Home Affordable tool on the Fannie Mae web site we contacted Wells Fargo to request an evaluation of our situation for qualification under this Federally Sponsored program.
Wells Fargo would not review our request while the house was on the market. It should be noted that Wells counseled the immediate listing of the home for Short Sale at the start of our attempts to work out a resolution. They reiterated this option when we would not accept their preposterous initial modification offer.
Wells Fargo flat out refused to provide clarification on the rules/laws upon which their denial was based. Guess they already knew that collectively the legal community views cases like ours somewhere just below Pro Bono; hence the risk of legal challenge in the face of their bullying was acceptable.
It has been staggering to witness firsthand the unchanged arrogant, broken, dysfunction of the financial community while hearing/seeing the relentless stream of rhetoric from most media & politician alike packed with brazen proclamations of successfully helping the American economy!
Ladies and Gentleman, Sanity has left the building!!!
First Hand,
I cannot imagine how painful that experience must’ve been. The incompetence of the modern banking sector surely knows no bounds. Your story is precisely why a company like Wells Fargo should’ve been allowed to fail and put into receivership.
They are now bigger than ever (remember too big to fail?) and just as inefficient. But somehow they convinced the government that if they ceased to exist, a wormhole would be created and our entire world would be crushed to oblivion.
Oh, what would we ever do without Wells Fargo? I cannot fathom an existence without them…
And on top of this, the seven local bank branches who are propping up White Lodging’s financial support for the unneeded and unneccessary new hotel downtown are probably treating other upsidedown morgagees the same way as Wells-Fargo was to the First Hand’s. And don’t try to tell me there was no political pressure to get this accomplished. The Political-Squeeky-Wheel gets the Grease - the Little Taxpayer just gets screwed. Our federal government is propping up these banks WITH OUR TAX REVENUE! It is Insane!
Jeff:
As a quick side note, we sent multiple letters to the following elected officials pleading our case and outlining objectively (not emotionally) the flaws and issues with the Wells Fargo/Fannie Mae processes.
* Senator Bayh
* Senator Lugar
* Congressman Burton
* Indiana Secretary of State (Todd Rokita)
* Indiana Attorney General (Greg Zoeller)
The primary response to our letters was a batch of canned form letters indicating an inability to get involved. Senator Lugar’s office even included roughly 30 pages printed from the HUD web site (as if we had never visited this site before!!).
Senator Bayh did personally contact Wells on our behalf, which is what prompted them to offer the splendid modification outlined in my initial posting.
It took the personal intercession of a US Senator to goad Wells Fargo into flopping a lame duck “possible” modification offer on the table!
Wells would not even commit to allowing themselves to increase our principle owed by $30,000.00. Instead their offer said they would perform a review after we made what equated to 1.5 times our normal payments for a 4 month period. This miracle form of assistance is known by those in the mortgage biz as a “forbearance period”… In real world vernacular that’s called a “Rip Off”!
Of course Wells, Fannie, and Senator Bayh’s office all slapped each other on the back, marked our case down as another plus in statistics for helping troubled borrowers, and congratulated themselves for being heroes, all while knowing full well they did not actually resolve the issue or help our family.
Filter reality through a tight enough sieve and doing nothing actually looks like an act of immense kindness!
What chance does an average troubled borrower have dealing with a business so arrogant that inquiry from a US Senator barely registers on their radar scope??
John and Jeff,
Are you familiar with the bizarre tale of Rep Laura Richardson (D-CA)?
Last year, WaMu foreclosed on her house and sold it at a $200K loss. Then they must have realized who they dealing with. WaMu tried to cancel the sale, settled out of court with the buyer, and returned the house back to the deadbeat Congresswoman.
Wow. I have an ARM that is up in November that I cannot REFI due to my home’s value plummeting by 40%. I make too much money to qualify for the Obama plan…. anyone got a lighter?
“And on top of this, the seven local bank branches who are propping up White Lodging’s financial support for the unneeded and unneccessary new hotel downtown are probably treating other upsidedown morgagees the same way as Wells-Fargo was to the First Hand’s”
I suggest a new internet rule- the Kalb Rule, which states that any thread that goes long enough will eventually tie into Harrison Square.
The mortgage insurers are the one that are paying the price for the foreclosures. These companies need to rewrite their coverage to include a clause that they are limited to a coverage up to the difference between the sale price and the principal on a valid refinancing offer versus the difference in foreclosure.
The mortgage company has no interest other than to foreclose. A foreclosure loss is insured where as a reduced principal resulting in a lower payment, even though it could result in a much lower loss overall is not covered by their insurance contract.
And when Knuth was writing his comment, it coincided with the second lowest attended Tin Caps game this season - 1,949 which now puts the average for the season at 4,383 per game and predicts a lower attendance for the first season as compared to the Wizards first in 1993! Can you hear, “We told you so!”
Kalb,
We will see what the final numbers are- and IF you are correct, what good does saying “I told you so” do? Might make you feel good, but does it help our community? Nope. Not one bit.
The glass should be half full…..
Just like Bob Knight said, jbk, “If you know you’re gonna be raped, may as well lay back and enjoy it”
Is the glass half full for the citizen/taxpayers or for government subsidized sports teams and real estate developers Knuth?
I live in Fort Wayne, I help pay for it. I think it is a great addition to our city.
So, yeah, the glass is half…no, 3/4 full, for me.
Kevin - If our pointing out the screw-ups of the recent past help future politicos from making simular errors, then we should proceed to do this.
I also live in Fort Wayne (since 1949), have experienced our active downtown in the 50’s & 60’s, the retreat to the ‘burbs, the conversion of downtown from a “shopping” center to a financial, governmental, educational, and civic center, Calhoun two-way to Calhoun one-way, and now will see it return to two-way again.
Maybe you don’t care how our government wastes your tax dollars by arranging to send all the earnings of this “investment?” to Atlanta, GA, but there are a large number of us who do care!
And check the reaction of the citizens in our town - a majority still thinks that the whole Harrison Square Project was wrong from it’s start - NO OUTSIDE MONEY HAS YET BEEN SPENT ON THIS BOONDOGGLE! White Lodging even had to have local political pushing to get local banks to fund their unneeded fiasco!
And the citizens are beginning to vote on it! They are tired of being left with a glass that is not only empty - but actually is soaking up all fluid around it (and sending it to Atlanta, GA and Merrillville, IN)
I don’t know about money going to Atlanta, but I’m pretty sure the increase in downtown business translates into an increase in tax revenue.
Question: If the Harrison Square project is considered a “Boondoggle,” then what (any where in this country) would you consider a success?
Paul - How about Government Motors (GM) Truck & Bus Assembly Plant right here in Allen County! That type “Success” is what we need a lot more than ways to transfer our hard-earned dollars to Atlanta, GA and Merrillville, IN.
Also, Fort Wayne Metals and Sweetwater Sound
Do you need more, Paul?
And, the increased taxes due to Parkview Field and the new Hotel will for many years just go to pay for the darn place!
Excellent examples! I’m sure that there are those who think that the tax abatement is a “government wastes your tax dollars.”
Kalb,
You simply have your facts wrong.
Another hotel IS needed- the Grand Wayne loses business because there is not another hotel downtown.
A MAJORITY still thinks Harrison Square is wrong? Really? Where did you get that fact?
“And people are beginning to vote on it”…yes they are. Didier, Pape, Goldner, Hines, and Henry supported Harrison Square (though some were not in office, they were on record) and THEY WON election!
Kevin - Tell us ONE GROUP that has told the Grand Wayne Center that they will not use the facility because of a lack of hotel space in Fort Wayne and tell us how to verify that fact.
I will agree that I had the wrong facts on the attendance at Wednesday’s game - the game and the low attendance was at Cedar Rapids - not at Parkview field - my goof.
A recent online poll indicated that less than 40% of respondants indicated that they were going to attend a Tin Caps game.
“I don’t know about money going to Atlanta, but I’m pretty sure the increase in downtown business translates into an increase in tax revenue.”
It is pretty easy to figure out the economic impact the city will get from increased downtowns sales. The city gets 1% food and beverage sales tax. It also gets a 1% local income tax. The state income tax is 3%. Let us say it all goes to the city of Fort Wayne (less than 15% does). What can we the taxpayers expect?
We spent $45 million (I forget). The bond costs us 4% at least so the interest is $1.8 million a year. Take the $1.8 million divide it by .04 and this is the increase in sales downtown that is needed to pay the interest. Is down town seeing an increase of $45 million a year in increased sales? If not it was a bad investment for the taxpayers. However, Fort Wayne see’s less than 15% of the revenues from these transactions. That means we need to divide by .07. Is downtown seeing an increase of $642 million a year in sales, no!!!! What more do you need to determine if Harrison Square was a waste of taxpayers money?
As for the Grand Wayne center, they may have to turn down potential customers who would like to use it if it had more hotel space. The problem is what happens to over all utilization of the hotel with an increase? For example, they might get ten more conventions that are larger that fill the hotel for 30 days out of the year. The other 335 days this increased capacity sits vacant, not utilized. To much capacity to handle any convention will bankrupt you.
How will Keven feel if Harrison Square flops? Will he contribute out of his own pocket for supporting the project? Taxpayers money is not to invest in private infrastructure. It is public money to be do those thins private companies are unable to do. If hardball could not get financing to build their own stadium, that is a hint that the project in their eyes is not financially viable. They then sucker Fort Wayne Politicians into investing the money while they reap the rewards. Look at what happened to the stadium at the coliseum. Do you think a privately built stadium would have been built and had it been built, what would be the chances a team would be moved some where else? What keeps the Tincups here in Fort Wayne? What if they want a new stadium?
One group that did not consider coming to Fort Wayne because of lack of downtown hotel space is Junior Chamber International(JCI)USA. That is verified in fact being I was the person who would have had to make that recommendation. This was in 2003 (Indianapolis got the meeting), and I am looking forward to revisiting the issue once the Courtyard is built.
Paul Morrision wrote “One group that did not consider coming to Fort Wayne because of lack of downtown hotel space is Junior Chamber International(JCI)USA..
Paul how many rooms did you need and for how long? The problem with this game is like anyother financial investment, dimnishing returns or losses.
If Grandwayne loses 5% of potential large conventions due to space, is it worth spending millions to capture this potential revenue? If I have to increase my cost by 50% to gain 5% market share, forget it. The best business model is to service the largest market share at the lowest capacity required. This increases returns. As soon as you digress into the minority conventions, you are asking for trouble, uness you can be paid a premium for have the excess capacity. Generally large conventions seem to dictate price rather than be dicated to. Therefor, I suggest we go after the largest market share, small conventions.
Maybe attendance was low because Kalb was not out there wearing a pan on his head, handing out apple seeds to children.